The news that Freeport-McMoRan (NYSE:FCX) reached an agreement to monetize part of a copper mine was a game changer for the stock. Though the company took copper and gold out of the official company name, investors made a big mistake taking a focus away from those two commodities.
The stock is now surging towards $7.50 following a massive rally. At this point, one has to wonder if the rally doesn't need a pause, but investors need to remember where the stock came from in the last couple of years.
Morenci Mine Monetization
On February 15, Freeport-McMoRan announced that the company had reached an agreement to sell a 13% stake in the Morenci mine in Arizona for $1.0 billion in cash. The company owned 85% of the mine and sold the position to the minority holder Sumitomo Metal Mining Co. The deal leaves Freeport-McMoRan with a 72% position in the mine.
At that valuation, the mine is valued at roughly $7.7 billion making the Freeport-McMoRan position worth a total of $6.5 billion. After the deal closes in mid-2016, the position has a value of $5.5 billion.
For 2015, the mine produced $2.2 billion in revenues and had costs of $1.5 billion. The valuation is roughly 10x trailing EBITDA.
Most importantly, the deal gets the market back to focusing on the copper assets that have solid prospects with copper trading above $2/lb. Also, it allows the energy markets to stabilize and possibly rebound before the company needs to monetize those assets.
In addition, Freeport-McMoRan has substantial other copper and gold properties. With five properties having the potential to produce one billion pounds of copper per year.
The Grasberg mine in Indonesia offers some near-term potential for monetization with the government potentially purchasing roughly 20%. A deal could easily net the company far in excess of $1.0 billion after paying the $530 million for the smelter.
The biggest issue with Freeport-McMoRan is the well-known debt load. The company made the big mistake of piling on debt by buying Gulf of Mexico energy assets towards the peak in oil prices. The company is now saddled with $20 billion in net debt.
The story is well understood and the cash from the copper mines will go a long way to solve the debt crunch. Ironically, S&P downgraded the debt to junk status right at the lows in the market.
With this cash and the plans for positive cash flow outlined in the previous article, Freeport-McMoRan appears positioned to cover the debt load.
With the big rally in Freeport-McMoRan, the question now is what to do with the stock after the rally back to a valuation approaching $10 billion. Based on the chart, the stock likely rallies towards the 200ema around $11 though it quickly becomes overbought. Chasing the stock now probably is a losing game with the best option to purchase on any dips. Either way, Freeport-McMoRan remains a solid, long-term play on copper demand after this game changing deal.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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