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Assessment of Freeport McMoRan

- By Mark Yu

A few weeks ago, Freeport-McMoRan (FCX), the $22.8 billion natural resources company, reported its fourth-quarter and full-year 2016 earnings. Its sales grew by 1.5% to $14.83 billion in 2016 while losses mounted to $4.15 billion compared to $12.24 billion in 2015.

Freeport-McMoRan experienced a 37.3% reduction in total costs and expenses compared to the year earlier resulting in the $4.15 billion loss.


Freeport-McMoRan also expects sales volumes for its natural resources decline for the year 2017. Consolidated sales are expected to approximate 4.1 billion pounds of copper, 2.2 million ounces of gold and 92 million pounds of molybdenum. In comparison, the natural resources company sold 4.65 billion pounds of copper, 1.1 million ounces of gold and 74 million pounds of molybdenum for the year 2016.

Shares fell 3.1% while the broader Standard & Poor's 500 index rose 0.8%.


"During 2016, we took aggressive actions in response to market conditions to restore our balance sheet strength. I am pleased to report that we were successful in reducing our net debt by over $8 billion during the year while completing a major expansion at our world class Cerro Verde mine. I am proud of our global team for their accomplishments in 'Proving our Mettle.'

"As we enter 2017, we are enthusiastic about opportunities to generate future values for shareholders through our portfolio of high-quality, long-lived copper resources. We remain focused on generating significant cash flows to complete our debt reduction plan and to build long-term values for shareholders." - Richard C. Adkerson, president and CEO



Total returns

Freeport-McMoRan could be one of the best performers in terms of total returns among the widely known miner stocks in the past year. According to Morningstar data, Freeport-McMoRan returned 217.3% compared to the broader S&P 500 index's 27.8%. On a five-year basis, the natural resources company still underperformed the broader index with -14.3% and 13.9%.

Valuations

Freeport-McMoRan currently trades at a discount compared to its peers in terms of forward earnings. According to GuruFocus data, the company had a forward earnings multiple of 11.8 times (industry median 17.8), price-book (P/B) ratio of 1.4 times (industry median 1.9) and price-sales (P/S) ratio of 1.4 times (industry median 1.9). Meanwhile, the company did not have any trailing dividend yield.

(10-K)

Freeport-McMoRan

Freeport-McMoRan is a 105-year-old premiere U.S.-based natural resources company with an industry-leading global portfolio of mineral assets and significant oil and natural gas resources.

In 2015, Freeport-McMoRan derived 43% or $6.84 billion of its sales from the U.S., 8% from Japan, 7% from Indonesia, 6% from Switzerland, 6% from Spain, 5% from China and other countries.

In its annual filing last year, Freeport-McMoRan's portfolio of assets included the Grasberg minerals district in Indonesia - one of the world's largest copper and gold deposits; significant mining operations in North and South America; the Tenke Fungurume (Tenke) minerals district in the Democratic Republic of Congo (DRC) in Africa and significant U.S. oil and natural gas assets.

(Ownership Interests From 2015 10-K, Freeport-McMoRan)

Freeport-McMoRan's Tenke stake would have been already sold as discussed further in the cash flow section of this article.

(Business Segments in News Release, Freeport-McMoRan)

Here are the corresponding figures per segment for fiscal 2016 compared to 2015 operations:

Sales figures

  • North America Mining Operations lost 25% in sales and contributed 5% in total sales.
  • South America Mining Operations grew 47% in sales and contributed 19% or $2.75 billion in sales.
  • Indonesia Mining Operations grew 24% in sales and contributed 22% or $3.23 billion in sales.
  • Molybdenum Mining Operations did not deliver any sales in both fiscal 2015 and fiscal 2016; $0 sales.
  • Rod & Refining sales lost 7% and contributed 26% - or $3.83 billion - in sales.
  • Atlantic Copper Smelting & Refining also lost 7% in sales and contributed 12% in sales.
  • Other Mining & Eliminations lost 13% in sales and contributed 7% in total sales.
  • U.S. Oil & Gas Operations sales fell by 24% and contributed 10% in total sales.



In all of Freeport-McMoRan's business segments, only South America and Indonesia Mining Operations exhibited growth in sales year on year.

Operating margin

  • North America Copper Mines Mining Operations had a 216% margin.
  • South America Mining Operations had a 22% margin.
  • Indonesia Mining Operations had 32%.
  • Molybdenum Mines had none.
  • Rod & Refining had 0.42%.
  • Atlantic Copper Smelting & Refining had 4%.
  • Other Mining & Eliminations had 10%.
  • U.S. Oil & Gas Operations had -377% or delivered a $5.7 billion loss in 2016 compared to a $14.2 billion loss in 2015.



On average, Freeport-McMoRan had a three-year sales loss average of 9.3%.

(Morningstar and News Release Data, Freeport-McMoRan)

Cash, debt and book value

As of December, Freeport McMoRan had $4.25 billion in cash and cash equivalents and $16 billion in debt with a debt-equity ratio of 1.73 times compared to 1.69 in December 2015.

In addition, the natural resources company did not carry goodwill or intangible assets in its $37.3 billion assets. Freeport McMoRan had a book value of $9.3 billion in 2016 compared to $12.8 billion the year prior.

Cash flow

(News Release, Freeport-McMoRan)

Freeport-McMoRan experienced a 15.81% cash flow from operations growth to $3.73 billion in 2016. As observed, the company had far lesser losses for the period accompanied by net positive cash inflow from its deferred income taxes and accrued income taxes among others. Freeport-McMoRan also had $689 million cash inflow received from drillship settlements and other contract terminations compared to nil in 2015.

Capital expenditures were $2.81 billion leaving Freeport-McMoRan with $916 million in free cash flow compared to free cash flow loss of $3.1 billion in 2015.

(10-K Filing and News Release, Freeport-McMoRan)

For the year, Freeport-McMoRan allocated 76% of its cash flow in dividend payouts, specifically to noncontrolling interests. On average, the company provided -19% of its free cash flow in dividends in the past three years.

Also, Freeport-McMoRan raised $1.52 billion in issuing common shares to the public while having raised $1.94 billion the year prior.

In 2016, Freeport-McMoRan gathered $6.36 billion in proceeds from selling its Deepwater Gulf of Mexico and onshore California oil and gas properties, interest in TF Holdings Ltd. and 13% in Morenci copper mines.

In review, TF Holdings is a Bermuda holding company that indirectly owns an 80% interest in Tenke Fungurume Mining, Tenke Fungurume Mining holds one of the world's largest known copper and cobalt resources in the northern region of the Democratic Republic of Congo (DRC).

Freeport-McMoRan sold its interest amounting to $2.65 billion having had a 70% interest in TF Holdings and an effective 56% interest in Tenke Fungurume Mining.


"This transaction is another significant step to strengthen our balance sheet and enhance value for shareholders. Since the start of 2016, we have announced over $4 billion in asset sale transactions. We are committed to our immediate objective of reducing debt while retaining a large portfolio of high quality assets and resources and a leading position in the global copper industry." - Richard C. Adkerson, president and CEO



In 2016, Freeport-McMoRan allocated $3.94 billion in debt repayments, net proceeds.

Conclusion

Continuous sales decline and losses accompanied by share dilution and weak outlook on the commodity business makes Freeport-McMoRan a pass.

Disclosure: I do not have shares in any of the companies mentioned.

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This article first appeared on GuruFocus.