Should This Banker Upgrade Freeport-McMoRan?

We begin today's story with a tale of two commodities companies. On Monday, oil and gas producer Chesapeake Energy (CHK +0.00%) released a statement tersely denying that it has any "plans to pursue bankruptcy." Naturally, this unsolicited use of the b-word by Chesapeake made investors nervous. But it also may have prompted a curious reaction from investment banker Jefferies -- which this morning published a pretty positive note about Freeport-McMoRan (FCX 0.54%).

The news
As outlined in a news item on StreetInsider.com today, Jefferies has upped its price target on hold-rated Freeport-McMoRan on the theory that: "a copper asset sale would be a positive for [Freeport's] share price as a sale would improve the company's liquidity and unlock value." Previously valuing Freeport at $5 a share, Jefferies now says it's worth $6.50 -- a 30% price bump.

Jefferies notes that "M&A activity in the mining sector should increase this year [among] leveraged miners." Already, copper miner Glencore has started plans rolling on a deal to sell two mines, producing a combined 125,000 tons of copper annually, in a bid to raise cash and pay down its $50-billion-plus debt load. If Freeport follows a similar path, Jefferies believes this could reduce the "near-term downside risk" of Freeport having to declare bankruptcy itself.

But is Jefferies right about that? Might a move by Freeport to sell off its marquee copper assets (which Jefferies sees happening as early as H1 2016) convince the analyst to upgrade the stock? Could such a move save the stock?

Let's find out.

Let's go to the tape
In many respects, Jefferies is a fine stock analyst. According to our data here at Motley Fool CAPS, where we've been monitoring Jefferies' performance for nearly 10 years now, Jefferies outperforms most of the investors we track. But the hard truth is that when it comes to metals and mining stocks, Jefferies...just isn't very good.

Over the course of 10 published recommendations in the sector from the past 10 years, Jefferies has racked up a record of astonishingly bad performance, getting barely 5% of its guesses right, and underperforming the S&P 500 by a combined 1,700 percentage points.

Among its poorer picks:

Those numbers tell you why I'm skeptical of Jefferies' optimism about Freeport-McMoRan from the get-go. Freeport is lugging more than $20 billion in debt on its balance sheet, whereas Chesapeake Energy has less than $12 billion in debt. If Chesapeake has begun talking about bankruptcy, then you have to figure the situation at Freeport is even more dire.

I'm also not sure how much good the sale of a few copper mines would do for Freeport-McMoRan's balance sheet. Consider: According to the experts at Mining.com, Glencore's plan to sell off its Cobar and Lomas Bayas copper mines -- combined production: 125,000 tons per year -- would raise at most $1 billion. And Mining.com warns the sale could produce just half that.

By way of comparison, data from S&P Global Market Intelligence (formerly known as S&P Capital IQ) show that Freeport produced 1.5 million tons of copper last year. So in the best possible case, Freeport's sale of all its copper assets might raise as much as $12 billion toward paying down its $20 billion debt. Or it could raise just $6 billion. Or it might raise even less, if a fire sale of copper assets suddenly coming onto the market, as everyone tries to deleverage at once, drives down prices for everybody.

The upshot: At the cost of losing its identity as the world's second-largest copper miner, Freeport might take a long step toward shoring up its balance sheet and saving itself from bankruptcy. Or it might fail. In any case, unless and until Freeport begins generating some positive free cash flow from its business (Freeport burned through more than $3.1 billion in cash last year, and it hasn't reported a FCF-positive quarter since late 2013), the company's not out of the woods.

Until Freeport fixes that problem, its future is uncertain, and Freeport's end is not at all clear.