When Carl met Jim Bob
Freeport-McMoRan’s latest round of cuts still leaves Carl Icahn plenty of targets. The struggling miner’s stock has now soared some 33 percent since it announced spending and staff reductions on Thursday – just before the activist investor revealed he owned an 8.5 percent stake. The pre-emptive strike won’t be enough to satisfy the feisty billionaire, though.
Shareholders are probably happy that at least something is being done. Bad corporate governance heads the list of concerns. Freeport’s three top executives – Chairman James “Jim Bob” Moffett, Chief Executive Richard Adkerson and head of Freeport-McMoRan Oil & Gas James Flores – comprise an office of the chairman that’s bound to overpower lead independent director Gerald Ford.
Questionable dealmaking has also been a problem. In 2012, Freeport bought another troubled company, McMoRan Exploration, for a 74 percent premium. Moffett was a part-owner and served on the board with Adkerson and Flores, who at the time ran Plains Exploration, which Freeport bought on the same day.
The upshot has been a declining share price. Before Thursday’s rally, Freeport stock had lost 66 percent of its value this year and 86 percent since the end of 2010. Little wonder, then, that the stock jumped a third after the company announced it would slash its mining capital budget by a quarter, its North American staff by a tenth and reduce production in its U.S. copper mines.
Those measures address only some of the criticisms Icahn set forth in the regulatory filing disclosing his stake. The activist thinks executive pay is too high, even though it was cut last year after shareholders twice expressed their displeasure in non-binding votes.
The bigger worry is whether Freeport can get itself back on track with falling output, low commodity prices and some $20 billion of debt. That amount is four times this year’s expected earnings before interest, taxes, depreciation and amortization, according to Reuters data.
Moffett is considering selling $1 billion of new stock to help reduce the load. Icahn, though, probably has something bigger in mind: asset sales. Hiving off the low-margin U.S. copper mines and even some of the businesses bought in 2012 would improve profitability and cut debt. This battle is just getting started.