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Is Freeport-McMoRan’s Valuation Attractive?

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Valuation

Freeport-McMoRan (FCX) is valued at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) of 4.7x its 2018 consensus EBITDA. The stock’s valuation multiples, based on 2018 consensus estimates, are the lowest in our select group of copper stocks. Anglo American (AAL-L) and Antofagasta (ANTO) are valued at enterprise values of 5.0x and 5.8x their respective 2018 consensus EBITDA. Glencore (GLEN-L) and Southern Copper (SCCO) have a 2018 EV-to-EBITDA of 6.2x and 11.0x, respectively.

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Aberration year

Freeport’s 2018 EV-to-EBITDA multiple seems low compared to peer companies as well as its own historical valuation. However, there are several other aspects to consider. First, 2018 is an aberration year for Freeport, as it is ending open-pit mining at its Grasberg mine. Freeport expects a byproduct credit of $2.56 per pound at its Grasberg mine this year to bring down the mine’s unit cash costs after a by-product credit of -$0.57 per pound. To put this in context, the company’s unit cash costs after the byproduct credit are expected to average $1.67 per pound in North America and $1.63 per pound in South America.

2019 multiples

Thanks to higher gold production at Grasberg this year, Freeport’s earnings are expected to rise sharply. However, earnings are expected to fall next year led by lower copper and gold production. While Freeport might look undervalued based on its 2018 valuation multiples, it looks fairly valued at 2019 multiples. The stock is valued at an enterprise value of 6.3x its 2019 consensus EBITDA.

In the final article, we’ll look at Freeport’s long-term drivers.

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