Here are a few main points to consider:
The Freeport/Phelps Dodge combo trades at a trailing pro forma 4.6x EV/EBITDA. Compare this with other major miners like Southern Copper (PCU) at 6.8x EV/EBITDA, Rio Tinto (RTP) at 7.4x EV/EBITDA, Barrick Gold (ABX) at 10.6 EV/EBITDA, and Newmont Mining (NEM) at 10x EV/EBITDA. Copper market fundamentals remain positive for Freeport, as supply and demand remain in a very tight balance. Further, a lack of major capacity additions coupled with continued growing demand from China and an eventual uptick in housing starts in America will further add to the demand side. The potential for supply disruptions – as seen with Southern Copper’s miners going on strike in Peru last week – remains a very real threat, as warehouse supplies of copper are also near record lows. Much of the additional supply that is seen coming to the copper markets in the next few years will be sourced from Freeport’s mines; this should give the company better control over industry-wide production practices, and hence price. With the majority of mines in the latter stages of life and estimated to be depleted by 2021, Freeport is in excellent positioning with its reserve quality and life, as its projects will have a great role in swaying global supply. This might sound a bit scary, but Freeport does not hedge its production. The company is levered to copper prices, with each $0.10 change in copper resulting in a change of $250M in Operating Cash Flow or $0.75 in EPS. Gold and molybdenum prices both have an impact, although to a much lesser extent. Freeport’s management has a great degree of experience and a reputation for being the lowest cost producer, and their stance on hedging is obviously indicative of a belief that copper prices won’t significantly retreat any time soon. At current prices, Freeport should be able to generate well over $6 billion in Operating Cash Flow. Using a quick cash flow valuation, I believe FCX is worth north of $85/share. While there might be some uncertainty surrounding this stock given that the latest quarter only including marginal production from Phelps Dodge, I think that next quarter’s fully integrated results will handily beat expectations and send the stock much higher, but make sure to watch the cash, as the accrual results are going to be impacted by accounting items from the deal.
FCX 1-yr chart