Freeport-McMoRan: Suspends Dividend, Slashes Targets

by: Ryan Barnes December 03, 2008 | about stocks: FCX    

Ryan Barnes

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Copper, gold, and molybdenum producer Freeport-McMoRan (FCX) has released a cast iron, kitchen sink of a statement this morning, announcing the suspension of the $2/share annual dividend and a 50% cut in 2009 capital expenditures, along with volume cuts for copper and moly covering the next two years.

The moves come in response to rapidly falling spot prices for copper and molybdenum. Copper is down over 50% from its July peak of $3.60/pound to $1.63 as of Monday on the London Metal Exchange (LME). Molybdenum has fallen from $30 to just $9 in less than two months, which is a frightening trend I first mentioned in this November 11 post.

Further adding to the heft of the sink is this tidbit, and buried in the back of the 9-page(!?) release under “Accounting Matters," was a notation that a $665 million pretax charge will be taken in the fourth quarter to write down the value of stockpiles related to the Phelps Dodge acquisition. This after taking just a $22 million charge on the same assets in the third quarter is a sign of a naive management, if not an irresponsible one.

We could also see a significant goodwill write-down in the final quarter, but most investors should be backing the $6 billion goodwill figure out of book value estimates already. Even if all the goodwill is wiped away, shares still trade for less than 2/3 of book value.

Balance Sheet Study

It’s tempting to think the sky must be falling when a dividend is suspended, but it’s far more prudent to un-allocate capital that’s going out the door than to seek expensive funding in a market that would provide little to Freeport anyway.

FCX still expects to generate over $1 billion in free cash flow during 2009, as it foresees decent preservation of margins for its three main commodities. Current estimates call for a 19% reduction in unit production costs across the company portfolio, as Freeport ramps up production at lower-cost mines in Indonesia and Grasburg. However, the majority of the excess capacity gained from the Phelps Dodge buy is going to be sitting idle for quite some time.

Phelps, Phew...

Thank God, Freeport paid off $10 billion of the Phelps Dodge debt in 2007, leaving only $7 billion, which isn’t due for many years. Had it not been proactive last year when the cash was overflowing, the stock would be at single digits today.

After today, we may feel as though it’s still possible; this news will put a real hurting on shares today. 25-30% wouldn’t be a surprise. How many investors were still here for the 9% dividend yield? Probably not as many as would be around during a normal market, but there will be fallout all the same. However, were it not for aggressively paying down debt early, FCX would have become little more than a cautionary tale for future MBA classes. As it stands now, however, management has a lot to prove, like whether it will be able to justify the Phelps deal in this decade.

Que Sera Sera?

While I respect the company’s transparent thinking in the press release, I can’t help but notice how recently (just six weeks ago) the company stood all by the prior estimates. At some point, I think we all just need to let go of wishing our CEOs were more prescient, and just grant a universal, one time “forgive and forget” pass. This has truly been an unprecedented year, and neither industry experience, Wall St. experience, nor a Ph.D. in economics could have prepared one to anticipate this crisis.

Parting Thoughts

Freeport Remains in the Secular Trends Portfolio, and as much as I wish I’d listened to my earlier advice to dump shares following the last (literally, for now) dividend payment, today’s release has got to be the crescendo of bad news. In stock market parlance, that could be a good thing.

Disclosure: Author does not hold a position in FCX; shares are held in EpiphanyInvesting Secular Trends Portfolio.

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This article has 5 comments:

  •  
    Dec 03 09:35 AM
    FCX will be back...by late Spring. This is a smart move..though painful for investors. This is written before the bell on Wed and I'm sure FCX will get hammered. The problem is not that there will be no liquidity working thru the system to stimulate product demand..it's that right now...6-9 months looks most reasonable and that's with a cold Winter in between.
    The real story in this enormous untanglement will be the reigniting of China..that fall from fantasy hasn't been fully accounted for yet and with them goes the near term hopes of Australia (and BHP)...
    This IS that chance (coming VERY soon) to buy Oil for $45..Gold for under $700 perhaps..and Silver for $9..the opportunity that everyone looks back on and says.."My god, we could have had that for only..."
    Remeber Rothschilds COMPLETE quote.."Buy when there's blood running in the street..even if it's your own..."
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  •  
    Dec 03 09:43 AM
    So what's the story on FCX M (preferred convertible). It is senior to the common, mandatory converts to common in about 18 months. Is that dividend suspended as well? The co's press release specifically says "common stock" when referring to the dividend; however, their SEC filings suggest they would have to kill both common and preferred dividends to meet their 700 million plus saving goal. Someone give us a clue here.
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  •  
    Dec 03 10:08 AM
    Materials and Commodities will trend higher in the near future. Supply is going down even faster then demand. But when demand returns...prices will go way higher.

    Maybe its a good opportunity to buy FCX.

    Another good pick might be ACH. Jim Rogers is very bullish on China and ACH is a chinese metals producer.

    jimrogers-investments..../
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  •  
    Dec 03 01:22 PM
    The preferred dividends are safe; $755 million savings comes from $2 in dividends on 377.5 million common shares.
    Reply | Link to Comment
  •  
    Dec 07 05:00 AM
    Lets see FCX "is going to be hammered". Before the open, it was around $22 down from an annual high of $127 and after it was hammered it was around $18. WOW $4.00 more. Instead of being down 80+% it went to down 85%.

    By late "spring", FCX will be higher! Than what? The $22, the $18 or the recent sub-$16 or will you claim credit for the Move down to $12-13 which your sub-$700 gold implies?

    There were 5 Rothschild Families, which of them made the remark which you have altered.

    Please note, I am one of the halfwits you referred to in one of your posts. The article titled "Gold and Silver assets will begin to shine". Georealist's post is a must read for anyone making a post on any article published by Seeking Alpha. IMHO

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