Understanding the Strategic Importance of Freeport’s Asset Sales
Freeport-McMoRan (FCX) closed at $14 on April 29, 2016, gaining more than 10% from its previous day’s closing. It’s been a remarkable year for Freeport-McMoRan. At the beginning of the year, not many expected that Freeport would trade above the $10 price level. However, Freeport has been defying all pessimism in the commodity space (RJI) and moved to higher price levels.
To put things into context, during its 4Q15 earnings call, Freeport-McMoRan announced that the company plans to generate $5 billion–$10 billion to shore up its balance sheet. Freeport mentioned various alternatives to raise cash, which you can see in the graph above.
Note that other miners are also trying to shore up their balance sheets. BHP Billiton (BHP) and Rio Tinto (RIO) have scrapped their progressive dividend policy while Glencore (GLNCY) has scrapped its annual dividend altogether.
Freeport’s 1Q16 earnings turned out to be a non-event for the Market. The earnings itself were a mixed bag for investors. While Freeport’s adjusted net loss was better than expected, it missed the consensus revenue estimates.
As expected, Freeport took another hit on its GAAP (generally accepted accounting principles) earnings due to the write-off of its energy assets. With the 1Q16 write-off, the carrying value of Freeport’s energy assets has been reduced to ~$3.4 billion.
However, the key takeaway from Freeport’s 1Q16 earnings was the company’s commitment to proceed with its asset sales program. In the course of this series, we’ll see why asset sales are so crucial for Freeport-McMoRan and what investors can expect on this front in the coming months.
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