For companies in cyclical industries such as mining, EV-to-EBITDA (enterprise vale 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 Freeport’s historical valuation multiple. This approach will help us to understand whether Freeport is trading at a discount or at a premium to its historical multiples.
Currently, Freeport-McMoRan is trading at ~5.6x its next four quarters of expected EBITDA. To put this value into context, consider that the company’s forward EV-to-EBITDA multiple has averaged 5.94x in the last three years and 5.14x in the last five years. The current valuation multiple doesn’t look high, given Freeport’s historical trading multiples.
Freeport’s asset sales program has restored investor confidence, helping it to trade at a higher valuation multiple. Other miners (GNR) such as Southern Copper (SCCO), Rio Tinto (RIO), and Teck Resources (TCK) are also trading at premiums to their historical valuation multiples.
Note that analysts expect Freeport to generate EBITDA of ~$7.3 billion in the next four quarters. This is a significant premium over Freeport’s current run-rate EBITDA. Analysts’ optimism seems to stem from expectations that copper will average ~$5,000 per metric ton over the next year. Also, markets seem to be factoring in positive EBITDA contributions expected from Freeport’s energy business in 2017.
Copper is currently trading near the levels analysts are factoring in when arriving at their EBITDA estimates. With that said, the Grasberg mine will be crucial for Freeport over the next couple of years. The mine’s higher gold production should help the company to reduce its consolidated unit cash costs and boost its earnings.
However, the Grasberg mine faces several impending issues, some of which Freeport discussed in its 2Q16 earnings call. You can explore this more in Freeport-McMoRan’s 2Q16 Call: Indonesia and Debt Reduction.
You can also visit our Copper page for more updates on this industry.