Freeport-McMoRan Suspends Dividend; Slashes Targets (FCX)
Posted on | December 3, 2008 Time: 6:14 am |
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, a frightening trend I first mentioned in this November 11 FCX post.
Further adding to the heft of the sink is this tidbit, buried in the back of the 9-page(!?) release under “Accounting Matters”: a $665 million pretax charge will be taken in the 4th 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 3rd quarter, 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 3 main commodities. Current estimates call for an 19% reduction in unit production costs across the company portfolio, as Freeport ramps up production at lower-cost mines in Indonesia and Grasburg. But 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 they 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. But 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, or 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. After today.
Disclosure: Author does not hold a position in FCX
Tags: capex > copper > Dividend Cut > Freeport-McMoRan > gold > molybdenum > Phelps Dodge
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