Freeport-McMoRan Inc. Company
- Copper (North American Mines, South American Mines, Indonesian Mines) constitutes 77% of the Trefis price estimate for Freeport-McMoRan Inc.'s stock.
- Gold constitutes 19% of the Trefis price estimate for Freeport-McMoRan Inc.'s stock.
WHAT HAS CHANGED?
- Impact of Coronavirus
- Freeport-McMoRan's stock price crashed from $13 at the beginning of 2020 to $5 in March 2020. Two distinct trends were driving the sell-off. Firstly, the increasing number of coronavirus cases outside China caused mounting concerns of a global economic slowdown. Secondly, crude oil prices plummeted by more than 20% after Saudi Arabia increased production. The stock fell sharply considering the impact that the outbreak and a broader economic slowdown could have on gold and copper prices and demand, and the global mining industry. Higher gold demand for investment purposes is offset by lower demand for copper from automobile and other industries. With copper contributing almost 50% of FCX’s revenue, copper prices have a much larger effect on FCX’s stock. But with the Fed and other central banks over the world announcing stimulus measures and with the lock downs being gradually lifted, copper prices have rebounded strongly on expectations of higher demand and ease of supply constraints. This has led to a strong recovery in the stock price which increased from $5 in March 2020 to $28 at the end of January 2021.
- Latest Annual (FY2020) Earnings
- FCX reported revenue of $14.2 billion in 2020, marking a decline of 1.4% from $14.4 billion of revenue in 2019. Lower revenue was driven by a decrease in volume of copper and gold due to operating plan adjustments made after the outbreak of the coronavirus pandemic. Lower volume was offset by the rise in price realization of copper as well as gold. Gold prices increased as the value of gold as a hedge increased during the pandemic. Copper prices recovered in the second half of the year with expectations of a rise in demand as global lockdowns were gradually lifted. FCX reported an adjusted profit of $0.54 per share in 2020, as against a net profit of $0.02 per share in the year-ago period.
- Q3 2020 Performance
- FCX reported revenue of $3.85 billion in Q3 2020, marking a growth of 22% from $3.15 billion of revenue in Q3 2019. Higher revenue was driven by an increase in volume of copper along with higher price realization of copper. Price realization was higher due to the recent recovery in copper prices on the back of gradual lifting of lockdown and expectations of rising demand and ease of supply constraints. Gold price realization improved sharply due to an increase in global gold price levels. However, gold shipments were slightly lower on y-o-y basis reflecting lower mining and milling rates associated with the ramp-up of the Indonesian mine. FCX reported an adjusted profit of $0.22 per share in Q3 2020, as against a loss of $0.15 per share in the year-ago period.
- Indonesian operations
- PT-FI is currently mining the last phase of the Grasberg open pit and expects to transition to the Grasberg Block Cave (GBC) underground mine. PT-FI continues to advance several projects in the Grasberg minerals district related to the development of its large-scale, long-lived high-grade underground ore bodies, which are expected to produce large-scale quantities of copper and gold following the transition. As PT-FI transition nears its end, metal production is expected to improve significantly in 2021 following the ramp-up period.
- New copper mine development
- Freeport has been focused on developing new copper mines in order to augment future copper production. The company completed developing its Lone Star Oxide project in Arizona, which is expected to produce an additional 200 million pounds of copper per year with an approximate mine life of 20-years. First production from this project came in at the end of 2020. 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.
- Potential impact of the federal government's policies
- The federal government has proposed a $1.5 trillion overhaul of domestic infrastructure. If the federal government can get this plan implemented, it is expected to boost the demand for copper in the U.S. sharply This, in turn, would boost copper prices which have seen volatility lately, along with higher volumes would increase revenues for FCX
- Increased regulatory curtailments in China
- Owing to alarming levels of pollution and undergoing a structural change by cutting down its output from heavy industries, China announced its intention on banning the import of scrap copper into China from the end of 2018 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 likelihood of this ban shifted the demand for high quality refined copper as a substitute in China. This resulted in a surge in copper prices in mid-2018. However, weak manufacturing data, lower growth in China, and strengthening of dollar vis-a-vis emerging market currencies led to a fall in copper prices thereafter. Prices have seen a lot of volatility since. However, general consensus reflects that prices would be on an upswing in the medium term - EV sales are expected to be strong year-on-year - which would be beneficial for Freeport-McMoRan, which has a substantial degree of ownership in copper mines.
