US And Indonesia Projects Will Expand Operational Capabilities

Key Takeaways

• Scaling leach opportunities and PT-FI smelter recovery are expected to boost revenue and stabilize long-term growth with low costs.
  
• Investment in U.S. technologies and global exploration aims to optimize costs and maintain high production rates, enhancing margins and cash flow.
  
• Geopolitical and regulatory challenges, coupled with reliance on potential legislation and copper price fluctuations, could risk revenue and pressure cash flows.

Catalysts

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

• The scaling of Freeport-McMoRan’s leach opportunity, targeting 800 million pounds of incremental copper per year by 2030, is expected to significantly boost revenue with low capital investment and operating costs.
  
• The recovery plan for the Indonesian PT-FI smelter, set to be completed in 2025, will enable Freeport to return to fully integrated operations, stabilize revenue streams, and secure license extensions that support long-term growth beyond 2041.
  
• Increased investment in the U.S., including autonomous technology and innovation for cost reduction, aims to optimize performance, lowering production costs and enhancing net margins with an 8% production hike expected by 2025.
  
• Exploration and development of the Kucing Liar ore body in Indonesia and significant long-term prospects in other high-potential growth areas are poised to maintain high production rates at Grasberg, resulting in steady revenue and cash flow over the long term.
  
• The allocation of $1.6 billion to $1.7 billion for discretionary projects and ongoing investments in brownfield expansions in the Americas are expected to enhance earnings through improved efficiencies and expanded capabilities in existing operations.

Freeport-McMoRan Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Freeport-McMoRan compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Freeport-McMoRan's revenue will grow by 7.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 7.4% today to 15.9% in 3 years time.
• The bullish analysts expect earnings to reach $5.0 billion (and earnings per share of $3.51) by about April 2028, up from $1.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 19.6x on those 2028 earnings, down from 22.3x today. This future PE is greater than the current PE for the US Metals and Mining industry at 17.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

Freeport-McMoRan Future Earnings Per Share Growth

Risks

• The fire incident at the PT-FI smelter in Indonesia resulted in production delays and repair costs, potentially impacting revenue if further disruptions occur.
  
• Ongoing geopolitical challenges and regulatory uncertainties in Indonesia, including requirements for export approvals and risk of increased retention of export proceeds, could create additional operational risks and impact revenue.
  
• The reliance on potential U.S. legislation for a 10% tax credit on copper production introduces regulatory risk; if this legislation doesn't pass, it will affect net margins as anticipated cost savings may not materialize.
  
• Fluctuations in copper prices and market conditions, including potential macroeconomic headwinds from trade policies, could impact earnings as Freeport is highly leveraged to copper price changes.
  
• Capital expenditure plans, including the significant commitments to new projects like Kucing Liar and discretionary expansion projects, may put pressure on cash flows if these investments do not yield expected returns or if copper prices decline.

Valuation

• The assumed bullish price target for Freeport-McMoRan is $55.03, which represents one standard deviation above the consensus price target of $47.04. This valuation is based on what can be assumed as the expectations of Freeport-McMoRan's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.04, and the most bearish reporting a price target of just $25.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $31.8 billion, earnings will come to $5.0 billion, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $29.21, the bullish analyst price target of $55.03 is 46.9% 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.