Good news for Freeport-McMoRan (NYSE:FCX) investors! This morning, The Wall Street Journal reported that "the world's biggest mining companies ... are now poised to reap the rewards" of a mining market in which copper prices have surged 30%, and named Anglo American PLC, BHP Billiton Ltd, and Glencore PLC as beneficiaries of the boom.
Bad news for Freeport-McMoRan investors: Freeport isn't on that list. In fact, although Freeport-McMoRan is one of the biggest names in copper worldwide, Freeport stock just got downgraded, as analysts at Deutsche Bank removed their hold rating and downgraded Freeport stock to sell.
Here are three things you need to know about that.
1. Hold no more
As reported this morning on StreetInsider.com, Deutsche has cut its rating on Freeport stock to sell. The analyst also cut its price target on Freeport-McMoRan from $14 a share to $12.50 per share.
Mind you, with Freeport selling for nearly $15 a share at the close of trading last week, Deutsche wasn't thrilled with the stock in any case. But now, the German analyst thinks Freeport stock could fall by as much as 16% over the course of this year -- and indeed, after the downgrade came out, Freeport promptly plunged nearly 6% in early Tuesday trading.
2. Big trouble in little Indonesia
Why cut Freeport stock in the face of a booming world market for copper? Because according to Deutsche, Freeport isn't going to be allowed to export its copper to the world -- or at least not as much as it would like to.
Last month, The Financial Times reported on Indonesia's ban on copper exports from Freeport's giant Indonesian Grasberg copper mine. As FT explained, Jakarta wants foreign miners to sign new mining licenses, sell majority stakes in their mining operations to local companies, and build more smelters in-country to reduce the volume of exports of raw materials outside the country, retaining more value-added profits for Indonesia. Failing to agree to these terms, Freeport will be prevented from exporting copper concentrate from the country.
3. Why this matters to Freeport
As FT goes on to explain, Grasberg is both the second-largest copper mine in the world and a low-cost producer of copper -- and Freeport-McMoRan's most important asset, to boot. Deutsche believes that in failing to reach an agreement with the Indonesian government, Freeport will be forced to cut production at Grasberg, and will delay development of the mine as well.
In Deutsche's opinion, Freeport's reduced prospects in Indonesia, alone, decrease the value of its shares by about $0.80 per share. The analyst believes other factors subtract a further $0.70 from the "net present value" of Freeport-McMoRan stock, adding up to a total reduction in target price to $12.50.
Bonus thing: The future for Freeport
Freeport-McMoRan has made some big mistakes in recent years -- first and foremost its disastrous entree to and exit from the oil exploration and production market, which according to S&P Global Market Intelligence data cost Freeport $5.7 billion in lost profit last year, and more than $24 billion in operating losses over the past three years. At high cost, Freeport has moved to extricate itself from the oil market, selling its Deepwater Gulf of Mexico to Anadarko for $2 billion in September 2016 and its onshore California oil and gas properties to Sentinel Peak Resources California LLC for at least $592 million a month later.
In contrast, Freeport is somewhat less to blame for the copper fiasco in Indonesia, which has been sparked by government interference in the business. And there may even be a silver lining to this latest gray cloud lowering over Freeport stock. According to Deutsche, the need to cut back on development of Grasberg will relieve Freeport of the need to make capital investments in the mine, "pushing out" capital expenditures by at least 18 months. At the same time, even Deutsche admits that "Grasberg is a high quality, long life, low cost asset," so what copper Freeport cannot produce today will still remain to be mined in years to come, when regulatory restrictions in Indonesia may lessen.
Meanwhile, Freeport-McMoRan remains free of the need to spend money on developing Grasberg. The company, which burned cash in 2014 and 2015, may enjoy more years like 2016, in which it generated respectable positive free cash flow (of $916 million, according to S&P Global).
Granted, with a market capitalization of more than $21 billion, I still wouldn't call Freeport-McMoRan stock a bargain at only $916 million in FCF. But it is, at the least, free cash flow positive once again. And with a little help from Indonesia, perhaps it will be able to stay that way for a little bit longer.
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