Freeport-McMoRan Inc (NYSE: FCX) has spent most of the last few years working itself back from an ill-timed investment in the oil and natural gas industry. By the start of 2017, however, it was starting to make material progress in this effort. But just as it was starting to gain some traction there, it got hit with troubles elsewhere in its portfolio. Here's where things went wrong for Freeport-McMoRan in 2017.
Correcting the big mistake
Back in 2013, when oil and natural gas prices were nearing a peak, Freeport bought two energy companies. The copper and gold miner's goal was to diversify its business by expanding into oil and gas. It sounded like a great plan, since energy prices were holding up better than copper and gold prices at that point. However, within a year of the investment, oil prices started a deep downturn that turned the new business into an albatross.
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The real problem, however, was leverage. Freeport's long-term debt went from roughly $3.5 billion at the start of 2013 to just over $20 billion by the end of it. With oil prices starting a deep descent in mid 2014, the newly acquired energy business started to eat cash that was already tight due to the downturn in the copper and gold sectors. With Freeport having to cover the increased interest expense of that huge leverage expansion, investors started to wonder about the company's future. Interest expenses had tripled between 2012 (before the oil acquisitions) and 2016, a span that saw the company's bottom line go from black ink to red.
By the time 2017 began, however, Freeport had started to regain its footing. It was reducing leverage and selling oil and gas assets, an effort helped along by the 2016 recovery in copper and gold prices. Long-term debt fell around 25% in 2016 to roughly $15 billion. The progress on this front continued in 2017, with long-term debt down to $12.5 billion by the end of the third quarter. Couple that with the sale of oil assets over the past couple of years and it would have been reasonable to expect 2017 to be a very good year. In fact, the miner has been posting positive earnings since the third quarter of 2016. The underlying business has, indeed, improved in an important way.
The story at a big mine goes awry
Unfortunately, however, the uncertainties at Freeport weren't over, with a dispute at the giant Grasberg Mine in Indonesia taking center stage in early February. This single mine accounts for roughly 30% of Freeport's copper reserves and virtually all of its gold reserves, clearly an important asset for the miner. Shares sold off sharply on the news.