Freeport-McMoRan (NYSE: FCX) is a mining company based in Phoenix, Arizona. The company is the largest copper and molybdenum producer in the world with the vast majority of the company's revenue coming from copper. However, the company also recently started entering the oil markets as a source of increased revenue. This has led to increased difficulties from the oil crash but as prices recover, this could help Freeport's earnings.
Freeport-McMoRan has had an incredibly difficult time recently. The company's dual exposure to both oil and commodities hurt it both with the initial 2011 commodities crash followed by the 2014 oil crash. The company saw its stock price peak at just over $60 per share in late-2010 before dropping to roughly the mid-$30s before the start of the oil crash.
Once the oil crash started, the company's stock price began to fall harder faster with a bottom set at just under $4 per share in January 2016. The company then saw its stock recover quickly after this bottom to roughly $14 per share in late April this year. Since then the company's stock has dropped back down and is currently hovering at just over $10 per share.
Freeport-McMoRan Financial Achievements
Unlike companies like ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) which ran into difficult times just two year ago, Freeport-McMoRan has been in difficult times for more than half a decade. The company has had a long time to worry about fixing its cost structure, improve production, and sell off over-priced assets. As a result, we will start this section by looking at the improvements that Freeport-McMoRan has made since the start of the crash.
The above slide dictates the financial improvements that Freeport-McMoRan has made since the start of the oil crash. The company has sold more than $4 billion in assets which has strengthened its balance sheet and allowed the company to focus on its high-rewarding assets. These asset sales have allowed Freeport-McMoRan to significantly improve its cost structure for copper from $1.50 per pound in cash costs (after by-product) to $1.33 per pound (after by-product) an improvement of more than 10%.
The company has restructured $1.1 billion in drilling contracts allowing its costs to decline significantly. This has combined with the company's declining capex which has gone down from $855 million in the quarter a year ago by 48% to just $441 million currently. By reducing its costs, Freeport-McMoRan needs lower commodity prices to break-even which should allow its cash flow generation to improve significantly.
Freeport-McMoRan Year End Debt Based on Copper Price - Freeport-McMoRan Investor Presentation
The above slide shows Freeport-McMoRan's balance sheet improvement from its actions. At the end of June 2016, Freeport-McMoRan had an astounding $18.8 billion of debt compared to a market cap of roughly $15 billion. This was a debt to market cap ratio of roughly 1.25 with a net debt / average EBITDA ratio of roughly 3.6. Even with the company's present high debt load, that is still a manageable debt load.
However, because of this difficult debt load, Freeport-McMoRan is focused on rapidly improving its debt ratio. Presently, copper prices are roughly $2.10 / pound. However, should the average copper price for 2016 - 2017 improve to just $2.25 per share, still a ways away from where it was at the height of the 2011 commodity cycle, Freeport-McMoRan's debt load would fall all the way to $11.8 billion. This brings down its net debt / average EBITDA ratio to a much lower 1.9x, allowing the company to handle a continued downturn.
Freeport-McMoRan Asset Sales So Far - Freeport-McMoRan Investor Presentation
And the other thing to realize is that Freeport-McMoRan is not desperately selling assets to earn enough money to pay off its debt. Freeport-McMoRan has managed to sell an astounding $4.41 billion in assets year to date which was worth roughly $400 million in EBITDA at present copper prices. That means the company is getting an 11 to 1 cash to EBITDA ratio on its asset sales.
As we saw above, Freeport-McMoRan end-2017 debt of roughly $11.8 billion (assuming $2.25 / pound copper prices) would be a debt to '16-'17 average EBITDA ratio of just 1.9x. That means that Freeport-McMoRan expects its '16-'17 EBITDA to average roughly $6.2 billion. That means assuming all the company's assets can achieve this ratio, the company is valued at $68 despite its market value + debt being a mere $26 billion at the end of 2017.
Sure all its assets won't achieve this rate, but they do point towards Freeport-McMoRan being a company that's presently valued at less than the sum of its parts.
Freeport-McMoRan Portfolio Overview
Now that we have seen an overview of Freeport-McMoRan's financial achievements, it is now time to discuss the company's portfolio.
Freeport-McMoRan Copper Assets - Freeport-McMoRan Investor Presentation
The above image shows Freeport-McMoRan's copper assets which are responsible for the vast majority of its earnings. As we saw above, Freeport-McMoRan is expecting net unit copper cash costs to be reduced down to $1.33 per pound. With present copper prices at $2.10 per pound that means that Freeport-McMoRan is earning $0.77 per pound of copper profits.
