Freeport-McMoRan (NYSE:FCX), one of the world's heavyweight miners with growing oil and gas assets, has seen its share price get hit hard during the second half of 2014, down 35% due to both macro and micro concerns. While these concerns are valid, I think that such a confluence of factors has pushed the share price too low, presenting a useful entry point for investors. Remember, stocks usually bottom before earnings.
Strong Volume Growth Outlook in Key Commodities
Freeport-McMoRan is the world's second-largest copper miner, but also produces gold and molybdenum. Furthermore, FCX now has a significant presence in oil and gas production through acquisitions. Due to attractive mine sequencing in the coming years the outlook for FCX's production volumes is strong, with copper volumes likely to be 40% higher by 2016, gold volumes 110% higher, and oil and gas production 25% higher. With such volume growth, FCX is less reliant upon pricing to drive revenue and EBITDA growth than its peers.
Unfavorable Macro and Micro Sentiment
Supply-side challenges in copper production are being outweighed presently by concerns over slowing demand in China and Western Europe. In addition, the recent sharp decline in crude oil prices has weighed heavily on sentiment in all the oil producing stocks. This, in conjunction with some internal issues at one of FCX's mines and resource nationalism in Indonesia, are all factors that have conspired against FCX.
Levered Returns Valuation Model
I have modeled a trough EBITDA margin in FY 2014 at 39.8%, but rising sharply thereafter to reach 46% by FY 2017 as the full extent of FCX's volume growth optimizes fixed-asset utilization. I also assume capex peaks at $7.5bn in FY 2014 and $7.0bn in FY 2015. However, I have a normalized level of capital expenditures running through the model below and subtract the excess capex in FY 2014 and FY 2015 from the equity waterfall in the "Other" line item. I arrive at a fair value per share of approximately $35, giving 37% upside from its Dec. 8 closing price.
Freeport-McMoRan is well-positioned in its markets with less of a reliance on pricing to drive growth in the coming years than its peers. A number of negative factors have all conspired against FCX recently, driving the share price down to a near five-year low. However, the outlook for FCX in the near term (2015-17) is that of sharply improving margins, driving strong FCF growth. There is significant upside here, with FCX currently representing a compelling entry point.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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