Back in March 2015, I wrote an analysis on Freeport-McMoran (FCX) and issued a BUY recommendation on the stock (it was trading at $19 per share or so). After that, the stock peaked to about $24 per share in May and then receded to below $7 per share. It is currently down 70% since the start of the year and testing the 52-week lows: (Source: Google Finance) I have admit I was wrong on this one. The number one reason is that I did not do my own valuation of the stock and largely relied on analysts' estimates. I also did not expect commodities to slide this much: (Source: IndexMundi.com) You can do the math and see how much the prices fell since March. In response to the deteriorating situation on the market for the company's output, Freeport-McMoran issued a press release last Wednesday, December 9, 2015, where it outlined the ways in which it will tighten the belt. I will show the key points below: - CapEx slashed for the company's O&G division - by 25% to $3B for the next two years. The same figure is applied to the mining operations - from $2.7B to $2B in 2016. In total, FCX will save almost $2B in 2016-2017 on CapEx. - The company is looking for ways to monetize some of its assets and considers selling minority stakes in certain mining assets in order to further cut down its debt (the company currently has about $20.5B in net debt and about $50.4B in assets, according to the latest 10-Q report ). - Dividends of $0.20 per share have been SUSPENDED indefinitely in order to save about $240M per annum. - Assuming prices of $2.00 per pound for copper and $45 per barrel Brent crude oil for 2016, FCX estimates consolidated operating cash flow would exceed capital expenditures by more than $600 million. As of today, one pound of copper costs about $1.85, while Brent ducked below $39 per barrel. - The company has raised $1.6B in equity from the stock market since August 2015 and has another $0.4B to go. It also managed to relax some conditions on the Bank Credit Facility - the leverage ratio (Net Debt/EBITDA) has been amended in the following manner: "4.75x to 5.5x at December 31, 2015, 5.9x for the first half of 2016, and stepping down to 5.0x by year-end 2016 and 4.25x in 2017. The Leverage Ratio is unchanged at 3.75x thereafter" What the prices for the company's products are so volatile, almost anything is good to keep the company alive. I applaud FCX's management for its ability to steer the ship through the storm. The only problem is that common shareholders get punished heavily for every such crisis management measure. In addition to that, the company has only stay alive if its balance sheet can withstand the storm. Let us analyze FCX's latest balance sheet figures: (Source: Q3 Report) Key points: - Cash is down by over $100M since the start of the year. This is partially explained by a ~$200M increase in materials and supplies; - Inventory down by about $16M. This basically means inventory levels have remained flat for the last 9 months. This is not good at all given that it is losing value almost on a daily basis; - Long-term mill and leach stockpiles are up by almost $150M - yet another cash outflow. On the assets side, I can say that FCX has failed to sufficiently monetize its current assets. - Account payable are down by over $200M. On the hand, this is a cash outflow, which is bad in the current situation. On the other hand, it helped the company improve liquidity ratios, which are also important in the present time; - The current portion of long-term debt almost doubled to $906M. This is a problem in the short-term because the company's cash balance is insufficient to cover the payment. This means that the rest of the cash will come from inventory realizations and reductions in the accounts receivable which is risky to an extent; - Dividends payable decreased by $270M which is bad for investors but good for the company's liquidity. As stated before, FCX actually eliminated dividends for at least the next year; - On the equity side, the company increased the common stock balance by about $1B through the sale of shares on the market. FCX also increased the balance of non-controlling interest which implies that the company sold a few stakes in its assets to their other current owners. On the liabilities and equity side, I conclude that Freeport-McMoran has been improving its current financial situation at the expense of the current shareholders. I urge the readers to look at the company's disappointing cash flow statement. There are a few things I would like to point out: - For the nine months, the company's cash flows from operation actually decreased by 43% (!), while capital expenditures increased by 36%; - The company issued $1.85B in net debt in the last nine months vs. retiring $850 a year before. Although this contributes to the company's liquidity, it does not help the credit risk at all; - FCX issued $999M in common stock (already mentioned that), while also slashing dividend by over 50% (and eliminating it altogether by now). Apparently, this was done to help finance the $1.3B asset expansion. Not a wise thing, in my opinion. Looking at the above analysis from the start to the end, I can only say one thing: stay away from this stock - it is a falling knife. We have no (even remote) idea of how low it can fall. The company is indebted, and its cash flow projections are already underwater. Perhaps, the only positive thing I can say is that the company has no debt to retire in 2016 which help liquidity and gives time for maneuver. Let us hope the management uses the time wisely. Assuming prices of $2.00 per pound for copper and $45 per barrel Brent crude oil for 2016, FCX estimates consolidated operating cash flow would exceed capital expenditures by more than $600 million. - See more at: http://investors.fcx.com/investor-center/news-releases/news-... Assuming prices of $2.00 per pound for copper and $45 per barrel Brent crude oil for 2016, FCX estimates consolidated operating cash flow would exceed capital expenditures by more than $600 million. - See more at: http://investors.fcx.com/investor-center/news-releases/news-...