US And Indonesian Projects Will Secure 20% Operational Edge

Key Takeaways

• Strategic expansion in U.S. resource positions and Indonesian smelter progress are set to drive significant long-term revenue growth and margin improvements.
  
• Cost reductions through operational innovations could enhance net margins, while potential U.S. tariffs on copper imports may boost EBITDA and cash flow.
  
• Government policies, export reliance, and rising costs pose significant risks to Freeport-McMoRan's margins and future profitability.

Catalysts

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

• Freeport-McMoRan is expecting a significant increase in copper and gold sales volumes, with quarterly copper sales volumes projected to be 20% higher and gold sales nearly four times the first quarter rates, contributing to higher revenue and earnings.
  
• Advancements in cost reduction initiatives, such as the scaling of low-cost leach innovation projects in the U.S. and the autonomous haul truck conversion at Bagdad, are expected to reduce unit net cash costs by 30% on average in future quarters, thus improving net margins.
  
• Progress on the PTFI smelter in Indonesia, which is ahead of schedule and expected to be operational by the end of May, enhances Freeport-McMoRan's ability to meet domestic demand and reduce export costs, impacting operating margins favorably.
  
• The potential imposition of U.S. tariffs on imported copper could result in a 13% premium on U.S. copper pricing, translating to an approximate $800 million annual boost in bottom-line financials, directly improving EBITDA and operating cash flow.
  
• The company is actively pursuing brownfield expansion opportunities in known U.S. resource positions, which are expected to result in an additional 600 million pounds of copper per annum, poised to enhance long-term revenue growth.

Freeport-McMoRan Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Freeport-McMoRan's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.1% today to 10.8% in 3 years time.
• Analysts expect earnings to reach $3.3 billion (and earnings per share of $2.34) by about April 2028, up from $1.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $5.5 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 22.5x on those 2028 earnings, down from 30.3x today. This future PE is greater than the current PE for the US Metals and Mining industry at 20.6x.
• Analysts expect the number of shares outstanding to decline by 2.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.66%, as per the Simply Wall St company report.

Freeport-McMoRan Future Earnings Per Share Growth

Risks

• Government policy and tariffs are heavily influencing financial markets, which could lead to uncertainty and potential volatility in copper pricing, impacting Freeport-McMoRan's revenue.
  
• The reliance on exports from Indonesia and the need for additional export permits present a risk of delays, particularly if smelter ramp-ups do not proceed as planned, potentially impacting net margins.
  
• Inflationary pressures and rising input costs in the United States could affect overall cost management, thereby reducing Freeport's net margins if not mitigated effectively.
  
• Operational risks associated with scaling innovations such as the leach program and autonomous haulage could affect execution and efficiency gains, potentially impacting future earnings.
  
• The potential increase in U.S. tariffs on imported copper and uncertainty in the energy market could drive up costs, threatening to erode Freeport-McMoRan's profitability and margins further.

Valuation

• The analysts have a consensus price target of $44.706 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 $57.0, and the most bearish reporting a price target of just $26.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $30.4 billion, earnings will come to $3.3 billion, and it would be trading on a PE ratio of 22.5x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $37.17, the analyst price target of $44.71 is 16.9% 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.