Citigroup forecasts $3/lb copper, $700/oz gold and supports FCX/PD merger
Dorothy Kosich
'12-MAR-07 08:00'
RENO, NV (Mineweb.com) --With the upcoming shareholder vote on the Freeport-Phelps Dodge merger Wednesday, Citigroup Metals Analysts John H. Hill and Graham Wark reiterated their support for the combination, asserting the deal challenges “consensus and the copper industry on several levels.”
In their recently published analysis, Hill and Wark also declared that they expect copper to regain a $3/lb price in the coming months.
The analysts said that Freeport-McMoRan Copper & Gold’s friendly takeover of fellow U.S. copper company Phelps Dodge “simply translates margins and the copper ‘valuation wedge’ into higher earnings per share. Freeport has also challenged the industry to make good on perpetual M&A speculation, from diversified majors, China, private equity, elsewhere.”
Among the reasons Citigroup cited for their confidence in the merger are that “the combined company can stand firm with a heavy debt burden, working it down rapidly as copper, gold and molybdenum prices remain strong longer. Freeport has comfortably managed a Debt-to-Total-Capitalization ration over 60% in the past, and there is no reason this can’t be done today given the margin structure of the business.”
The analysts also suggested that Freeport “could move to de-risk the transaction in the near term, reducing debt by: 1) Monetizing the Gold Strip from Grasberg; 2) Selling peripheral moly, gold, or PD Industries assets; and/or 3) Raising cash from straight equity, convertible debt or old favorites such as gold-linked preferreds.”
Citigroup regards the “entire Nonferrous Metals sector as undervalued, and believe that the sector can re-rate toward 12-14x mid-cycle earnings and 9-10x P/OCF.”
Other positive aspects of the combination, the analysts asserted, will be its statute as “the likely go-to institutional copper names; 2) Positive diversification efforts related to the Grasberg underground conversion and PD’s development project, plus an enviable commodity mix of copper, gold and molybdenum; 3) Security value as one of the few companies that have the technical staff, supply chain, and management expertise to permit and construct major mines in an ever-tight climate, with ever-closer community/government scrutiny; and 4) International transformation as projects such as Safford, Tenke, and El Abra sulphides come on line.”
POSITIVE METALS OUTLOOK
“There is a good chance that metals prices move higher from current levels through at least mid-07,” Citigroup’s analysis suggested. “We expect copper to regain the psychologically significant $3.00/lb range in the coming months due to a combination of incremental U.S. consumption growth (rather than retrenchment), Europe and Japan continuing to turn the corner organically if modestly, solid Chinese re-stocking demand, and the supply side likely to undershoot 5.6& expectations.”
“We regard the recent sell-off in commodities and emerging markets to be yet another contest between negative macro thematics and positive metals micro-indicators, such has been seen at least one per year in 2004-05-06,” Hill and Wark indicated. “In each case, it has paid to dwell on the metals micro-indicators, which remain positive for copper in terms of inventories, merchant premia [prices], scrap prices, and smelter TC/RCs.”
Citigroup also advised that “gold is quite likely to move to the $700/0z level or higher due to a mix of macro and supply/demand catalysts.”
“Chinese resource regulatory and taxation changes, plus solid steel production growth in the 14.5% range, suggest that moly will stay above $20/lb,” the analysis concluded.
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