Now let's take a look at Freeport-McMoRan's reserves. We will assume that the company's molybdenum reserves fall under the category of its copper reserves because the $1.33 quoted price was an all-in price that is the company's copper costs after all of its buy-products. Now that we know the company's potential for copper profits, we can attempt to value the company's vast array of copper mines.
The company has 7 copper mines in North America holding a total of 32 billion pounds of copper. The company has two more mines in South America with 31 billion pounds of copper. Lastly, the company has 28 billion pounds of copper from a single copper / gold mine in Indonesia for total copper reserves of 91 billion pounds of copper. At the company's present profit margin that means a potential for $70 billion in profits or 2.7x the company's 2017 end debt + market value.
This again points towards the company's undervalued nature.
Freeport-McMoRan Cerro Verde Project Success - Freeport-McMoRan Investor Presentation
The above image highlights Freeport-McMoRan's success with developing new projects past this $70 billion copper asset profit potential. This above slide highlights the company's Cerro Verde project which has come in under-budget with costs of $4.5 billion. This project, while expensive, has seen its copper production increasing rapidly up to 270 million pounds in the most recent quarter meaning $250 million in profits.
Freeport-McMoRan Oil and Gas Resources
Now that we have discussed Freeport-McMoRan's financial achievements along with an overview of its portfolio, it is now time to discuss the company's oil and gas resources.
Freeport-McMoRan Copper Operations - Freeport-McMoRan Investor Presentation
When Freeport-McMoRan entered the oil and gas business it was supposed to be the business that significantly increased its profits. The company would use its massive cash flow from its mining business to aggressively invest and expand into the oil and gas industry allowing it to rapidly become a major producer with major earnings. However, after the oil crash, the company's oil investments suddenly become a major cost that hurt the company's profits.
Still the company has managed to significantly improve its oil and gas cost structure. The company's 2Q 2016 sales of 12.4 million barrels amounted to 138 thousand barrels per day in daily production. With incredibly low lease operating expenses of just $15 per barrel and a significantly cut capex down to $392 million that means that the company's oil and gas business is still earning respectable profits at present oil and gas prices. Even during January 2016's price crash to less than $30 per barrel, the company was still earning profits.
Freeport-McMoRan Oil and Gas EBITDA - Freeport-McMoRan Investor Presentation
The above image gives a better picture of Freeport-McMoRan's potential earnings at different copper prices once its expenses have been taken into account. However, it does not count the company's estimated exploration capex of $0.6 billion. Present oil prices are just under $45 per barrel meaning that the company's estimated EBITDA at that price is $0.8 billion. Subtracting the company's 2017 capex means the company will still be earning $0.6 billion.
However, here the upside and downside look very good. On the upside that oil prices rise to $65 per barrel, a price that was still 40% below the company's pre-crash highs, the company would have almost $1 billion in profits after capex. For a company that has a present market cap of just $14 billion, that means at $65 per barrel oil, the company's P/E ratio for its oil business alone would be roughly 15.
And on the downside that oil prices drop all the way to $35 per barrel. Take into account that this would mean Brent prices would have to spend all of 2017 at a price just barely above its January 2016 lows. However, even then subtracting capex costs, Freeport-McMoRan's losses would be just $0.1 billion, an incredibly low loss for oil prices spending an entire year at such a lower price.
As we have seen from Freeport-McMoRan's oil business and its overall copper portfolio overview, the company is significantly undervalued at the present time.
Freeport-McMoRan has had a more difficult time as a commodity company than most other commodity companies. This has come from the company's joint commodity and oil businesses which means the company first experienced a downturn starting in 2011, a downturn that became even worse starting in 2014. However, this also means that the company has had much longer to deal with the effects of a crash.
As a result, the company has adjusted its portfolio and at the present time is significantly undervalued based on the value of its portfolio. The company's copper assets alone have the potential to generate more than $70 billion in profits while the company's oil and gas business has the ability to generate almost $1 billion in annual EBITDA should oil prices recover to $65 per barrel, still 40% below their pre-crash highs.
For these reasons, I recommend investors invest in Freeport-McMoRan at the present time.
Disclosure: I am/we are long FCX, XOM.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.