Phoenix-based mining company Freeport-McMoRan (FCX, Financial) has surged by 117% in the last three months, and upside should continue for the stock after a brief correction.
On May 9, Freeport-McMoRan announced the company has entered into a definitive agreement to sell its interests in TF Holdings to China Molybdenum for a consideration of $2.65 billion in cash. Further, there is a contingent consideration of up to $120 million, consisting of $60 million if the average copper price exceeds $3.50 per pound and $60 million if the average cobalt price exceeds $20 per pound, both during the 24-month period between 2018 and 2019.
Freeport-McMoRan declined by more than 8% on news of the asset sale and the reasons for the decline are as follows:
- The stock has surged by 117% in the last three months, and some profit booking on the news was entirely expected.
- Even when deleveraging is a priority, the markets will react to quality assets being sold, and a stake in TF Holdings was a potential long-term value creator on commodity price recovery.
- Freeport-McMoRan expects meaningful no profit or loss from the transaction when markets would have expected any transaction to provide some gains as compared to the acquisition cost.
While these factors have triggered a selloff in Freeport-McMoRan, this is a good buying opportunity for the medium to long term. It is important to note here that Freeport-McMoRan has already announced asset sales worth $4.0 billion in 2016, and the company is moving in the right direction as deleveraging remains a top priority for the company.
From what might be expected in the foreseeable future, oil and gas assets sale is in the cards, and, with oil prices trending higher, Freeport-McMoRan might be looking at partial divestment of its stake in the energy assets.
Complete asset sale is unlikely in the oil and gas segment with the company having quality assets, and it is entirely likely that these assets will be spun off into a separate listed entity when the company gets the desired valuations from an IPO perspective.
While asset sale is a positive along with the point that Freeport-McMoRan has been trying to adjust capital expenditure to be largely in line with the operating cash flows, global economic concern is a continued reason for worry. China’s commodity demand is unlikely to increase any time soon and other economies are also struggling. However, if central banks pursue renewed expansionary monetary policies, commodity prices can trend higher on a weak dollar.
From an investment perspective, Freeport-McMoRan remains attractive as asset sales will continue to boost the company’s balance sheet. However, investors need to wait for some correction before any fresh exposure to the stock. Another 10% to 15% correction from these levels would make Freeport-McMoRan attractive from a trading perspective.
Disclosure: No positions in the stock.
