Continued demand for copper could help drive Freeport-McMoRan (NYSE:FCX) higher in the long term. As InvestorPlace’s Josh Enomoto noted, new technologies like electric vehicles could help bolster this long-term growth further. But, Freeport-McMoRan stock isn’t 100% in the catbird’s seat.
Freeport faces short-term headwinds like the coronavirus. Copper prices have taken a dip thanks to the crisis. As this Barron’s article declares, “the worst is yet to come”
All bets are off when it comes to whether the situation for copper prices is that dire, but if copper prices do hit lows seen in prior years, Freeport could go into freefall.
When copper prices fell to around $2/pound in 2016, Freeport-McMoRan stock took a beating. Shares cratered from just under $12/share in late 2015, to prices below $4/share in early 2016. Then again, the company was much more leveraged at the time. It since has improved its balance sheet.
However, it goes to show how volatile Freeport-McMoRan stock can be. On the other hand, buying Freeport shares today could be shrewd contrarian play. Let’s dive in, and see why investors should consider Freeport stock.
Freeport-McMoRan Stock Is a Long-Term Play
As seen from recent articles on InvestorPlace, there’s a good reason why Freeport-McMoRan stock could be a great long-term buy. Long-term, copper prices have been trending higher. Yet, for investors looking at the stock today, they may not be looking at a 5 or 10-year time horizon. Perhaps they want an investment that will appreciate within 1-2 years. Perhaps, even less.
For those investors, the question is, “will Freeport-McMoRan move the needle in 2020?” In the midst of a runaway bull market, old economy Freeport has been left in the dust. Along with the recent coronavirus fears, last month’s earnings release didn’t help either.
Reporting decreased output, and increased costs at their flagship Indonesian Grasberg copper mine, shares sold off in light of the negative developments. Yet, it may be unfair to judge Freeport shares only on recent performance. The company is in the middle of a transition.
With three major projects in motion (Grasberg Underground, Lone Star Oxide, productivity enhancements), the company could see profitability improvements in the coming years. If these projects pay off, Freeport-McMoRan stock could reach new highs. The company projects that by 2021, increased copper and gold production, along with a 25% reduction in unit costs, could boost EBITDA by 100%.
But, with external factors at play, there’s no guarantee this payoff will happen. In addition, interest in Freeport’s assets by competitors would alter the course as well.
Worth the Risk
Outside of organic catalysts, what types of “strategic alternatives” could be in play? There’s speculation that Barrick Gold (NYSE:GOLD) is interested in Freeport-McMoRan. But, Barrick’s CEO (Mark Bristow) has ruled out Barrick considering a hostile takeover. Bristow’s real interest is Freeport’s Grasberg mine, not the whole company.
All could change if the price is right. But, Freeport is likely better off retaining Grasberg instead of selling it to Barrick. As mentioned above, staying the course with the major projects, Freeport-McMoRan stock could soar on improved results.
Let’s say Freeport achieves its goal and boosts EBITDA 100% by 2021. That means an EBITDA of around $4.2 billion. Assuming Freeport is given the same EBITDA multiple of 10.5 as Southern Copper (NYSE:SCCO), the company’s enterprise value would be about $44.1 billion. Subtract $9.8 billion in debt, and add back $2 billion in cash. You get a $36.3 billion market capitalization, or around $25/share. In other words, more than 100% upside.
The risk of a Chinese slowdown causing copper prices to fall remains. Shares could fall below the $10/price level in such an event. But, considering the upside opportunity from Freeport’s projects, buying Freeport-McMoRan stock today may just be well worth the risk.
The Bottom Line on Freeport-McMoran Stock
It’s hard to say whether Freeport-McMoran stock will move significantly in the short-term. Shares could tread water, or worse, fall lower, this year. Yet, if long-term demand helps to shore up copper prices, Freeport could realize the “best case scenario” for their Grasberg, Lone Star Oxide, and productivity enhancement projects.
Doing so could double EBITDA. Consequently, Freeport-McMoran stock could be trading around $25/share just a few years from now. Yet, with uncertainties around the situation in China, it may not be smart to go all-in today.
Consider dipping your toe into Freeport-McMoRan stock. If shares take a dive due to short-term copper price declines, consider expanding your position. With Freeport more than able to ride out the storm, long-term opportunity could outweigh short-term risk.
Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.