Shares of Freeport-McMoRan (NYSE:FCX) got hit hard late last week, when the mining and energy specialist announced that it had decided to move forward with plans to raise more capital by selling shares of stock. Investors are far from happy with the dilemma that Freeport faces, as plunging prices for key commodities like copper and crude oil have put the company in a difficult situation.
Yet there's one aspect to Freeport's $1 billion cash raise that's revolutionary. Rather than conducting a typical secondary offering, Freeport instead has used what's known as an at-the-market offering, giving the company considerably more flexibility in figuring out how to handle its capital needs. Let's take a closer look at the at-the-market offering and why other companies are starting to look closely at the method for raising capital.
The old way vs. the new way
Typically, most companies continue to raise the equity capital they need by using traditional secondary offerings. This involves hiring a financial firm to act as the underwriter for the offering. This lead underwriter often gathers together a team of other underwriting firms to work together to find buyers for the shares that the client company wants to offer. Together, the underwriters establish the demand for the offering and set a price, with the client getting the lion's share of the proceeds and the underwriters collecting fees in exchange for their having actively gone out to find buyers for the newly issued shares.
Over the past decade or so, though, at-the-market offerings have gotten more popular. With an at-the-market offering, a company announces its intent to sell shares into the open market at some point in the future, without having to specify exactly when it will make sales or at what price. Essentially, the at-the-market offering allows the company to become a seller of its own stock, using a named broker-dealer to conduct the transactions. In 2005, the SEC made it easier for companies to use this method by loosening some previous restrictions on the practice, including simplifying disclosure provisions and eliminating some limitations on volume.
As a result, what Freeport announced last week was actually two different things. First, Freeport explained that it had completed its first at-the-market offering of $1 billion. Second, it said it would put itself in a position to offer another $1 billion sale at some point in the future, if it so chooses.
How did Freeport's sale work out?
The interesting thing about Freeport's strategy is that it didn't go as well as investors would have hoped. The day of the announcement, Freeport's stock jumped more than 10% to $11.65 per share, as shareholders seemed to interpret the offering as the best way to raise capital while still keeping other options on the table. The market's volatility during August and September kicked in shortly thereafter, sending the stock below $8 briefly, even though the stock climbed above $12 as recently as last Thursday.
Yet in the release last week, Freeport said it had had to sell 96.7 million shares in order to raise the $1 billion, for an average selling price of about $10.34 per share. Although not a horrible result, it is well below where shares have traded throughout the past couple of weeks, and at least compared to the price on the day the offering was announced, it seems as though Freeport might have done better just using a traditional secondary offering method rather than taking on the task of market timing on its own.
That said, it's not entirely fair to judge Freeport's offering based on its ability or inability to pick market tops for its share price. In many cases, using the at-the-market offering method can be a lot less disruptive to the market for a given stock than having underwriters desperately searching for buyers of a traditional secondary offering. By making it clear that a company doesn't necessarily need financing at a moment's notice, the at-the-market strategy can prevent investors from having their confidence undermined at a critical time.
Given the stress in the energy and mining industries, it's likely that more companies will need to raise capital in the near future. Many should take a closer look at the at-the-market offering strategy to see if it might be the best solution for their capital-raising needs. In the meantime, investors will have to wait and see how Freeport next $1 billion sale goes in the future.