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.