Freeport-McMoRan (NYSE: FCX) is a massive $65 billion company and one of the largest mining companies in the world. The company is at its highest stock price since the early 2010s with copper at $4.5/pound. Copper is over $10,000/tonne, and with a massive decarbonization boom supporting prices, most expect copper prices to remain high for decades to come.

Freeport-McMoRan transformation

We’ve discussed this in previous articles, however, Freeport-McMoRan is in the midst of a substantial transformation.

Freeport-McMoRan worked on projects such as the Grasberg Metro to increase production and improve its overall sales profile. Sales increased from around £3.2m to £3.8m in 2021e. For 2022e and 2023e, sales are expected to reach 4.4 billion pounds of copper, with molybdenum sales remaining roughly constant.

Gold sales should remain incredibly strong. From 2021e to 2022e, gold sales are expected to increase from 1.3 million to 1.6 million ounces to reach 1.8 million ounces in 2023e. This is significant volume growth for the company and marks an important transformation for the business. The success of the transformation will define future returns for shareholders.

New assets from Freeport-McMoRan

Freeport-McMoRan presents many growth opportunities that should support the company’s future financial performance.

The company’s Lone Star development represents a valuable new development asset. The company is looking to expand assets from the initial targets of 200 million pounds/year in copper development to 300 million pounds/year. There is a potential of 50 billion pounds of ore here and overall the asset represents a low cost source of growth.

In Grasberg, the company also has significant strengths and potential. The company is focused on a 10 year development schedule with capital of $400 million per year with the potential to add 500 million lbs/yr of copper and 500,000 oz/yr of gold. This development would represent a growth of about 11% in copper and a growth in gold production of 28%.

The development of mines such as these highlights the decades-long strength of Freeport-McMoRan’s assets. Outside of these, Freeport-McMoRan has many smaller assets that have significant capacity to add additional production.

Freeport-McMoRan General Operations

Overall, Freeport-McMoRan continued to show strong operational performance, which shows the strength of the business.

Freeport-McMoRan continued to generate strong operational performance. The company is performing better in the development of Lone Star compared to initial forecasts and has the potential for an additional start-up. At Cerro Verde, the company’s production is expected to remain fairly constant with a volume increase of around 5% expected for 2022.

Across South America, the company is looking to return to pre-pandemic production levels. In Indonesia, the company has met its targets after the ramp-up and is looking for continued long-term opportunities to increase volume and sales. The company has settled potential disagreements with the Indonesian government and enters the mid-2020s with strong production.

The company’s operational performance continues to meet or exceed targets.

Returns to Freeport-McMoRan shareholders

Putting it all together, with strong copper prices, Freeport-McMoRan has the ability to generate substantial returns for shareholders.

Freeport-McMoRan’s ability to generate substantial returns for shareholders is despite a substantial increase in capital spending from $2 billion to $2.9 billion. It should be noted that a substantial part of this capital expenditure is a one-time operation, as the company’s capital expenditure in Indonesia is expected to reach $1.4 billion in 2022e. For 2023e, this is expected to drop to $0.9 billion, meaning nearly $3 billion of capital spending is temporary.

With copper prices around $4.5/lb, the company expects 2022e/2023e average cash flow to be $10 billion. After capital expenditures, which include significant investments in the business, FCF is expected to be $7 billion. With a market capitalization of $65 billion, this implies an FCF yield of around 11%.

The company currently pays a 0.7% dividend that costs it about $400 million a year. It has a net debt of

At $5 copper, the company has an additional $2 billion for FCF and $1 billion for shareholder returns.

Freeport-McMoRan Risk

The risk of Freeport-McMoRan is simple. Copper prices. Historically, copper prices have been incredibly volatile. For decades to come, as the economy transforms into things like electric cars, we expect copper demand and prices to remain high overall. However, there is no guarantee this will happen and if copper prices drop significantly, the company’s earnings could as well.

Conclusion

Freeport-McMoRan completes a significant transition for the company. The company has steadily increased production and 2022e/2023e are expected to be record years for the company. At current copper prices, the company will see approximately $7 billion in FCF or an 11% return in FCF. At higher prices, the firm can significantly increase the FCF.

In the coming years, we expect the company to continue to seek growth opportunities. The reshaping of the global economy will drive long-term copper demand and Freeport-McMoRan is one of the leaders in the industry. Going forward, the business represents a valuable long-term investment to which we recommend paying particular attention.