Freeport McMoRan Sale Is No Panacea

On Monday,

We've cut our fair value estimate to $3.95 per share from $4.30. Our fair value would have declined more steeply, but we've also lowered our pretax cost of debt assumption to 10.0% from 14.5% due to a stronger balance sheet following this deal and other sales in 2016. Our no-moat and extreme uncertainty ratings are intact.

The sale to Anadarko represents another major reversal of Freeport's foray into oil and gas, reducing near-term oil and gas production by roughly half. Buying exploration and production companies Plains and McMoRan in 2013 carried a combined price tag of $20 billion (including assumed debt), swelling Freeport's debt burden to unsustainable levels once commodity prices faltered. At the time of the deal, we questioned the benefit to shareholders given the hefty premium and lack of potential synergies.

We continue to regard Freeport as overvalued. Although the oil and gas sale strengthens the balance sheet, it does nothing to change Freeport's bigger problem—decelerating Chinese copper demand. In contrast to most sell-side shops, we doubt that a sustained copper price recovery is likely in the years to come. We expect China's copper needs, which currently account for roughly half of global demand, to fall as fixed-asset investment falters, real estate activity fades to a level more commensurate with underlying urbanization trends, and power spending shifts away from copper-heavy distribution to copper-light transmission. On the supply side, cost deflation, a flattening of the cost curve, and rising scrap supplies all threaten prices.

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