Will Freeport-McMoRan See Changes in Its Valuation?

What's in Store for Freeport: A Technical and Fundamental Overview

(Continued from Prior Part)

Valuations

Previously, we saw that Freeport-McMoRan (FCX) is trading at a substantial discount to Southern Copper (SCCO). The valuation discount can be attributed to Freeport’s higher debt levels and Southern Copper’s expansion programs. However, despite the expected fall in Freeport’s copper production, the stock could see changes in its valuation, which we’ll discuss in this part of the series.

Asset sales

The chart above shows the asset sales transactions that Freeport has announced year-to-date. The Morenci deal implied a trailing EV/EBITDA (enterprise value to earnings before interest taxes, depreciation, and amortization) of 8.7x. According to Deutsche Bank, the sales implied a forward EV/EBITDA of ~11.6x. This is almost twice Freeport’s consolidated valuation before the deal.

A few more valuation accretive deals could help Freeport trade at a higher valuation multiple. Teck Resources (TCK) also justified its asset sales program by comparing the company’s consolidated EV/EBITDA to the multiples for individual assets. Don Lindsay, TCK’s CEO, said during the company’s 1Q16 earnings call, “If you can sell things at 15 times EBITDA and your company only trades between 5 times and 7 times EBITDA, it makes sense to do them anyway, whether there’s an extremely low commodity-priced environment, or an improving commodity environment.”

Energy assets

Similarly, though the Timok exploration project had a negative EBITDA in fiscal 2015, Freeport managed to sell the asset at $300 million, subject to conditions. While Freeport’s energy assets still have some carrying value, it seems that the market was pricing Freeport on the one-year forward EBITDA.

Because Freeport’s energy assets were not exactly contributing to the company’s EBITDA, Freeport’s overall valuation was taking a hit. A sustained recovery in energy prices and a possible monetization of energy assets could be another boost for Freeport. Furthermore, as the company cuts its debt levels, markets (SPY) (DIA) might reward Freeport with a higher valuation multiple.

However, there could be some near-term headwinds, which we’ll discuss in the next part of the series.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Why It’s a Battle between Freeport-McMoRan Bulls and Bears

• Part 2 - What Does Wall Street Recommend for Freeport-McMoRan?

• Part 3 - How Do Freeport’s Technical Parameters Compare with Other Miners?