Freeport-McMoRan (NYSE:FCX) stock finally seems to be moving convincingly higher from range-bound trade. In the last two-and-half months, FCX stock has surged by 50%.
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Importantly, the rally has been supported by strong fundamental developments. Moving into 2020, I believe that FCX stock has more legs in the current rally.
Since FCX stock has already moved higher by 50% in the last few months, I want to first discuss the valuation. Freeport-McMoRan currently trades at a 2020 EV/EBITDA of 6.81. This is still attractive considering the point that Southern Copper Corporation (NYSE:SCCO) trades at a 2020 EV/EBITDA of 9.96. FCX stock can cool-off after a massive rally, but the uptrend is likely to remain intact in 2020.
Copper Will Trend Higher in 2020
The primary reason for FCX stock surging higher is the fact that copper has been trending higher. Last week, copper touched a seven-month high on the London Metal Exchange. There are reasons to believe that the uptrend for copper will sustain in 2020.
With the United States and China reaching a phase one deal, easing trade tensions can boost global GDP growth. The International Monetary Fund also expects emerging markets to grow at 4.6% in 2020 from 3.9% in 2019. If growth in China and India accelerates, the demand for copper will ensure that the commodity continues to move higher. This will be positive for FCX as EBITDA margin will expand along with growth in free cash flows.
Another reason to be bullish on copper is the fact that the Federal Reserve has been pursuing a renewed expansionary policy. The central bank’s assets have swelled from $3.8 trillion in September to $4.1 trillion in December.
With easy money in the financial markets, depressed asset classes are likely to move higher. In the last ten years, commodities have been the most depressed asset class and the next decade can be different. Lower investments in mining expansion due to depressed prices have narrowed the demand-supply gap. It is expected that copper market will go from surplus to deficit in 2021.
Clearly, fundamental factors support the bull story for copper and as the commodity trend higher, FCX stock will follow.
Financial Flexibility Will Support Growth
For 2020, Freeport-McMoRan expects to incur capital expenditure of $2.6 billion. With cash of $2.2 billion and undrawn credit facility of $3.5 billion, FCX is fully funded for 2020 and 2021.
FCX also generated an operating cash flow of $1.3 billion for the first nine months of 2019. This implies an annualized OCF of $1.7 billion. Therefore, with copper prices trending higher, FCX is well-positioned to reduce its net debt position in 2020.
In the last 24 months, deleveraging has ensured that credit metrics improve for FCX. With prospects of higher commodity prices, FCX stock is positioned to debt re-rating. In addition, dividends can possibly increase towards the end of 2020 or into 2021.
I want to add here that the sale of gold will also add to cash flow in addition to copper sales. Freeport-McMoRan expects gold sales to increase from 0.87 million ozs in 2019 to 1.45 million ozs in 2021.
Gold is trading near $1,500 an ounce and I am positive on gold as expansionary policies are bullish for the precious metal. Therefore, over the next 24 months, gold is likely to support EBITDA margin expansion and cash flow upside.
My Final Thoughts on FCX stock
If we go back by 24 months to 3Q17, FCX had $14.8 billion in total debt. In addition, the company had a relatively uncertain outlook due to negotiations with the government in Indonesia. Currently, total debt has declined to $9.9 billion and there is a firm agreement with the Indonesian government. In addition, the outlook for copper is bullish and gold has been trending higher.
Clearly, FCX has made significant progress in terms of sale of non-core assets, deleveraging. The next two years will be focused on production ramp-up, which will translate into EBITDA and cash flow upside.
This makes FCX stock worth considering even after the strong rally in the last few months. However, investors can wait for some profit booking before fresh exposure for 2020.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
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