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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.
- Stake sales in copper mining division
- Freeport announced the sale of its stake in its African copper mining operations for $2.65 billion in cash in May. The transaction is expected to be completed in Q4 2016. The proceeds of the transaction have been earmarked for debt reduction.
- Freeport-McMoRan sold off a 13% equity stake in the Morenci mine to its partner in the venture for $1 billion in cash. The company intends to use the proceeds from the transaction to pay off some of its outstanding debt.
- Carl Icahn's investment in Freeport-McMoRan
- Carl Icahn acquired an 8.5% stake in Freeport-McMoRan in the second half of 2015. 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. Pressure from the activist investor has facilitated stake sales by the company, with proceeds from these transactions to be used for debt reduction.
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 are expected to stand at 47.3 million barrels of oil equivalent (MMBOE) in 2016. Given the weak pricing environment, we expect shipments to rise gradually to around 62 million MMBOE by the end of forecast period in 2023. However, if demand recovers faster than expected and the division's shipments rise to around 70 MMBOE by 2023, it would represent an upside of around 7% 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 $44 in 2015. We expect realized prices to bottom out in 2016 and start rising thereafter 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. In this scenario, if realized prices recover to around $60 per BOE by 2023, instead of $65 per BOE in the base case, it would represent a downside of around 4% 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, 2015, the company's consolidated reserves totaled 99.5 billion pounds of copper, 27.1 million ounces of gold, and 3.05 billion pounds of molybdenum. In addition, the company's proved oil and gas reserves stand at 252 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 2015, the company sold 4.07 billion pounds of copper at an average realized price of $2.42 per pound. Sales of copper accounted for 67% of the company's consolidated revenue in 2015.
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 6.3% and 6% in 2016 and 2017 respectively, from 6.9% in 2015. 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 2015 and will decline further in 2016 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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