Freeport-McMoRan: It Will Get Worse Before It Gets Any better

The ongoing fall in oil and copper prices along with the concerns over China, the leading consumer of copper and second largest oil importer, has also dragged down shares of Freeport-McMoRan Copper & Gold (FCX) to below $10 – the lowest level since November 2008. Beyond low commodities prices, is the company in jeopardy?

Is there a cash flow problem?

Even though the company slashed is capital spending, it still showed a negative free cash flow of $1.6 billion during the first half of 2015. And if metal and energy prices were to remain low, the negative free cash flow could expand further in the second half of the year. Let’s consider a very crude calculation: The company’s operating cash flow was $1.8 billion in H1 2015 and its capex was $3.5 billion. For the year, Freeport-McMoRan expects its capex to reach $6.3 billion – nearly $900 million lower than in 2014. Assuming the company doesn’t exceed this number, this means its capex in the second half will be roughly $2.8 billion. Let’s also assume gold, copper and oil prices were to remain around their current levels for the rest of the year at $2.3, $1,100 and $40, respectively.

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