Freeport-McMoRan 4Q21 Earnings Analysis


Freeport-McMoRan Stock Analysis

Business Description:

  • 3.8 billion lbs of Copper, 1.3 billion lbs of Gold and 82 million lbs of Molybdenum produced in 2021

  • Expected unit cash cost of $1.35 per lbs of Copper in 2022

Freeport-McMoRan Stock Analysis

Catalysts:

  • Copper inventories are at a 47-year low

  • Demand for Copper still rising with EV and Renewables in the West and China; and electrification and construction in the developing world

  • Economic recovery

  • Supply gap happening

  • Shifting business in cheaper markets such as Indonesia

  • FY20 Cash cost per lbs in Indonesia $0.43 vs $1.81 in North America

  • 34% of sales from Indonesia in FY21, expected to be 36% in FY22

  • Restarted to pay dividends, intends to return more cash to shareholders in the future

  • Greatly improved balance sheet with net debt of $1.4 billion vs $6.1 billion a year ago


Risks:

  • Shift from North America to Indonesia and Peru poses more political risks

  • Copper prices are very volatile

  • Will be taking more debt in the future for Indonesian smelter project


Financial Analysis:

  • 1,020 mm lbs of Copper sold in 4Q21 (vs 866 mm lbs for 3Q20) at $4.41 (vs $3.47 in 4Q20) with cost of $1.96 (vs $1.78 in 4Q20)


Freeport-McMoRan Stock Analysis


Valuation:

  • My personal Biases:

  • Very Bullish on Copper

  • Already one of my best investments of 2020 with 300% gains on some trades and 81% on average

  • 8.9% of my portfolio


  • Assumptions:

  • Intrinsic value calculated with expected average copper price of $4.30 per lbs, expected gold price of $1750 per oz and expected Molybdenum price of $15 per lbs in the next 5 years

  • Production cost of Copper $2 per lbs

  • Operating cash flow 40% of revenues

  • Expected production data and Capex from Company


Freeport-McMoRan Stock Analysis

  • Discount Rate of 13% with terminal growth rate of 0% (lower than last time with improved balance sheet)


Freeport-McMoRan Stock Analysis

  • Sensitivity data for 2022-2023 given by company

  • 5 year horizon (we could see higher/lower Copper prices in less time than that)

  • No change in shares outstanding

  • P/FCF ratio ranged from 4-20 in the last 10 years

  • Ignore all dividends and buy backs

Freeport-McMoRan Stock Analysis

Conclusion

  • Premium on current intrinsic value if we assume Copper prices to be on average of $4.30 in the next 5 years

  • But still a good bet on Copper with 15% annual returns if Copper prices remain at $4.50

  • Possible 350% upside in 5 years or less if Copper prices cross $5.50

  • Big downside if Copper prices drop considerably

  • Expected annual returns of 16%


Freeport-McMoRan Stock Analysis


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