Freeport-McMoran, Inco sink in metals meltdown; Level 3 gains while investors still sweet on Nektar

By Kenneth Lim

Boston, Feb. 10 - A sharp plunge in metal prices sent convertibles of metal mining companies falling with their stock on Friday, with the notes of Freeport-McMoran Copper & Gold Inc. among the most exposed.

"The problem with the [metal] converts is that a lot of them are equity related...the converts are so equity sensitive," said a buy-side analyst who covers materials companies.

Outside of the metal sphere, though, Friday was a quiet end to the week, with internet backbone network provider Level 3 Communications Inc. gaining after the company said it had increased its trans-Atlantic capacity by more than 50%. On the biotechnology side, Nektar Therapeutics saw its convertibles gain slightly in line with the stock as speculators took positions ahead of a conference next week when it is expected to discuss its strategy for its new diabetes drug.

"It's pretty quiet," said a trader. "At the end of the day, people were just picking their spots."

For new issues, India's Videocon Industries Ltd. has priced a $90 million issue of 5-year foreign currency convertible bonds at 5% with an initial conversion premium of 20% above the stock's last price.

Metal plays hit by correction

Freeport-McMoran, which the industry analyst described as having one of the most equity-sensitive convertibles in the sector, saw its two convertibles plunge more than 6% against an 8.62% stock tumble on Friday after metal prices pulled back sharply in London trading.

The 7% convertibles due 2011 dropped about 10 points on Friday and were bid at 177.51 and asked one point higher versus a stock price of $51.93. The stock closed at $56.83 Thursday. The copper and gold mining company's 5.5% convertibles due 2049, which have a par of $1,000, were bid at 1,163.94 and asked at 1,168.94 against a $51.93 stock. That was 80 points, or 6.3%, lower than Thursday's close, which was done against a $56.83 stock. Shares of New Orleans, La.-based Freeport-McMoran (NYSE:FCX) closed Friday at $51.93, down $4.90 or 8.6%.

Metal prices had been rising over the past year, but started losing altitude over the past week.

Copper prices fell to a two-week low on Friday, with the March contract about 8.05 cents lower at $2.2245 per pound. Spot gold prices were $14.30 down at $550.20 per ounce.

"The corrections had to be expected at some point, but it's such a steep correction because there were a lot investment funds that had gotten in and are getting out now," the analyst said.

Inco Ltd., which mines mainly nickel, also saw its convertibles slide amid the sinking metal. The Toronto-based company's 0% convertibles due 2021 were two points lower on Friday at 127.3 bid, 127.55 offered against the stock's $47.99 close. The 1% notes due 2023 were also two points down, bid at 154 and offered at 154.25 versus the same stock. The 3.5% convertibles due 2052 came in 2.5 points to 186.57 bid, 187.07 offered. Inco (NYSE: N) stock ended the session 1.48% or 72 cents lower.

The commodities analyst said Freeport-McMoran and Inco convertibles were among the most exposed to metal prices in the sector, in large part because they were "already so much in the money."

"If there's a crash, these converts don't offer any downside protection," the analyst said. "So they will take the full blow."

Freeport-McMoran, whose business is mainly in Indonesia, is also embroiled in a controversy over payments it made to military and police units near its mine in Indonesia. Indonesia's attorney general, Abdul Rahman Saleh, said in January that he is looking into whether those payments illegal, while New York City's comptroller, William Thompson Jr., has asked the Securities and Exchange Commission to investigate those payments. Freeport-McMoran has said those payments are "ordinary business activities" and that it has consistently disclosed them in filings to the regulator.

The analyst said that while the correction was justified, he remains confident about worldwide metal demand because of continued growth in China, India and the rest of the developing world, and healthy construction trends. He reckoned that copper supplies are not easy to increase because of political and operational risks in developing countries - "a lot of the mines have not been operating at full capacity for some time," the analyst said - while nickel tends to be stronger nearer to the end of an economic cycle.

Investors who are already exposed to metal-mining plays and want to stay there may want to switch to convertibles that are not as sensitive to the stock and commodity prices, the analyst noted. Century Aluminum Co., which is buffered by a more flexible supply of aluminum, and Placer Dome Inc., which was recently acquired by Barrick Gold Corp. (NYSE: ABX), have convertibles that are more "balanced" than Freeport-McMoran's the analyst said.

