BYDDY - Freeport-McMoRan: Irrational Beatdown Is Not Justified

2023-09-01 14:00:00 ET

Summary

• Freeport-McMoRan Inc. investors have experienced recent market volatility due to risk-off sentiments in China. I assess the steep selloff isn't justified.
• Despite challenges in China's property market, Freeport-McMoRan is well-positioned to benefit from the global economic recovery and energy transition.
• Freeport-McMoRan is expected to regain significant operating leverage through 2025, not priced into its valuation at the current levels.
• Buying sentiments on Freeport-McMoRan have improved over the past two weeks, suggesting Freeport-McMoRan could resume its upward bias.
• I argue why investors looking for a steep plunge opportunity to capitalize shouldn't miss out on adding at the current levels.

Investors in Freeport-McMoRan Inc. ( FCX ) have endured a torrid month, as FCX topped out in early August 2023. Keen investors following the developments in China should have observed the risk-off sentiments driving recent market volatility.

Despite its importance in the secular energy transition thesis, dip buyers in May likely took the opportunity to take profit as FCX closed in on a well-established resistance level.

As a result, FCX fell back toward levels last seen in early July, allowing dip buyers another opportunity to assess buying opportunities. I gleaned buying sentiments have improved since last week despite the ongoing malaise in China's property market.

Despite China's property market challenges, leading copper producers like Freeport-McMoRan are well-positioned to benefit from the global economic recovery and the energy transition growth story. At its July 2023 earnings conference , management also reminded investors that the underlying demand/supply dynamics favor a constructive medium- to long-term outlook for FCX.

In addition, management also expects improved production in the second half. Moreover, Freeport-McMoRan's operating leverage is expected to strengthen further as its revenue inflected back toward growth after experiencing steep declines over the past four quarters. Accordingly, Freeport-McMoRan posted revenue growth of 6% YoY and delivered adjusted EBITDA growth of -4.5%. Analysts' estimates suggest that its adjusted EBITDA is expected to increase 57% in Q3 and 29% in Q4 as Freeport-McMoRan recovers from the malaise in late 2022.

Freeport-McMoRan's cost advantages would likely remain critical as it leverages its leadership position to capitalize on recovering underlying copper prices. However, geopolitical risks relating to the Grasberg mines in Indonesia could entail near-term uncertainties despite the recent approval of export licenses.

The company highlighted it had considered the current export duties that could raise its production costs in its outlook. Notwithstanding the impact, the company remains confident about the long-term partnership with the Indonesian government on approvals beyond its 2041 contract period. As such, I don't expect significant market upheavals relating to the government's requirements to increase its stake in Freeport-McMoRan subsequently.

As such, buying sentiments will likely be predicated on the strength of the buildout of data centers, renewable energy transition, and the growth of electric vehicles, or EVs. Notably, EVs have continued to gain traction in China despite its economic fallout. Therefore, China's EV market has remained a bright spot in an otherwise gloomy first half, which saw several leading Chinese stocks getting hammered.

The stock of leading Chinese EV player BYD Company ( BYDDF ) has made significant strides in 2023, as it surged toward its July 2023 highs before its recent pullback. As such, I believe it demonstrated the underlying strength in China's EV market (despite its economy's challenges), underscoring my confidence that the global EV growth story has robust underpinnings.

With that in mind, I believe Freeport-McMoRan's near- to medium-term buying sentiments should continue to improve as the company regains operating leverage. FCX last traded at an FY25 EBITDA multiple of 5.7x, below its 10Y average of 6.5x. Moreover, the FY25 adjusted EBITDA projection of $12.2B is toward the low end of the company's projected annual EBITDA range of $11B to $15B. While the estimates suggest an ongoing recovery of underlying copper prices above $4 (above July 2023 highs), I assess robust buying support as copper futures ( HG1:COM ) continue consolidating close to their long-term support levels at the $3.7 zone.

Therefore, I'm increasingly confident that the long-term buyers have returned to undergird FCX's robust buying sentiments at the current levels, as the market has likely discounted its medium-term recovery.

As seen above, I gleaned that FCX has regained its medium-term uptrend, with its May lows robustly supported by dip buyers. The recent August steep selloff attracted buyers over the past two weeks as FCX attempted to bottom out at the current levels.

If FCX buyers could defend the current $37 support zone, it would create an enticing opportunity for buyers to buy the recent pullback, anticipating further momentum gains to break decisively above the $47 resistance level (January 2023 highs).

Rating: Maintain Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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