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Freeport-McMoRan's (NYSE:FCX) focus on improving its balance sheet is driving value for shareholders. The company's increasing liquidity, coupled with lower debt, allows investment in growth opportunities and sustains increases to the dividend. The improvements to the balance sheet are evidenced by the company's S&P rating moving from B+ to BBB over the past 5 years.

Debt Reduction / Refinancing

Freeport most recently improved its financial position through the refinance of $3 billion of senior notes that were paying 8.375%; the new issues carry a weighted interest average of 3%. The company approximates annual interest costs savings to be $160 million. There are no near-term maturities with the new senior notes.

New Senior Notes
AmountRateDue
$.5 Billion1.4%February 2015
$.5 Billion2.15%March 2017
$2.0 Billion3.55%March 2022

Source

(click to enlarge)FCX Interest Expense Chart

Southern Copper (NYSE:SCCO) included for comparison.

In addition to refinancing, Freeport is also working to both eliminate debt and increase liquidity. Since year-end 2008 the company repaid over $3.8 billion of its $7.4 billion in obligations, a 50% reduction. At the same time cash increased from $.9 billion to $4.8 billion.

The majority of the $7.4 billion in obligations present in 2008 originated from the acquisition of Phelps Dodge. Freeport acquired Phelps Dodge in March of 2007. The acquisition added $16 billion in debt to Freeport's balance sheet. The total cost of the acquisition exceeded $25 billion in cash and stock.

(click to enlarge)FCX Long Term Debt Chart

However, Phelps Dodge had generated close to $12 billion in revenue and $3 billion of net income in 2006 and the valuation was generally accepted as fair. Following the acquisition of Phelps Dodge, Freeport's net debt exceeded $14 billion. Interestingly, the company was able to decrease the net debt to $6.5 billion by the end of 2008 (copper prices remained elevated through September of 2008).

Conclusions

Freeport is aggressively improving its balance sheet. These improvements allow liquidity to pursue growth opportunities. Major projects in 2012 include underground expansion at Grasberg, concentrator enlargement at Cerro Verde, new plant and equipment at Tenke and upgrades to the mill at Morenci. The balance sheet improvements also help sustain the increasing dividend and the company recently increased its dividend to $1.25 per share. Shareholders now reap the benefits of the Phelps Dodge acquisition rather than the bondholders.

Comparisons to Southern Copper
YieldPayout RatioRevenueDebtCash
FCX3.6%37%$19.78B$3.52b$4.5b
SCCO6.7%70%$7.02B$2.75b$1.75b

Source: Yahoo! Finance

Source: Freeport-McMoRan's Improved Balance Sheet Sustains Growth And Dividend