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Freeport-McMoRan: Improving Fundamentals

Freeport-McMoRan (NYSE: FCX) reported better than expected fourth quarter revenues and adjusted EBITDA as higher copper and gold prices more than offset lower than expected volumes, notes Evan Mann, an analyst with GimmeCredit, a leading provider of independent corporate bond research.

In 2024, FCX, one of the world’s largest publicly traded copper producers, plans to expand its leaching initiatives to capture more pounds (reached a 200 million pounds run rate in 2023), complete the construction and ramp-up of smelter projects in Indonesia, extend Indonesia mining rights beyond the current agreement expiring in 2041, and move forward with organic growth projects (Lone Star oxide expansion, Grasberg Mill recovery project and transition to LNG, Atlantic Copper recycling project, Kucing Liar mine development, and increased Bagdad concentrator capacity).

• Fourth quarter revenues rose 3% year over year to $5.9 billion on increased copper and gold shipments as well as higher average realized copper and gold prices. Copper shipments were up 7% to 1.1 billion pounds (3% above estimates on higher mining and milling rates at Grasberg) with the average realized price gaining 6% to $3.81 per pound. Gold shipments increased 20% to 549,000 ounces (5% below estimates on export license timing issues at Grasberg) with the average realized price rising 14% to $2,034 per ounce. Average unit net cash costs declined $0.01 to $1.52 per pound on higher by-product credits and volumes (below the $1.58 per pound estimate on higher volumes in Indonesia). Reflecting these factors, fourth quarter adjusted EBITDA rose a modest 2% to $2.3 billion while 2023 adjusted EBITDA of $8.8 billion (down 8% from 2022) covered interest 17.1x and leverage was 1.1x mostly unchanged from 17.0x and 1.1x, respectively, for 2022.

• FCX ended the fourth quarter with $8.7 billion in liquidity with the next bond maturity the $730 million of 4.55% senior notes due this November. For 2023, free cash flow (cash flow from operations less capital spending) fell $1.2 billion to $455 million mostly due to lower earnings and increased capital spending related to mining projects and construction of a greenfield smelter in Indonesia. This FCF was used to pay $863 million in dividends and $132 million for other investment while cash was used to reduce total debt by $1.2 billion to $9.4 billion.

• Guidance for 2024 shipments looks for copper to be unchanged at 4.1 billion pounds while gold increases by 30,000 ounces to 2.0 million ounces. Consolidated unit cash costs (net of by-product credits) are expected to decrease $0.01 to $1.60 per pound. Based on FCX’s current volume, costs, and metal price assumptions ($3.75 per pound for copper and $2,000 ounce for gold), 2024 cash flow from operations is expected to gain 10% to $5.8 billion. The capital spending budget was reduced by $200 million to $4.6 billion (includes $1.0 billion for Indonesia smelter projects, $1.1 billion for underground mine development in Grasberg and potential expansion projects in North America and $1.2 billion for discretionary growth projects), translating to $1.2 billion in free cash flow. Based on our updated projections, we expect 2024 free cash flow after dividends to be positive with leverage improving slightly to 1.0x.

• With recent supply disruptions and continued demand growth, FCX expects the copper market to be in deficit as the year progresses, suggesting tighter market conditions and price improvement over the near term. In the medium to longer term, copper prices are likely to move much higher on a demand recovery in China as well as the global transition in energy infrastructure, renewables, and electric vehicles. The 5.4% senior notes due 2034 yield 5.5%. Change to outperform.

FCX Bonds: Sr Nts 730mn 4.55% 11/15/24; Sr Nts 448mn 5% 9/1/27; Sr Nts 483mn 4.125% 3/1/28; Sr Nts 430mn 4.375% 8/1/28; Sr Nts 468mn 5.25% 9/1/29; Sr Nts 446mn 4.25% 3/1/30; Sr Nts 588mn 4.625% 8/1/31; Sr Nts 723mn 5.4% 11/14/34; Sr Nts 1.7bn 5.45% 3/15/43.

Editor’s Note: Gimme Credit provides bond investors with straight-talking in-depth credit analysis in a concise format with an unhedged investment recommendation. The firm provides a suite of subscription services, from daily research reports and recommendations to intraday comments to periodic industry reports. For further information Click Here.

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