Morgan Stanley Sees Sell Off In Freeport-McMoRan Shares 'Overdone'

In a report published Tuesday, Morgan Stanley analyst Paretosh Misra maintained an Overweight rating on

, while stating that the stock has declined close to 40 percent since the beginning of July, as compared to the more or less flat S&P. "A combination of rising negative sentiment towards the commodities complex, lack of firm signs of progress in Indonesia, and uncertainty surrounding the energy IPO have been the main drivers of increased balance sheet concerns," analyst Misra explained. However, the analyst believes that this sell-off is an overreaction, given that there appear to be near term catalysts for the stock. For instance, Grasberg exports, which are expected to resume soon, are likely to act as a positive catalyst. Freepost-McMoRan needs to renew its export permit every six months in Indonesia and its last permit expired over the weekend. In addition, the Gresik smelter has been facing operational problems and is currently under repair. The analyst believes that these issues are temporary, with indications that the Indonesian government has extended the company's export permit for another six months and that the company expects a rise in its Grasberg grades, starting in 4Q15 and continuing through 2017. In addition, a new labor contract for the Grasberg mine needs to be negotiated every two years in Indonesia. The current contract expires in September 2015. "We sense that the Company's relationship with the Grasberg union has improved. We expect a new labor contract to be signed in 3Q, which should act as a positive catalyst for the stock," the Morgan Stanley report stated. Given the weak crude prices, investors have also been concerned about the energy IPO. However, the analyst expects Freeport-McMoran to announce capex cuts for both its mining and energy segments in order to supplement the net proceeds from the IPO, which should take care of investors' balance sheet concerns.