Freeport-McMoRan (FCX) May Need to Drastically Cut Capex and/or Dividends to Reduce Debt, Says Goldman Sachs

Goldman Sachs maintained a Neutral rating on Freeport-McMoRan (NYSE: FCX) with a price target of $31. Analyst Sal Tharani thinks deflation in crude and copper could heighten leverage concerns.

"The recent sharp fall in oil and copper prices has brought into focus the debt reduction targeted by FCX by the end of 2016. FCX is highly exposed to both of these commodities and we feel current weakness, if persistent, could heighten investors’ concerns about its leveraged balance sheet," said Tharani.

"Since June, oil prices have fallen by about 40% to $70/bbl, with the declines reportedly exacerbated by producer hedging once prices moved below long-term cost support of about $90/bbl. Copper significantly breached its perceived long-term cost support of $3.00/lb. ($6,600/t) on November 28, opening up the possibility of a similar dynamic of increased producer hedging and a sharper than expected price decrease over the coming year. According to FCX, its EBITDA sensitivity is $480mn for every $0.10/lb. change in copper price and $180mn (net of benefit of diesel costs) for every $5/bbl change in Brent price," continued the analyst.

"We see three implications: (1) FCX will not be able to fulfill its target of reducing its net debt to $12bn by 2016. Based on our estimate of copper and oil prices, FCX would in fact increase its net debt by over $1bn from current levels by the end of 2016, excluding any capex requirement for the new smelter in Indonesia. (2) One of the main levers of reducing debt that FCX has spoken of is to sell its California oil assets; but given current oil prices, it would mostly likely not be able to get the value its was expecting, particularly in light of what it had paid for these when it acquired Plains Exploration in 2Q13. (3) FCX may need to drastically cut its capex and/or dividends to reduce debt," he added.

For an analyst ratings summary and ratings history on Freeport-McMoRan click here. For more ratings news on Freeport-McMoRan click here.

Shares of Freeport-McMoRan closed at $25.87 yesterday.

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