The commodities bust may be about to claim some brand-name victims:
Freeport-McMoRan
Inc: The Hits Just Keep Coming
Freeport-McMoRan (NYSE:FCX) is off to a brutal start in 2016 with its
stock price down nearly 40% in just over a week. The company is being
battered by a barrage of negative news items, with the latest being another
analyst downgrade. The rough start, which follows a very tough 2015, has a
lot of investors wondering if the company will make it through the year in
one piece.
The weakness in the copper price has been the biggest weight on
Freeport-McMoRan's stock this year. Its price recently hit a six-year low due
to growing concerns of a worsening slowdown in China, which is the world's
biggest copper market. With copper falling below $2 per pound it calls into
question Freeport-McMoRan's ability to generate sufficient cash flow to both
manage its debt and fund its capex plan. It's a plan that is based on a $2
copper price in 2016 and $45 per barrel for oil. Presently, copper is a few
pennies below that level, while oil has plunged into the low $30s.
Those price weaknesses not only will weigh on the company's cash flow, but
are weighing on the value of oil and copper assets. That's making it even less
attractive for Freeport-McMoRan to pursue asset sales to pay down its large
debt load. In fact, asset values have fallen so steeply that one Jefferies
analyst is concerned that "window of opportunity for Freeport-McMoRan to
repair its balance sheet may have closed." That's after the company has
yet to find a funding solution for its oil and gas business after searching
for alternatives for more than a year.
Glencore
Debt Swaps Jump to Six-Year High as Copper Price Slides
(Bloomberg) - The cost of insuring Glencore Plc's debt against default
rose to a more than six-year high as the price of raw materials such as
copper continued to tumble.
The trader and miner's credit default swaps increased to as much as 946
basis points, the highest since April 2009 on a closing basis, according to
data from S&P Capital IQ's CMA.
Slumping commodity prices have battered Glencore, prompting it to scrap a
dividend payment, sell new shares and outline asset sales as it seeks to curb
debt to maintain its investment-grade rating. Copper dropped to a six-year
low amid a rout in metals as muted Chinese inflation increased concern that
demand from the world's largest buyer of raw materials will slow.
"CDS levels are driven by commodity prices and in the case of
Glencore, especially copper," said Max Mihm, a Frankfurt-based portfolio
manager at Union Investment, which holds Glencore bonds among assets totaling
about $271 billion. "If prices fall further and stay low Glencore will
need to do more to protect its IG ratings."
A lot of big, diversified miners produce silver and gold as byproducts, so
if, say, a copper mine closes because of that metal's recent price collapse,
that also takes precious metals out of the production stream and other things
being equal raises their price. So far so good for gold bugs.
But fans of gold and silver streaming companies, including
this writer, are watching the carnage in copper and oil with mixed
emotions. Many of the miners now teetering on the edge of insolvency have cut
deals in which they promise to sell their byproduct gold and silver to
streaming companies in return for big up-front payments. That money may now
be at risk.
Franco Nevada, the biggest streaming company, recently paid Canadian miner
Teck
Resources $610 million for a future share of the silver produced by the
latter's Peruvian mine. The number two streaming company, Silver Wheaton, has
paid Glencore
and Vale
over $1 billion for portions of the gold and silver produced by some of their
mines.
What happens if some of these miners subsequently go bankrupt? That's not
clear, but it can't be good for the streaming companies whose cash will be
tied up (at best) and might simply disappear.
Meanwhile, the never-ending precious metals bear market is producing a
steady drumbeat of smaller gold and silver mining failures, some of which are
streaming company partners. Most recently, Rubicon
Gold fell to effectively zero after announcing that oops, its reserves
were only one-tenth of what it had previously promised. Streaming company
Royal Gold is on the hook for $75 million to this one.
Looking on the bright side, the streaming companies are highly
diversified, with dozens of deals spread around the world. So the failure of
any one -- even a big one -- probably isn't an existential threat. It is,
however, a near-term problem for buyers of these stocks. But also possibly a
long-term opportunity if the streaming companies get swept down in the
general carnage.
