Freeport-McMoRan: A Way Out?

| About: Freeport-McMoRan Inc. (FCX)

Summary

Freeport-McMoRan faces lend snags will selling the deepwater assets to Anadarko.

The possibility of higher oil prices would make any failure to close a deal actually positive for the company.

The potential heating up of the Asian Pacific construction markets is a positive sign for copper that will drive the Freeport-McMoRan higher regardless of the debt issues.

Only a couple of weeks ago, Freeport-McMoRan (NYSE:FCX) reached an agreement with Anadarko Petroleum (NYSE:APC) to sell the deepwater oil and gas properties. The move was questioned in my latest article as Freeport-McMoRan appeared to again unload valuable assets towards the lows in the related commodity market.

After an initial hit, the stock has rallied off the lows with improving commodity prices. The news of the day of a potential agreement by OPEC could make Freeport-McMoRan regret the yard sale though one has to wonder if the copper miner has a way out with the debt covenants.

Debt Covenants

According to Bloomberg, the $2.0 billion asset sale to Anadarko is running into snags with bondholders on the $2.3 billion of notes owed on the oil and gas assets. Apparently, these bondholders want some incentives to consent to the deal allowing for selling the assets and keeping the debt on the books of Freeport-McMoRan.

Oil surged over 5% today on the news of a potential agreement on curtailing oil production. Any such deal will boost the price of oil above $50/bbl and quickly increase the value of the deepwater assets Freeport-McMoRan is dumping.

At this point, the CFO is apparently suggesting that another path of selling/merging the Oil & Gas division would provide an opportunity for completing the transaction. Unfortunately, Freeport-McMoRan appears obsessed with selling assets at all costs despite the lack of any need now.

Copper Focus

The key copper market is showing some signs of life. Copper now trades at levels supportive of a rally higher finally. The below chart shows a commodity making higher lows this year.

Another prime sign that copper is possibly headed higher are the machine and construction sales figures released by Caterpillar (NYSE:CAT). On a rolling three-month basis, Asia/Pacific machine sales are now up 2% while construction industries from the same region are up a strong 12%. Both numbers are huge improvements from the prior months and suggest a robust market in the current month.

If Freeport-McMoRan only sees a rebound in copper prices toward $2.50/lb, the copper miner is back on a path to huge free cash flows to pay down debt. The debt picture prior to the Deepwater Gulf of Mexico asset sale was already shaping up for vast improvements in 2017.

Click to enlarge

Source: Freeport-McMoRan Q216 presentation

Takeaway

The key investor takeaway is that anything that trips up some of the recent assets sales are positives for shareholders. Freeport-McMoRan dumped these assets at the lows in the market. Either way though, the copper market is showing signs of heating up making the stock a solid buy around $11.

Disclosure: I am/we are long FCX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.