Freeport-McMoRan Inc. Company
- Copper (North American Mines, South American Mines, Indonesian Mines) constitutes 81% of the Trefis price estimate for Freeport-McMoRan Inc.'s stock.
- Gold constitutes 13% of the Trefis price estimate for Freeport-McMoRan Inc.'s stock.
WHAT HAS CHANGED?
- Stock Price Volatility
- The shares of Freeport-McMoRan (NYSE: FCX) have lost 30% in value since early April, after observing a year-long rally, primarily due to renewed restriction measures in China – raising concerns over copper’s demand in the coming years. Despite the Russia-Ukraine war causing volatility in the energy markets and hurting discretionary spending, Freeport maintained its full-year sales and cash flow projections. Construction and electrical applications sectors account for nearly half of copper’s demand, followed by consumer products and transportation. Investments in the renewable energy sector including electric vehicles, charging infrastructure, and solar & wind power plants are key markers supporting long-term copper demand.
In 2021, Freeport reported 3 billion pounds of total copper sales at an average price of $4.33/lbs. Strong demand and supply-chain issues have assisted Freeport’s top and bottom line in recent quarters with the company registering a 60% (y-o-y) increase in operating cash flow in Q1 2022. Due to copper’s diverse use across multiple industries, its demand can be referenced for world economic growth. Per IMF, the global output is likely to increase by 3.6% in 2022 and 2023 with China & India as focal points. Thus, copper demand is likely to remain strong despite the uncertainty caused by the conflict in Europe.
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 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, 2021, the company's consolidated reserves totaled 107.2 billion pounds of copper, 27.1 million ounces of gold, and 3.39 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 2021, the company sold 3 billion pounds of copper at an average realized price of $4.33 per pound. Sales of copper accounted for 80% of the company's consolidated revenue in 2021.
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.