UPDATE: Morgan Stanley Cuts Freeport-McMoRan (FCX) to Underweight
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(Updated - September 14, 2016 11:50 AM EDT)
Morgan Stanley downgraded Freeport-McMoRan (NYSE: FCX) from Equalweight to Underweight with a price target of $7. The bank's bull case on the stock is $14 and its bear case is $3, and analyst Evan L Kurtz thinks risk/reward is skewed meaningfully to the downside. The stock is pricing in $2.75/lb copper, well above the bank's view for a $2.43 average over the next 3 years.
"On our math, the key copper asset sales that positively surprised the market earlier this year are consistent with a 6x EV/EBTIDA valuation on a ~$2.75/lb copper assumption. We believe the stock is currently trading at about 6x on $2.75/lb copper, which would indicate the remaining assets already trade at a similar value to those sold earlier this year," said Kurtz.
The analyst continued, "Freeport is currently negotiating a 10.64% stake sale of their largest copper asset, Grasberg, with the Indonesian government. The company has asked for $1.7 bn for the stake, while the government has said it is worth only $630 mn. In this note, we unveil our new Grasberg NAV. We value the stake at $1.25 bn, modestly above the midpoint of the current bid-ask."
Kurtz added, "We estimate this year's asset sales and equity issuance will lower debt levels from 5.1x in 2Q16 to 2.1x by the end of the year. Leverage is likely to continue to drop modestly again in 2017 since the company will be mining a high grade area of its key Grasberg mine. However, as the grade begins to normalize in 2018, a flat commodity price would cause leverage to climb back up to ~3.3x. Copper would need to rise closer to the $3/lb mark, in our view, for the company to be able to continue to both de-lever and pursue necessary mine extension capex at Grasberg."
Shares of Freeport-McMoRan closed at $10.15 yesterday.
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