2023-04-19 14:19:41 ET
Summary
- Freeport-McMoRan buyers recently flocked back to the market, supporting the pullback in FCX and propelling it upwards from its March lows.
- The company remains well-positioned to benefit from the global energy transition.
- Despite its promising outlook, our assessment reveals that the company's current valuation no longer presents an attractive opportunity, and the risk-to-reward ratio suggests a potential resurgence of selling pressure.
- While a return to July 2022 lows is unlikely, investors must exercise patience as a more significant retracement would prove beneficial in enhancing FCX's valuation and providing a more compelling entry point.
Leading copper mining company Freeport-McMoRan Inc. ( FCX ) is slated to release its FQ1'23 earnings report on April 21 , as FCX remains well above its July 2022 lows.
As such, investors who dared to tune out the highly pessimistic noise of a deep recession back then have benefited tremendously. As a reminder, we also urged investors not to fear the recessionary headwinds in our article in July 2022 and repeated that call in October .
Accordingly, FCX is up nearly 70% (in price-performance terms) as FCX bulls dismantled the bearish thesis completely. With no deep recession in sight, even as we recently faced a harrowing banking crisis, FCX looks poised not to revisit those levels.
The revised Wall Street estimates expect Freeport-McMoRan to see an inflection point in its top-line growth from FQ2, even though revenue is still expected to fall by 20.6% YoY in Q1.
As such, it indicates that analysts are not expecting copper prices to fall back toward the lows in June/July 2022.
We believe it's a reasonable assumption, as analysts had started to mark up their projections after turning highly pessimistic last year when FCX bottomed out.
Furthermore, China's recent GDP report for Q1 was robust, suggesting that China could be on track to meet or even surpass its 5% 2023 target as economists upgraded their projections.
As such, China's industrial engine is expected to provide another critical source of support for the global economy, even as growth in Europe and the US are expected to remain meek.
Furthermore, the secular tailwinds driving the global energy transition remain on track. While price cuts have dominated the recent EV pricing environment, stronger auto OEMs and EV leaders should be able to consolidate their market position while squeezing out the less healthy upstarts.
Copper miners are also scrambling for more premium resources, as seen in the recent interest in Teck Resources ( TECK ) copper and base metals business.
Bloomberg reported recently TECK's assets are " highly coveted ," attributed to the "high ore grade and geopolitically friendly regions of the deposits." Moreover, physical copper supplies fell to the " lowest level in 18 years" recently, compounded by recent "supply stumbles."
Notwithstanding, Freeport- McMoRan highlighted in early March that it had resumed operations at Grasberg after the recent floods , which hampered operations.
Hence, the buying sentiments likely remain supportive as FCX recovers from its recent March selloff.
However, FCX's valuation is no longer attractive, rated with a D- by Seeking Alpha's quant ratings. Therefore, even though its momentum has recovered (B+), the risk/reward is much less attractive than the opportunity in July or October 2022.
Trefis' sum-of-the-parts or SOTP valuation model also indicates that investors are not expected to have any margin of safety, rating its fair value at $39.30 (6.7% implied downside).
We assessed FCX's NTM EBITDA multiple of 7.6x is well above its 10Y average of 6.4x and markedly above its peers' median of 5.8x (according to S&P Cap IQ data). As such, the various valuation metrics point to the same conclusion that the optimism in FCX has likely been reflected.
We also assessed the long-term price chart of FCX over Copper Futures ( HG1:COM ) and did not observe an attractive set-up.
FCX has outperformed the underlying futures market since the 2020 COVID lows. However, the momentum has stalled since March 2022, with FCX/HG1 consolidating in a discernible trading range.
Furthermore, the level resisted by March 2022 highs has continued to act as a robust resistance zone for sellers to take profit. As such, there isn't an optimal opportunity from the price action perspective to add exposure currently, corroborating the earlier valuation analysis.
Hence, FCX buyers are encouraged to remain patient and wait for another steep pullback before considering adding more.
Rating: Hold (Reiterated).
Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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For further details see:
Freeport-McMoRan: Don't Be Blindsided By Optimism