Freeport-McMoRan (NYSE: FCX) is a more than $16 billion mining company with a significant portfolio of assets, especially in the copper business. Just over a year ago, I made the company my top mining pick for the next 5 years. The company had a difficult 2018 however, due to a difficult commodity environment. Despite this, the company’s asset portfolio still makes it my top mining pick for the next 5 years.
To properly analyze Freeport-McMoRan, we need to start by looking at the markets the company operates in. Like all other commodity companies, the company is subject to price fluctuations in what it sells. For those interested in the oil markets, another popular commodity, I recommend looking at my 2019 oil market outlook.
The above shows the performance of the copper markets. Like all other markets, copper prices took a healthy nosedive in late-2018. Current copper prices are roughly $2.85 per pound down from $3.20 per pound in the first half of 2018. This difficult drop in copper prices put a significant blip in the earnings of Freeport-McMoRan.
Despite this, overall, global demand remains healthy. U.S. construction and manufacturing remain positive and the European market remains steady. At the same time, there are constraints for scrap processes. Copper, due to its cost, is readily recycled. As a result, an oversupply in scrap can also be something that impacts copper prices.
Long-term the fundamentals in the copper markets remain strong, which should impact Freeport-McMoRan. Freeport-McMoRan believes a significant supply gap is approaching, and such a supply gap could lead to prices going up in the coming years. This could be a significant benefit for Freeport-McMoRan.
Freeport-McMoRan Market Position - Freeport-McMoRan Investor Presentation
One of the things that makes me believe that a supply gap is approaching is the graph above. This graph shows significant copper discoveries recently, with none of the 10 largest mines in terms of copper reserves discovered in the past 30 years. In fact, a significant percentage of the largest mines were originally discovered in the 1800s.
In terms of the largest mines by production, a number of the larger ones were discovered roughly 30-40 years ago. Another significant thing to note is where Freeport-McMoRan is located on this graph. The company has 3 of the 5 largest producing mines in the world and 2 of the top 10 largest mines by reserves.
As a result, if worldwide copper demand continues to grow while no new supply is coming online, this means that copper prices should recover.
Freeport-McMoRan Global Footprint
We discussed the company’s assets a tiny bit above, but let’s continue by discussing the company’s global footprint. This is essential to making the company my top mining pick for the next 5 years.
Freeport-McMoRan Global Footprint - Freeport-McMoRan Investor Presentation
Freeport-McMoRan has a global leadership position and operates all of its own assets. The majority of the company’s assets have been quantified and the company has significant production capacity at the present time. On top of this, the company has significant long-term expansion options. On top of this the company has an experienced team and leading position in the U.S.
Freeport-McMoRan copper reserves alone are massive. The company has astounding 87 billion billion pounds of reserves, worth almost a quarter of a trillion dollars at current prices. This is a massive portfolio of assets, and is worth approximately 15 times that of Freeport-McMoRan.
Overall, Freeport-McMoRan’s impressive portfolio is incredibly difficult to replicate. The implied replacement value of the company’s current capacity is $36-45 billion. That’s more than double the company’s market cap, and it actually means Freeport-McMoRan’s assets are so impressive the company would be a good acquisition target, for a large company looking to expand.
Freeport-McMoRan Lone Star Project - Freeport-McMoRan Investor Presentation
At the same time, Freeport-McMoRan has continued to invest heavily in expanding this asset base. One of the company’s major projects is the Lone Star project in Arizona. This massive project being located in the United States is a strong benefit in my opinion; this is a large commodity project and being in a stable government environment will help it to provide reliable cash flows.
The project will cost $850 million, of which $200 million has already been incurred. At the same time, the project has a NPV @8% of $1.2 billion at $3.5 per pound copper. Keep in mind that current copper prices are $0.7 per pound below this, so this NPV has the chance to drop significantly. At the same time, the project is expected to start up at YE 2020 with a 20 year mine life.
Freeport-McMoRan Production Grasberg - Freeport-McMoRan Investor Presentation
At the same time, the company has been focused on ramping up the PT-FI underground mine. This will result in a few years with lower production. Going in the long term, copper production will pick up in the underground mine, which has higher reserves, but gold production will drop down. This means that Freeport-McMoRan is moving more towards a long-term company.
