Stronger-than-expected oil and gas volume highlighted Freeport-McMoRan’s third quarter on the operating front. However, lower copper and gold prices pressured cash flow and net debt rose in the quarter. We expect still-lower prices and continue to doubt Freeport can meaningfully deleverage unless it undertakes significant asset sales and cuts its dividend.

Production and cost figures were solid. Strong output in the Eagle Ford and Gulf of Mexico prompted management to hike its full-year oil and gas volume outlook. Mining volume was in line with management’s prior expectations, and the company affirmed its full-year outlook. Mining costs were also in keeping with expectations. Unit costs fell from the prior year on better copper and gold volume at Grasberg and cost-control efforts. Market conditions were less kind.

Copper price realizations fell to $3.28 per pound from $3.64 on weaker underlying demand growth in China and strong supply. We continue to expect prices will remain under pressure in the quarters to come, mainly due to lower Chinese demand growth (China accounts for two fifths of global copper consumption) and significant supply additions by Freeport and peers.

Deleveraging would prove difficult in such circumstances. Freeport ended the quarter with $21.1 billion in debt and $2.2 billion in cash, after delivering $300 million in free cash flow before dividends. This pace will grow harder to sustain if we’re right on our price outlook. Absent a cut to the dividend or material asset sales, we would not expect Freeport to meet its target of paring debt to $12 billion by 2016.

Management indicated it is reviewing its portfolio for opportunities to “accelerate its deleveraging plans” via a number of means, including asset sales. This would probably involve selling oil and gas assets at a discount to the premium Freeport paid less than a year ago when it got into the business.