As we discussed in the previous part, trade war concerns are a short-term risk for copper prices (XME). However, the long-term outlook seems positive given the supply-demand dynamics. Along with the macro scenario, Freeport-McMoRan (FCX) also faces uncertainty about its Grasberg operations. Although the company announced a non-binding head of agreement with the Indonesian government, it still needs to sign a definitive agreement and address the environmental claims made by the Indonesian government. In this part, we’ll discuss Freeport-McMoRan’s valuation given its risk-return trade-off.
Freeport-McMoRan is trading at an EV-to-EBITDA multiple of 3.94x its 2018 expected EBITDA—the lowest among the companies that we’re covering in this series. However, Freeport-McMoRan’s 2019 EV-to-EBITDA multiple of 6.03x is the highest among our coverage of copper miners. BHP Billiton (BHP) and Vale (VALE) have 2019 EV-to-EBITDA multiples of 5.81x and 5.09x, respectively. Antofagasta (ANTO) is trading at an EV-to-EBITDA multiple of 4.38x its 2019 consensus EBITDA.
We should remember that Freeport-McMoRan’s copper production is expected to fall to 3.3 billion pounds next year from 3.8 billion pounds this year. The company’s copper production is expected to average 4.0 billion pounds per year between 2020 and 2022. Freeport-McMoRan’s gold sales are also expected to fall to 0.75 million ounces next year from 2.4 million ounces this year. After 2019, Freeport-McMoRan’s gold sales are expected to average 1.45 million ounces per ounces between 2020 and 2022.
Next year, Freeport-McMoRan’s copper and gold production and its earnings could take it a hit as its Grasberg mine transitions from overground to underground operations. However, Freeport-McMoRan’s valuation might look reasonable beyond 2019. Projecting copper prices that far into the future is futile given the volatility in commodity prices.