Freeport-McMoRan: A Long-Term Buy Opportunity May Have Opened Up

| About: Freeport-McMoRan Inc. (FCX)


Asset sales have gone a long way toward improving the debt metrics.

GoM assets sale will reduce leverage as well as save free cash flows.

Rating companies might consider a positive outlook soon if the progress on debt reduction continues.

Full-year EBITDA target should be achieved and it should result in an acceptable debt-to-EBITDA multiple.

At the start of August, Goldman Sachs (NYSE:GS) predicted a considerable decline in copper prices in the next twelve months as they believed the market was on the verge of being oversupplied. At that time, per ton copper price was just above $4,800 which has now come down to $4,730. It is not a major fall as the bank was predicting the metal price to hit $4,500 in three months. There is still almost six weeks left and we might see their short-term target reached in three months. Bloomberg also highlighted that the hedge funds were leaving copper due to the same reason. If we look at the stock price movement of Freeport-McMoRan (NYSE:FCX), there is clear correlation and looks like some investors took Goldman's advice and decided to leave one of the largest copper producers. However, the decline in FCX's price is much larger than the decline in copper prices.

The magnitude of FCX's price fall is higher because the company is carrying a lot of other problems as well. While commodity prices are out of its control, other matters can be addressed. Freeport-McMoRan decided to raise cash through different measures at the start of the year. One of these measures was to sell some assets and raise around $3 billion. The management has been successful in this area even beyond its own expectations and the total asset sales have now reached around $6 billion after the sale of Gulf of Mexico assets. Almost all these sales have occurred due to the need to improve balance sheet. Debt reduction has become a theme in the commodities market and most of the major players are looking to raise funds and improve their balance sheets. So, this issue is not unique to FCX.

These asset sales have gone a long way in improving the balance sheet of the company and its debt metrics are now looking quite respectable. This deal will bring in a total of $2 billion once the transaction is closed and $150 million in contingent payments. $582 million will be paid to the preferred shareholders of Plains Offshore Operations while the remaining will be used to pay debt. Moody's have already weighed in on the transaction and they believe it is credit positive. This is not a surprise as the debt payment will reduce the future interest burden along with the overall leverage of the business. However, the more important point here is that the debt metrics are now slowly reaching a level where the rating agencies might change the outlook to positive. This will be a real boost for the company and it will be a stamp of approval about the financial health of the business.

Energy operations have been a drag on the cash flows of the company. Despite poor market conditions, FCX's mining assets have been generating positive cash flows and EBITDA. However, the energy assets have only been eating into those cash flows. Mining assets were financing the capital spending for the energy operations. This sale will result in cash flows saving in the form of reduced capital spending for the oil and gas segment. The benefits of this sale are twofold: reduction in debt and future interest obligation and cash flows savings from capital spending. Strategically, it allows the company to focus on its core business and use those free cash flows efficiently.

If the company is able to meet its full year EBITDA expectations of $4.5 billion then its long-term debt-to-EBITDA ratio will go below 4x. This will be a huge improvement and might result in an upgrade from the rating agencies. Interest obligation of around $550 million will be sufficiently covered by EBITDA.

I am a bit more optimistic about the copper market than the people at Goldman. Most of the predictions are based on expected slowdown in the Chinese market. However, the Chinese economy is making a recovery and the most recent data shows that the things are not as bad as feared. In fact, the growth seems to be in line with the government target of 6.5-7%. Furthermore, the Asia-Pacific economies along with India are increasing their spending and the infrastructure spending by these nations will certainly stimulate demand for commodities. Due to these factors, we might not see copper prices go down to $4,000/ton and FCX should meet its EBITDA target. Current shareholders should not worry too much as the decline, if it comes, will be temporary. The recent fall in stock price might have created a good opportunity for investors looking to invest for the long-term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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