Copper Producers: Their 3Q15 Earnings and Industry Outlook
(Continued from Prior Part)
Cash flows
Freeport-McMoRan (FCX) and Teck Resources (TCK) reported net losses in 3Q15 on a GAAP (generally accepted accounting principles) basis on massive asset write-downs. However, looking at the current challenging situation, markets are more interested in cash flows.
Generating negative free cash flows would lead to cash burn. As a result, companies might have to borrow to fund the deficit. Most copper companies are already grappling with a rising debt pile. Negative free cash flows would only make things worse. In this part of the series, we’ll look at some copper producers’ 3Q15 cash flows.
Freeport-McMoRan
Freeport-McMoRan (FCX) generated negative free cash flows of $705 million in 3Q15, as you can see in the graph above. However, the company managed to stay above water by raising $1 billion from an at-the market equity offering. The company’s leverage ratios would have deteriorated further in 3Q15 if it had not raised cash by selling its stock.
Southern Copper (SCCO) also generated negative free cash flows of $54 million in 3Q15. However, this is not a major worry for Southern Copper investors. The company has comfortable leverage ratios and is investing to expand its copper mines. These expansions would pay off well once the commodity cycle turns around.
Streaming transactions
Teck Resources generated free cash flows of $211 million in 3Q15. The company has also raised about $1 billion in two streaming transactions. In a typical streaming transaction, a third party provides upfront cash to the mining company and gets a share of future production. Teck Resources has done the streaming transaction at the Antamina mine in Peru (EPU), where it has sold its share in silver production. BHP Billiton (BHP), Glencore (GLNCY), and Mitsubishi are the other partners in the mine.
In a separate transaction, Glencore raised $900 million by entering into a streaming transaction with Silver Wheaton and selling its share of future silver production from the Antamina mine.
In the next part, we’ll explore what copper companies have to say about the industry’s outlook.
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