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What Is Driving Freeport-McMoRan’s Valuation amid the Commodity Slump?

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Aug. 24 2016, Updated 8:05 a.m. ET

Freeport-McMoRan’s valuation multiples

For companies in cyclical industries such as the mining industry, EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] is the preferred valuation metric. A forward EV-to-EBITDA multiple tells us how a company is valued for each dollar of EBITDA.

In this article, we’ll look at Freeport-McMoRan’s (FCX) forward EV-to-EBITDA multiple. We’ll then compare it with its historical valuation multiple. This approach will help us understand whether FCX is trading at a discount or a premium to its historical multiples.

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Historical valuation multiples

Currently, Freeport-McMoRan (FCX) trades at ~5.5x its next four quarters’ expected EBITDA. To put this value into context, consider that the company’s forward EV-to-EBITDA multiple has averaged ~6.0x in the last three years and ~5.1x in the last five years.

The current valuation multiples don’t look high, given Freeport-McMoRan’s historical trading multiples. Notably, Southern Copper (SCCO) and Teck Resources (TCK) are trading at a significant premium to their long-term trading multiples. Rio Tinto’s (RIO) current valuation multiple is also higher compared to its historical multiples.

What’s driving Freeport’s multiples?

Freeport-McMoRan’s EV-to-EBITDA has fluctuated between 5.2x–6x in the last three months. Before that, its trading multiple surged to 8.2x in mid-May, but we saw the valuation multiples revert toward the mean after that.

For commodity (DBC) companies, valuation multiples tend to peak when the economic cycle is about to take a turn for the better. Markets start factoring in better forward earnings before analysts upgrade their earnings guidance, and analysts generally upgrade their earnings estimates after stocks rise from the depths.

Therefore, along with the valuation multiples, you should also look at the earnings estimates. In the next part of this series, we’ll see what analysts are projecting for Freeport-McMoRan’s forward earnings.

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