Freeport Chooses Second Share Sale as Lesser of Three Evils

Updated on
  • Shares drop after company plan to sell as much as $1 billion
  • Miner says it's facing `weak and uncertain market conditions'

Freeport-McMoRan Inc.’s plan to sell a new tranche of shares is seen as its least-unpalatable defense against operational risks amid a rout in commodities prices.

The Phoenix-based company said Friday it may sell as much as $1 billion of new shares after it raised $1 billion in open-market transactions since Aug. 10, when a previous offering was announced. The company is responding to a 23 percent slump in copper prices in the past 12 months as Chinese demand slows and the U.S. dollar strengthens.

Given that the world’s largest publicly traded copper producer already has about $21 billion in total debt, it would be difficult for Freeport to increase leverage without losing its investment-grade status, said Garrett Nelson, an analyst at BB&T Capital Markets.

“That would leave them either the option of asset sales in a distressed environment or equity issuance,” Nelson said Friday in a phone interview. “I think that’s why they’re doing equity issuance.”

Freeport tumbled 9.7 percent to $10.88 at the close in New York, the biggest decline in the Standard & Poor’s 500 Index. The shares of the metals and energy producer have dropped 53 percent this year amid falling commodity prices.

‘Uncertain’ Conditions

Ivan Feinseth, chief investment officer and analyst at Tigress Financial Parters LLC, said market conditions aren’t ideal for asset sales.

“The sad thing is, when you’re in this position, you tend to sell the most valuable assets and whatever you can,” he said in a phone interview. “It’s the equivalent of pulling out the flowers and watering the weeds. They’re in a difficult spot.”

In response to the downturn, the company said last month it would trim production and investment and also announced cutbacks in energy investments as part of a sweeping operational review.

“The actions we have taken to cut costs, significantly reduce capital expenditures in our mining and oil and gas businesses and raise equity proceeds are necessary in the current period of weak and uncertain market conditions,” Freeport said in the statement.

The company also said Friday it continues to consider a potential initial public offering of a minority interest in its energy unit. Freeport’s debt jumped almost sixfold in 2013 after it bought two energy producers for $9 billion.

Commodity Rout

Freeport is not alone in looking for ways to weather the rout in commodity prices. Glencore Plc, the world’s third-largest mining company, said this week it sold$2.5 billion of new shares as part of a wider $10 billion debt-reduction plan to protect its credit rating.

Freeport also is facing significant risks at its Indonesian copper and gold mine at Grasberg, in eastern Indonesia, which will require massive capital expenditure in coming years, Nelson said in the interview. Freeport generated 8.4 percent of its revenue last year from Indonesia, according to data compiled by Bloomberg.

Billionaire activist investor Carl Icahn disclosed in a filing last month that he had amassed a stake of about 8.5 percent in Freeport. Icahn said at the time he may seek board representation and intended to hold talks with the company on “capital expenditures, executive compensation practices and capital structure as well as curtailment of the issuer’s high-cost production operations.”

An additional equity issuance would clearly be dilutive for his stake and it’s unlikely Icahn would support it, Nelson said.

“It’s not really clear what Icahn can do,” Nelson said. “He’ll probably try to get a couple of board seats but the problems that Freeport faces are structural and it mainly relates to their Indonesian exposure.”