Commodities Rout Still Taking a Toll on Freeport-McMoRan Inc.'s Earnings

The Cerro Verde open pit copper mine in Peru helped Freeport-McMoRan achieve greater output after its expansion allowed it to operate a full capacity. Image source: Freeport-McMoRan.

Copper and gold miner Freeport-McMoRan (FCX 2.13%) is about to get a lot smaller after reporting that losses widened to almost $4.2 billion in the first quarter. Despite having sold more copper in the period, those gains were more than offset by less gold and molybdenum sold, with revenues falling to $3.53 billion, a 15% decrease from last year and below analyst expectations as well.

Freeport-McMoRan First-Quarter 2016 Results

Data source: Freeport-McMoRan SEC filing.

The diminished results, widening losses, and continued plans to de-emphasize its oil and gas assets, which it previously tried to sell but couldn't find a buyer for, is leading the miner to restructure its oil and gas operations while cutting its workforce in the field by as much as 25%. Freeport-McMoRan said it will record a $40 million charge in the second quarter related to those moves. It's divested some $1.4 billion in assets so far this year.

Bad deals don't get better with time.
The copper and gold miner has posted six straight quarterly losses now, for a total of almost $20 billion, as commodity prices have been routed. Despite their bouncing back this year, which helped lift Freeport's stock 67% year to date -- and it has more than tripled from the lows it hit early on -- it is still operating under a heavy load of debt totaling $19.6 billion as a result of acquiring oil and gas drillers Plains Exploration and McMoRan Exploration.

At the time of their purchase in 2013, it seemed like a good idea to diversify away from metals mining. After a huge run up in value, mining prices were falling while oil and gas stayed elevated. But Freeport overpaid for their assets, shelling out some $20 billion, including debt and when energy prices collapsed, Freeport-McMoRan was dragged down with them.

Burning the furniture to heat the house
In January it announced with would try to "complete significant asset sale transactions" to ease its debt load, and the following month said  it had agreed to sell to Sumitomo Metal Mining a $1 billion stake in its giant, open-pit Morenci copper mine in Arizona, which is expected to close in the current quarter. It also agreed to sell an interest in its Timok exploration project in Serbia.

It still has significant operations at its massive Grasberg copper mine in Indonesia, and large joint ventures in South America and Africa where it owns more than half of the project. It just completed an expansion of its Cerro Verde copper project in Peru that allowed it to achieve full capacity that helped Freeport increase its copper production this quarter.

Pennies on the dollar
Yet its Grasberg mine is still a source of contention as the Indonesian government continues to play hardball with both Freeport and industry peer Newmont Mining (NEM 2.22%) over exporting unprocessed ore out of the country. Both miners are facing lowball bids for their assets their as the government has backed them into a corner. Newmont may soon received an offer from a consortium of investors of only $3 billion for its Indonesian assets, well under what they should be worth, while Freeport has been told by the government to revise how much the 10% stake it is selling to it is worth, since it value's the miner's asset at just a third of what Freeport does.

The deal was part of a plan forced on the miner to win the right to have its contract of work in the country extended. Where Freeport valued the stake at $1.7 billion, the government says it's worth just $630 million

Freeport-McMoRan had once owned a sprawling empire of assets and had sold or spun them off in the 1990's to focus on its core business. It subsequently gave into empire-building once more, and investors will see it once again pare down its holdings to a more manageable size.