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Energy

Will Freeport-McMoRan Inc (FCX) Be Able To Sustain Its Rally This Year By Asset Sales?

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Why Freeport-McMoRan would continue to rally in futureAsset Sales Present Upside To InvestmentFocusing to Lower Debt BurdenConclusion

Freeport-McMoRan Inc (NYSE:FCX) stock continues to boost investor confidence as it has soared by 73.34% Year-to-Date (YTD). The past five days have shown sluggish performance as the stock declined by 6.35%, but we expect significant upside potential inherent in the stock due to asset sales.

Freeport reported a net loss in the quarter for period ending March 2016 of $4.2 billion, or $3.35 per share, after net charges adjustment of $4 billion, a loss totaled to $197 million or $0.16 per share. The loss was predicted by analysts covering the stock but earnings surpassed analysts’ expectation by $0.02.

Asset Sales Present Upside To Investment

Freeport had mentioned earlier that it would incur asset sales to boost liquidity. It also mentioned that earnings from asset sales would be used to downsize its debt burden and hence prepare the company for long term growth.

First of all, Freeport is in agreement to dispose its 13% stake in Morenci Mine, which could provide the company with liquidity of worth $1 billion. The stake had provided the company $115 million of Earnings before Interest Tax and Depreciation (EBITDA) last year, and is expected to close during 2Q this year.

Further details about asset sales are highlighted in slide below:

The company further mentioned that it is advancing in discussions on additional transactions and expects additional progress in better interest of shareholders by this quarter.

This would mean disposing off assets which no longer fit with overall portfolio, and would also enhance its financial health.

Focusing to Lower Debt Burden

On Year-over-Year (YoY) basis, Freeport’s debt burden has increased from $20.3 billion to $20.8 billion. This would mean higher interest costs associated to fund debt obligations. But positive aspect is that the management has been actively involved in agreements which would enable to lower its debt burden.

The asset sales mentioned above would help a lot to lower its debt and as further asset sales are expected, its debt burden would be further trimmed. Also, by paying off debt, its interest liabilities would be reduced and hence, strengthen the company.

Freeport has to pay $0.03 billion for its debt maturing this year, and $1.6 billion the next year. With assets sales, this appears to be no problem and its short term liabilities could be easily paid off.

Conclusion

Asset sales are a double sword, as it would provide liquidity but would also lower future sales revenue. But in case of Freeport, debt is of considerable importance as it has hampered its performance in the past, so asset sales would provide considerable financial breathing space to the company.

 

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