Freeport-McMoRan Inc. FCX has revised its capital and operating plans in view of the recent slump in copper prices which led to lower production levels, lower capital expenditures and reduced administrative, operating and exploration expenses. These initiatives are a result of the company’s previously announced review of its operating plans.

According to Freeport, the London Metal Exchange (“LME”) copper prices averaged $3.11 per pound in 2014 and $2.69 per pound in the first half of 2015, ended Jun 30, 2015. Also, during the third quarter of 2015, copper prices have averaged $2.41 per pound and presently stand at around $2.25 per pound, a nearly six-year low.

Freeport has a positive long-term outlook for its business, considering the limited supplies of copper and its growing demand in the global economy. However, the company is attempting to cope with weak market conditions in the near term by delaying investments and adjusting operations to maximize its current cash flows.

Based on the present market conditions, Freeport decided to reduce its capital expenditure to $4 billion for 2016 to strengthen its financial position. This includes $1.4 billion in mining projects, $0.6 billion in mining sustaining capital and $2 billion in oil and gas expenditures. This revised capital expenditure is around 29% lower than the previous projection of $5.6 billion made on Jul 23, 2015.

Freeport’s revised plans will help it lower production by around 150 million pounds per year from Jul 23, 2015 estimates, mainly due to reduced operating rates at the company’s American mining operations. This will further help the company to lower its operating costs.

Based on the revised outlook, Freeport’s site production and delivery costs before by-product credits, would average at around $1.45 per pound in 2016, being around 20% lower than 2015 levels. Also, net unit costs after by-product credits for 2016 would be around $1.15 per pound, assuming prices of $6 per pound for molybdenum and $1,150 per ounce for gold.  

Mining Update

North America Copper Mines: The company’s revised plans for North America include lower mining rates which are anticipated to reduce operating and capital costs, including the suspension of mining operations at its Miami mine, 50% lower mining rates at the Tyrone mine, and adjustments at other U.S. mines. Amendments to each of the operations will include the impacts of lower energy, acid and other consumables, lower labor costs and a considerable reduction in capital spending plans. These actions will be further assessed and adjusted according to market conditions. Additionally, the initiatives will lead to a 10% reduction in workforce at Freeport’s U.S. mining operations.

South America Copper Mines: The revised outlook for the copper mines in this region for 2016 includes adjustments related to lower mining and stacking rates by around 50% at El Abra to attain reduced operating and labor costs, defer capital expenditures and extend the life of existing operations.  

At Cerro Verde, the concentrator expansion project is nearing completion by year-end 2015 which will ensure significant cash flows. The revised actions include favorable impacts of lower input costs and foreign exchange rates.

Africa Mining: The revised outlook for the Tenke Fungurume mine includes 50% lower capital spending for 2016 and numerous other actions to lower operating, administrative and exploration costs. The company is also deferring development and expansion opportunities until market conditions improve.

Indonesia Mining: Freeport anticipates ore grades in PT-FI to improve significantly in 2016 and 2017, resulting in increased production and lower unit costs, owing to access to higher grade sections of the Grasberg open pit. Further, the revised plan for PT-FI includes improved operational efficiencies, lower input, supplies and contractor costs, foreign exchange impact, and around 15% of capital expenses being deferred in 2016.

The company estimates aggregate capital spending on the ongoing projects in this region for the next five years to average $1.1 billion per year, including aggregate costs of $2 billion over the period beyond 2016.

Molybdenum: The revised outlook for Freeport’s Henderson primary molybdenum mine includes lower operating rates, representing a 35% reduction in Henderson’s previous annual production estimate of 27 million pounds. The company continues to assess its molybdenum production plans at its by-product mines. Freeport is also involved in discussions with its customers regarding potential pricing structure changes for its chemicals products to facilitate continuous production of chemical grade at reasonable margins.

Oil & Gas: Estimated capital expenditures for this business have been lowered to $2 billion per year for 2016 and 2017. The revised plans, along with third party financing, incorporate the previously stated initial public offering of a minority interest in FM O&G or other actions. These actions will be taken as required to fund oil and gas capital spending within cash flow for 2016, and thereafter.

Based on estimated sales volumes for 2015 and assuming average prices of $2.25 per pound of copper, $1,150 per ounce of gold and $6 per pound of molybdenum, and recent futures prices of $50 per barrel of Brent crude for the second half of 2015, Freeport anticipates consolidated operating cash flows for 2015 to be around $3.1 billion. The company also plans to fund its capital expenditure of $6.3 billion with operating cash flows, amounts available under its $1.8 billion Cerro Verde bank facility and borrowings under its $4 billion bank credit facility.

Further, Freeport has initiated a program to raise around $1 billion in proceeds from its at-the-market common stock offering announced previously. Also, it is contemplating future opportunities to sell a minority interest in its oil and gas subsidiary.

Zacks Rank

Freeport currently carries a Zacks Rank #5 (Strong Sell).

Better-ranked companies in the basic materials sector include Pretium Resources Inc. PVG, ThyssenKrupp AG TYEKF and Air Products & Chemicals Inc. APD, all carrying a Zacks Rank #2 (Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>