Freeport-McMoRan 3Q17:Not cheap enough given the risks,Maint


2017guidance retained, aiming for Grasberg resolution by YE17

Forecasts And Ratios

    Freeport reported 3Q17sales broadly in line with expectations, maintained2017guidance and extended its Grasberg export permit from October to YE17.However, in our view, there was no concrete evidence of any progress towardsresolution (divestment process and valuation) at Grasberg in Indonesia.Freeport is working towards reaching an outcome by YE17(previouslyOctober). While we acknowledge this may occur, there is still uncertainty onthe outcome and we do not view the stock favorably on a risk/reward basis(trading at 1.13x NPV and 5x EV/EBITDA attributable 2018E at $3/lb copper)and maintain a Sell rating.

    Grasberg remains the key swing factor; risks not yet removedFreeport's 2Q17result and conference call was again dominated by Grasberg.While discussions with the Indonesian Government have been moreconstructive, a resolution on final ownership, smelting requirements and otheroperating conditions medium-to-longer term remain uncertain. The current sixmonthexport permit expires in October with Freeport aiming for resolution bythis time. We continue to assume underground development is at a slower rate(full production not until beyond 2023). Our 2017EBITDA is down 5% withsome Grasberg production delays. At the current share price, we don't see anattractive risk/reward opportunity. Maintain Hold and $13/sh PT.

    The good - Balance Sheet, 2017guidance maintained, copper exposure

    Renewed optimism with Indonesian Government discussions but not there yet

    1) Freeport has now reduced Net Debt (ND) to below $10bn, which comparesto $20.1bn at YE15. This will enable FCX to begin considering re-investment,highlighted with the $850m capex Lone Star project as a replacement forSafford with other opportunities at El Abra and Kisanfu (cobalt in the D.R.C).ND could fall towards $5bn by YE18at the current copper price, 2) Guidancefor 2017and forward years remains largely unchanged, a positive vs somerecent quarters when Grasberg disappointments resulted in reduced forecasts,3) We like copper in the medium-to-long term and see increasing deficits.

    Grasberg remains the largest contributor to Freeport’s business; we forecast45% of 2017E EBITDA and the asset is ~35% of our company-wide NPV.Negotiate with the Indonesian Government to lock in a long-term agreement atGrasberg continue following changes in mining regulations in January, 2017.Uncertainty remains over 1) the underground development profile (currentlypartially delayed), 2) a potential smelter (~$3bn capex), and 3) sell-down of partof the asset. During the quarter, Freeport faced labor issues (from strikes) andalso experienced some seismic issues at the DMLZ which will now see a slowerramp-up profile. Freeport is now examining pit wall optimization to potentiallytake the open pit deeper to extend mining. Company-wide 2017copperguidance was downgraded from 3.9bn lbs to 3.7bn lbs following laborsetbacks at Grasberg in 2Q17; we assume 3.6bn lbs (previously 3.7bn lbs).

    Balance Sheet continues to improve, working on unlocking longer term options

    Freeport’s Net Debt is now $10.7bn, down from a peak level of $20.5bn. Onour forecasts, Net Debt will reach $8bn by YE18which should then allowgreater investment opportunities. Freeport is slowly working at unlocking valuefrom North and South American assets, such as Lone Star (potential fordevelopment by leveraging off Safford by 2021) and El Abra (sulfidesexploration and studies ongoing). Overall, Freeport’s capex remains low ($1.6bn2017guidance unchanged), but we believe it could increase medium-term as thecompany will need to further invest back into the business.

    $13/sh Price Target unchanged; Maintain Hold

    Our $13/sh PT is based on ~1x NAV ($12.9/sh, unchanged), using a 10%WACC. We have made some changes to 2017/18production forecasts. Our2017E EBITDA/EPS have decreased 5%/13% while our 2018E EBITDA/EPS areup 5%/10%. Key risks: copper, gold and molybdenum prices, Grasbergoperating terms and conditions uncertainty. See page 5for further details.