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Update On Freeport McMoran

Sep. 23, 2019 12:43 PM ETFreeport-McMoRan Inc. (FCX)
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  • Transition continues as progress is made on Grasberg & Lone Star.
  • Operational improvements will lead to material financial improvements.
  • Strong portfolio of assets that will lead to shareholder value creation.

Update on Freeport McMoran

The previous 18 months have been financially and operationally challenging for Freeport McMoran. The company has been going through some very large scale projects with their transition from the open Pit Grasberg mine to an underground production, which has presented operational challenges all while the global macroeconomic environment, particularly the price of copper, has begun to deteriorate. Lets begin by discussing some of the most important aspects of Freeport’s business. The company posted disappointing Q2 results as revenue declined 31% Y/Y to $3.55 Billion and EPS were -.05 cents.

Grasberg Mine

Freeport has continued their progress in transitioning the Grasberg mine from an open pit mine to an underground operation. Management has been pleased with the progress made by their team in Indonesia, as during the Q2 Earnings call CEO Richard Adkerson was highly complementary of the team and the data they are seeing from the mine. They were able to expand the open pit mine even further, with expectations that they could mine through September and potentially slightly beyond. This has offset the decline in volume as the company focuses resources on developing the underground mine. When the company first announced the transition to underground mining, they expected to cease production of the open pit in 2018, so any continuation of mining can be seen as a positive for the firm. Improvements to the Block Cave and the DMLZ have also allowed the firm to begin to ramp up production. The company expects that once the transition to underground is fully complete, that the Grasberg mine will produce 1-1.3 Billion pounds of Copper and 1.3 million oz’s of gold on an annual basis. The company is still expecting 2019 and 2020 to be “transition years”, but with an expected ramp up of the mine during this time, the firm is predicting sales of copper in 2021 are 4.2 billion lbs.

Lone Star Update

The Lone Star project continues to be a incredibly exciting opportunity for Freeport as development progresses. The company believes that the development is incredibly low risk, even with copper prices being suppressed over the last two years. The company believes they have surpassed the 50% mark, and fully expect to have first production of copper before the end of 2020. The project had an initial estimate of development costs around $850 Million and remain in budget today. What makes this opportunity so safe is they are operating in a mature mining district, so they can leverage the already in place infrastructure in the region. The Lone Star mine is located 8 miles north of their Safford mine and 18 miles southwest of the Morenci Mine. CFO Kathleen Quirk recently stated during the Morgan Stanley Laguna Conference that, “We think it has the opportunity to become another Morenci, which Morenci is the largest mine in North America.” The company has continued drilling in the surrounding areas of the development and are beginning to realize the opportunity is significantly larger than what was originally expected and should begin producing approximately 200 mm lbs. copper per year.

US Regime

Since the passage of the Tax Cuts in 2017, America has become a favorable tax domicile as compared to many of the other countries mining firms operate in. This will continue to be a big tailwind for the firm as they bring dollars back into the United States and continue to ramp production. This makes developments such as Lone Star that much more attractive, and the company even has some NOL’s from the development project which will have a positive effect on the firms bottom line. CEO Richard Adkerson stated in the Q2 Earnings Call, “and for out company, we face no income taxes for many years in the future in the United States. Additionally, on Tuesday September 17th, the United States Senate’s Energy and Natural Resources committee help a hearing on the global race to develop the electric vehicle supply chain. A bipartisan group of US senators stated, “The United States is losing the race to extract and refine minerals used to make electric vehicles and should do more to spur domestic production.” The hearing came after reports that China is working to dominate the markets for materials such as Lithium, Cobalt, and other strategic materials that are critical in the production of consumer products. The committee identified mining as one of the critical components needed to develop and transition the world on clean technologies. For example, a single typical wind turbine uses 5 tons of copper according to the National Mining Association, and with the growing shift to electric, this provides a huge macro tailwind for the firm.

Improving Financial Outlook

Management fully believes that 2019 will be seen as the trough year for Freeport, as they continue to execute on their long term strategy and developments in Indonesia and the US come to fruition. The firm has been investing in their technological capabilities, with the inclusion of AI and Digital Twin to their operations teams. They first implemented these projects in their Bagdad mine, which resulted in a 10-15% increase in throughput, 1% increase in material recovery, a 10% reduction in Unit Cost, all while improving safety for the team members in the mine. Management is now planning to implement this fully across their portfolio of mines, which they hope will lead to an increase in volume of 200 mm lbs. of copper while reducing unit costs. While a typical increase of production volumes of this size would cost 1.5-2 Billion dollars, they will only need to implement far less capital intensive technology.

Between 2019 and 2021, the company announced guidance that calls for an increase in copper production of 30% and an increase in gold production of 80%. Additionally, the newly instituted technological capabilities should reduce unit costs across the mine portfolio approximately 25%. All told, the combination of these two factors will lead to the firms EBITDA approximately doubling from $2.8 Billion in 2019 to nearly $6 Billion in 2021. This number is all while assuming that the price of copper fails to appreciate and remains at a realized of price of $2.75. EBITDA would increase even higher if the price of copper was to rise above $3, as every 10 cent increase in the price of copper leads to EBITDA growing $185 Million.

Analyst's Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FCX over the next 72 hours.

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