The Answer to Freeport-McMoRan’s Valuation Could Lie with Indonesia

Freeport-McMoRan’s valuation

Currently, Freeport-McMoRan (FCX) is trading at an EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of ~6.6x based on its 2017 EBITDA estimates and ~5.1x based on its 2018 EBITDA estimates. The multiples appear to be in line with its long-term valuation.

However, we should not draw simplistic assumptions about whether Freeport-McMoRan is undervalued or overvalued by looking at traditional valuation metrics.

The Answer to Freeport-McMoRan’s Valuation Could Lie with Indonesia

Indonesia

In August 2017, Freeport-McMoRan announced a framework with the Indonesian government (EIDO). According to Freeport-McMoRan’s release, “PT-FI will convert its Contract of Work to a special license (IUPK), which will provide PT-FI with long-term operating rights through 2041.”

Although the agreement provides visibility for Freeport-McMoRan’s long-term mining rights in Indonesia, it lacks crucial details—especially related to the valuation of Freeport’s Indonesia operations.

Although Freeport-McMoRan and the Indonesian government have agreed to a “fair market value” approach for Grasberg, we don’t have a watertight figure for the valuation. According to Freeport-McMoRan, “the timing and process of divestment” are “being discussed with the government.”

Grasberg valuation

Previously, Freeport-McMoRan (FCX) had proposed a valuation of $16.2 billion, but the Indonesian government valued the operations at a fraction of that amount. The divestment price could be a key driver for FCX’s valuation.

The importance of Freeport-McMoRan’s Indonesia operations, where Rio Tinto (RIO) is its junior partner, can’t be undermined. The operations are expected to account for almost 30% of Freeport’s 2017 copper shipments (BHP) (GLNCY).

In the absence of any information on FCX’s new fiscal terms in Indonesia, we don’t believe it would be prudent to come to a conclusion based on current valuation multiples.

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