Readers can dig into all the gory numbers from the company's press release, so here's a brief summary of key items:
Freeport McMoran (NYSE:FCX) managed to generate $201M in operating cash flow (OCF) on realized metals prices of $1.55 copper, $818 gold and $24.55 molybdenum. While the moly price has fallen further to $9/lb, Q4's results implies FCX can remain cash flow positive if commodities prices stay at current levels. In fact, the company forecasts $1B OCF in 2009 based on $1.50 copper, $800 gold and $9 moly.
The ~$17B impairment drastically marked down the balance sheet. All of the Phelps Dodge goodwill has been wiped off along with a large part of the resource base. Management claims the writedown impacts mainly the accounting side and that the assets underlying the impairment are still valuable if metals prices improve.
The income statement was wiped out, obviously from the impairment. Adjusting for special items, FCX eked out a small profit in the 1st full quarter of the new economic reality.
As with many of the companies in my portfolio, I've been eagerly awaiting Freeport's earnings call this quarter to see how management is dealing with the new economic reality, post-Lehman (OTC:LEHMQ). Readers can review my concerns from Freeport's December update in a previous post but as stated above, I was reassured by Q4 results for the following reasons:
The company has announced further cutbacks in operations and capital spending (excepting Tenke). They now project unit net cash costs of $0.71/lb, with each of their regional operations priced to generate positive cash flow @ $1.25 copper (even North America).
While positive free cash flow probably isn't in the cards for 2009 and perhaps 2010, FCX should generate positive OCF above roughly $1.15 copper. While that projection is dependent on a lot of other variables, it would take another major leg down in the global economy to warrant more drastic action. FCX doesn't have any meaningful debt maturing until 2015, when $2.5B comes due.
If management can execute this plan they've laid out, FCX seems well-situated to ride out this current downturn and well-positioned to capitalize when the cycle turns. However, there are still sizable risks for investors:
FCX is becoming more reliant on regions with questionable property rights. Indonesia has made recent moves[$] suggesting a tilt toward more government control. The Grasberg mine is the cornerstone asset of the FCX portfolio and while the law seems to affect only new mines, Indonesia seems to be moving toward a non-capitalist stance which may lead to more negative actions in the future.
Freeport is also in ongoing negotiations in the DRC (Congo) over the terms of a contract that was already renegotiated as recently as 2005. Tenke is expected to drive future growth. I am concerned with the company's continued investment into the Tenke project with the contract situation still unresolved. Because the company's capital resource is so precious right now, it seems risky to continue investment in a project where all or some portion of the proceeds can be appropriated away.
The volatility of commodity prices may lead to some discomfort with the company's debt covenants. I don't envision this being a problem unless prices take a sustained leg down from recent lows.
The economy could take years to turn around. It will not be able to fund capex solely from cash flow for the next two years. While FCX can maintain this level of activity for some time, it seems unsustainable over a 5 year period once expensive credit markets, minority interests and preferred dividends are taken into account.
At the last update, I stated my intention to hold at $18. In recent days, the stock has finished as much as 10 points higher and I was sorely tempted to cut my losses and sell. If I had a gun to my head, I would guess that the stock will follow the economy down in the upcoming months. Despite that, I am holding my position since I already have surplus cash and therefore, no need to realize losses on a position that I think will work out over the long term. Unless the global economy peaked in 2007, commodity markets will recover to an extent, especially in the face of Chinese urbanization and a huge upgrade in American infrastructure.
Besides, selling based on expectations of lower prices is basically market timing. If I was any good at timing the market, I wouldn't be in this position in the first place.
As always, your mileage may vary.