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Word on the Street: Freeport Sold Assets at Depressed Valuation

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GOM property

Earlier this year, Freeport-McMoRan (FCX) announced that the company plans to generate $5 billion–$10 billion to shore up its balance sheet. Note that other miners (XME) are also trying to shore up their balance sheets. BHP Billiton (BHP) and Rio Tinto (RIO) have scrapped their progressive dividend policy while Glencore (GLNCY) has scrapped its annual dividend altogether. Glencore is also selling some of its non-core assets to raise cash.

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The graph above shows the various routes Freeport was considering to raise cash. So far, the company has explored all avenues listed above apart from the stake sale in Indonesia operations. Freeport and the Indonesian government have not been able to reach a consensus on the valuation of Freeport’s Indonesia operations.

Depressed valuation?

According to a CNBC report, some analysts find Freeport’s GOM (Gulf of Mexico) asset sale to be “cheap.” The report cites a Deutsche Bank research report that says that the asset sale is of “low value.” According to the report, Deutsche Bank values the property at $2.9 billion while Freeport is selling the assets to Anadarko Petroleum (APC) for a cash consideration of $2 billion and up to $150 million in contingent payments.

Notably, Deutsche Bank was positive on Freeport’s Morenci stake sale. According to Deutsche Bank, the Morenci stake sale implied a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) of ~11.6x. This is almost twice Freeport’s then-prevailing consolidated valuation. Most Wall Street analysts took a positive view of Freeport’s asset sales.

However, comparing the deal multiples of copper assets with energy assets might not be the correct approach. We’ll discuss this more in the next part of the series.

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