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Investment Overview for Freeport McMoran Copper (NYSE:FCX)
Below are key drivers of Freeport's value that present opportunities for upside or downside to the current Trefis price estimate:
Copper from Indonesian mines
- Freeport's Average Realized Copper Price per Pound, Indonesia: This is the average selling price per pound of copper produced by Freeport at its Indonesian mines. Its value increased from the low of $2.36 in 2008 - owing to the economic downturn - to $3.58 in 2012. We expect copper prices to eventually decline to just above $3 by the end of our forecast period. However if global copper production doesn't pick up as much as expected and supply can't keep up with demand, the realized price for this division could remain at its current value. This would represent an upside of about 5% to the Trefis price estimate. However, as copper prices would affect realized revenues across all of FCX's mines, the actual upside would be closer to 12% for the company.
- Copper Sold from Indonesian mines: Copper Sold from Indonesian mines was 1.1 billion pounds in 2008 and increased to 1.40 billion pounds in 2009. Production fell to 1.21 billion pounds in 2010 due to mining in the lower-grade section of the mine, to 846 million in 2011 and further to 716 million in 2012. We forecast production improving and approaching 1.5 billion by the end of our forecast period. However if the company is unable to ramp up production levels and shipments remain about flat it would present a downside of 3% to the Trefis price estimate.
Freeport-McMoRan Copper (FCX) is involved in mining, smelting and refining of copper, gold and molybdenum and 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, 2012, the company's reserves totaled 116.5 billion pounds of copper, 32.5 million ounces of gold and 3.42 billion pounds of molybdenum.
Prices of copper, gold and molybdenum have been at historically high levels since 2004, generating higher revenues for the company. Further increases in spot prices would lead to more positive earnings while any kind of downward correction would lead to a decrease in operating income. The no value added products (refined copper in its raw form) that the company sells leaves it intimately vulnerable to commodity price fluctuations as the company cannot charge for its specialized product design and manufacturing.
Crude oil prices are expected to remain high for the foreseeable future. Demand from rapidly growing countries such as India and China is expected to keep prices elevated. The global fleet of vehicles is expected to grow by 60% from 1 billion today to nearly 1.6 billion by 2030. Vehicle density per 1000 people on the other hand will grow from approximately 50 to 140 in China and from 20 to 65 in India. Natural gas production has been spurred by the shale gas revolution in the U.S. With the manufacturing sector adopting natural gas for its operations and export talks gaining ground, we expect gas prices to increase going forward.
Copper as the primary source of revenue
Copper mining is the most important division for FCX in terms of revenues and profits. In 2012, the company sold 3.7 billion pounds of copper at an average realized price of about $3.58 per pound. It generated $13 billion in revenues from the sale of copper, over $1.6 billion from gold mining and nearly $1.2 billion from its molybdenum operations.
Industrial copper demand in emerging markets
Many global manufacturers are setting up facilities in developing countries like India, Thailand, China and South Korea primarily due to lower labor costs and growing demand in the region. As industrial activity continues to increase in those countries we expect that copper demand will remain strong.
Low copper supply
Copper supply has struggled to meet demand of late, as copper mine output has lagged due to various factors such as strikes and weak recoveries. We expect that this supply shortfall will keep copper prices high in the near-term, but as worldwide production ramps up over the next few years we anticipate a decline in copper prices.
Trefis Forecast Rationale for Freeport's Tax Rate
The Effective Tax Rate is the tax rate representing a blend of local, state, federal and international taxes.
Due to the losses in 2008, the company accrued tax benefits and the tax rate was at 0. The tax rate for 2009 was 35.5%, 32.9% for 2010, 33.8% for 2011 and 26% for 2012. Going forward, we expect the tax rate to remain at the present level during the Trefis forecast period.
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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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