- Clarity On Indonesian Operations After Successful Completion Of Transaction With Government Of Indonesia
- In December 2018, FCX announced the completion of its agreement with the Indonesian government regarding PT Freeport Indonesia's (PT-FI) long term mining rights and share ownership. As per the terms of the agreement, PT Indonesia Asahan Aluminum (PT Inalum), a state-owned enterprise that is wholly owned by the Indonesian government, completed $3.5 billion cash acquisition of all of Rio Tinto's interests in PT-FI. As a result, PT Inalum and the provincial/regional governments' share ownership of PT-FI approximates 51.2%, and FCX's share approximates 48.8%. FCX will continue to manage the operation of PT-FI and will retain economics of revenue and cost-sharing arrangement, as per which, FCX's economic interest in PT-FI is expected to approximate 81.28% through 2022. Also, under the terms of a new special mining license, PT-FI has been granted an extension of mining rights through 2031, with rights to extend it up to 2041 subject to PT-FI completing the construction of a new smelter and fulfilling its fiscal obligations. PT-FI has committed to construct a new smelter in Indonesia within five years. The completion of this agreement provides clarity about FCX's Indonesian operations, which would benefit the company in the medium to long term.
- Freeport hit by Cerro Verde charges
- FCX has been issued with pre-tax charges of nearly $400 million in penalties and interest related to disputed mining royalty assessments for its Cerro Verde copper mine in Peru. In Dec 2018, Cerro Verde decided not to appeal against a decision by the Peruvian Tax Tribunal to deny the company the right to waive charges, which related to the years 2009 to 2011. As a result of the decision, Cerro Verde recorded pre-tax charges in the fourth quarter of 2018, totaling $399 million ($195 million net of income taxes and non-controlling interests). FCX owns a 53.56% stake in Cerro Verde.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
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: The Indonesian government's ban has negatively impacted Freeport's Indonesian operations 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. Both parties successfully inked the agreement in Dec 2018. However, if there is some future uncertainty that FCX faces with respect to the concluded agreement or any other unfavorable regulatory decision, we assume that the actual shipments realized from 2019 through 2021 would amount to only 80% of our forecast value. Such a scenario would represent a downside of 10% to our stock price estimate.
- Average Realized Price per Pound: This is the average price realized per pound by the company's copper mining operations. Prices rose sharply in 2017 as a result of an improved demand outlook from China and the U.S and an increasing demand environment for electric vehicles (EVs). Along with these factors, the proposed import ban on scrap copper by China also led to a price rise in mid-2018. Post this, prices declined due to weaker growth in China. If the U.S. government is able to implement its infrastructure plan and Chinese economic growth picks up, 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 will represent an upside of 10% to our price estimate.
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, 2020, the company's consolidated reserves totaled 113.2 billion pounds of copper, 28.9 million ounces of gold, and 3.71 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.
SOURCES OF VALUE
Copper is the primary source of revenue
Copper mining is the most important division for Freeport-McMoRan in terms of revenues and profits. In 2020, the company sold 3.20 billion pounds of copper at an average realized price of $2.95 per pound. Sales of copper accounted for 50% of the company's consolidated revenue in 2020.
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 $1.5 trillion revamp of U.S. infrastructure, which has raised the demand outlook for copper from the U.S. and led to a recovery in prices of copper in 2017 and supported 2018 price levels, as well. Though prices remained under pressure in 2019 due to the failure of talks between the US and China regarding their trade war and in the first half of 2020 due to the pandemic, the outlook for copper remains positive due to higher demand from electric vehicle manufacturers and industries such as construction and electronics.