Looking at anticipated production from 2022-2027, the company anticipates roughly 1.7 billion pounds in annual copper production and 1.8 million ounces in annual gold production. This means an astounding $7.1 billion in revenue over this six year period, compared to $6.9 billion in 2018. This shows that while the mine will have some uncertainty, it has long-term potential.
Another important thing to keep in mind is that the Grasberg Mine has been significantly de-risked. Freeport-McMoRan has come to an agreement with the Indonesian government which will provide the company with rights until 2041, with no significant change in fiscal terms. This will provide a continued long-term future for the company and this asset.
Freeport-McMoRan Future Cash Flow
Freeport-McMoRan is in a growing environment, and at the same time, the company has an impressive asset base. Together, these things will be the key to what makes the company my top mining pick for the next 5 years, and that’s the company’s future cash flow.
Freeport-McMoRan Production - Freeport-McMoRan Investor Presentation
This shows Freeport-McMoRan’s anticipated sales profile in the coming years. As can be seen, Freeport-McMoRan is anticipated to have a rough 2019 as it reorganizes its portfolio. However, going into the early-2020s, especially as the Lone Star project picks up and Grasberg gets more organized for copper, the company’s copper production will increase as gold drops.
The company’s anticipated 2020-2022 revenue will be double-digits lower than 2017 revenue, and in line with 2017 revenue. This will result in 2020-2022 revenue of roughly $14 billion. That’s incredibly strong revenue for a company with growing margins and a market cap of >$16 billion. This is incredibly exciting to see for Freeport-McMoRan.
Freeport-McMoRan Earnings - Freeport-McMoRan Investor Presentation
To gain a more accurate picture of Freeport-McMoRan’s earning potential, the map above shows Freeport-McMoRan’s average EBITDA and operating cash flow for 2019-2022 at a variety of prices. The operating cash flow excludes working capital changes and is based on $1200/oz. Gold and $12/pound Molybdenum.
For reference, before we go into this next discussion, current copper prices are roughly $2.7 per pound, current gold prices are roughly $1300/oz, and current molybdenum prices are almost $12 per pound.
Let’s start with Freeport-McMoRan’s $3.00 per pound copper prices. Here the company anticipates 2019-2020 operating cash flow of $3 billion per year increasing to more than $4 billion per year from 2021-2022. Using current prices, 2019-2020 we’ll see operating cash flow of $2.3 billion at current prices increasing to $3.6 billion from 2021-2022.
It’s important to note that both of these numbers are still incredibly strong cash flow for a company with a market cap of $16 billion. At the same time, the company’s capital expenditure has been growing to $2.0 billion in 2018 and $2.3 billion in 2019. This continued capital expenditure should support increased earnings going into the 2020s and onwards.
Freeport-McMoRan Financials - Freeport-McMoRan Investor Presentation
Freeport-McMoRan has net debt of $6.6 billion and has worked to significantly improved its deleverage. The company’s significant improvement in its financial position has allowed it to continue returning money to shareholders. At the same time, the company has reinstated a quarterly cash dividend on common stock that is close to 2%.
The company has more than enough financial capability to continue increasing its dividend and I think it’s really a testament to all that Freeport-McMoRan has accomplished.
Five Year Plan
Let’s look at this five year plan for Freeport-McMoRan, which makes the company my top mining pick for the next five years, in terms of cash flow.
As can clearly be seen, Freeport-McMoRan has more than enough cash flow to cover its dividends, especially when the company finishes reorganizing business. The Freeport-McMoRan of the early-2020s will be earning $3.6 billion in cash flow, paying out less than 10% as dividends to give a 2% yield, and have a market cap of just $16 billion.
This helps to highlight why the company is my top mining pick for the next 5 years.
Freeport-McMoRan has had a difficult time over the past six months, but the company has continued to focus on improving its portfolio. The company’s strong portfolio of assets has resulted in growing cash flow, and this past year, the company initiated a dividend. At the same time, the company has continued to focus on aggressively paying down debt.
Freeport-McMoRan has managed to solve the issues with the Grasberg project, with negotiations with the Indonesian government being solved until 2041. At the same time, the company’s Lone Star project should be coming online in the early-2020s. This will result in Freeport-McMoRan’s production and earnings stabilizing starting in the early-2020s.
Disclosure: I am/we are long FCX. 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.