The Morenci deal
As discussed previously, Freeport-McMoRan (FCX) is trading at a substantial premium to its long-term trading multiple. While the valuation uptick is also driven by expectations, we might be seeing a cyclical uptrend in commodities (GSG), though there are other factors lending support to Freeport’s valuation multiple.
Freeport-McMoRan (FCX) will be selling a 13% ownership interest in its Morenci mine to Sumitomo Metals for a consideration of $1 billion. The Morenci stake sale will help FCX bring down its debt and strengthen its balance sheet. Freeport’s net debt is more than $20 billion, according to the company’s 4Q15 fillings. Note that other mining companies including BHP Billiton (BHP), Rio Tinto (RIO), and Teck Resources (TCK) are also working to strengthen their balance sheets.
The Morenci stake sale was received well by the markets, and Freeport saw an upward price action of more than 15%. Markets have a couple of reasons to feel euphoric about this transaction. Firstly, it will help FCX strengthen its balance sheet. The second reason is the deal’s valuation multiple.
Freeport-McMoRan’s stake sale in its Morenci mine is an indication of copper’s better long-term fundamentals. According to Deutsche bank, the sales implies an EV-EBITDA (enterprise value to earnings before interest taxes, depreciation, and amortization) of ~11.6x. This is almost twice Freeport’s previous valuation. Furthermore, Morenci is not the most sought after mine in Freeport’s portfolio. While analysts have pointed out that Sumitomo Metals—the buyer—paid a somewhat higher price, quality copper assets might not be very cheap even in the current markets.
Morenci’s valuations changed the way markets look at copper assets. However, Freeport has a long way to go in asset sales. We’ll explore this further in the next part.