Trends Driving Our $21 Price Estimate For Freeport-McMoRan

Freeport-McMoRan Inc. (NYSE:FCX) is a diversified natural resources company which mainly produces copper, in addition to crude oil, natural gas, and their by-products. The company’s stock price had been under pressure over the past few months largely due to the subdued pricing environments for both copper and crude oil. However, there has been a marginal recovery in prices and the future outlook for both copper and crude oil, which has boosted the company’s prospects. As a result, we have revised our price estimate for the company from $17.41 to $21.62. In this article, we will explore the factors that have led to an improvement in the business prospects for the company and consequently, a revision in our price estimate.

Copper Prices

(Copper Prices, Source: London Metal Exchange)

Copper has diverse applications in industry, particularly in the manufacturing, power, and infrastructure sectors. London Metal Exchange (LME) copper prices fell sharply from over $7,000 per ton at the start of 2014 to levels below $5,400 per ton earlier on in 2015. ^[1] The fall in prices was mainly because of concerns over copper demand from China, due to recent signs of economic sluggishness. China’s GDP growth is expected to slow to 6.8% in 2015, down from 7.4% and 7.8% in 2014 and 2013, respectively. ^[2] China is the world’s largest consumer of copper, accounting for nearly 40% of the world’s demand for copper. ^[3]. Thus, concerns over weakening demand from the world’s largest consumer of copper weighed on prices earlier in the year.

Despite signs of weakness earlier on in the year, copper prices have recovered somewhat lately, and currently stand at levels of over $6,300 per ton. The recent rally in prices has largely been due to expectations of the tightening of copper supply. ^[4] As a result of the weakness in copper prices, large copper mining companies have put on hold several new projects. In addition, given the adverse pricing environment, funding has become hard to come by for smaller copper mining companies. ^[4] Furthermore, declining ore grades have negatively impacted copper output for many mining companies. As a result of these supply side constraints, copper prices have risen over the past couple of months. Prices have also been bolstered by improving economic conditions in the developed world, particularly in the U.S., and to a lesser extent, in Europe and Japan. ^[5] The improved pricing environment has certainly boosted the prospects of copper miners such as Freeport-McMoRan.

Oil Prices

(WTI Oil Prices, Source: Y Charts)

Oil prices declined sharply in the latter part of 2014, primarily due to an oversupply situation. Global oil supply was boosted by rising oil and gas output from the U.S., where hydraulic fracturing techniques helped boost output. In addition, major oil producers of the Organization of the Petroleum Exporting Countries (OPEC) did not lower output in response to falling prices, in order to preserve their market shares. ^[6] Demand for oil remains weak in the midst of slowing Chinese growth and a weak economic recovery in Europe. As a result of the weakness in demand and the supply glut, prices tumbled in the latter part of 2014.

As a result of the weakness in oil prices, there has been a sharp reduction in drilling activity in the U.S. Further, several oil companies have lowered their upstream capital expenditures for 2015. With a decline in drilling activity and upstream capital expenditure, there has been a tightening of supply, which has provided a boost to oil prices. West Texas Intermediate (WTI) crude oil prices currently stand at levels of close to $60 per barrel, after falling below $45 per barrel earlier on in the year. The improved oil pricing environment has boosted the prospects of Freeport-McMoRan.

Trefis Price Estimate

As a result of the improvement in both the oil and copper pricing environments, we have revised upwards our estimates of realized prices and margins for the company’s copper mining and oil and gas operations. Our new price estimate stands at $21.62, which is just under ten times next year’s earnings.

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More Trefis Research

1. LME Copper Prices, LME [↩]
2. World Economic Outlook, IMF [↩]
3. Copper Ends at 5-Month Low on China Worries, Wall Street Journal [↩]
4. Copper producers position for price recovery, Financial Times [↩] [↩]
5. Copper Rebound Seen by Barclays as Miners Struggle on Output, Bloomberg [↩]
6. Global Oil Glut Sends Prices Plunging, Wall Street Journal [↩]