Freeport McMoran Copper & Gold (FCX): No Longer Citi "Top Pick", But Still A Buy

Citi is removing Freeport McMoran Copper & Gold (FCX) from their Top Picks Live list, but still recommend the stock as a Buy despite the near-term risks.

Multiples have expanded:

FCX shares have outperformed while Copper is off-the- boil. Multiples measured on spot prices are 12.4x PE and 8.2x OCF [operating cash flow], just below the late-’07 peak, and up from discount levels of 7.1x PE and 5.1x OCF seen in Mar- ’08….We do not expect near-term expansion, given a firmer dollar and likely demand-side deterioration.

M&A lift may fade:

Capital-raise by Brazilian mega-miner Vale has sparked M&A speculation, and helped FCX shares “catch a bid.” This has put an exclamation point on relative outperformance since early May. While FCX has M&A allure, Vale indicates it is not in negotiations. Should this speculation cool, we see downside risk in FCX shares to $100 – 110/sh.

Cost escalation poses earnings risk:

Key input costs are up 30% in 2Q/TD while Copper is down. This was not reflected in prior unit cost guidance, suggesting risk to consensus estimates.

Citi remains bullish overall because they see copper as the best-positioned non-ferrous metal. They like the long-term value in FCX due to:

  • a China-centric product mix
  • high margins
  • cash distributions
  • reinvestment opportunities

Citi maintains BUY, target $145.

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