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Stock Analysis & Ideas

Freeport-McMoRan: Supply Crunch and Kucing Liar Expansion to Provide Upside

It can difficult to fully comprehend the magnitude of change in a post-Russia supply chain. For perspective, Russia supplies 44% of the world’s platinum, 14% palladium, 5% silver, 10% gold, 6% nickel, 2% zinc, 6% aluminum, 4% copper, 5% coal, 17% natural gas, 12% oil, and 11% of the global wheat.

The restructuring of supply chains could take a considerable amount of time, possibly meaning that commodity prices will continue surging for the foreseeable future. For U.S. based miner, Freeport McMoRan (FCX), its Fossil Fuel segment will likely benefit from oil prices surging beyond the $110 level. Additionally, prominent metals indices have already been climbing since the turn of the year, and are heavily linked to FCX’s activity.

Copper for an EV Pivot

I see Freeport’s copper exploits as a massive cash cow for decades to come as it provides the firm with leverage to pivot into renewable energy while slowing its existing fossil fuel projects.

Freeport is busy expanding with a $400 million investment in Kucing Liar, which is expected to yield 500 million pounds of copper per year once operational. Ongoing projects are producing stellar results, with total copper production increasing by 19.6% for the full year of 2021.

As for its previous quarter, Freeport managed to increase its copper segment’s EBITDA by 160% year-over-year and lowered its net segment debt by $4.7 billion. Freeport’s growing regional stronghold in South America is allowing it to cut costs and concurrently add to its balance sheet before pivoting towards a renewable energy pure-play in the coming years.

Justifying Valuation

Many investors will be looking at Freeport’s valuation metrics, thinking it’s an overvalued stock. I mean, its price-to-earnings and price-to-book ratios are trading at premiums relative to their five-year averages. However, the rising commodity prices provide cyclical support to the stock, making it natural for it to trade above its historical price multiples.

In addition to the cyclicality argument, Freeport’s PEG ratio is trading at 0.03x, suggesting that the firm’s earnings growth is outpacing the stock’s growth by 33.33x.

Wall Street’s Take

Turning to Wall Street, Freeport-McMoRan has a Moderate Buy consensus rating, based on eight Buys and four Holds assigned in the past three months.

The average Freeport price target of $45.67 actually implies an 8.86% downside but this could soon change as more analyst ratings get captured over the next month.

Concluding Thoughts

Freeport could experience short and long-term success amid commodity prices surges and its copper exploits to serve the electronic vehicles market. Additionally, the stock is undervalued when its earnings growth is considered.

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