Freeport-McMoRan (FCX) is valued at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 4.5x, whereas copper mining peers Antofagasta (ANTO) and Anglo American (AAL-L) have EV-to-EBITDA multiples of 5.5x and 4.7x, respectively, and Southern Copper (SCCO) and Glencore (GLNCY) have multiples of 5.8x and 11.0x.
Based on the above 2018 multiples, Freeport appears to be the cheapest among the copper mining stocks we’re covering, while Southern Copper appears to be the most expensive. However, we should read Freeport’s 2018 EV-to-EBITDA multiple with caution. This year has been an unusual one for Freeport, as it is ending open-pit mining at its Grasberg mine. From the mine, the company expects unit cash costs (after by-product credits) of -$0.57 per pound, led by higher gold production. After spiking in 2018, Freeport’s earnings are expected to fall in 2019 before stabilizing in 2020.
What’s priced in?
As noted previously, there are several uncertainties surrounding Freeport’s Grasberg mine, including whether the company will have to share its 2018 production with the Indonesian government if it sells its majority stake there. Also, the macro picture has deteriorated since the beginning of the year. At $7,000 per metric ton at the start of the year, copper needed a lot of positives to sustain its rally. On the contrary, we’ve seen sentiments take a turn for the worse.
While it’s tough to predict the outcome of a US-China trade war or Freeport’s tussle with the Indonesian government, markets might not be adequately pricing risks in their valuation of Freeport. While the recent sell-off has not changed copper’s long-term fundamentals significantly, its short-term outlook has started to look a bit hazy.
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