Would Freeport-McMoRan’s Borrowing Costs Rise If Fed Hikes Rates?
The Possible Fallout of a Fed Rate Hike for Freeport-McMoRan
Borrowing costs
The metals and mining industry is capital-intensive by nature. Companies have to borrow money to invest in plants and new mines. As a result, it’s important for investors in mining companies (XME) to understand how these companies manage their leverage ratios.
It’s important to see a company’s debt ratios when market conditions are as challenging as they are currently. Investors should note that making interest payments is a contractual liability, unlike dividends that can be changed by the company.
Freeport-McMoRan (FCX) has already slashed its dividend, while Glencore (GLNCY) has scrapped it completely. BHP Billiton (BHP) and Rio Tinto (RIO) are still paying generous dividends (DVY).
Stretched balance sheet
Freeport-McMoRan has one of the most stretched balance sheets in the copper industry. The company took on a huge amount of debt to fund the acquisition of energy assets. Freeport’s energy business has been suffering from falling energy prices. To add to its woes, Freeport’s borrowing costs could rise if the Fed hikes the interest rate.
Variable rate loans
According to Freeport’s 2014 annual report, 22% of its $18.8 billion debt pile is variable rate. The interest rates on these loans are linked to LIBOR (London Inter-Bank Offered Rate) or Euribor (Euro Interbank Offered Rate).
Although LIBOR is different from the Fed’s rate, the two have moved in tandem, as you can see in the graph above. The one-month LIBOR has already risen by more than 50 basis points in the last one month. Currently, the one-month LIBOR is the highest since August 2012. The rates are possibly rising in anticipation of a possible Fed rate hike later in December.
Any increase in the Fed rate could have an impact on LIBOR as well. Higher LIBOR would push Freeport’s borrowing costs. Though the additional liability wouldn’t be high, it would still add to the company’s cash outflow.
Read Freeport-McMoRan: Why the Current Rally Could be Unsustainable to learn more about the company.
You can also visit Market Realist’s Copper page for other developments in this industry.
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