Freeport-McMoRan Inc (NYSE:FCX) shares reacted favorably initially to the 2Q results/outlook, likely due to the 4% rally in copper prices, cautious positioning ahead of earnings, and a more positive tone regarding Indonesia negotiations. But, with Grasberg volumes continuing to be deferred, with future ownership/economics at Grasberg still unresolved, and with longer-term valuation metrics not overly compelling in BMO view, BMO remains on the sidelines.
Key Takeaways From 2Q Results: 1. More mine plan changes at Grasberg (~30%/100% of total FCX copper /gold volumes in 2017). FCX reduced expected copper volumes at Grasberg for 2017, 2018, and 2019 by 12%, 6%, and 11%, respectively, and raised 2021 by ~20%, with 2017-2022 volumes in aggregate down marginally. Result: A choppy annual production profile from 2017 to 2022 (+20% in 2018, -33% in 2019, +25% in 2020, +20% in 2021, -17% in 2022), with 2022 expected to be 17% lower versus 2018. Meanwhile, for gold, FCX revised 2017-2021 gold volume targets (down in 2017 and 2019, up in 2018, 2020, and 2021) with 2022 expected to be 38% lower than 2018. 2. Solid FCF generation - FCX generated $531mm in FCF in 2Q, before working capital changes ($675mm including w.c. changes). BMO estimates 2017 FCF generation of ~$1.5Bn (before w.c. changes), based on an assumed copper price of $2.62/lb (vs. current of $2.80/lb). 3 FCX indicated increasing optimism regarding a favorable resolution in the ongoing COW/mining license negotiations in Indonesia, although nothing definitive yet.
Lowering 2017-2019E EBITDA: 2017 from $5.5Bn to $5.1Bn, 2018 from $7.1Bn to $6.7Bn, and 2019 from $5.6Bn to $5.5Bn. BMO NAV estimate is $11.92, vs. $11.96 previously ($3.05/lb l.t. Copper price and 8% discount rate). BMO is bumping the price target to $17 from $15, reflecting recent improvement in underlying copper prices. The $17 target represents 5.3x/6.2x our 2018/2019 EBITDA estimates and 1.4x BMO NAV estimate.