I am of the opinion that Freeport-McMoRan stock (NYSE:FCX) is a “Buy and Hold” with an investment horizon of 24 to 36 months. This article will discuss FCX stock upside triggers for this diversified commodity major.Before talking about company-specific factors, I want to point out that over the last 20 years, the average annual return for commodities has been a negative of 2.5%. In the last 10 years, the average annual return for commodities has been a negative of 5.2%.
Commodities therefore still remain undervalued even as liquidity and fundamentals have triggered a bull market in several asset classes globally.
I believe that with renewed prospects of expansionary monetary policies, commodities are due for a rally and Freeport-McMoRan stock is well-positioned to leverage on the upside.
In addition, years of depressed commodity price have translated into lower investment in the mining sector. I believe a tight demand-supply scenario will translate into upside for copper and other industrial commodities.
Besides industrial commodities, I am also bullish on gold as the precious metal is likely to trend higher on potential catalysts. This includes expansionary monetary policies, central banks mopping up gold, and higher geopolitical tensions.
The bullish view on industrial commodities and gold forms the basis of my positive view on Freeport-McMoRan stock.
FCX Stock Fundamentals Remain Strong
As of June 2019, Freeport-McMoRan reported cash and equivalents of $2.6 billion. Further, with an undrawn credit facility of $3.5 billion, the company’s total liquidity buffer stands at $6.1 billion.
With planned capital expenditure of $5.2 billion for 2019 and 2020 combined, FCX is fully financed for the next 24 months.
In addition, Freeport-McMoRan reported operating cash flow of $1.1 billion for 1H19. This implies an annual operating cash flow in the range of $2 billion to $2.2 billion. Therefore, the capital expenditure for the next 24 months can be largely funded through internal cash flows. In other words, the company’s leverage is unlikely to increase.
It is also worth noting that for the last 12 months ended June 2019, Freeport-McMoRan reported EBITDA of $4 billion. For the same period, the company’s interest expense was $930 million. With EBITDA interest coverage of 4.3, debt servicing is likely to remain smooth.
Importantly, high coverage implies that Freeport-McMoRan has the financial headroom to leverage if the company wants to accelerate capital expenditure in the coming years.
The key point from the financial analysis is that Freeport-McMoRan has navigated challenging times with a relatively healthy balance sheet.
I don’t see any financial concerns. On the other hand, if copper and gold start trending higher, the company’s leverage will decline further.
FCX Copper and Gold Production Growth
Freeport-McMoRan expects copper production to increase from 3.3 billion lbs in 2019 to 4.2 billion lbs in 2021.
I believe that copper prices will trend higher during this period and translate into revenue and EBITDA growth. No major copper discoveries in the past decade, lower investments, and declining copper grade are factors that support commodity price upside.
For 2Q19, Freeport-McMoRan reported price realization of $2.78 per lb. For the same period, the net unit cash cost was $1.85 per lb. As price trends higher and cost declines (company guidance), there is clear visibility for higher operating cash flows over the next 24 to 36 months.
Freeport-McMoRan is likely to deliver gold production of 0.8 million ounces for 2019. Production is expected to increase to 1.5 million ounces in 2021.
Gold has been trending higher after a long consolidation in the range of $1,100 to $1,300 an ounce. If expansionary monetary policies are pursued in the United States, it is a strong reason for dollar weakening and gold surging. Even the broad industrial commodity space will trend higher on dollar weakness.
Therefore, with a bullish outlook for copper and gold, Freeport-McMoRan stock is attractive for the medium- to long-term.
A counter argument is that copper can remain weak on sluggish global growth expected for 2019 and 2020. However, the slowdown factor is discounted in copper prices and tight market fundamentals will dictate the price trend.
Concluding Words on Freeport-McMoRan Stock
Freeport-McMoRan is a leaner organization than it was a few years ago.
The sale of oil and gas assets has been a positive. The company’s financial flexibility allows for higher-than-planned capital investment if economic prospects brighten.
FCX stock has been largely sideways amidst volatility in the last 12-months. I am of the opinion that this is a good time to accumulate the stock.
Higher copper and gold production coupled with higher commodity prices can take the stock significantly higher in the next 24-36 months.