Freeport-McMoRan's Risks Aren't Over

UBS' Matt Murphy downgraded the rating for

from Buy to Neutral, while raising the price target from $6.50 to $9.00. Although Freeport-McMoRan has made some progress in achieving its asset sales target, there are significant risks that the company faces. Freeport-McMoRan's shares have more than doubled from their lows of mid-January, after the company sold 13 percent of its stake in Morenci for $1 billion. The leverage covenant on the company's revolver and term loan had been raised to 8.0x in 1Q-3Q/16, but reduced again to 6.0x for 4Q16, analyst Matt Murphy said. The analyst pointed out that Freeport-McMoRan's debt remains unsecured. If the company is unable to generate $3 billion from asset sales by mid-year, it will face several collateral provisions to secure the term loan and the revolver credit. The company needs to continue its sale process, cut costs and consider other long-term actions to strengthen its balance sheet and address maturity profiles. Freeport-McMoRan has shown its reluctance to sell tier 1 assets unless there is significant interest, and is instead aggressively pursuing other options. Murphy believes Freeport-McMoRan's recovery continues to be restricted by the company's vulnerability to commodity prices, its ongoing discussions to secure its future at Grasberg and the requirement of considerable success in asset sales to achieve its debt reduction target. The upward revision in the price target reflects additional high-grade production from Grasberg.