Leading copper miner Freeport McMoRan (FCX) has been discussed here several times recently as part of a tracking of infrastructure capital spending. Their recent earnings release and conference call offer greater insight not only to that, but on the demand situation for copper (an important industrial metal) and gold (to a lesser extent).

Although the headline numbers from Freeport’s earnings were ugly, the stock has jumped substantially since then. After closing last week at $22.81, FCX shares rose the day of earnings and have gained momentum to close at $28.07 today (1-28-09).

With copper prices today around $1.50/pound, Freeport took asset write-downs and goodwill impairments in the amount of $12.6 billion, which they say brings book value in-line with long-term prices in the current range. As a result, net tangible book value decreased from $12.9 billion at the end of 2007 to $6.75 billion at the end of 2008; this puts FCX shares at 1.57x tangible book value. Still, with the potential for further asset write-downs if copper prices fall further, those values should be taken as the imperfect measures they are.
Through all of this, Freeport was operating cash flow-positive for 2008. Capital expenditures were higher on the year, although next year promises much-reduced spending as spending is reduced. Freeport is looking to reduce copper volumes by 9% in 2009 and another 17% reduction in 2010; molybdenum (an input for steel) volumes are expected to fall at more than twice that rate. Gold volumes have held steady this entire time, perhaps attributable to a combination of continued strong pricing and demand driven by inflation fears.
One additional note involves the company’s intent to raise up to $750 million in new equity capital – this is roughly 7% of the current market cap. At current metals prices, Freeport is trading for around 5.7x 2009’s pro forma Enterprise Value/EBITDA. Board Chairman Jim-Bob Moffett said the stock sale was a tool to preserve liquidity at the company, should the need arise.

One small positive from the decline in essentially all commodity prices is that unit cash production costs will be about 40% lower in 2009 than 2008. This will be a big contributor to Freeport maintaining EBITDA, which still looks to be roughly 5x total interest expense for the year. And, although the company has over $7 billion in debt, annual maturities do not exceed $250 million until 2014.

The most interesting exchange from the conference call involved Freeport’s withdrawal of over $400 million in cash from its environmental reserves.

Dave Katz – J.P. Morgan
On the cash flow item that was described as decrease in global reclamation or remediation trust for $430 million –

Kathleen L. Quirk (CFO)
Dave, could you repeat your question?

Richard C. Adkerson (President & CEO)
Yes, we couldn’t understand your question, Dave.

Dave Katz – J.P. Morgan
I was hoping that you could go into a little more detail on the cash flow item that was titled,
“Decrease in Global Reclamation or Remediation Trust”?

Kathleen L. Quirk
Yes, we had some trusts for reclamation that were established prior to the acquisitions which allowed us to fund reclamation costs, our ongoing reclamation costs out of that fund. This was cash we had that was available to do – to fund reclamation costs, and so we’ve taken the cash out of that fund to reimburse us for the reclamation spending that we’ve had over the last couple of years.

Dave Katz – J.P. Morgan
And are there any expectations of further outflows in 2009?

Kathleen L. Quirk
Yes. We have ongoing outflows for our environmental costs.

My suspicion is that Freeport found it convenient to tap that source of liquidity when funds were scarce, rather than try to borrow at a mid-teens interest rate. And, as much as the tone seemed positive given the supposedly great long-term fundamentals, I believe Freeport will be forced to quickly use its stock sale program to raise cash. The additional supply created makes me wary of believing the stock has bottomed, and the insider transactions continue to strongly favor sales over purchases as well.

On a broader level, the lack of any near-term positivity by management and Freeport’s role as a producer of key industrial inputs suggests that no pending upturn in economic activity is set to take place. Is this being priced into the market? Again, I believe not. While I will continue to use the mining complex as an early barometer of the economy, I don’t plan on looking too closely for purchases here.

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This article is part of the Festival of Stocks.