Future asset sales
As noted previously, Freeport-McMoRan’s (FCX) asset sales have changed the way the Market looks at copper companies. Basically, from a one-year forward earnings standpoint, the Market has started to factor copper’s long-term fundamentals into copper producers’ stock prices.
The obvious question would be, will future asset sales also lead to a pop in Freeport’s stock as the Morenci transaction is complete? Let’s explore this in detail.
Reduction in future earnings
Asset sales also reduce Freeport’s future earnings. As copper prices have recovered from their January lows, as can be seen in the graph above, future asset sales might put a bigger dent in Freeport’s forward earnings as compared to the Morenci transaction.
One could also argue that Freeport would be in a stronger position to better negotiate the selling price of its copper assets due to the changed market conditions. There is merit in this argument, and this was echoed by Freeport’s CEO, Richard Adkerson, during the company’s 1Q16 call.
Speaking about future asset sales, Adkerson said that the company is “much more confident today” as compared to 1Q16, when the markets were really depressed. He added that “the scarcity of quality assets in the copper business is attracting significant interest from potential purchasers.”
However, it might be difficult for Freeport-McMoRan to extract an even higher valuation for its copper assets. Nonetheless, higher copper prices and improved market sentiment would also mean that future asset sales might not happen at valuation levels much below the Morenci transaction.
Although additional asset sales would be positive for Freeport, we might not see a big pop in prices similar to the Morenci transaction. However, the Grasberg mine, where Rio Tinto (RIO) (TRQ) is Freeport’s partner, could be a wild card for Freeport. We’ll explore this in the next part of this series.