Freeport-McMoRan Swings to a Loss--Update

By John W. Miller And Tess Stynes 

Freeport-McMoRan Inc. on Thursday swung to a first-quarter loss on sluggish copper prices, and said it might spin off part of its energy business after recording a hefty write-down in that segment.

Freeport-McMoRan's main business is still copper, which is used to make wiring for electronics and pipes for plumbing. But sluggish growth in China, easily the world's biggest buyer of the metal, has deflated prices. Freeport said the average price it charged customers fell 13.4% from a year earlier to $2.72 a pound.

The Phoenix-based mining company posted a loss of $2.47 billion, or $2.38 a share, compared with a profit of $510 million, or 49 cents, a year earlier. Revenue fell 17% to $4.15 billion.

The company said it believes that once Chinese growth returns to normal, the country will need massive amounts of copper to raise its economy to the next level of development. And unlike steel and aluminum, which China is producing and flooding world markets with, the country is short of copper, said Dan Rohr of Morningstar Inc.

Freeport said it remained optimistic about "the long-term commodity markets for the commodities we produce and the significant values embedded in our large-scale, long-lived assets." It controls mines in the world's principal copper mining regions---Arizona, Chile, Peru, Indonesia and the Democratic Republic of Congo. And it is still increasing production. Copper sales, which make up 63% of Freeport's overall revenue, were up 10% to 960 million pounds in the latest quarter.

However, the company remains weighed down by its 2013 acquisitions of energy explorers McMoRan Exploration Co. and Plains Exploration & Production Co., in deals valued at a combined $9 billion. Its energy unit drills for oil and gas on land in the U.S. and in the Gulf of Mexico.

Investors and analysts were immediately skeptical about the purchases, because mining and drilling for oil are such different businesses. One fund manager said the Freeport call to announce the transaction "one of the worst teleconferences I've ever heard to justify a deal."

With oil prices slumping, it appears the skeptics were right. On Thursday, Freeport reported a $3.1 billion loss for impairment of oil and gas properties. It said the cash margin in its oil division fell to $23.45 per barrel of oil equivalent from $58.71. Revenue tumbled to $547 million from $1.2 billion.

Now Freeport is moving to minimize its exposure to oil and gas, and refocus on copper. On Thursday, it said it would look at ways to cut costs, and would explore a public listing for its oil and gas business, or sell a minority stake, although Chief Executive Richard Adkerson told analysts the company would retain a "significant interest" in any spun-off entity.

Freeport's debt increased to $20.3 billion at the end of the first quarter from $19 billion at the end of 2014. Freeport has abandoned a previous plan to cut debt to $12 billion by the end of 2016.

Even with a refocus on copper, risks remain. Freeport runs mines in politically volatile countries--Indonesia and the Democratic Republic of Congo. Last year, Freeport battled with the Indonesian government over export taxes, and this year, it will face negotiations with unions over a new labor deal. To resolve the issue, the company had to agree to help build a $2.3 billion smelter and sell a 20% stake in its local subsidiary. In the strife-torn DRC, output at Freeport's Tenke Fungurume copper mine now makes up around 10% of the company's total production.

Mr. Adkerson told analysts Thursday that the quality of a copper deposit could trump the risk of operating in a politically volatile country. In Indonesia, he said, "despite all the noise, none of us have lost sight of what a fabulous ore body this is."

Write to Tess Stynes at [e-mail]

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