Thursday, August 06, 2009

Freeport-McMoRan (NYSE:FCX): Upgraded to Buy at Merrill Lynch/BAM

Merrill Lynch/BAM is out with a major call upgrading Freeport-McMoRan (NYSE:FCX) to Buy from Underperform and raising their target price to $87 (prev. $49).

According to the firm the upgrade is based on a material upgrade to their copper price forecasts. Freeport is the largest pure-play copper miner and provides high leverage to firm's more positive copper view. Sensitivity to copper prices: a $0.10/lb change in copper is roughly $0.50 in EPS for FCX. They are raising their 2010 EPS to $9.25/sh (was $2.85). At this level of EPS, FCX should be able to generate over $10bb EBITDA and $10/sh of FCF. Dividend reinstatement also a high probability event for 2010.

Move copper outlook to high-end of Street
Firm is incorporating new base metal forecasts into our models. Their new copper price deck is as follows: 2009-$2.15/lb (was $1.76), 2010-$3.18/lb (was $2.00), 2011-$3.03/lb (was $1.90). Gold outlook remains unchanged at $1050/oz for 2010. New copper forecast is well above consensus in the $2.00/lb range and above the forward copper price of $2.70/lb. The drivers of more positive view on copper are:

1) a tight concentrate market;

2) lack of new supply in the pipeline;

3) an end to de-stocking; and

4) improving demand in OECD/China.

Merrill Lynch sees copper as structurally one of the best positioned base metals over the long term. Firm notes their prior Underperform was predicated upon an end to Chinese stockpiling leading to higher LME inventories and a downward correction in commodity prices. However, despite a 70% YTD rise in Chinese copper imports, underlying demand appears to be recovering and should be sustainable into 2010.

Increase PO to $87 on higher 2010 outlook
They are increasing their price target to $87 (was $49), given the magnitude of our 2010 EPS revision. Firm's target multiples for P/E, EV/EBITDA, and P/B are generally consistent with their prior PO and in line with midcycle multiples. Based on the current FCX price, they see roughly 35% upside to revised target.

Notablecalls: I view this as a more technical call than anything else. The chart looks like it wants new highs and Merrill/BAM provides the mo-mo crowd the reason to push for a breakout.

I see them gunning for $67+

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