Copper Is Key For Freeport-McMoRan And Citi Knows

• The share price of Freeport-McMoRan, Inc. FCX has declined almost 58 percent, year to date.
• Citi’s Brian Yu has downgraded the rating on Freeport-McMoRan from Buy to Neutral, while lowering the price target from $20 to $12.
• The company has taken the lead in cutting down on copper production and spending, given the current pricing environment, and other companies are expected to follow.

Freeport-McMoRan has guided to strong cash flow of $6.3 billion for 2016, at $2.25/lb copper and $54/bbl oil. However, the guidance included considerable working capital drawdown, which Yu estimates at $1.8 billion, while mentioning that “there is very little incremental deleveraging opportunity.”

According to the Citi report, the best opportunity for the company to improve its free cash flow is to eliminate or at least reduce its exposure to Oil & Gas, given that it does not have any perceptible synergies with Freeport-McMoRan’s core mining business.

“Management is already looking at an IPO of the O&G assets, which could help even if valuation is not ideal,” the report said, while adding that at the current operating levels, the company’s oil & gas business would need Brent price at about $75/bbl to breakeven.

“Holding all else equal, any reservations about a low transaction value should take into consideration future cash burn avoided,” Yu added.