Thursday, September 03, 2009

Freeport-McMoRan (NYSE:FCX): FCX could raise its overall 2010 copper sales guidance - FBR

One of the more interesting calls today comes from FBR Capital:

FBR is raising their tgt on Freeport-McMoRan Copper & Gold, Inc. (NYSE:FCX) to $87 from $69 and reiterating their Outperform rating on the stock.

According to the firm the higher price target primarily reflects their view that FCX would raise its overall 2010 copper sales guidance by about 12% (or, approximately, a 45% increase in North America) after recent improvement in leading economic indicators for the developed economies, such as the U.S., Europe, and Japan. Furthermore, FBR believes the economics of increased production are also justified at current copper prices and with the strong outlook in 2010. Based on their revised commodity price deck and increased production estimates (2010 only), they also increase their 2009 and 2010 EPS/EBITDA estimates by about 24%/16% and 26.5%/12%. Firm recommends that investors take advantage of market volatilty to accumulate FCX shares. Their price target of $87 is based on 6.0x revised 2010 EV/ EBITDA, and the stock is currently trading at 4.4x 2010E EV/EBITDA.

Model North American operations to ramp up in early 2010. FBR is increasing their estimates for FCX's North American 2010 copper sales by 45%, from 1,000M lbs to 1,450M lbs, reflecting their view that FCX's management will decide to ramp up its high-cost North American operations, which it partially curtailed in 2H08 and 1Q09. Firm believes that 1) the improving macroeconomic indicators in the developed world suggest sustainability of demand and 2) the runup in commodity prices justifies the economics of North American operations. Both factors should provide management enough comfort to take decisions in favor of restarting its curtailed capacity in North America.

Raising 2010 copper price forecast. FBR is increasing their 2010 copper price outlook modestly by $0.10/lb to $2.70/lb, which reflects the increased marginal costs as some high-cost mines are brought back on line to meet the improved demand levels. They are also increasing their 2009 commodity price estimates by 6.5%, to $2.28/lb, primarily to reflect recent strength in commodity prices. Firm continues to emphasize that investors should focus on the supply risks to copper, which should allow the commodity to trade at a premium to other base metals.

Background of North American Production Cuts
In late 2008, as financial crises impaired global demand for copper and commodity prices crashed, Freeport-McMoRan laid out aggressive production cuts at its high-cost mines (mostly North America) by making operations lean, revising the mine plans, and deferring project starts. It lowered its 2010 sales guidance by as much as 44% in North America over a period of three months to match the reduced demand.
FBR notes that the first production cut was announced assuming an operating scenario with a $1.50 to $2.00/lb copper price. This implies that, at such copper prices, Freeport-McMoRan would be comfortable operating at a 1,200 Mlbs annual rate in North America. With current copper prices at, approximately, $2.80/lb (FBR forecast of $2.70/lb average copper price in 2010) and improving macroeconomic indicators in OECD countries offering hope of additional demand (outside of China), they feel comfortable with their assumption of increased output from the North American mines—a decision Freeport-McMoRan could announce before the end of 2009.

Notablecalls: First of all, I must admit trading commodity stocks isn't exactly my cup of tea. I almost totally missed the C2008 decline in many of the names playing mostly bounces while shorting would have yielded 10x the profit.

Yet, FBR's comments regarding FCX raising its 2010 copper sales guidance caught my eye. Especially in light of Alcoa (NYSE:AA) raising its Aluminum guidance last night.

FCX /Copper has become somewhat hated lately and I suspect shorts have positioned themselves ahead of the ever coming decline. Positive news/comments are likley greeted by short squeezes.

I'm not going to set a target range for FCX here but I think there is fair chance of the stock moving higher today and in the n-t.

Take it with a pinch of salt.

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