Freeport to sell Tenke stake for US$2.7B

VANCOUVER — Freeport-McMoRan (NYSE: FCX) has been working to reduce its sky-high debt loads, and on May 9 it made the deepest cut to date. The company has agreed to sell its 56% stake in the US$3-billion Tenke Fungurume copper-cobalt mine in the Democratic Republic of the Congo (DRC) to China Molybdenum for US$2.65 billion in cash.

The mine cost US$3 billion to build and has annual nameplate capacity of 195,000 tonnes copper cathode and 15,000 cobalt hydroxide.

The move may surprise those who considered Tenke a core asset of Freeport. But the Tenke deal will bring Freeport’s asset-sale proceeds to US$4 billion this year, which addresses the company’s US$20 billion in debt.

Tenke Fungurume is located in the Democratic Republic of Congo. Credit: Lundin Mining.

Freeport simlarly sold a 13% stake in its Morenci copper mine in Arizona to Sumitomo Metal Mining for US$1 billion in February.

The company has also agreed to negotiate exclusively with China Moly to sell its interests in the Freeport Cobalt unit — including the Kokkola cobalt refinery in Finland — for US$100 million, and the Kisanfu exploration project in the DRC for US$50 million.

“Our company is over-leveraged,” president and CEO Richard Adkerson declared during a late April conference call. “In the nature of the business that we are in where you have such high operating leverage from commodity prices, you just should not be in this position. When commodity conditions unfold as they do from time-to-time, your revenues will drop, and having this kind of debt is a killer.”

Freeport has suffered alongside its base metal peers with copper prices dropping precipitously over the past few years. But the more pressing financial issues are due to an ill-fated foray into the energy space during a period of peak oil prices. The company spent almost US$20 billion to acquire McMoRan Exploration and Plains Exploration & Production in December 2012, and has felt the brunt of the collapse in oil and gas prices as well.

Freeport reported a headline net loss of US$4.2 billion, or $3.34 per share, during the first quarter, which includes net one-time charges of US$4 billion, related to writedowns in its energy division. The company has since written off almost the entire value of its 2012 oil and gas acquisition.

“We are looking for opportunities to sell or monetize assets in the oil and gas business, but we are now working with — and this is admittedly a tough market to try to do that — our operating team on new plans to preserve and enhance the value of our assets,” Adkerson said. “We have a new organizational structure in the [division], so it’s now being run as an operating division … we reduced employment 25%, and we are looking for ways to cut costs.”

Copper cathodes at the Tenke Fungurume project in 2015. Credit: Freeport-McMoRan

The company is also negotiating with the Indonesian government over an incremental divestiture of its world-class Grasberg copper-gold mining complex in that country. Roughly two years ago, Freeport cut a deal wherein it would sell the government a larger stake in Grabserg — and invest in domestic processing — to try to extend its contract of work, which expires in 2021. Another 10% is scheduled for divestment by the end of 2019.

In January the company had proposed to sell a 10.6% stake for US$1.7 billion.

Freeport estimates Grasberg’s value at US$16 billion, and has agreed to sell up to a 30% stake at “fair market” value.

RBC Capital Markets analyst Fraser Phillips says the cash value Freeport received for its Tenke stake implies a flat, long-term US$2.57 per lb. copper price. RBC research notes that joint-venture partner Lundin Mining (TSX: LUN; US-OTC: LUNMF) holds a 90-day right of first offer (ROFO) on both the Tenke and Freeport Cobalt interests.

The proposed transaction creates an interesting conundrum for Lundin, which owns a 24% stake in the assets. The company could exercise its right to buy Freeport’s interest, but had been moving to diversify its base metal exposure away from the DRC.

Scotiabank analyst Orest Wowkodaw said that Lundin’s balance sheet “could support the ROFO,” but an 80% ownership stake in Tenke would “create a significant geopolitical risk overhang on the shares.” A second option for Lundin is finding a strategic partner to acquire the controlling stake, which could help restructure the ownership. The company could sell its interest in the DRC as well.

Freeport has traded within a 52-week range of US$3.52 to US$23.60 per share, and closed down 6.4% after the Tenke news at US$10.52 per share at press time. The company has 1.3 billion shares outstanding for a US$11.8-billion market capitalization.