Freeport-McMoRan: Attractive Valuation, Should Benefit from Infrastructure Bill

Freeport-McMoRan, Inc (FCX) is a leading mining company that explores copper, gold, and molybdenum. Its portfolio of assets includes the Grasberg minerals district in Indonesia, one of the world’s largest copper and gold deposits.

FCX has other significant mining operations in North America and South America, including the large-scale Morenci minerals district in Arizona and the Cerro Verde operation in Peru. It was founded in 1987 and is headquartered in Phoenix, Arizona.

Freeport-McMoRan shares have outperformed in 2021, with gains of about 49% so far. I am bullish on FCX stock as it stands to benefit from key catalysts and has an attractive valuation. (See Analysts’ Top Stocks on TipRanks)

Freeport-McMoRan: U.S. Infrastructure Bill Creates Lots of Opportunities

The U.S. Congress has recently passed a $1 trillion infrastructure spending package to modernize roads, bridges, highways, passenger rail networks, high-speed internet, and more. There is also a focus on clean energy and transportation, building a network of electric vehicle charging points as we move gradually to the electrification of mobility.

Regarding this investment, President Joe Biden stated that “generations from now, people will look back and know this is when America won the economic competition for the 21st Century.”

This important and historic infrastructure deal is expected to impact stocks in several industries such as industrials, materials, and electric vehicles. Material stocks and mining stocks could largely benefit from this infrastructure spending. Freeport-McMoRan explores copper, which is widely used in electrical wiring, plumbing, roofing, and industrial machinery.

The excellent news for Freeport-McMoRan continues, as copper is used in mobile phones, external cables and connectors, busways, printed circuit boards, and sockets.

The magic word to focus on is electricity. Electrical motors are wound with copper wire, and the automotive industry is heading into the gradual transition from internal combustion engines to pure electrification. This itself creates a great demand for copper.

Other electronic devices such as radios and TVs, air-conditioners, and home heating systems also use copper. Freeport-McMoRan, on its website, mentions that “copper is vital to clean energy,” a trend that COP 26, the United Nations climate change conference, highlighted to address climate change.

Copper Prices Surged in the Past Year: Can They Continue Moving Higher?

Freeport-McMoRan has seen copper prices surging in late 2020 and 2021. Copper futures traded at $3.35 per pound in late November 2020, reached a high of $4.77 per pound in May 2021, and have declined to $4.45 per pound today.

This rally in copper price has benefited the mining company, which returned to profitability in 2020 after net losses of ($245 million) reported in 2019. For 2020, net income was $596 million, an increase of around 350%.

Investors should be aware that Peru, where Freeport-McMoRan has significant operations, had a low Political stability index of -0.29 for 2020, compared to the average global figure of -0.07 in 2020, based on 194 countries. Overall, the political stability index for Peru has improved since 2013, when it had a figure of -0.81. However, in 2019 the index had a value of -0.15. This deterioration in 2020 for Peru poses a reason for concern.

Third-Quarter 2021 Results: Strong Financial Results, Favorable Outlook

Q3 2021 results were strong for FCX stock, which beat on earnings.

Freeport reported earnings of $0.89 per share compared to estimates of $0.78. However, revenue missed analyst forecasts. The company reported $6.08 billion in revenue against estimates of $6.22 billion. 

The year-over-increase for revenue was about 58% compared to revenue of $3.85 billion for Q3 2020. On the negative side, for the Fiscal Year 2021, Freeport-McMoRan stated that it expects copper sales to be 3.8 billion pounds, slightly less than the previous figure of 3.85 billion pounds.

Net income increased in Q3 2021 to $1.4 billion, an increase of about 325% compared to net income reported of $329 million in Q3 2020. Another favorable factor for FCX stock is the announcement of new $3.0 billion share repurchase authorization and the company’s approval of a variable cash dividend on common stock for 2022 at an expected annual rate of $0.30 per share.

Richard C. Adkerson, Chairman and Chief Executive Officer, said, “Our favorable results in the third quarter and year-to-date reflect strong execution by our global team in growing our production safely, efficiently, and responsibly. We have established a solid foundation for the future as a leading long-term supplier of copper to support a growing global economy and the transition to clean energy. We have successfully transitioned our Grasberg minerals district to be the world’s largest underground block-caving operation while maintaining excellent performance throughout our global operations.”

He then continued: “Our balance sheet is strong, and we are prepared to make value-enhancing investments in our business while providing shareholders with increasing cash returns consistent with our established financial policy. The outlook for the copper market is extraordinarily positive. As a leader in the global copper industry, Freeport is well-positioned for success in generating value for all stakeholders.”

Valuation: FCX Stock Is Attractive Now

Freeport-McMoRan has a price-to-cash-flow ratio (Q3 TTM) of 10.9x, lower than the same ratio of 36.2x for the metal mining industry. The P/E ratio (Q3 TTM) of 14.7x is also attractive compared to the P/E ratio of 18.8x for the basic materials sector. Another key metric, the price-to-book ratio (Q3 MRQ), stands at 2.6x for Freeport-McMoRan, which is less than the ratio of 3x for the basic materials sector.

Wall Street’s Take

Turning to Wall Street, Freeport-McMoRan has a Moderate Buy consensus rating based on six Buys, three Holds, and two Sell ratings. The average Freeport-McMoRan price target of $41.45 represents 7.2% upside potential.

Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.