Freeport-McMoRan Announces New Measures to Stay Afloat
(Continued from Prior Part)
Freeport-McMoRan’s dividend cut
Freeport-McMoRan (FCX) has suspended the dividend on its common stock. Glencore (GLNCY) also suspended its annual dividend program. Earlier this year, FCX had slashed its dividend by more than 80% in response to falling commodity prices. In this part of the series, we’ll explore why the dividend suspension is a step in the right direction.
Negative free cash flows
Freeport-McMoRan has generated negative free cash flows over the last few quarters. Falling commodity prices negatively affected the company’s operating free cash flows. Plus, the company was in the midst of aggressive expansion projects in both its energy and mining businesses. The net impact was that its operating cash flows fell short of meeting the capital expenditure, as you can see in the graph above.
To bridge this spending gap, the company has taken on more debt. As of the end of 3Q15, FCX had a total outstanding debt of $20.7 billion. This is more than 2.5 times its current market capitalization, and that explains the gravity of the situation.
To bridge the spending gap, FCX announced an at-the-market equity issuance of $2 billion in two separate tranches of $1 billion each. According to the company, as of December 4, it has raised $1.6 billion through this route. The company still has the option to raise $0.4 billion by selling its shares.
Will a dividend cut help?
FCX’s dividend suspension looks like a step in the right direction. A company that’s raising cash by selling shares at such depressed valuations shouldn’t be rewarding shareholders by paying dividends. The dividend cut would help FCX save $240 million in annual cash flows. This isn’t a small amount—commodity companies are going all-out to cut their cash outflows.
Moreover, Freeport-McMoRan doesn’t have a strong balance sheet like BHP Billiton (BHP) and Rio Tinto (RIO). BHP and RIO can afford to pay dividends even under the current market scenario. In fact, BHP has indicated that the company might take on more debt if required but it wouldn’t be cutting its dividends.
Investors who want to avoid the hassles of picking individual stocks can also consider the SPDR S&P Metals and Mining ETF (XME) to get exposure to the metals and mining sector. Currently, Freeport-McMoRan forms 3.6% of XME’s portfolio.
You can also visit Market Realist’s Copper page to learn more about this industry.
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