Are Freeport-McMoRan's Asset Sales Helping Or Hurting Things?

After shelving the O&G IPO, Freeport-McMoRan Inc FCX announced its plans of accelerated debt reduction, during its 4Q15 call. Deutsche Bank’s Jorge Beristain maintained a Hold rating for the company, with a price target of $10.

Freeport is targeting $5-$10bn in asset sales, which now include Mining. Analyst Jorge Beristain said that the attributable ownership is estimated to be worth $25-$36bn. He added, “Under a $30bn Mining value mid-point, after factoring $20bn debt load, current market cap appears justified, while retaining optionality of difficult-to-value O&G assets (~$2bn).”

Credit Agreement Calls For $3B In Asset Sales

The recent amendment of Freeport’s Credit Agreement requires asset sales of ~$3bn by June 30. Beristain mentioned that the company may come close to this target via the sale of:

• 13 percent stake sale in Morenci - for $1bn
• 55 percent in Timok project – for $263m
• Possible 51 percent stake in El Abra - for about $640m
• Sale of other non-cash flowing and/or minor O&G assets – for approximately $500m

“Over the next few years Freeport could also sell stakes in other flagship mines, completely sell smaller/higher-cost mines, consider streaming deals or monetize a 20.64% stake in Grasberg (~$2.6bn),” the Deutsche Bank report noted.

Call on Asset Sales

Freeport’s asset sales would be “a balancing act,” with the company trying to maximize cash that it can get up front, while retaining its “most lucrative assets as a source of long-term value,” Beristain pointed out. He added, “While near-term asset sales should be sufficient to placate bankers, risk of copper trading below $2.25/lb longer-term cannot be ignored.”