Freeport-McMoRan (NYSE: FCX) recently released its quarterly results after one of the best quarters for copper prices and the company. As we will see, the reorganized portfolio of the company will allow the company to generate strong returns for shareholders. With the massive demand for copper coming, this makes the company a valuable investment.

Figure 1. Key Statistics and Summary of Treasury Debt

Freeport-McMoRan earned $ 0.7 billion from 1Q 2021 FCF, showing its overall strength. The company made 825 million pounds of copper sales during the quarter. The company’s realized price was nearly $ 4 / pound with unit net cash costs, supported by strong by-product production, of $ 1.39 per pound. That means almost $ 2.6 / pound in net cash flow after expenses.

The company has used that cash to continue to aggressively repay its debt with net debt of $ 6.1 billion for YE 2020 rising to $ 5.2 billion in 1Q 2021. The company is stepping up Grasberg and continuing to focus on strong financial results while increasing returns for shareholders. Given the favorable market outlook, the company has great potential.

Figure 2. Summary of metal sales in April

Freeport-McMoRan’s copper sales forecast for 2021 is £ 3.85 billion as the transition year continues. This is expected to continue at £ 4.4bn in 2022 and 2023, with gold sales increasing significantly year over year. Throughout this period, molybdenum sales are expected to remain relatively constant. Continued growth in gold sales will lower costs for the business. Current cash costs are $ 1.33 / lb and they have the potential to decrease significantly as gold production skyrockets. Compared to copper prices of around $ 4 / pound or more, the strength of the company is impressive.

Figure 3. Measures of EBITDA and Cash Flow Per Ledger

Freeport-McMoRan has updated its cash flow information based on higher prices, with current prices at around $ 4.4 / pound. For 2022 and 2023, at current prices, the company would earn approximately $ 14 billion in annual EBITDA and approximately $ 10 billion in operating cash flow. The company’s annual capital expenditures are $ 2 billion to $ 2.3 billion annualized as forecast. This means that at current prices, the company should be able to earn $ 7.5 billion to $ 8 billion FCF. The company has a market cap of $ 53.3 billion, which means that at current prices, the company has an FCF of almost 15% for 2022+ at the end of its transition year. This strong FCF that should help support continued shareholder returns.

Figure 4. Return on Capital Plan 50% FCF Return to Shareholders

Freeport-McMoRan restored a basic annual dividend of $ 0.30 / share per year. That’s a 0.82% dividend yield that costs the company nearly $ 500 million annualized. That’s a manageable portion of the company’s $ 7.5-8 billion annual FCF, while at the same time, it’s a high dividend relative to the rest of the market.

The company is targeting net debt of $ 3-4 billion, compared to current net debt of $ 5.2 billion. We expect that it will be able to comfortably reach this figure, with no significant change in copper prices, by the end of 2021. The company will then switch to 50% FCF for shareholder return, which will likely result in share buybacks.

The company will also save money beyond that to support its overall asset base. Going forward, based on the company’s potential return to shareholders with its forecast from 2022 to 2023, the company will be able to continue paying its annualized dividend of 3.33%. The company will then be able to pay about 4% return through share buybacks (or about $ 2.2 billion per year). After all of that, the company will have about $ 4 billion in cash that it can put aside. It is an impressive portfolio of assets that can generate significant returns.

Freeport-McMoRan’s risk is the price of copper. At $ 4.4 / pound of copper, the company can generate incredibly strong returns and support the company’s stock price. The growing demand resulting from an energy transition should support the demand for copper. However, another collapse at less than $ 3 / pound could hurt the company’s positioning.

Freeport-McMoRan has an impressive portfolio of assets and the strength to use those assets to generate significant returns for shareholders. The company is a major producer of copper as demand for copper and copper prices skyrocket. The company’s FCF can be expected to grow significantly, thereby helping to generate significant returns for shareholders.

For interested investors, we recommend investing in Freeport-McMoRan for the long term. At current copper prices, the company has a yield of 15% FCF which, with its low net debt, may shift towards capital returns. FCX is a valuable investment at the moment.

Disclosure: Cho Research was not paid by Freeport-McMoRan to publish “Freeport McMoran Best Way to Capitalize on Copper Prices“Although Cho Research uses research money, it
generates other clients from our research service to fund market research
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