Yesterday's Fed decision to stand pat on interest rates appears to be weighing on stocks on Friday, with the Dow Jones Industrial Average (^DJI 0.63%) and the benchmark S&P 500 index (^GSPC 0.38%) down 1.78% and 1.63%, respectively at 3:50 p.m. EDT. Shareholders of miner Freeport-McMoRan would be happy with that performance today as shares are down 10.71%; the world's largest non-state copper miner said it completed a $1 billion share offering and has filed for another offering of up to $1 billion.
Morenci mine, Arizona. Source: TJBlackwell. Re-published under a Creative Commons license.
The share sale is just one of the steps Freeport-McMoRan has been forced to take in response to the slump in commodities prices. At the end of last month, Freeport announced it was reducing planned capital expenditures for next year by 29% -- the second cutback in a month.
Only a few hours later, legendary investor Carl Icahn announced that he had taken an 8.5% position in the company's shares.
As of Aug. 26, Mr. Icahn hadn't had any contact with Freeport's board or management, but that's likely no longer the case. I expect the company will have wanted to sound out Icahn prior to expanding its equity offering.
The 79-year-old billionaire may not know much about extracting copper out of the ground, but he knows something about mining a balance sheet for value.
Even following today's decline, Freeport's stock price remains above the $10.19 closing price immediately after Icahn disclosed his investment.
As one might expect, Freeport-McMoran is not alone in shoring up its finances. On Tuesday, miner-trader Glencore plc launched a $2.5 billion share placement, part of a $10 billion package of measures to reduce debt and protect its credit rating.
Meanwhile, another resource giant is diluting its shareholders in a less spectacular manner.
At the beginning of March, Royal Dutch Shell plc reinstituted its scrip dividend program, which gives shareholders the option to receive their dividend in shares instead of cash.
Shell scrapped the scrip dividend in May of last year; at the time, analysts interpreted the decision as a sign of confidence in the company's cash flow position. However, it proved to be atrocious timing, as the price of oil peaked the following month before beginning a vertiginous slide during which it has lost nearly 60%.
Unfortunately for existing shareholders, this week's financings are part of a long tradition in the highly cyclical commodities industry, whereby companies find themselves forced to raise equity capital when it's most expensive (that is, when shares are depressed).
For value investors, however, the offerings could be an indication that we are near the bottom of the cycle. Well-selected commodities and energy stocks could turn into gushers a few years from now.
