INVESTMENT THESIS
We are raising our rating on Freeport-McMoRan Inc. (NYSE: FCX) to BUY from HOLD. The company recently strengthened its balance sheet through the sale of assets. We view Freeport-McMoRan as a well-run company with a strong track record in its industry. FCX shares have significantly outperformed the broad market over the last three months, rising 56% compared to a gain of 13% for the S&P 500. They have risen 103% over the past year, compared to a gain of 16% for the index. The company faces risks from commodity price movements and currency fluctuations. However, we expect it to benefit from management’s efforts to strengthen the balance sheet, as well as from rising metals prices and a slowly recovering manufacturing sector. As such, we believe that FCX now warrants a BUY rating. Our target price is $30.
RECENT DEVELOPMENTS
FCX shares have significantly outperformed the broad market over the last three months, rising 56% compared to a gain of 13% for the S&P 500. They have risen 103% over the past year, compared to a gain of 16% for the index. Over the past five years, the shares have also outperformed both the index and the Materials ETF IYM. The beta on FCX is 2.2.
As discussed in our last note, on October 22, Freeport-McMoRan reported third-quarter adjusted net income of $430 million or $0.29 per share, up from net loss of $200 million or $0.14 per share a year earlier. Revenue rose 22% year-over-year to $3.85 billion. For the first nine months, the company posted adjusted EPS of $0.16.
FCX took charges totaling $34 million in 3Q20 (and $258 million for the nine-month period) related to the pandemic, including employee separation charges.
The company has increased virus testing at its mines and taken other steps to protect the health of employees.
EARNINGS & GROWTH ANALYSIS
Consolidated 3Q sales totaled 848 million pounds of copper, 234,000 ounces of gold, and 20 million pounds of molybdenum. This compares to 795 million pounds of copper, 243,000 ounces of gold, and 22 million pounds of molybdenum in 3Q19. During the third quarter, FCX’s average realized price for copper rose to $3.01 per pound from $2.62 per pound a year earlier, while the average realized price for gold rose to $1,902 per ounce from $1,487 per ounce. The price of molybdenum (used in steelmaking) fell to $9.23 per pound from $12.89.
On the expense side, net cash costs for copper were $1.32 per pound in 3Q20, down from $1.59 in 3Q19. Management expects full-year 2020 sales of 3.18 billion pounds of copper (up from a prior 3.1 billion pounds), 800,000 ounces of gold, and 80 million pounds of molybdenum (down from a prior 88 million pounds). This compares to 3.3 billion pounds of copper, 991,000 ounces of gold, and 90 million pounds of molybdenum in 2019. In 2021, management expects sales of 3.85 billion pounds of copper, 1.4 million ounces of gold, and 80 million pounds of molybdenum.
Turning to our estimates, based on trends in commodity prices as well as management’s production estimates and cost-cutting initiatives, we are maintaining our 2020 EPS estimate of $0.46 – well above 2019 EPS of $0.02. We are raising our 2021 EPS estimate to $1.63 from $1.11. Our long-term earnings growth rate forecast for FCX is 3%.
FINANCIAL STRENGTH & DIVIDEND
The company scores above-average on debt levels, but well below average on profitability. S&P has a rating of BB/positive, while Fitch has a rating of BB+/stable. Moody’s has a rating of Ba1/stable, up from Ba1/negative.
Total debt was $10 billion at the end of 3Q20, up from $9.9 billion a year earlier.
The company sold its interests in the Kisanfu project to a wholly owned subsidiary of China Molybdenum Co., Ltd. (CMOC) for $550 million.
The company suspended its dividend in March 2020 and does not expect to reinstate it this year. We do expect the company to reinstate a dividend in 2021, with a payout of $0.05 per quarter or $0.20 annually.
MANAGEMENT & RISKS
Richard C. Adkerson has been the company’s president and CEO since 2006. Kathleen Quirk is the CFO. She has worked at Freeport-McMoRan for over 30 years. Gerald J. Ford is the nonexecutive chairman.
Freeport-McMoRan competes with other global mining companies in the sale of mineral concentrates (copper and gold) and the recruitment and retention of qualified personnel. Some competing companies possess greater financial resources than Freeport, and have more geographically diversified assets.
The company also faces significant risks from strikes and related production disruptions.
VALUATION
We think that FCX shares are attractively valued at recent prices near $26. Over the past 52 weeks, the shares have traded between $5 and $26. From a technical standpoint, the shares had been in a bearish pattern of lower highs and lower lows that dated to January 2018. Since the pandemic lows of March 2020, however, they have been in a bullish pattern of higher highs and higher lows and have more than doubled in value.
On the fundamentals, the shares are trading at 16-times our 2021 EPS estimate, compared to a peer average of 15. The price/book ratio is 4.2, above the peer average of 2.7 and the five-year average of 2.4. The price/sales ratio is 2.8, below the peer average of 3.5 but above the five-year average of 1.1. Peers include Newmont Mining (NEM) and Barrick Gold (GOLD)., Looking ahead, we expect Freeport to benefit from management’s efforts to strengthen the balance sheet, as well as from rising metals prices and a slowly recovering manufacturing sector. As such, we are raising our rating to BUY with a target price of $30.
On January 4, BUY-rated FCX closed at $27.14, up $1.12.
Source: Argus
