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Investment Overview for Freeport-McMoRan Inc. (NYSE:FCX)
WHAT HAS CHANGED
The prices of both copper and crude oil have weakened considerably over the course of the last year. In response to the weak commodity pricing environment, and in order to reduce its debt burden, Freeport-McMoRan has sold off some of its assets. In addition, noted activist investor Carl Icahn acquired a stake in Freeport-McMoRan in August 2015, intensifying pressure on the management to take decisive action to increase shareholder value.
- Divestments in copper mining business
- The company sold off its Candelaria and Ojos del Salado copper mines towards the end of last year. These mines represented around 9% of the company's consolidated copper production in the first nine months of 2014. The company primarily used the proceeds from these transaction to pay off some of its debt.
- Restructuring of oil and gas portfolio and potential IPO
- Freeport restructured its oil and gas portfolio last year. The company sold off its Eagle Ford Shale assets for $3.1 billion and simultaneously announced the purchase of some oil and gas assets in the Deepwater Gulf of Mexico (GOM) for $1.4 billion. The net proceeds of these transactions were primarily used to lower the company's debt.
- Freeport is looking to offload a minority stake in its oil and gas division, in order to raise funds for capital expenditures and other business requirements without taking on additional debt. The company has already filed a registration statement with the SEC for a potential IPO. However, the company has not specified the exact amount that it intends to raise through the potential IPO.
- Carl Icahn's investment in Freeport-McMoRan
- Carl Icahn acquired an 8.5% stake in Freeport-McMoRan in August. Issues foremost on Mr. Icahn's agenda are the rationalization of capital expenditure, a review of executive compensation practices and capital structure, as well as the curtailment of high cost operations.
Below are key drivers of Freeport's value that present opportunities for upside or downside to the current Trefis price estimate:
Oil & Gas Division
- Oil & Gas Sales:Freeport's oil and gas sales stood at 56.8 million barrels of oil equivalent (MMBOE). Oil and gas sales are expected to total 52.7 MMBOE in 2015. As per Freeport's expansion plans, its oil and gas sales will rise to 61 MMBOE in 2017. However, if demand for oil and gas remains weak, the company's oil and gas sales may not rise at rates that the company has visualized. Such a scenario will represent a downside of around 4% to our price estimate.
- Average Realized Price per BOE: This is the average price realized by the company's oil and gas division per barrel of oil equivalent sold. Its value stood at $72 in 2014. We expect the average realized price per BOE to decline in 2015 due to the prevailing environment of low oil prices. We expect realized prices to start recovering from 2016 due to supply cutbacks in response to low oil prices and higher demand for crude oil due to better economic conditions. However, if the recovery in demand for crude oil is lower than expected, realized prices will grow at less than expected rates. This would represent a downside of around 5% to our price estimate.
Freeport-McMoRan Inc. (FCX) is involved in mining, smelting, and refining, of copper, gold, and molybdenum, and is now in oil and gas operations, as well. The company runs its mining and smelting operations in North and South America, Indonesia, and Africa. Its oil and gas business is concentrated in North America.
FCX is one of the world's largest copper, gold, and molybdenum mining companies in terms of reserves and quantity produced. The Grasberg mine in Indonesia contains the largest single recoverable copper and gold reserve in any mine in the world. As of December 31, 2014, the company's consolidated reserves totaled 103.5 billion pounds of copper, 28.5 million ounces of gold, and 3.11 billion pounds of molybdenum. In addition, the company's proved oil and gas reserves stand at 390 million barrels of oil equivalent(MMBOE).
The company's earnings are sensitive to the prices of these metals, particularly copper. Prices of copper, gold, and molybdenum have fallen over the past 2-3 years. Further decreases in spot prices would negatively impact the company's earnings, while any kind of upward movement would lead to an increase in earnings.
Crude oil prices have fallen over the past year due to a supply glut. However, supply cutbacks in response to low prices and rising demand from large emerging economies, such as China and India, is expected to boost prices over the medium and long term.
Copper is the primary source of revenue
Copper mining is the most important division for Freeport-McMoRan in terms of revenues and profits. In 2014, the company sold 3.9 billion pounds of copper at an average realized price of about $3.09 per pound. It generated roughly $12.8 billion in revenues from the sale of copper, $1.6 billion from sales of gold, $1.2 billion from the sale of molybdenum, and $4.2 billion from oil and gas sales.
Weak global demand for copper
China is the largest consumer of copper in the world, accounting for nearly 40% of the total world consumption of copper. China's GDP growth is expected to slow to 6.8% and 6.3%, in 2015 and 2016, respectively, from 7.4% in 2014. Slower economic growth in China has led to a moderation in demand for copper. Further, the proposed structural transformation of the Chinese economy from an investment and export led growth model, to a consumption led growth model, may negatively impact Chinese demand for copper in the long run. Weak Chinese demand for copper will put pressure on copper prices.
Environment of subdued oil prices
Average oil prices declined in 2014 and will decline further in 2015 due to a global supply glut. Global oil supply has been boosted by rising oil and gas production from the U.S., where hydraulic fracturing techniques have helped boost output. In addition, major oil producers of the Organization of the Petroleum Exporting Countries (OPEC) have not lowered output in response to falling prices, in order to preserve their market shares. Rising demand from emerging economies will provide support to oil and gas prices over the middle and long term. As per BP's Energy Outlook 2030, low and medium income non-OECD (Organization for Economic Cooperation and Development) countries will account for over 90% of the global energy demand growth till 2030.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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