Freeport-McMoRan: Why the Current Rally Could Be Unsustainable
Freeport-McMoRan’s 2016 guidance
Freeport-McMoRan (FCX) hasn’t made many changes to its 2015 guidance apart from lowering its expected operating cash flow by $0.5 billion. However, the company has given ambitious guidance for 2016. In this part of our series, we’ll analyze Freeport-McMoRan’s 2016 guidance.
Freeport-McMoRan expects to be free cash flow positive next year
Freeport-McMoRan expects to generate positive free cash flow in 2016. It has given a guidance of operating cash flows of $6.2 billion for next year while its capital expenditure is expected at $4 billion. Its cash flow guidance is based on average copper prices of $2.25 per pound while Brent crude has been assumed at $54 per barrel. Gold and molybdenum prices have been assumed at $1,150 per ounce and $6 per pound, respectively.
These estimates leave Freeport with positive free cash flows of $2.2 billion for the next year. Freeport plans to spend this money on debt repayment and dividends.
Freeport slashed its dividends earlier this year. Meanwhile, Rio Tinto (RIO) and BHP Billiton (BHP) have managed to maintain their dividends despite the steep drop in commodity prices.
BHP currently forms 5.09% of the SPDR S&P Global Natural Resources ETF (GNR) and 0.38% of the Vanguard FTSE All-World ex-US ETF (VEU).
Is the guidance too ambitious?
Freeport expects unit copper costs to fall to $1.15 per pound in 2016 from the average expected unit cost of $1.51 this year. This is a significant reduction in unit costs. However, there isn’t much clarity on how Freeport would be able to reduce unit costs over the next year.
There are tailwinds from lower energy costs facing the company, but they’re spread across the industry. In fact, less unit production costs might push copper prices even lower in the short term.
Any further fall in copper prices would mean Freeport could miss its EBITDA guidance.
Meanwhile, what could change at Freeport with Carl Icahn buying an 8.5% stake? We’ll explore this in the next part of the series.
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