Freeport defends Phelps takeover after US$14B net-loss

Vancouver – Impairment and goodwill charges primarily related to Freeport-McMoRan Copper & Gold’s (FCX-N) acquisition of Phelps Dodge in March 2007 have come back to haunt it with a US$13.9 billion net-loss in the fourth quarter of 2008.

 

After-tax charges due to reduced value of assets came in at US$13.1 billion.

 

In a conference call with analysts Freeport president and CEO Richard Adkerson emphatically defended the deal arguing that in the long-run the US$26 billion takeover of Phelps puts Freeport in a stronger position.

 

He said not only has the merger allowed the Freeport to pay down US$10 billion in acquisition related debt, but that the combined company has greater mineral reserves, a balanced global presence and a strong roster of exploration and development projects.

 

The write-down is “not the case of a company walking away from assets,” Adkerson emphasized. “We followed the accounting rules and that’s the way it turned out.”

 

He said that the merger was put together in a “totally different economic environment. The focus at the time was on growth.”

 

But with falling commodity prices and the collapsing global economic outlook – something the company couldn’t have predicted at the time of the deal – Adkerson said, “We changed that (focus) very quickly.”

 

In addition to revealing the impairment and goodwill charges, Adkerson also announced further production cuts over those previously announced in December.

 

Then Freeport said it would reduce copper output by 5% in 2009 to 4.1 billion lbs. and 11% in 2010 to 3.9 billion lbs. (relative to the October forecast). The same forecast had molybdenum production falling 12.5% in 2009 to 70 million lbs. and 30% in 2010 to 60 million lbs. Gold remained unchanged at 2.2 million oz. during both years.

 

But with copper and molybdenum prices ever depressed Adkerson said Freeport will curb production even more. Now Freeport estimates copper production will go down 9% in 2009 and 17% in 2010 and molybdenum production 25% in 2009 and 40% in 2010. Freeport did not change its gold outlook.

 

Cash costs in 2008 came in at $1.16-per-lb. copper (net of gold credit) and in 2009 Freeport expects them to decrease to 71¢-per-lb. copper.

 

In addition to the new production cuts Adkerson announced plans to raise up to US$750 million through an equity issue.   

 

On the timing of that he said, “It’s totally at our discretion and we’ll use our judgment about when it occurs.”

 

As for capital expenditures, there were few changes to decisions made in November and December that put on hold several mine expansion projects and suspended construction of its Climax molybdenum mine near Leadville Colorado. Freeport also cancelled its dividend to protect liquidity.

 

The only significant change to capital expenditures was a US$200 million upward revision of capital expenditures in 2009 from US$1.1 billion to US$1.3 billion. That compares with expenditures in 2008 of US$2.7 billion.

 

The uptick primarily came as a result of adjustments to the 2009 cost estimate of its 58%-owned Tenke Fungurume copper and cobalt project in Katanga province, Democratic Republic of the Congo (DRC). So far the project has cost US$1.4 billion to develop and Freeport expects the final bill to hit US$1.8 billion.

 

When Tenke goes to production it will produce about 300 million lbs. of copper and 18 million lbs. cobalt a year.

 

Since there has been uncertainty over the security of mine-related holdings in the DRC after the government said it was reviewing all mining contracts, Freeport among them, Adkerson reassured bankers and analysts that Freeport had a healthy relationship with the government.  

 

“Discussions are going on right now,” Adkerson said. “The government convened a council of ministers to take the lead on discussions with Freeport management.”

 

So far he said the government is honouring its original contract, renegotiated in 2005. Then the DRC government gave Phelps Dodge approval to build the mine.

 

“Key government officials continue to see it as valid,” Adkerson said.

 

Asked if Freeport was using the government’s more vulnerable position stemming from lower copper and cobalt prices as a bargaining tool Adkerson responded, “I wouldn’t want to characterize it as leverage. It’s just the way it is.”