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Attention Freeport-McMoRan Investors: Here’s What to Watch in 2016

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Nov. 20 2020, Updated 5:17 p.m. ET

Asset sales

To be sure, there’s a long road ahead for Freeport-McMoRan (FCX) in its asset sales program. The company is looking to raise between $5 billion and $10 billion this year through multiple transactions. If Freeport can manage to sell more copper assets at valuation multiples higher than its current valuation, it will support Freeport’s price movements.

If Freeport can manage to sell more copper assets at valuation multiples higher than its current valuation, it will support Freeport’s price movements. This will also help allay key investor concern regarding the company’s huge debt burden. However, it would not be prudent to link every deal’s multiple with Freeport’s valuation multiples. In asset sales transactions, buyers take a long-term view of assets. The opportunity cost for a copper mine buyer would be to compare the purchase price to the capital expenditure, or capex, associated with digging a new mine. But not many equity investors take such long-term views when investing.

Attention Freeport-McMoRan Investors: Here's What to Watch in 2016

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Commodity prices

Commodity prices—especially copper and energy (VDE)—have risen steeply from their 2016 lows, as can be seen in the graph above. If commodity prices sustain at these levels, we could see upward earnings revisions for miners including Teck Resources (TCK), Glencore (GLNCY), and Southern Copper (SCCO). This would justify the current rally in commodity stocks. As with almost every commodity cycle, earnings revisions would follow price movements.

Risks?

In any case, Freeport is not totally out of the woods yet. Its current valuation multiples indicate a turnaround in the commodity cycle, and if commodity prices retreat from these price levels and commodity cycle turnaround hopes fade away, we could see miners losing their recent gains.

The recent energy rally has been driven by hopes of a possible deal between OPEC (Organization of Petroleum Exporting Countries) and the non-OPEC bloc. Copper has also piggybacked energy and moved to higher price levels, as can be seen in the graph above. However, copper has its own fundamentals, which might come into play once investors take their eyes off energy markets.

That said, Chinese copper imports have been quite strong this year. But this seems more of an inventory building exercise rather than any real uptick in demand.

You can read more about the Chinese copper inventory buildup in Market Realist’s “Should Record Copper Inventory in China Worry Freeport Investors?” You can also stay tuned at Market Realist’s Copper page for ongoing industry updates.

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