Morgan Stanley Downgrades Freeport-McMoRan Citing Valuation Following Restructuring

The risk/reward on Freeport-McMoRan Inc FCX may be significantly skewed to the downside, according to Morgan Stanley’s Evan L Kurtz, given that the stock appears to be pricing in copper at $.275/lb, meaningfully ahead of the estimate of an average $2.43/lb over the next three years.

Kurtz downgraded the rating on the company from Equal Weight to Underweight, while lowering the price target from $9 to $7.

Stock Valuation

While the key copper asset sales earlier in 2016 took the market by surprise, the analyst believes the current stock valuation indicates that the remaining assets are already trading at a value similar to those sold earlier in the year.

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“Copper would need to rise closer to the $3/lb mark, in our view, for the company to be able to continue to both de-lever and pursue necessary mine extension capex at Grasberg,” the analyst mentioned.

Stake Sale

Kurtz pointed out that Freeport-McMoRan is in negotiations with the Indonesian government for the sale of its 10.64 percent stake in the company’s largest copper asset, Grasberg. While the Indonesian government believes the stake is only worth $630 million, the company has asked for $1.7 billion.

“We value the stake at $1.25 billion, modestly above the midpoint of the current bid-ask,” Kurtz stated.

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