Classification Of Copper As Critical Mineral May Introduce 10% Tax Credit

Key Takeaways

• Technological and automation advances in U.S. operations may lead to cost savings and higher net margins.
  
• Strategic expansions and classification as a critical mineral could boost copper production, ensuring revenue growth and stability.
  
• Geopolitical, operational, and legislative uncertainties, alongside investment risks and reliance on innovation, pose significant threats to Freeport-McMoRan's revenue stability and growth.

Catalysts

Engages in the mining of mineral properties in North America, South America, and Indonesia.

• The implementation of technological innovations and automation in U.S. operations is expected to lead to significant cost reductions and increased efficiencies, potentially improving net margins.
  
• Scaling the leach opportunity, targeting 300 million pounds by the end of 2025 and 800 million pounds per annum by 2030, could increase copper production capacity and enhance revenue.
  
• Advances in the PT-FI smelter project, with a recovery plan in place and expected completion in 2025, are crucial to securing operating rights beyond 2041, ensuring long-term revenue stability.
  
• The anticipated legislative change to classify copper as a critical mineral may introduce a 10% tax credit on operating costs, which could positively impact net margins if enacted.
  
• Organic growth projects, like expansions at Bagdad and Safford Lone Star, promise higher future copper production, potentially boosting future revenue and cash flow.

Freeport-McMoRan Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Freeport-McMoRan's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.4% today to 11.1% in 3 years time.
• Analysts expect earnings to reach $3.2 billion (and earnings per share of $2.31) by about January 2028, up from $1.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $5.0 billion in earnings, and the most bearish expecting $2.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.0x on those 2028 earnings, down from 27.3x today. This future PE is greater than the current PE for the US Metals and Mining industry at 16.5x.
• Analysts expect the number of shares outstanding to decline by 1.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.41%, as per the Simply Wall St company report.

Freeport-McMoRan Future Earnings Per Share Growth

Risks

• The ongoing negotiations with the Indonesian government over smelting operations and export approvals highlight geopolitical risks which could impact Freeport-McMoRan's ability to generate consistent revenue from its Grasberg operations if not resolved favorably.
  
• The mention of reduced ore grades in North American operations suggests potential challenges in maintaining production levels and efficiency, which could affect Freeport-McMoRan's margins and overall earnings if not managed properly.
  
• The substantial capital expenditures planned for the next two years, especially discretionary spending on growth projects, present risks if these investments do not deliver expected returns or if market conditions deteriorate, potentially impacting Freeport-McMoRan's cash flow and financial flexibility.
  
• Uncertainties surrounding legislative actions, such as the approval of copper as a critical mineral for tax benefits in the U.S., pose risks to cost structures and potential earnings if these favorable conditions do not materialize.
  
• Dependence on technological innovations and scaling of leach opportunities for organic growth introduces execution risk, where failure to achieve targeted outputs or technological setbacks could negatively affect Freeport-McMoRan's production forecasts and revenue growth projections.

Valuation

• The analysts have a consensus price target of $48.42 for Freeport-McMoRan based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $62.0, and the most bearish reporting a price target of just $25.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $28.9 billion, earnings will come to $3.2 billion, and it would be trading on a PE ratio of 26.0x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $35.84, the analyst's price target of $48.42 is 26.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.