About a month back, I reviewed conference calls from several of the major infrastructure companies to see what they were saying about demand. A few key takeaways were that energy projects are seen as resilient, while miners and utilities are seen as vulnerable.

One major point of concern about the present state of the economy is how far-reaching the impact of this recession has been; with the banks having impaired balance sheets and a reluctance to lend, which area of the economy is able to be the focal point of the re-inflation process? A process of elimination and a cursory thought about what the country needs lends weight to my belief that infrastructure is the natural area to pump money into. Assuming some action must be taken, a Public Works-style plan seems like the most reasonable course of action.

The focus of President-Elect Obama’s recent address outlined a plan that sounds very similar to what I was looking for. The infrastructure group jumped more than 10% today on the news, and many of the tech stocks that could benefit from spending on technology for schools – Cisco (CSCO), Dell (DELL), and Microsoft (MSFT) – saw strong gains as well.

But there are still signs of weakness. As part of the infrastructure coverage, I noted that copper miner Freeport McMoRan (FCX) had announced a halt to work necessary to bring their molybdenum mine on-line – and bad news, like bugs, follows the “there is always one more” axiom. At the end of last week, Freeport said they were eliminating their dividend, as well as cutting total capital spending in half (a decrease of $1.2 billion), as plummeting copper prices and scarce liquidity require a conservative new approach. Below are charts for copper and molybdenum prices, both of which are general signs of industrial activity.

This makes me wonder if players like Southern Copper (PCU) are on track do either reduce their dividend substantially, or curtail capital spending projects. While Southern Copper has a better liquidity profile than Freeport, Freeport’s debt maturities are far in the future and the two companies’ long-term leverage ratios are similar – Southern Copper’s long-term debt-to-tangible capital ratio is .355x, whereas Freeport’s is .53x.
From their most recent presentation, Southern Copper has over $2 billion in near-term expansionary capital spending scheduled, and another $2 billion further down the road. How much of that will actually materialize? Those plans were made in good times of strong pricing, so if we see more stats like this, the answer will be “not much”…

With Wall Street doing some backtracking on just how far through the credit crunch we are, it’s clear that the financial effects are spilling over into the real world, and hurting companies that want to expand. Still, infrastructure stocks with the right operating business look set to find support from a US government with unparalleled (and cheap!) borrowing power. Continue looking for companies that are self-financing, and have a customer base that will not face a liquidity crunch – the latter is often overlooked.

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