Top Copper Producers Announce New Measures to Stay Afloat
(Continued from Prior Part)
Financial stress
As discussed previously, Glencore (GLNCY) and Freeport-McMoRan (FCX) have announced a new series of measures to cope with the rapidly deteriorating commodity price environment. In this part of the series, we’ll explore how both of these companies are vulnerable to financial stress.
Business parameters
Freeport-McMoRan is susceptible to falling energy prices along with multiyear low copper prices. Apparently, Brent crude prices are currently trading much lower compared to what Freeport has assumed in its 2016 free cash flow guidance. Moreover, the outlook for energy prices is much more bearish compared to copper.
Southern Copper (SCCO) and Turquoise Hill Resources (TRQ) are among the major pure play copper producers. Currently, Southern Copper forms 1.7% of the iShares Latin America 40 ETF (ILF).
Glencore, on the other hand, has a more diversified business. Copper accounted for only a little over a quarter of its 1H15 EBITDA (earnings before interest, taxes, depreciation, and amortization).
Furthermore, Glencore has a marketing arm that is largely insulated from falling commodity prices. In 1H15, such marketing activities accounted for ~78% of its consolidated revenues and more than 25% of its adjusted EBITDA.
You can read Glencore: An Investment Overview of a Mining Giant to learn more about Glencore’s different business segments.
Financial metrics
Glencore’s leverage metrics as measured by interest coverage ratio and its net debt to EBITDA are not high, considering the industry standards. However, the company faces significant near-term debt maturities.
According to a report released by Glencore on October 6, 2015, the company has upcoming debt maturity of $5.4 billion until June 30, 2016. This represents almost 15% of the company’s capital market notes. Of this, more than $1.5 billion of Glencore’s debt maturities were in October 2015 alone.
Glencore also faces major debt maturities over the next couple of years. Between June 30, 2016, and December 2017, Glencore has debt maturities of $5.8 billion. This means that more than 30% of Glencore’s long-term capital market bonds are maturing over the next two years.
Fortunately, Freeport does not face any near-term debt maturities. In an interview with CNBC, Carl Icahn, who holds a significant stake in Freeport, said that he does not see Freeport headed toward bankruptcy.
Nonetheless, falling energy prices could continue to haunt Freeport in the near term. Though the company has a comfortable debt maturity schedule, it looks prone to financial stress if commodity prices tumble further. Moreover, unlike Glencore, Freeport does not have any non-core assets that it can sell to raise cash.
You can also read Is Freeport-McMoRan Worth a Look for Investors? to explore FCX’s outlook in the current market scenario.
Browse this series on Market Realist: