Freeport-McMoRan Stock Rises 4.5x – Time To Exit?

After an eye-popping rise of more than 4.5x from its March lows of this year, at the current price of $23 per share, we believe Freeport-McMoRan stock (NYSE: FCX) is overvalued. FCX stock has rallied from $5 to $23 off its recent bottom compared to the S&P 500 which increased 60% from its March lows. The stock was able to beat the broader market in the last 8 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 pace with stimulus measures announced by various economies. However, with gold prices being volatile recently and, in fact, having declined from over $2,000/ounce in August 2020 to less than $1,800/ounce in the beginning of December 2020, FCX’s revenue growth might not be as sharp in 2021 as projected earlier. This is likely to lead to a drop of over 15% in FCX stock from its current level. Our dashboard What Factors Drove 23% Change In Freeport Stock Between 2017 And Now? provides the key numbers behind our thinking.

Some of the stock price decline between 2017 and 2019 is justified by the 12% drop in Freeport-McMoRan’s revenues during this period, while the company reported losses in 2019 after being profit-making in 2017 and 2018. FCX’s revenues primarily declined in 2019 and reached even 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 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 beyond its recent historical levels and currently stands at 2.4x. We believe the company’s P/S multiple could drop in the near term considering the downside bias in commodity prices.

Where Is The Stock Headed?

The global spread of coronavirus and lockdowns in various cities, which affected industrial and economic activity, led to a sharp drop in copper prices while gold prices rallied. Additionally, production slowed down. This was reflected in the company’s Q1 and Q2 2020 results where Freeport-McMoRan’s revenues declined by 26% and 14%, respectively (on a y-o-y basis). FCX saw some recovery in Q3 2020 when revenues increased 22% due to increased copper shipments and higher gold and copper prices.

The gradual lifting of the lockdowns has seen sharp recovery in copper prices over recent months. Copper prices seem to have increased, but peaked as of now, after having shot up significantly from $2.10/pound in March 2020 to almost $3.50/pound in December 2020. Additionally, the gold rally also seems to have come to a halt after the price increased from $1,500/ounce at the beginning of 2020 to over $1,950/ounce in September 2020. In fact, with economies opening up, the gold price has declined over recent weeks to less than $1,800/ounce currently. The gold price is likely to remain volatile over the near-term with a slight downside bias as the lockdowns are gradually lifted and investor sentiment regarding economic recovery has improved. The actual movement in commodity prices and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia.

Though the company’s production, shipments, and revenue are likely to rise sharply in 2021 as the mine transition at Grasberg is almost complete, it is unlikely to lead to any major rise in the stock price from here. This is because the Grasberg event is already accounted for in the sharp rally of FCX stock price over recent months. Also, investor focus has shifted to 2021 numbers. However, expectations of higher revenue and earnings (due to higher volume sold) are likely to be offset by a drop in the P/S multiple, driven by copper prices having peaked and a possible downside to gold prices. This has put FCX at the risk of seeing a drop in its stock price. We believe the stock is already overvalued and is likely to see a drop of over 15% in the near term.

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

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams