From the November 2010 issue of Treasury & Risk magazine

Silver AHA Winner in Liquidity Management

Innovation in a Rocky Market: Freeport-McMoRan


When the global recession sent the price of copper and molybdenum into a tailspin that would quickly translate into cutting revenue in half for Freeport-McMoRan Copper & Gold, the company went into action. It implemented a broad-based plan that included lowering operating costs by 18% by idling facilities, reducing its U.S. workforce by one-third, and suspending its common stock dividend. The goal was to take the pain upfront, hang onto much of its $1.2 billion in cash, and protect the company's prospects in the recovery.

The company also converted many of its $1.1 billion, 5.5% preferred shares into common to reduce dividend payouts, and used funds from certain trust accounts where there was excess cash that the company could reclaim.

On top of that, the company issued new stock, but used an innovative "equity drawdown program" to dribble the stock out over 10 days and avoid taking the hit to its stock price that a new issue typically brings. In fact, the average $28 price for the new shares was 22% higher than the stock price at the time of the offering filing, reports Kathleen Quirk, EVP, CFO and treasurer. These steps together allowed the company to keep its investment-grade ratings with S&P and Fitch and to set the stage for a 229% gain in stock price in 2009, making it the seventh best performing stock in the S&P 500, she notes.

The plunging copper price forced the company to post margin with the COMEX exchange that went as high as $160 million. Freeport implemented a plan to pass along margin costs to copper-rod customers. It also introduced 15-day payment terms for customers, with a prime-plus finance charge after 15 days, which accelerated collections.

The company cancelled the static supplier discount programs it had encouraged and regularly used, and substituted a dynamic discounting program, funded by Freeport but operated on a J.P. Morgan platform, to extend payables. "The new system allows the company to separate clearly the negotiation of commercial terms with its vendors from the discounting terms, providing a better yardstick to measure the economics of the discount program," Quirk notes.

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