For companies in cyclical industries such as the mining industry, EV/EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] is the preferred valuation metric. A forward EV/EBITDA multiple tells us how a company is valued for each dollar of EBITDA. In this article, we’ll look at Freeport’s’ forward EV/EBITDA multiple. We’ll then compare it with Freeport’s historical valuation multiple. This approach will help us understand whether Freeport is trading at a discount or premium to its historical multiples.
Currently, Freeport-McMoRan (FCX) trades at 5.4 times its next four quarters’ expected EBITDA. To put this value into context, consider that the company’s forward EV-EBITDA multiple has averaged 5.93 in the last three years and 5.11 in the last five years. The current valuation multiples don’t look high, given Freeport’s historical trading multiples.
Plus, Freeport’s asset sales program also helped restore investor confidence and helped it trade at a higher valuation multiple. Other miners, like Southern Copper (SCCO), Rio Tinto (RIO), and Teck Resources (TCK) are also trading at a premium to their historical valuation multiples. Plus, Freeport’s premium to its long-term trading average is much lower than some of the other copper miners.
You could even argue that there’s be scope for a multiple expansion for Freeport, as its premium over the long-term averages is much lower than some other miners. However, Freeport’s current earnings estimates could also be a bit aggressive, as we’ll explore later in this series.
Plus, as the goodwill generated from asset sales is slowly fading, the attention is shifting to Freeport’s earnings capacity. In the next part of this series, we’ll explore what analysts are projecting for Freeport’s 2016 earnings. This projection will also help us understand what analysts are factoring in while arriving at Freeport’s forward earnings.