Freeport McMoRan a ‘buy’ for Citibank

Despite concerns that the government of the Democratic Republic of the Congo (DRC) will take more cash and a greater share of the massive Tenke Fungurume project, Freeport-McMoRan Copper & Gold’s (FCX-N) share price is going to climb US$52.64 over the next year, Citibank’s mining and precious metals analyst John Hill maintains in a Sept. 2 research report.

The Tenke Fungurume contract is one of about 60 identified for renegotiation in a review commissioned by the DRC government. And last week, the deputy chief of staff at the mines ministry was quoted by Bloomberg news agency as saying the government now wants to raise its share in the copper-cobalt project to 45%, from 17.5%, and increase a signing bonus to US$250 million from US$100 million.

Freeport owns 58% of Tenke and Lundin Mining (LUN-T, LMC-N) owns 25%.

“As the largest and most modern operator working the most important copper asset in the country, Freeport has considerable leverage,” Hill writes. “Should Freeport exit, this would likely be the death knell for other Western developers and play into the hands of Chinese interests which have been showering cash on the administration in a well-publicized flurry of multibillion- dollar infrastructure agreements in exchange for mineral access.”

Just how that leverage might translate into a negotiated settlement however, remains to be seen and the devil will be in the details. One scenario, Hill contends, is that the government could increase its benefits from Tenke through benefit buyback rights tied to property expansions, and or to social and sustainability initiatives. Staged royalties tied to metals prices, profitability or expansion, Hill writes, could be put towards funding social initiatives in the area.

Other outcomes could include the Mines Ministry abandoning its current demands, given the fact that the original contract was approved by decree of the current president; or a stalemate leading to litigation and arbitration. The latter scenario, Hill says, is probably less likely given that Freeport would probably try to “avoid a rigid, legalistic approach.”

“Our view is that Tenke will likely take longer and cost more, with Freeport and partner controlling less of the economics — but that it is still the best asset in the industry with potential for tremendous value creation for all stakeholders,” he says.

Tenke is certainly the high-risk, high-reward portion of Freeport’s portfolio and Hill also likes Freeport for its other more conservative attributes. The largest publicly traded copper producer in the world “benefits from a China-centric copper-moly- gold mix, high margins, low multiples and strong free cash flow,” he says.

Hill estimates the stock will trade at US$142 per share a year from now, up from its current US$89.32.