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 tess.stynes@wsj.com
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