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Freeport Bondholders Resist $2 Billion Oil Deal

Offshore oil

Shares in Freeport-McMoRan Copper & Gold (NYSE:FCX) reacted negatively to reports that the number one publicly-held copper producer's sale of oil and gas assets could be in trouble.

Bloomberg reports Freeport bondholders want greater protection and to hold out for more money following the deal with Anadarko Petroleum to buy Freeport's deepwater Gulf of Mexico assets for a total of $2 billion. The proposed sale requires changes to Freeport’s existing agreement with lenders.

According to Bloomberg, "Freeport, which wants to keep the debt on its own balance sheet even as the assets shift to the buyer, is seeking majority approval from five sets of bondholders who together own $2.3 billion of notes to complete the asset sale."

"Freeport Chief Financial Officer Kathleen Quirk said the company plans to push ahead with the sale of its assets to Anadarko even without the consent of the bondholders. If it can’t secure bondholder consent for the proposed deal, Freeport will instead strike a merger with its subsidiary Freeport-McMoRan Oil & Gas LLC, the entity that issued the bonds. That deal would allow for the transaction with Anadarko to take place while keeping the debt on the Freeport balance sheet, she said."

Phoenix-based Freeport abandoned plans to spin off its oil and gas operations earlier this year after putting the division up for sale more than a year ago. Like many of its peers, Freeport has been struggling to get its debt load under control, which ballooned to $20 billion following the ill-timed acquisition of oil and gas assets three years ago not long before the price of crude started its descent from $100+ a barrel levels.

Copper complications

In May, Freeport announced the sale of its largest African copper mine to China Molybdenum (CMOC) for up to $2.65 billion, but the deal is complicated by a right of first offer extended to Lundin Mining (TSX:LUN) which indirectly owns 24 percent and moves by the Democratic Republic of Congo's state-owned Gecamines (20 percent direct owner) which appears to be putting together its own bid for Freeport's 56 percent stake in the high-grade Tenke Fungurume mine.

Last week, Freeport extended the right of first offer for co-owner Lundin Mining to September 29. If Lundin manages to secure the same terms as the Freeport-CMOC agreement, its stake could be worth in the region of $1.2 billion, but the extension suggests a new deal could be negotiated that could see Lundin become a major shareholder (and perhaps operator) together with Gecamines and CMOC.

A contemplated expansion of Tenke would likely boost copper cathode production capacity towards the region of 500,000 tonnes of copper per year, almost double current maximum output, catapulting Lundin towards the top tier of copper producers.

Freeport reported consolidated Tenke sales for the year 2015 totaling 467 million pounds of copper (215,000 tonnes) and 35 million pounds of cobalt (16,000 tonnes) at a net unit cash cost of $1.21 per pound of copper.

In February, Freeport sold a 13 percent stake in its U.S. Morenci mine, the world's fifth largest, for $1 billion to Japan's Sumitomo. The company is also locked in negotiations with the Indonesian government to sell an additional 10 percent in the iconic Grasberg mine, but the company hasn't been able to narrow the gap with the Asian nation on a price.

While other industrial metals and steelmaking raw materials have jumped in value this year, bellwether copper is trading flat year to date following a 26 percent decline in 2015, exchanging hands for around $2.18 a pound on Wednesday.

By Frik Els via Mining.com

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