Can Freeport-McMoRan Beat Consensus For FY 2019 When The World’s Largest Gold Mine Is In Transition?

Freeport-McMoRan (NYSE: FCX) is slated to release its Q4 and full-year 2019 results on January 23, 2020. Trefis details expectations from the copper and gold mining giant in an interactive dashboard, parts of which are highlighted below. We believe that Freeport-McMoRan’s revenues and earnings for FY 2019 will beat consensus, but its stock price might not see much movement post earnings release. We expect FCX to report revenues of $14.7 billion (vs. consensus estimate of $14.3 billion), which would be 21.4% lower than the previous year, primarily due to a sharp drop in gold and copper shipments. Earnings are likely to be around $0.10 (vs. consensus estimate of $0.00), much lower than $1.78 reported in 2018, due to a combination of lower revenues and expenses decreasing at a lower rate than revenues, weighing on net income margin. However, we believe that better-than-expected revenues and earnings for FY 2019 is unlikely to lead to any big movement in the company’s stock price once earnings are announced. In fact, our forecast indicates that Freeport-McMoRan’s Valuation is $13 a share, which is in line with its current market price of roughly $13.

A] Revenue Expected To Beat Consensus

• Total revenues have increased at a CAGR of 12% over the previous two reported years, with the company adding $3.8 billion to its revenue base between 2016 and 2018.
• However, Trefis estimates FCX’s revenues to decline by 21.4% to $14.7 billion in 2019 from $18.6 billion in 2018, as elevated gold and copper prices would be more than offset by a decline in volume sold.
• Lower revenue is entirely to be driven by lower gold and copper sales. The ongoing transition of the Grasberg mine in Indonesia (from open pit to underground) is set to completely offset gains in North and South American copper operations. Gold is expected to be the most affected since all of the company’s gold output comes from Grasberg.
• On the contrary, revenue growth rate is expected to reverse from -21.4% in 2019 to 5.8% in 2020.

A separate interactive dashboard for FCX provides an in-depth view of FCX’s revenue trend and segment-wise revenue performance, along with forecast for 2019 and 2020.

B] EPS To Be Higher Than Expected

• FCX’s 2019 earnings per share (EPS) is expected to be $0.10 per Trefis analysis, slightly higher than the consensus estimate of $0.00 per share.
• A decrease in revenues as detailed above coupled with a lower reduction in total expenses along with stable share count will drive EPS decline.
• Expenses are expected to remain elevated due to higher cost per ton due to a sharp drop in production, along with expenses related to the Grasberg mine transition and additional spending on the Lone Star project.
• As we forecast FCX’s Revenues to decline at a faster rate than Expenses in 2019 (21.4% vs. 9.5%), this will result in a decline in FCX’s Net Income Margin figure from 14% in 2018 to 1% in 2019.
• For 2020, with an increase in revenue, on the back of pick up in volume sold and higher price realization, margins are expected to improve to 7%.

C] Stock Price Estimate In Line With Market Price

• A trailing P/S multiple of 1.3x looks appropriate for FCX’s stock, which is in line with the current implied P/S multiple of 1.3x.
• Trefis’ forecast for FCX’s 2019 revenue and earnings, which is only marginally higher than consensus, coupled with a P/S multiple in line with market expectations, works out to a fair value of $13 for FCX’s stock, which is similar to its current market price of around $13.

Additionally, you can input your estimates for Freeport-McMoRan’s key metrics in our interactive dashboard for FCX’s pre-earnings, and see how that will affect the company’s stock price.

Note: We have used the P/S multiple for FCX as the average consensus EPS is $0.00, with the range being from -$0.10 to $0.12. With nil or negative EPS, P/E multiple will be undefined, thus for simplicity we  used the P/S multiple.

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