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Is Freeport-McMoRan Fairly Valued at Its Current Levels?

Mark O'Hara

A Closer Look at Freeport-McMoRan’s 3Q15 Earnings

(Continued from Prior Part)

Fairly valued?

There are several valuation metrics that we can use in valuing a company. For companies in cyclical industries like copper, EV (enterprise value) to EBITDA (earnings before interest, taxes, depreciation, and amortization) is the preferred valuation metric. In this part of our series, we’ll share a valuation analysis for Freeport-McMoRan (FCX) and compare it with other companies in the mining space.

Valuation multiples

  • Based on consensus estimates, Freeport-McMoRan was trading at a forward EV-EBITDA multiple of 5.21 as of October 23. This represents a premium of ~10% over Freeport-McMoRan’s five-year average multiple.
  • Historically, Freeport-McMoRan has traded at a discount to diversified miners including Rio Tinto (RIO) and BHP Billiton (BHP). Rio Tinto (RIO) owns the Oyo Tolgoi mine in Mongolia through its subsidiary Turquoise Hill Resources (TRQ). Currently, TRQ forms 0.27% of the iShares Commodities Select Strategy ETF (COMT).
  • Freeport-McMoRan’s lower valuation multiples are likely due to its higher financial leverage.

Outlook

  • Markets might take a different view of Freeport-McMoRan after the company takes a final call on the energy (DBE) business. In the case of a spin-off, the energy and copper companies would command different trading multiples. In its 3Q15 earnings conference call, Freeport-McMoRan’s management hinted that the final decision about energy assets would be taken within the next six months.
  • Out of 21 analysts surveyed by Bloomberg, ten analysts have given the stock a “buy” rating and an equal number of analysts have a “hold rating” on the stock. However, one analyst has given a “sell” recommendation for Freeport-McMoRan.
  • Freeport-McMoRan has a consensus one-year price target of $14.57, which represents ~20% upside from the current levels.

You can also visit our Copper page to learn more about Freeport-McMoRan.

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