Stock Analysis & Ideas

Analysts Think Copper Can Rise: Freeport-McMoRan to Benefit

Copper futures, which expire in May 2022, are up about 5% year to date to $4.72 a pound due to supply disruptions caused by Russian aggression in Ukraine and other factors. 

Following the rise in the commodity, stocks of the major publicly traded producers have also risen. Since the catalyst is likely to last for a few more weeks, I am bullish on Freeport-McMoRan (FCX) as the stock is growing much faster than the commodity itself.

Freeport-McMoRan, a Phoenix, Arizona-based large copper miner that produces nearly 4 billion pounds a year, has seen its shares rise more than 18% this year, outperforming the commodity’s rise by a wide margin.

Freeport-McMoRan Operations

FCX is not only a copper producer, but it also mines gold and molybdenum. In 2021, copper accounted for approximately 80%, gold was 11%, and molybdenum was 6% of Freeport-McMoRan’s total sales.

Its mineral deposits are located in the Grasberg mineral district of Indonesia and on various properties in Arizona, New Mexico, Colorado, and Canada. The company also mines the metals in Peru and Chile, with the latter being the world’s largest copper producer. 

Rounding out the portfolio are offshore oil and gas properties in California and the Gulf of Mexico.

Full Year and Q4-2021 Results

Higher metal prices and sales volumes drove revenue and earnings for both the most recent quarter and full-year 2022.

For the fourth quarter of 2021, EPS of $0.96 was up 146% year-over-year, beating analysts’ average estimates by $0.02.

Revenue came in at $6.2 billion, up nearly 37% year-over-year, but it missed analysts’ median forecast by $312 million.

For Fiscal 2021, earnings were $3.13 per share, up nearly six times year-over-year, while total revenue increased about 61% year-over-year to $22.85 billion.

Throughputs

In 2021, Freeport-McMoRan produced 3.843 billion pounds of copper, up 20% year-over-year, 1.38 million ounces of gold, more than 60% up year-over-year, and 85 million pounds of molybdenum, up 12% year-over-year.

Copper, Gold, and Molybdenum Price Outlook

The crisis in Eastern Europe, coupled with lower copper production in Chile (the world’s largest producer, with 5.73 million tons produced in 2020) and Peru (the world’s second-largest producer, with 2.2 million tons produced in 2020), is causing supply problems.

In Chile, mining activities are being challenged by exceptional weather conditions and an increase in earthquake frequency. In terms of seismic activity, Chile sits on the Ring of Fire, a 25,000-mile belt that encircles the Pacific Ocean and contains about 90% of the world’s earthquakes and most of its volcanic eruptions.

In Peru, throughput is impacted by concerns at the mines about the Peruvian government’s intention to target the excess profits they have earned as a result of higher metal prices worldwide.

In addition, the resurgence of COVID-19 virus infections in China is also causing problems in the supply of copper and other raw materials.

As a result, copper prices are expected to continue to trade higher as the year progresses, reaching $5.11 a pound before the end of the first quarter of 2023, according to analysts. This price target will reflect a rise of about 8% from current levels.

Gold and molybdenum are also likely to rise. Gold is expected to rise about 4.5% to $2,033 an ounce, while molybdenum is expected to gain over 15% to $54/kg in 12 months.

Company Sales Volume Estimates

Freeport-McMoRan set the following sales volume targets for 2022:

• 4.3 billion pounds of copper (up 13% from 2021).

• 1.6 million ounces of gold (up 17.6% from 2021)

• 80 million pounds of molybdenum (down 2.4% from 2021)

Wall Street Analysts’ Earnings Estimates

Analysts are forecasting earnings per share growth of ~19% this year, which could translate into a dividend increase from the current 12-month payment of $0.45 per share (for a dividend yield of 1.2% as of this writing). 

Balance Sheet

The balance sheet is solid, showing $8.07 billion in cash against total debt of $9.77 billion. At the same time, the 14.8x interest coverage ratio indicates that the company can easily pay interest on outstanding debt. The ratio should be at least 1.5 to be considered satisfactory.

In addition, Freeport-McMoRan’s weighted average cost of capital of 14.2% compared to a return on invested capital of 19.2% shows that the investment is generating returns greater than the cost of raising the capital required to fund it. 

That means that as metal prices and sales volumes increase, the company will likely be able to further deleverage its balance sheet, and the market will certainly appreciate that.

Wall Street’s Take

In the past three months, 14 Wall Street analysts have issued a 12-month price target for FCX. The company has a Moderate Buy consensus rating based on nine Buys, five Holds, and zero Sell ratings.

The average Freeport-McMoRan price target is $50.57, implying 2.6% upside potential.

Valuation and Technicals

Shares are changing hands at $49.3 as of the writing of this article, for a market cap of $71.66 billion, a P/E ratio of 17, and a 52-week range of $30.02 to $51.99. 

The stock has a price/book ratio of 5.1, a price/sales ratio of 3.1, a price-cash flow ratio of 9.3, and a price-to-free-cash-flow ratio of 12.8. 

The stock price is above the 50-day moving average of $46.5 and trades well above the 200-day moving average of $39.48.

Conclusion

The stock is poised to benefit from metals prices that are expected to trade higher throughout the year. Hence, the share price will likely continue to trade higher.

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