Freeport or Alcoa: Which Looks More Attractive?



Both Freeport-McMoRan and Alcoa have underperformed the broader markets this year. The entire metals and mining space has sagged amid demand slowdown and concerns over the US-China trade war. With that said, does Freeport-McMoRan or Alcoa look better placed?

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Freeport-McMoRan versus Alcoa

Both Freeport-McMoRan (FCX) and Alcoa (AA) are leading US-based metals and mining companies. While Freeport is among the leading copper miners in the world, Alcoa is among the top aluminum producers. This year, both Alcoa and Freeport-McMoRan have underperformed the broader markets. While FCX is still in the green, AA is actually trading with a year-to-date loss. Last week, Bank of America Merrill Lynch took a divergent view of AA and FCX. It downgraded AA to “underperform” from “neutral.” However, it upgraded FCX to “buy” from “neutral.” Last week, Citigroup and Jefferies also raised FCX’s target price.

Aluminum versus copper

Alcoa is a play on alumina and aluminum, while Freeport-McMoRan is a play on copper. Notably, some analysts turned bullish on copper amid the protests in Chile, the leading copper miner. On a broader level, both aluminum and copper are in a supply deficit this year. However, copper’s supply deficit is more structural in nature amid a lack of new projects and declining ore grades at existing mines. Aluminum, on the other hand, faces no such structural shortfall. It’s just that aluminum production hasn’t been that profitable, and smelters have been either curtailing production or closing down altogether. From that perspective, copper looks better placed compared to aluminum.

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Freeport-McMoRan and Alcoa: Risks and opportunities

Freeport-McMoRan is investing in its Grasberg mine to develop underground operations. Once it’s completed, the mine will be a key driver of the company’s earnings for the next decade. It also has some other expansion projects in line if copper markets improve. Alcoa, on the other hand, is a play on cost cuts. The company has undertaken several portfolio decisions over the last decade. In a nutshell, it’s been exiting plants that are unviable in current markets. However, Alcoa’s leverage position is comfortable compared to Freeport-McMoRan’s. From a political risk standpoint, Freeport is more exposed to geopolitical risks due to its operations in Indonesia.

Valuation: AA versus FCX

Freeport-McMoRan is valued at an enterprise value-to-EBITDA of 4.9x its 2021 estimates. Alcoa is valued at 3.2x its 2021 estimates. It’s worth noting that we’ve bucked convention and not looked at the next-12-month numbers. The years 2019 and 2020 are aberrations for Freeport due to the transition at its Grasberg mine. From a valuation perspective, AA might look relatively undervalued, but FCX can command a higher multiple due to its copper assets and growth potential.

Analysts’ ratings: FCX and AA

Alcoa has received a “buy” rating from 42% of the analysts polled by Thomson Reuters. A total of 7% of analysts have given it a “hold” rating, while the remainder have “sell” ratings on the stock. Alcoa’s mean consensus price target represents almost a 24% upside over its current level.

A total of 54% of the analysts covering Freeport-McMoRan have rated it as a “buy” or higher, while the remainder have given it “holds.” No analysts have “sell” ratings on FCX. Its mean consensus price target represents an 18% upside over its current level.


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