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Investment Overview for Freeport-McMoRan Inc. (NYSE:FCX)
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 38.1 million barrels of oil equivalent (MMBOE). Oil and gas sales are expected to total 56 MMBOE in 2014. As per Freeport's expansion plans, its oil and gas sales will rise sharply to 80 MMBOE in 2016. However, the prevailing environment of subdued oil prices may disrupt Freeport's plans to raise its oil and gas output. The company may forego its planned capital expenditure to raise its oil and gas output due to low oil prices. Such a scenario will represent a downside of around 12% 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 $69 in 2013. We expect the average realized price per BOE to decline in 2014 and 2015 due to the prevailing environment of low oil prices. We expect realized prices to start recovering at a modest rate from the middle of the forecast period, driven by rising demand from emerging economies. However, if the recovery in demand for crude oil is faster than expected, this would represent an upside of around 4% to our price estimate.
Freeport-McMoRan Inc. (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.
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, demand from large emerging economies, such as China and India, is expected to boost prices over the medium and long term.
Copper as the primary source of revenue
Copper mining is the most important division for Freeport-McMoRan 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.
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 7.3% and 7.1%, in 2014 and 2015, respectively, from 7.7% in 2013. 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 will decline in 2014 and 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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