Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Freeport-McMoRan has ripped off the Band-Aid, and its shareholders are smarting. 

The natural resources company's shares fell as much as 12 percent as of midday Monday after it agreed to sell its stake in the Tenke Fungurume copper mine in the Democratic Republic of Congo to China Molybdenum for $2.65 billion. The deal -- deemed to be a fair price by Wall Street analysts -- enables Freeport to repay debt and reduces the likelihood it'll have to provide collateral to certain lenders. But it also highlights the company's desperation and may have come as a surprise, considering Tenke was viewed as one of Freeport's five "core" copper assets.

The Phoenix-based company has been under pressure ever since it piled on billions in debt in 2013 to purchase two oil and natural gas companies as part of plan to diversify away from copper. Unfortunately, the acquisitions -- of Plains Exploration & Production and McMoRan Exploration -- preceded a collapse in energy prices and were accompanied by a decline in the price of copper. Freeport's debt now stands at about $20 billion, exceeding its $13 billion market value -- "a killer," as President and CEO Richard Adkerson described it on an earning call last month. 

Weighed Down
Freeport-McMoRan's sale of a stake in the Tenke copper mine is a positive step toward reducing its massive debt load.
Source: Bloomberg

Freeport's sale of Tenke, which follows its pending disposal of a stake in the Morenci copper mine in Arizona for $1 billion and a dividend suspension for the first time since the crisis, may leave investors wondering what's next. 

Getting Squeezed
Freeport's copper cash margins have fallen by almost 70 percent since 2011
Source: Bloomberg Intelligence

Already, Freeport has been open about seeking ways to "sell or monetize" assets in its oil and gas business and has offered Indonesia a slice of its unit that owns Grasberg, a copper and gold mine for $1.7 billion. Other options include selling its 51 percent stake in Chile's El Abra mine, which could be valued by a buyer at $1.2 billion, according to analysts at Cowen, and selling its remaining stake in Morenci for $2.5 billion. A less likely route -- and one that Freeport should avoid unless a knockout offer is tabled -- is the sale of its 53.6 percent stake in Chile's Cerro Verde mine. That could fetch roughly $5.6 billion, Cowen estimates. 

Sigh of Relief
Freeport-McMoRan's asset sales have appeased lenders in recent months
Source: Bloomberg

Notably, the company has support from Carl Icahn, who has two representatives on its board and is Freeport's largest shareholder with a stake of 8.3 percent. And short interest has come down, falling to 8.3 percent of the company's free float from 19.6 percent in January, according to data compiled by Markit and Bloomberg. So at least some skeptics have had a change of heart. 

In the absence of rebounding commodity prices, Freeport faces an continuing uphill battle repairing its balance sheet while doing its best to stick to its knitting as a copper producer. But investors should give management a chance to prove their mettle. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net