What Should Freeport-McMoRan Put on the Auction Block?

 | Feb 10, 2016 | 4:01 PM EST
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This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.

Last month Freeport-McMoRan (FCX) said it wanted to chip off $5 billion to $10 billion of its $20 billion debt load. The question is, can it do it, and if so, how?

Several Wall Street analysts have offered their solutions for the troubled, Phoenix-based natural resources company.

Most recently, a team at Nomura led by Alexander Burnes identified two prime asset sale targets for Freeport to consider. Nomura's report followed a report released on Tuesday by an analyst team led by Jefferies' Christopher LaFemina entitled "M&A Can Save Freeport."

Freeport has faced pressure to divest itself of its oil and gas assets, some of which were acquired near the height of the market in 2013. However, Nomura said it believes a sale of some of its mining assets would have a greater impact on Freeport's liquidity and that the assets are still attractive to buyers. This can't necessarily be said of oil and gas properties given current market conditions.

Nomura holds a Buy rating on Freeport and a price target of $7.

"Market conditions and the size of FCX's liquidity shortfall will likely force FCX to divest a tier one asset, transforming its mining portfolio in the process," Burnes wrote.

Burnes analyzed the marketability of Freeport's assets against the potential impact of a sale on the balance sheet. By his measure, the most accretive asset sales would be Freeport's Cerro Verde copper mine in Peru and its Morenci copper mine in Arizona, which could improve Freeport's liquidity by $1 billion and $1.2 billion, respectively.

As for the direct impact to Freeport's financial position, Burnes posits that the company may need to choose between pleasing its shareholders or its bondholders. With much of Freeport's debt trading well below par -- some as trading below 50 cents on the dollar -- the company could take advantage of the discounts and do an exchange offering of its unsecured notes for secured notes in advance of an asset sale. In doing so, Freeport's shareholders would get the value boost from a successful exchange, which could temper the dilutive effects of a later asset sale, Burnes wrote.

LaFemina similarly maintains that Freeport will consider a sale of some of its copper assets and that an asset sale could happen in the first half of this year. Jefferies maintains a Hold rating on the company and it raised its price target to $6.50 from $5.00.

"The company should sell an asset now, when it can, rather than later, when it might have to," LaFemina wrote after noting the company could run out of liquidity by 2018 if commodity prices fail to recover. The company has two notes due in 2017 totaling $1.25 billion.

Freeport's financial situation -- particularly its hefty debt load -- makes it an unlikely takeover target, but its individual assets still carry value, LaFemina said. As options for leveraged miners dry up given the lack of eager buyers for its shares, the sale of high-quality assets becomes the next option aside from waiting.

Whether any sales are imminent remains to be seen.

For more on Real Money's 20 distressed companies to watch:

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: Sprint Entangled in High-Yield Debt Mess; Shares and Debt Tank

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