Credit markets are grossly overstating Freeport-McMoRan, Inc.’s (FCX) fundamental credit risk with a CDS of 645bps relative to an Intrinsic CDS of 235bps, and a cash bond YTW of 7.564% relative to an Intrinsic YTW of 3.524%. Our fundamental analysis highlights a much safer credit market risk for FCX. Their relatively young asset base would afford them some flexibility in cutting their maintenance capex over the next several years, despite their cash flows falling short of obligations starting in 2017. We therefore rate FCX at HY2+, or a B1 equivalent using Moody’s ratings scale.
FCX is trading at low valuations relative to history with a 0.7x V/A’. The market expects an ROA’ expansion to 5% from -5% levels in 2015, with 3% Asset’ divestment. Valuation levels well below the firm’s asset value may act as a floor to valuations, limiting equity downside. This is especially true since they are not at a high risk of default. Despite FCX’s recently declining ROA’ profile, consensus analyst estimates project an eventual ROA’ expansion and stabilization near cost-of-capital levels in line with the market’s expectations. FCX therefore appears fairly valued, with potential equity upside if ROA’ improves to historical levels.
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