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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 South American mines
- Copper Sold from South American mines: South American copper shipments stood at 1.39 billion pounds in 2009, declining to 1.33 billion pounds in 2010 due to mining of lower grade ores. These further decreased to 1.32 billion pounds in 2011 due to a two month labor strike at Cerro Verde and to 1.25 billion pounds in 2012. They regained 2011 levels in 2013. Going forward, we expect South American Copper Shipments to fall in 2014 due to mining of lower grades, followed by a sharp rise in 2016, with the completion of the Cerro Verde mine expansion project. However, if the production is not ramped up as planned and remains nearly flat, it would represent a downside of about 8% to the Trefis price estimate.
- Average Realized Copper Price per Pound, South America: This is the average selling price per pound of copper produced by Freeport at its South American mines. Its value increased from $2.70 in 2009 - owing to the economic downturn - to $3.77 in 2011. Realized prices per pound declined to $3.58 in 2012 and 3.30 in 2013 due to an oversupply situation, caused due to falling demand and rising supply. We expect copper prices to eventually decline to about $3.11 per pound by the middle of our forecast period, before rising, driven by rising demand from major emerging economies. However, if global copper consumption doesn't pick up as much as expected and an oversupply situation persists, the price of copper may not rise as expected. If copper prices remain flat from the middle to the end of the forecast period, it would represent a downside of about 3% to the Trefis price estimate, as copper prices would affect realized revenues across all of Freeport's mines.
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, 2013, the company's reserves totaled 111.2 billion pounds of copper, 31.3 million ounces of gold and 3.26 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 2013, the company sold 4 billion pounds of copper at an average realized price of about $3.28 per pound. It generated $13.4 billion in revenues from the sale of copper, over $1.5 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.
Oversupply of copper
Copper supply is currently exceeding demand, due to increase in copper mine output by major copper suppliers, in addition to weak demand from China and India, and a weak economic recovery in Europe. We expect this oversupply situation to lead to a decline in prices in the near and medium term. However, we anticipate that rising demand from major emerging economies, particularly China and India, will lead to a recover in copper prices in the longer term.
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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