My bullish investment thesis favored the copper miner at the end of 2015 as the company detailed a realistic path towards free cash flows in the weak commodity environment. The question now is whether Freeport-McMoRan is making progress towards those goals or whether the constant moves to lower debt will cap the upside.
Positive Cash Flow Shift
The Q2 results saw great improvements in the cash flow picture and further questioned the desire of the company to unload so many assets at low commodity prices.
When including working capital sources, operating cash flows of $874 million exceeded capital expenditures of $833 million. The number was a huge improvement over the $600 million burned by operations last Q2. As well, the sequential improvement from Q1 was impressive after Freeport-McMoRan burned over $240 million of cash to start 2016.
Due to lower costs from copper mining, Freeport-McMoRan forecasts operating cash flows surging to roughly $2.9 billion in 2H from only $1.6 billion in 1H of the year. The improved cash flows are being mirrored with even further cuts in capital expenditures.
In total, the copper miner projects free cash flows of nearly $1.4 billion for the year and further improvements to those numbers in 2017. Freeport-McMoRan models the below operating cash flows in 2017 with a capex of only $1.7 billion next year. Even with copper at $2.00/lb, the miner generates huge free cash flows.
Questionable Strategy Moves
All of the positive developments in the cash flow situation question why Freeport-McMoRan dumped so many assets and is still working on a large common stock offering. The company has announced potential deals of up to $4.4 billion that includes the major Tenke deal for $2.65 billion that hasn't closed yet.
Even worse than dumping $435 million worth of EBITDA at the cycle lows of 2015, the sale of Tenke leaves Freeport-McMoRan more exposed to the whims of the Indonesian government.
To add to that, the company plans a $1.5 billion stock offering when the debt position is under control based on the asset sales and expected cash flows. Maybe Freeport-McMoRan is foreshadowing that management fears lower copper prices, but the company continues to project copper deficits in the near future.
The company even canceled deepwater drilling rigs at a cost of $755 million in the form of cash and $540 million worth of stock. Sure, Freeport-McMoRan saved an estimated $500 million in costs, but the company as well doesn't get the oil and gas production while wasting $755 million.
The stock traded positive on the quarterly results, suggesting Freeport-McMoRan has more upside. A large stock offering will cap the upside along with the other dilutive deals that have grown the share count YoY by about 25% to 1,269 million shares outstanding already.
After the stock offering, Freeport-McMoRan trades at an enterprise value of about 6x estimated EBITDA levels of $6.2 billion. One can estimate some upside potential based on the deal prices that were near 10x EBITDA levels, assuming contingent consideration is met. When considering a similar upside for 2016 EBITDA levels, the transactions were done at similar levels to the current valuation of the stock.
All signs point to Freeport-McMoRan heading higher though the stock isn't going to return to previous prices. The biggest issue with meaningful stock gains is whether the copper miner keeps unloading assets and selling stock at these depressed levels versus planning for the brighter future under a positive cash flow situation.
Disclosure: I am/we are long FCX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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