Century Aluminum (Nasdaq: CENX), a Monterey, Calif.-based miner, has a 1.75% convertible due 2024 that was bid two points lower at 127.42 and asked at 129.42 against the stock's $35.40 close on Friday. The stock was down 2.21% or 80 cents.

Vancouver, B.C.-based Placer Dome mines mainly for gold, and it has a 2.75% convertible due 2023 with takeover put protection. That convertible was bid at 126.02, 0.92 point lower, and offerd at 126.52 against a $23.51 stock on Friday. Placer Dome shares (NYSE: PDG) closed at that price, down 29 cents or 1.22%.

Level 3 maintains level

Beyond the metal-mining plays, traders reported little excitement on Friday. Among the names of interest was Level 3 Communications Inc., a Broomfield, Colo.-based provider of internet backbone networks that has been seen to improve its credit and earnings potential despite recently reporting losses.

The company's 2.875% convertible due 2010 was about 1.5 points higher on Friday, against a $3.49 stock that closed at that price up 13 cents or 3.87%. The convertible was at 65.42 bid, 66.42 offered. Level 3's 5.25% convertible due 2011 also rose, with bids coming in 2.6 points higher at 97.8 against the same stock.

Level 3 (Nasdaq: LVLT) said earlier in the week that fourth-quarter losses widened to $169 million, or 24 cents per share, from $77 million, or 11 cents per share, including a $3 million loss related to its acquisition of WilTel Communications.

But Gimme Credit analyst Kim Noland was comfortable with the company's credit, saying Level 3 "could end the year with about $500 million liquidity."

Noland said Level 3 caught a break when holders of about $700 million of its bonds due 2008 agreed to accept new notes that expire in 2010, giving the company some breathing room. The acquisition of WilTel and Progress Telecom could also boost earnings in the next few years, Noland said.

"If the company meets its forecast, there is a good chance the capital markets would remain open for a refinancing of approximately $600 million of debt coming due in 2008," Noland added.

Level 3 also said on Thursday that it was increasing its trans-Atlantic network capacity by at least 62.5%. The company will buy 300 gigabits of capacity with an option on 300 gigabits more to add to its existing 480 gigabits linking both sides of the Atlantic.

Nektar gains ahead of conference

An analyst said there could be speculation in Nektar Therapeutics as the BIO CEO and Investor Conference 2006 approaches on Wednesday. The company is expected to provide details about its marketing strategy for the new diabetes drug Exubera.

Nektar (Nasdaq: NKTR) has a trio of convertible bonds that have been in play recently, although Friday was a slow session. A big sellside convertible shop closed out the 3.25% convertible bond due 2012 at 116.375 bid, 116.875 offered, the 3.5% due 2007 at 95.875 bid, 96.875 offered and the 5% due 2007 at 99.875 bid, 100.875 offered. The stock added 47 cents, or 2.38%, to end at $20.23.

The San Carlos, Calif.-based biotech is a partner with Pfizer on the inhaled insulin drug Exubera.

A buy-side market source said a sell-side analyst recently suggested that the Street estimates for Exubera sales are too low.

"Based on the significant market need, growing diabetes prevalence, and data which show strong patient preference for Exubera, they believe internal expectations could be closer to $5 billion - twice their forecasts," the buysider said. "They believe estimates remain too low and are more likely to come up than fall."

Said another sell-side analyst: "We do like this convertible. It has a bit of a yield advantage, it's got a great risk reward, it's almost in that sweet spot in the convertible space."

Videocon prices $90 million

In the primary market, the only news was that Indian issuer Videocon Industries Ltd. priced $90 million of foreign currency convertible bonds due March 7, 2011 to yield 5% with an initial conversion premium of 20% above its latest stock price.

The five-year bonds may be converted into Videocon shares at any time after Feb. 7, 2009. The initial conversion price of Rs 545.24 may be adjusted down toward a floor price of Rs 410 if the 15-day average closing price before Feb. 7 each year falls below the initial conversion price. Videocon stock closed at Rs 451.90 on Friday. The bonds are non-callable until Feb. 7, 2009.

Lehman Brothers and DBS Bank are running the books.

Aurangabad, India-based Videocon is a conglomerate with businesses in consumer electronics retail, video-display component manufacturing and oil-and-gas production.

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