Not long after suggesting Freeport-McMoRan (NYSE:FCX) was proving its mettle due to improving cash flows, the company has turned exceptionally aggressive in dumping copper assets and eliminating drilling rig contracts. The moves provide the company with some net cash and reduced costs, but one has to wonder what is left of the company if even more asset sales occur.
The stock closed the week down at $10.41 after recently peaking at $14.06. The recent weakness in copper is an issue, but the business decisions of the management team question the investment thesis now.
On May 9, Freeport-McMoRan announced the decision to sell their 56% stake in the Tenke Fungurume copper mine for $2.65 billion plus additional contingent consideration. The deal provides cash to reduce debt levels, but also leaves a lot of questions regarding valuation.
Tenke was always touted as one of the five copper mines with the potential for 1 billion pounds in annual copper sales. This leaves Freeport-McMoRan with four remaining mines with that potential and includes the Grasberg mine in Indonesia that is constantly under government pressure. As the statistics above indicate, the Tenke mine accounted for roughly 10% of reserves, production, and EBITDA of the company.
Using the purchase price of say $2.7 billion assuming some of the contingent income is eventually earned, Freeport-McMoRan is suggesting that their total copper mining assets are worth in the range of $27 billion. In that case, the stock almost seems over valued at a market cap of $13.7 billion and $20 billion of net debt.
The ultimate disappointment in the deal is that the company gives up a top copper mine and an exploration project when the research showed that copper was the more valuable commodity to own.
The news on this copper mine deal isn't even over with the Democratic Republic of Congo mines minister claiming Freeport-McMoRan is hiding the value of the mine in order to avoid paying taxes. The government official made the following statement:
Freeport has made a foreign sale of a Congolese asset of great value. There must be a tax to pay here. We will push the tax authority to claim it.
Paying Mighty Price
The even more disturbing news is that Freeport-McMoRan is paying a mighty price to cancel offshore drillship contracts with Noble Corp. (NYSE:NE). The perplexing part is the desire to pay substantial sums to not utilize the rigs to drill oil wells, especially now that the commodity has rebounded and these deepwater wells are typically long lasting.
The settlement according to Noble calls for Freeport-McMoRan to pay $540 million to cancel the remaining terms on the drillships Noble Sam Croft and Noble Tom Madden. Both contracts have day rates exceeding $600,000 and termination dates of July and November 2017, respectively.
Even more frustrating to investors is that Freeport is agreeing to pay a combination of cash, stock, and bonds to fulfill the deal. In essence, the company might issue stock to not utilize a drilling rig that could help produce oil in 2017 and beyond when prices are likely to rebound.
According to a Freeport-McMoRan filing the deal saves up to $800 million in payment obligations over the remaining life of the contracts. In total, the copper miner will save up to $260 million depending on potential contingent payments. Naturally, the company saves on all of the support staff as well. Of course, the ultimate accounting gimmick is that the O&G business will write these costs off now and the go forward results will look better.
The end results is that Freeport-McMoRan pays a hefty price to terminate the contracts and ends ups with nothing in return. One has to wonder how the cash flow scenario works in the favor of the company having to pay the $540 million upfront without the cash inflows of oil in the future. Possibly more perplexing is the fact that the company was set up to generate solid free cash flows in 2017 to help cover such costs.
Maybe even more concerning is that CEO Richard Adkerson made a statement about selling more assets in a package deal to help reduce debt levels in half by 2018. So despite large asset sales this year for a combined $4 billion and prospects of strong free cash, the copper miner may sell even more assets at the bottom of the cycle.
For a second time in the last few years, Freeport-McMoRan appears obsessed by asset moves at the wrong time in the cycle. The company infamously bought oil assets at the peak in oil prices and is now unloading copper assets at the lows in the recent copper cycle. With all signs pointing to a long-term favorable supply/demand scenario for the difficult to explore and mine commodity, my interest in Freeport-McMoRan is waning due to what appears inappropriately timed and forced moves again.
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