Monday’s sudden resignation of Freeport-McMoRan co-founder James Moffett as Chairman caps a disastrous year for the world’s largest copper miner. Laboring under an unsustainable debt load as the prices for oil and copper plummet, Freeport has seen its stock drop by 70% this year.
Investors now pin their hopes on Carl Icahn, who has taken a 8.8% stake in the troubled commodities conglomerate, to turn things around.
The Wrong Time To Get Into Oil
A major reason Freeport is in the predicament it is in today is its 2013 leveraged buyout of Plains Exploration and McMoRan Exploration for $9 billion, which increased Freeport’s debt six-fold. The acquisition of these shale and deepwater exploration companies has been an albatross around the company’s neck, as oil prices have tumbled from $115 a barrel to under $40 a barrel. The wisdom of some of Freeport’s offshore licenses were called into question, as they bought an offshore lease abandoned by Exxon in 2006.The collapse in oil prices led to Freeport taking a $4.24 billion writedown on oil and gas reserves this year.
Recent efforts by Freeport to spin off its energy holdings were fruitless. McMoRan is not generating enough revenue to cover its own operating costs, much less contribute to paying down the debt incurred from the acquisition. Even though Freeport sold its shale operations in Eagle Ford, Texas last year, it used the money to finance an expansion of its offshore drilling operations in the Gulf of Mexico.
Some investors feel that they were taken advantage of, as Freeport co-founder James Moffett was also co-founder and CEO of McMoRan. A lawsuit by stockholders ended with Freeport paying a $138 million settlement.
Fighting For Survival
As if getting into oil at the worst possible moment wasn’t enough, plummeting copper prices due to China’s economic slowdown is piling insult onto injury. Freeport is closing one of its Arizona copper mines as part of its efforts to cut copper production by 350 million pounds a year.
Freeport’s existence is very sensitive to commodities prices. For every $5 that crude prices rise, the company gains $170 million to its operating cash flow. Now, envision what oil prices dropping $60 a barrel has done. Copper prices are much the same, where a 10 cent per pound change in prices means an extra $350 million in additional (or less) cash flow.
The company has announced several cuts to capital expenditures, workforce, and production since the beginning of 2015, each more drastic than the last. While each announcement has been greeted enthusiastically by investors, the inevitable news of lower oil or copper prices hammers the stock price back down. The latest announcement of cuts occurred on December 9, when the company announced it was suspending its dividend, and cutting even more capital expenditures.
From Top Dog To Underdog
While most companies in the commodity sector have suffered, the fall of Freeport has been dramatic. In January 2015, it was ranked as one of the top ten stocks in the S&P 500 with the greatest implied upside potential.
As 2015 draws to a close, Freeport is the worst performing minerals company in the S&P 500. Its stock price has fallen 70% for the year, bringing the 5-year return to -69.5%, and lifetime average annual return to -17%. The McMoRan acquisition and questions over executive compensation have caused a crisis of faith in company management. Even though Chairman Moffett’s base salary was cut in half to $1.25 million last year, his total compensation still amounted to $8.7 million, according to company records.
Freeport was built around the Grasberg open pit mine in Indonesia. The massive copper deposits the mine is built on were discovered in 1988 by geologist and recently departed Chairman James Moffett. Grasberg pulled in $3 billion in revenue in 2014, out of a total of $21.4 billion. The mine accounted for 93% of Freeport’s gold production last year, and 18% of its total copper production. The next phase of the mine’s operations is a transition to underground mining. This will cost $17 billion. Freeport is reluctant to start pouring money into the upgrading the mine, unless it can get an extension on its lease, which expires in 2021.
The last few years have seen Grasberg’s future embroiled in controversy. Indonesia’s government forbade the exportation of raw metals, demanding that all metals be refined before export. The problem was, there was only one small smelter in the entire country. Freeport committed in 2014 to building a $2 billion smelter for Grasberg, with construction to begin by January 2016. The government is also demanding an additional 10% stake in Freeport’s Indonesian operations, on top of the 9.36% stake it already owns. Freeport was forced to suspend copper exports in July, as negotiations over an extension of their export permit faltered.
As if things couldn’t get worse, the Speaker of the House of Indonesia’s Congress approached Freeport officials in June, demanding that 20% of the company’s Indonesian operations be given to the President of Indonesia and his wife, in exchange for an early extension of Grasberg’s lease. After the extortion attempt was made public, it was discovered that the Speaker was just using the President’s name in an attempt to gain the 20% stake for himself.
Icahn To The Rescue?
In August, activist investor Carl Icahn revealed that he had taken an 8.5% stake in Freeport, which has grown to 8.8%. His stated intent is fixing what he describes as mismanagement, overly generous executive pay, and excessive expenses. Icahn’s 88 million shares makes him the largest single investor in Freeport, which he has parleyed into appointing two of his people to the company’s board of directors. The board was shrunk from 16 seats to nine at the same time.
A former corporate raider, Icahn now casts himself as fighting for value for shareholders (including himself,) by shaking up companies he sees potential in. Freeport is far from Icahn’s only interest, and Moffett isn’t the only CEO that has recently been driven out of the company they founded. Cheniere Energy CEO Charif Souki was recently ousted for disagreeing with Icahn’s plans for the company. Icahn has interest in more than energy companies, as his recent acquisition of Pep Boys shows.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.