Deutsche Bank Comments on Freeport-McMoRan (FCX) Following Asset Sale

Deutsche Bank maintained a Hold rating on Freeport-McMoRan (NYSE: FCX) with a price target of $6. Earlier Freeport-McMoRan announced that it entered into an agreement to sell a 13% ownership interest in its Morenci unincorporated joint venture to Sumitomo Metal Mining Co., Ltd. (SMM) for $1.0 billion. Analyst Jorge Beristain noted Freeport-McMoRan is starting to deliver on promised asset sales.

"This marks the first tangible step towards Freeport’s objective to accelerate debt reduction via asset sales (targeting $5-10bn - timing fluid, but anticipating progress in 1H16) amid recent credit downgrades," said Beristain. "Last week, Standard & Poor’s (S&P) cut Freeport’s credit rating by 2 notches to BB (from BBB-) with a negative outlook, driven by rising leverage amid declining commodity prices. This follows a similar downgrade by Moody's last month."

The analyst continued, "Morenci stake sale implies a high valuation of EV/EBITDA 2016E of ~11.6x, or basically 2x Freeport’s current 5.5x valuation so would appear ~10c/share accretive to DBe. However, on a Net Present Value basis we find the sale to be at fair value (Wood Mackenzie estimates 13% Morenci NPV at $1.1-1.4bn considering discount rates of 8 12%,) but helps reduce 2016E ND to $19.7bn (vs. $20.7bn current estimate, $20.2bn at YE15) and 2016E ND/adj. EBITDA to 4.1x (4.3x prior, 4.6x in 2015)."

Beristain added, "Freeport showcases Morenci (85%-owned, largest copper mine in North America), Cerro Verde (53.6%-owned, world’s largest concentrator facility), Grasberg (90.64%-owned through PT-FI, one of the largest copper/gold reserves in the world) and Tenke (56%-owned, high grade copper/cobalt resource) as its best mines, each capable of producing +1bn lbs/yr of copper or +455kt/yr. All asset sales are now “on the table” in an effort to shore up the balance sheet. The company is in talks to divest a 20.64% interest in its Indonesian unit PT-FI (recently offered to sell 10.64% in PT-FI for $1.7bn, but the gov’t deemed the price too high). Potential sale of O&G assets is ongoing but the near-term oil price will be the key driver and a price below $30/bbl could largely negate the O&G assets’ value, impairing timely disposal."

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 $5.53 yesterday.

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