Our copper MMI scored a one point gain to 61 from 60. Like other base metals, after sliding in November, copper prices stabilized in December.
Similar to aluminum, copper prices have fallen more than 30% since May and the fact that prices aren’t able to bounce after such a decline should have copper producers worried. The low pricing environment has depressed producers’ earnings and liquidity causing their stock prices to plunge this year.
Freeport McMoRan’s stock price is down 76% on the year to date, falling to its lowest level since 2003. The company recently undertook cost cutting measures. When Freeport announced spending cuts in August 2015, its stock soared more than 28% but announcements of further cuts in December didn’t help boost shares this time, indeed shares are down 25% since the announcement a few weeks ago.
The company also announced the suspension of its $0.20 per share annual stock dividend. By suspending dividends, Freeport expects to save around $240 million annually, helping the company to raise cash under the weak current market conditions. Although some long-term investors might see the reasoning behind this move, dividend cuts are very discouraging for investors looking for a constant stream of income. The decision shows the challenging business situation that Freeport and other mining companies are in.
In December, The International Copper Study Group reported a market surplus of 35,000 metric tons for the first nine months of 2015. This compares with a market deficit of 450,000 mt for the same period last year. Weakening demand and the unwillingness of miners to cut production continues to generate surplus copper. Despite low prices, we are not seeing big production cutbacks from copper producers as companies don’t want to leave market share open to competition. What’s even worse is that copper producers including Rio Tinto Group, BHP Billiton and Southern Copper are still going ahead with their 2016 production plans.
Will Copper Producers Manage to Stay Alive?
Thanks to cost reduction measures and the suspension of dividends, Freeport expects to generate cash flows of $600 million in 2016. However, Freeport’s estimates are based on assumptions that might not materialize. In the math, the company assumed that copper will be at $2 per pound while crude oil at $45 in 2016.
It only took copper prices a week to already trade below $2 per pound and we’ve already seen crude oil at $32 per barrel in January. Some say it might hit $20 per barrel by the end of the year. Although Freeport is not facing any short-term debt maturities, the company is prone to financial stress if the slump in energy and copper prices doesn’t stop. We feel that many companies like Freeport are being too optimistic about 2016 and we suspect that prices still have room for more declines. Many producers will need to give up believing in those rosy outcomes to support prices and help other producers survive this bearish commodity market. A dose of reality is necessary.