Where the massive debt and losses come from is a concern for investors as the question is how did commodity experts get it so wrong. In other words are they good managers?

Freeport-McMoRan did two massive deals in 2012 when oil was over $100 a barrel and natural gas was at $4.50 per million Btu. The deals were for over $20 billion. Copper was $3.50 per pound and gold $1,500 per ounce at the time. Of course as history showed us that was around the peak and the commodity rout took hold. The deals were closed mid-2013 and the massive overpay has wreaked havoc.

To pay down debt in 2014 it sold its Eagle Ford Shale assets to Encana $ECA for $3.1 billion. While they used half to buy Gulf of Mexico assets from Apache $APA.  Earlier this year $FCX sold its California onshore oil and gas properties to a private buyer for $720 million. 

Freeport-McMoRan has raised only $4.4 billion from those oil and gas assets from 2012. There are some oil properties left. Thats a huge chunk gone. $FCX also had equity raisings yet the debt level was still $15.4 Billion of debt at the end of 2Q17 with $4.7 Billion in cash. 

Geopolitical Risk

Global commodity companies have another risk, geopolitical. Freeport-McMoRan this year had a number of disputes at its Grasberg Mine in Indonesia (image above). In January $FCX suspended copper exports due to a contract dispute with the government. It took until  April for exports to flow again. The Indonesian government agreed to allow the company to continue shipping for six months while it negotiated a new operating license with FCX. Hence the issue remains a risk and unresolved.

Then as soon as exports were back on in May more than over 5,000 workers at the mine went on strike. An added risk to the mine and therefore the firm's cash flow.

Of course the flipside is should Freeport-McMoRan resolve these issues, earnings keep improving and debt paid down they do appear cheap relative to their major competitors like the Australian mining giants $BHP and Rio Tinto $RIO on several measure. There is the added risk of will they replicate the same type of errors again? Are they good commodity managers?

Sources: FCX Presents at Deutsche Bank 2017 Global Industrials and Materials Summit, Reuters

From the Traders Community News Desk