Up 150% In 4 Months, Freeport-McMoRan Still Looks Undervalued

by Trefis Team
Freeport-McMoRan Inc.
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After a formidable 147% rise since the March lows of this year, at the current price of $13 per share we believe Freeport-McMoRan stock (NYSE: FCX) has still not reached its near-term potential. FCX stock has rallied from $5.31 to $13.12 off the recent bottom compared to the S&P 500 which increased 44% from its March lows. The stock was able to beat the broader market in the last 4 months as gold prices have shot up significantly and remained elevated during the ongoing pandemic, while copper prices which had dropped after the outbreak of coronavirus, have also recovered at a significant rate with the US government announcing a string of measures along with stimulus packages announced in other economies to keep businesses afloat. However, despite a healthy stock recovery, the stock is still down 31% from its 2017 levels, a little over two and-a-half years ago. We believe FCX stock could have a further upside of 15% from its current level. Our dashboard What Factors Drove -31% Change In Freeport-McMoRan Stock Between 2017 And Now? provides the key numbers behind our thinking.

Some of the stock price decline between 2017-2019 is justified by the 12% drop in Freeport-McMoRan’s revenues during this period, while its operations turned loss-making in 2019 after reporting profits in 2017 and 2018. FCX’s revenues primarily declined in 2019 and reached below its 2017 levels as gold and copper production saw a sharp decline in 2019 on the back of negligible output from the Indonesian Grasberg mine which is undergoing a 2-year transition from an open pit to underground mine. During this period the P/S (price-to-sales) multiple declined from 1.7x in 2017 to 1.3x in 2019, as the stock price also saw a significant decline along with lower revenue per share.

While FCX’s P/S multiple declined further in 2020, it has recovered to its 2019 level now and currently stands at 1.3x. We believe the company’s P/S multiple has the potential to rise to around 1.7x considering improvement in commodity prices.

What’s the likely trigger for an upside?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. The copper demand from industry players affects global copper price levels, in turn impacting the company’s price realization. Lower demand from construction and automobile players, has led to a drop in global copper prices from $2.80/pound in January 2020 to $2.10/pound in March 2020. This was reflected in the company’s Q1 2020 results where FCX’s revenues declined by 26% on a y-o-y basis.

However, prices have recovered sharply and currently (24th July 2020) stand close to $2.90/pound, higher than its level at the beginning of 2020. FCX’s recently reported Q2 numbers, where revenues saw a 14% y-o-y decline, much better than Q1, thus signifying a turnaround in copper prices. Earnings also came in at $0.03/share as against a loss of $0.04/share in the year-ago period. Another positive for the company is the sharp rise in gold prices during this pandemic. But copper prices impact the company’s stock much more than gold and copper is the major source of FCX’s revenues, contributing 62% to its top line.

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. compared to the rate seen in April-May to boost market expectations. Additionally, the gradual lifting of lockdowns is also giving investors confidence that developed markets may have put the worst of the pandemic behind them. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results.

As the global lock downs are gradually being lifted, copper prices are expected to remain strong in the near term. This recovery is due to expectations of demand increasing in the next few months and supply constraints being eased. Additionally, FCX’s gold and copper production is likely to see a sharp rise in 2021 as the output from the Grasberg mine is expected to start flowing with the transition work running as per timeline despite the pandemic. FCX is likely to be able to take complete advantage of higher copper and gold prices in 2021 as shipments are likely to increase when global prices are strengthening. Thus, revenue is expected to see a sharp rise in 2021.

As investors’ focus has shifted to 2021 numbers and with FCX likely to see a sharp growth in the top and bottom line, we believe the P/S multiple, which has recovered since March lows, could see a further upside, thus pushing the stock price up further. Based on Freeport-McMoRan valuation by Trefis, we have a price estimate of $15 per share for FCX’s stock, which reflects an upside of about 15% from the current level.

For further insight into the mining space, see how rivals Newmont and Freeport-McMoRan compare with each other.


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