Freeport-McMoRan Stock Soars 500% – What Has Changed?
Freeport-McMoRan stock (NYSE: FCX) has increased an astonishing 6x since its March lows of 2020 and at the current price of $30, we believe the stock is slightly overvalued. FCX stock has rallied from $5 to $30 off its recent bottom compared to the S&P 500 which increased 70% from its March lows. The stock was able to beat the broader market in the last few months as gold prices have shot up significantly and remained elevated during the ongoing pandemic, while copper prices, which had dropped after the outbreak of coronavirus, have also recovered at a significant pace with stimulus measures announced by various economies. However, gold prices have remained volatile recently and, in fact, have declined from over $2,000/ounce in August 2020 to about $1,860/ounce in January 2021. Though FCX’s revenue will see a sharp rise in 2021 due to higher output from Indonesia, volatility in gold prices could affect the earlier projections about FCX’s revenue growth. We believe the market has been over enthusiastic and FCX’s stock has a potential downside of about 10% from its current level. Our dashboard What Factors Drove 60% Change In Freeport-McMoRan Stock Between 2017 And Now? provides the key numbers behind our thinking.
Some of the stock price decline between 2017 and 2019 is justified by the 12% drop in Freeport-McMoRan’s revenues during this period, while the company reported losses in 2019 after being profit-making in 2017 and 2018. FCX’s revenues primarily declined in 2019 and reached even below its 2017 levels, as gold and copper production saw a sharp decline in 2019 on the back of negligible output from the Indonesian Grasberg mine which is undergoing a transition from an open pit to underground mine. During this period, the P/S multiple declined from 1.7x in 2017 to 1.3x in 2019, as the stock price also saw a significant decline along with lower revenue per share. While FCX’s P/S multiple declined further in early 2020 due to the pandemic, it has recovered beyond its recent historical levels and currently stands at over 3x. We believe the company’s P/S multiple could drop in the near term considering the volatility in commodity prices.
The global spread of coronavirus and lockdowns in various cities, which affected industrial and economic activity, led to a sharp drop in copper prices while gold prices rallied. Additionally, production slowed down. This was reflected in the company’s Q1 and Q2 2020 results where FCX revenues declined by 26% and 14%, respectively (on a y-o-y basis). FCX saw some recovery in Q3 2020 when revenues increased 22% due to increased copper shipments and higher gold and copper prices.
The gradual lifting of the lockdowns has seen a sharp recovery in copper prices over recent months. Copper prices seem to have increased, but peaked as of now, after having shot up significantly from $2.10/pound in March 2020 to almost $3.70/pound in January 2021. Additionally, the gold rally also seems to have come to a halt after the price increased from $1,500/ounce at the beginning of 2020 to over $1,950/ounce in September 2020. In fact, with economies opening up, the gold price has declined over recent weeks to about $1,860/ounce currently. The gold price is likely to remain volatile over the near-term with a slight downside bias as the lockdowns are gradually lifted and investor sentiment regarding economic recovery has improved. The actual movement in commodity prices and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia.
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Though the company’s production, shipments, and revenue are likely to rise sharply in 2021 as the mine transition at Grasberg is almost complete, it has already been incorporated in the rally over recent months and it is unlikely to further lead to any major rise in the stock price from here. Expectations of higher revenue and earnings (due to higher volume sold) are likely to be offset by a drop in the P/S multiple, driven by copper prices having peaked and volatility in gold prices. This has put FCX at the risk of seeing a drop in its stock price. We believe the stock is already overvalued and is likely to see a drop of close to 10% in the near term. As per Trefis, FCX valuation works out to $28 per share.
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