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Investment Overview for Freeport-McMoRan Inc. (NYSE:FCX)

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1. Potential impact of federal government's policies
   • The federal government has promised a $1 trillion overhaul of domestic infrastructure. If the federal government is able to get implemented the infrastructure plan, it is expected to sharply boost the demand for copper in the U.S.

2. Increased regulatory curtailments in China
   • China is currently fighting alarming levels of pollution and undergoing a structural change by cutting down its output from heavy industries. The Chinese officials recently announced their intention on banning the import of scrap copper into China from the end of 2018 in an effort to clean its highly polluted environment. China accounts for roughly 45% of the global copper demand and meets its consumption requirement by both internal production and through imports. The increased likelihood of the ban, has in turn, shifted the consumer demand for high quality refined copper as a substitute in the Chinese economy. This has resulted in a surge in copper prices and would remain an upside for Freeport-McMoRan who has a substantial degree of ownership in copper mines.

3. Regulatory Uncertainty With Respect To The Company's Indonesian Operations
   • Freeport agreed to divest its total holdings in its Grasberg mines to 49% due to the consistent regulatory pressure faced in the Indonesian economy. Freeport and the Indonesian government had jointly arrived at their final framework of agreement with respect to the divestment of the company's stake of its Grasberg mines in the second half of 2017. However, despite the agreed terms, both parties have failed to arrive at an appropriate divestment value for the sale of Freeport's stake. Additionally, per the latest developments, the Indonesian government has imposed new environmental standards in the region which has challenged Freeport's 20-year-old operating system and has been indicated as impossible to adhere to by Freeport's management. The company has been given a six-month transitional period for the establishment of the new decree and hence this poses a significant threat with respect to the company's future operation in the region.

4. New copper mine development
   • Freeport has been focused on developing new copper mines in order to augment future copper production. The company is currently focused on developing its Lone Star Oxide project in Arizona which is expected to produce an additional 203 million pounds of copper per year with an approximate mine life of 20-years. Additionally, Freeport is currently involved in the development activity at its Deep Mill Level Zone (MLZ) underground mine in Indonesia which is expected to provide access to higher grade copper and gold ores.

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Below are key drivers of Freeport's value that present opportunities for upside or downside to the current Trefis price estimate:

Indonesian Copper Mines Division

• Copper Sold:Freeport's Indonesian operations have been negatively impacted by the Indonesian government's ban on unprocessed mineral exports implemented in Jan 2017. Freeport arrived at an agreement with the Indonesian government over the broad contours of a new investment agreement in August 2017. However, the specific details of the agreement are yet to be worked out and are most likely to be implemented in 2018. Freeport is currently operating in Indonesia through a temporary permission extended in December '17 to resume mineral exports, to be effective until June '18. Though Freeport is engaged in negotiations with the government, if the company is unable to reach an agreement with the government by the end of the year, it could again negatively impact the division's shipments. If the company is unable to reach an agreement on favorable terms soon and we assume that the actual shipments realized over the course of 2018-2020 amount to only 80% of our forecast values, it would represent a downside of 8% to our price estimate.


• Average Realized Price per Pound: This is the average price realized per pound by the company's copper mining operations. Prices have risen sharply in 2017 as a result of an improved demand outlook from China and the U.S and increasing demand environment for electric vehicles (EVs). If the U.S. government is able to implement its infrastructure plan, the demand for copper and prices of the commodity could rise at a faster rate than currently factored into our model. If prices increase by around 5% from our current estimates by the end of the forecast period, it would represent an upside of 8% to our price estimate.

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Freeport-McMoRan Inc. (FCX) is involved in mining, smelting, and refining, of copper, gold, and molybdenum. The company runs its mining and smelting operations in North and South America and Indonesia.

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, 2017, the company's consolidated reserves totaled 86.7 billion pounds of copper, 23.5 million ounces of gold, and 2.84 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 been recovering recently. A sudden decrease in spot prices would negatively impact the company's earnings, while any kind of upward movement would lead to an increase in earnings.

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Copper is the primary source of revenue

Copper mining is the most important division for Freeport-McMoRan in terms of revenues and profits. In 2017, the company sold 3.70 billion pounds of copper at an average realized price of $2.93 per pound. Sales of copper accounted for 74% of the company's consolidated revenue in 2016.

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Recovery in global demand and prices for copper

China's fight against pollution has increased the global demand for refined copper, thus aiding prices. Additionally, an optimistic outlook on electric vehicles (EVs) has improved the global outlook on copper. Coupled with President Trump's plans for a $1 trillion revamp of U.S. infrastructure has raised the demand outlook for copper from the U.S. which has led to a recovery in prices of copper in 2017 and has supported 2018 price levels as well.

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?

1. We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
2. 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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