Why Did Merrill Lynch Resume Coverage of Freeport-McMoRan?


Dec. 4 2020, Updated 10:53 a.m. ET

Merrill Lynch expects a limited short-term upside

On Wednesday, March 2, 2016, Merrill Lynch resumed Freeport-McMoRan’s (FCX) coverage, with a neutral rating and a price target of $9. Currently, Freeport is trading at a three-and-a-half-month high. Merrill Lynch’s research house expects a limited upside in the short-term price movements of Freeport’s stock.

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What might support Freeport in the short term?

The factors that could support Freeport in the short term include the cancellation of dividends and the decrease of the capital expenditure and their debt reduction plans. Freeport has eliminated an estimated $1.3 billion worth of dividends at the end of last year. In addition to this, this top miner also issued outstanding shares worth of $1 billion to increase its equity and cash flow as a part of debt reduction measures.

Other debt reduction plans include the sale of core assets. In February 2016, Freeport sold 13% of its stake in Morenci facility for $1 billion. (For further reading on this, check out “How Has Freeport-McMoRan Accelerated Its Debt Reduction?“)

Capital expenditure and metal prices

As for capital expenditure reduction plans, Freeport intends to reduce expenditure in both its core money-making divisions mining, oil, and gas assets for 2016 and 2017. Freeport planned to reduce its mining expenditure by 30% in 2016 and 23% in 2017, but only 28% in 2016 and 65% in 2017 for oil and gas assets. Currently, the rally in copper is supported by hopes of additional economic stimulus from China, and the limelight is on National People’s congress, in which Chinese officials will release a new five-year economic plan.

The US jobs report, which is scheduled to release this Friday, March 4, and the economic stimulus from Chinese officials over the weekend will likely have an impact on copper and, in turn, will likely affect Freeport’s prices in the short term. The price level of $10 is the nearest prominent resistance level for Freeport. Since the beginning of 2016, Freeport has gained by ~32.5%, whereas Glencore (GLNCY) has gained by ~46.7%. BHP Billiton (BHP) and Rio Tinto (RIO) declined by 1.4% and 1.9%, respectively, while the SPDR S&P Metals & Mining ETF (XME) has gained by 22.5% so far in 2016.


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