Freeport-McMoRan management think copper could go higher

0

Copper miner Freeport-McMoRan (NYSE: FCX) is an attractive way for investors to profit from rising commodity prices. In its latest earnings report, management highlighted several reasons for investing in Freeport. Let’s take a look at what has been said and why investors have reason to be bullish about Freeport-McMoRan.

All about copper

The outlook for a mining company is largely determined by the price of materials. This is because higher prices usually mean more income, provided that production remains at least at the same level as before. But, of course, commodity prices are the product of the interaction of supply and demand.

Image source: Getty Images.

With that in mind, it should be noted that the four points below relate to continued industry demand and potential supply constraints – which are generally good for prices. In addition, Freeport has great potential to increase production. Finally, investors are likely to see a substantial increase in the company’s profits and dividends in the future.

1. Demand remains strong

Many investors see copper as the most economically sensitive metal and a great way to get an optimistic view of global economic growth. And the emergence of a literally electrifying economy promises long-term demand growth.

As CEO Richard Adkerson noted on the recent second quarter earnings conference call, most copper is used to “generate and transmit electricity” with the metal being “essential in all aspects of achieving low carbon targets for the global economy ”. Whether in electric vehicles (wiring) or solar and wind energy (production, transport and storage), the emergence of new sources of demand for copper is important. It’s also significant because it helps diversify demand instead of being primarily a story of growth from China and the rest of the developing world.

2. Offer considerations

There are two key points to note here. The first is the potential for industry supply constraints in the future. As Adkerson noted, “40% of the current copper supply comes from Chile and Peru,” and there is speculation that the governments of both countries are seeking to increase royalty tax rates for copper production. This is not good news in itself, as Freeport has operations in both countries.

Copper mine.

Image source: Getty Images.

On the other hand, Freeport expects to generate only 27% of its copper volume in South America (North America is expected to produce 38% and Indonesia 35%), so it is relatively underexposed. Additionally, Adkerson said the uncertainty surrounding political developments delayed Freeport’s decision to expand the mine. Suppose uncertainty causes others to do the same. In this case, the copper supply to the industry is likely to be limited. It’s bullish for prices and miners like Freeport with substantial assets outside of South America.

The second point is that Freeport has reduced the risk of its production – which is in contrast to the other large copper coin listed in the United States. Southern copper, which should enter a multi-year investment phase. Referring to Freeport’s major projects in the Grasberg region of Indonesia and the production expansion plan, Adkerson noted that “there was always a reporting overhang related to execution risk with this underground development, risk politics in Indonesia “. The good news, he says, is that “we’ve encountered and mitigated all of these major risks to our business,” and he expects Freeport to hit 100% of the expected production ramp-up by now. the end of 2021.

3. New technologies can increase production

In addition to increasing production capacity, management discussed the possibility of using new leaching technology (a chemical process that extracts copper from material already mined) to increase production.

Management estimates that there are 38 billion pounds of copper in inventory, and Adkerson said recovering “just 10-20% of this material would be like having a major new mine with capital costs and costs. ‘operating variables’. These are significant numbers given that Freeport’s forecast copper production in 2021 is 3.85 billion pounds.

It’s just the start, but Freeport has a top-notch team of experts working on the technology. This is something to watch out for in the future.

4. Profits and dividends

The increase in the price of copper over the past year means Freeport is expected to significantly increase its earnings before interest, taxes, depreciation and amortization (EBITDA) in 2021 and beyond. As you can see below, Wall Street analysts have Freeport generating $ 10.5 billion in EBITDA in 2021 compared to $ 4 billion in 2020. Additionally, based on a copper price ranging from $ 4 per pound to $ 5 per pound (current price is around $ 4.48 per pound). pound), management forecasts EBITDA of $ 12.5 billion to $ 17 billion in 2022 and 2023.

Metric

2018

2019

2020

2021 Wall Street East.

2022 Management Est.

2023 Management Est.

EBITDA

$ 6.7 billion

$ 2.7 billion

$ 4 billion

$ 10.5 billion

$ 12.5 to $ 17 billion

$ 12.5 to $ 17 billion

Data source: Freeport-McMoRan, marketscreener.com.

The increase in earnings and cash flow will likely lead to increased payments to shareholders. CFO Kathleen Quirk said the board is considering its policy and “we expect us to follow the policy of paying up to 50% of excess cash flow.”

Look ahead

Suppose Akerson is correct that the demand for copper remains strong, supply is limited, and Freeport’s investment in leach technology is paying off. As a result, investors can expect a dramatic increase in profits and dividends in the years to come.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

Leave A Reply

Your email address will not be published.