Freeport-McMoRan Nears 52-Week Lows on November 13, Commodities Crash
(Continued from Prior Part)
Falling copper prices
As seen in the previous part of this series, copper prices have crashed to a fresh six-and-a-half-year low on concerns over the Chinese economy and a stronger US dollar. However, unlike other pure-play copper producers like Turquoise Hill Resources (TRQ) and Southern Copper (SCCO), Freeport-McMoRan’s (FCX) worries extend beyond falling copper prices. Together, Freeport and Newmont Mining (NEM) form ~4.1% of the Materials Select Sector SPDR ETF (XLB).
Lower energy prices
Freeport-McMoRan is also involved in the energy exploration business. In 3Q15, the company sold 1.0 billion pounds of copper, 23 million pounds of molybdenum, 13.8 MMBOE (or million barrels of oil equivalent), and 294,000 ounces of gold. Freeport has given a guidance of 13.3 MMBOE for 4Q15.
Energy exposure makes Freeport’s earnings sensitive to falling crude oil prices as well. The company’s energy operations generated an EBITDA (earnings before interest, taxes, depreciation, and amortization) of $0.3 billion in 3Q15. This is roughly one-third of Freeport’s 3Q15 consolidated EBITDA.
Sensitivity
According to Freeport-McMoRan, the company expects its 2016 EBITDA to fall by $215 million for every $5 per barrel fall in Brent oil prices. The company also expects its operating cash flows to be lower by $170 million for every $5 per barrel fall in Brent. Please note that the sensitivity is based only on the energy operations and does not account for diesel costs in Freeport’s copper operations.
Brent oil prices have fallen in the last couple of weeks, as can be seen in the graph above. Falling energy prices could weigh heavily on Freeport’s 4Q15 earnings.
Freeport noted that it is looking at “strategic alternatives” for its energy business. However, falling crude oil prices have only made things worse for Freeport’s plans. In the final part of this series, we’ll discuss what other factors could drive Freeport’s stock in the coming weeks.
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