Is Freeport-McMoRan’s Stock a Long-Term Play?

Freeport-McMoRan (NYSE: [stock_market_widget type=”inline” template=”generic” color=”default” assets=”FCX” markup=”{symbol} {currency_symbol}{price} ({change_pct})” api=”yf”]) has started 2019 on the right note. The stock is up 13% as of this writing on the back of a rise in copper and gold prices, but the question investors would be asking themselves is if this rally is just a short-term bounce or if it can continue for a long time. Let’s find out.

Copper and Gold Production to Drop in 2019

In 2018, Freeport produced and sold 3.8 billion pounds of copper. Its average realized price per pound of copper stood at $2.91 per pound as compared to $2.93 per pound in 2017. This had a negative impact on the business as costs rose.

The problem for Freeport this upcoming year is that forecasted copper sales will drop to 3.3 billion pounds as it enters the first year of transition.

Freeport incurred site production and delivery costs of $1.76 per pound in 2018 as compared to $1.60 per pound in the previous year. However, unit net cash costs per pound dropped to $1.07 per pound from $1.19 per pound in the prior year, which eased the pressure on Freeport.

The problem for Freeport this upcoming year is that forecasted copper sales will drop to 3.3 billion pounds as it enters the first year of transition. Additionally, consolidated unit net cash costs will increase to $1.73 per pound in 2019.

On the other hand, Freeport had sold nearly 2.4 million ounces of gold in 2018 at an average realized price of $1,254 per ounce. But this year, Freeport’s gold sales are expected to fall by a third to just 800,000 ounces. So it isn’t surprising to see why the company’s top line is expected to dive nearly 20% in 2019.

But Freeport doesn’t expect the transition pain to last beyond 2019. The drop in copper and gold sales will be on account of a transition at Grasberg to underground mining from open-pit mining, which will hurt the company’s output. However, things should start improving from next year and get even better in 2021.

Long-term Outlook Suggests Freeport’s Stock Price Positioned to Increase

Freeport expects its copper sales to start increasing in 2020, when it forecasts 3.5 billion pounds in sales and should increase further in 2021 to 4.2 billion pounds. Similarly, the company anticipates that gold sales will double to 1.6 million pounds in 2021.

Freeport sees copper base production declining around 5.3% over the next decade, but demand increasing at a compound annual growth rate of 1.5%.

Moreover, Freeport expects that the copper market’s economics will be more favourable by the time it gets its production capacity back online. That’s because the company sees copper base production declining around 5.3% over the next decade, but at the same time, demand for copper is expected to increase at a compound annual growth rate of 1.5%.

Freeport’s average EBITDA (earnings before interests, taxes, depreciation, and amortization) and average operating cash flow will increase substantially once the transition years of 2019 and 2020 are over. This is evident from the following table provided by the company.

EBITDA and Cash Flow at Various Copper Prices

EBITDA-operating-cash-flow-copper
Source: Freeport-McMoRan 2018 Q4 Earnings Presentation. US$ Billions.

As such, Freeport-McMoRan seems to have a bright future once it gets past 2020. An improvement in the company’s production profile and potentially higher pricing of copper would be tailwinds in the long run. As such, investors shouldn’t be disappointed even if the current rally turns out to be a short one as the company is positioning itself for long-term gains.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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