Morningstar | Freeport Reports Decent Third-Quarter Earnings; We Maintain Our $8.20 Fair Value Estimate. See Updated Analyst Note from 24 Oct 2018
Freeport-McMoRan reported decent third-quarter earnings as adjusted EBITDA grew nearly 12% year on year to $1.8 billion driven by higher copper and gold volumes and lower unit production costs, partially offset by lower copper prices. In its earnings release, management maintained its 2018 copper production guidance of 3.8 billion pounds. With our outlook largely unchanged, we maintain our $8.20 per pound fair value estimate for Freeport. Our no-moat rating is also intact.In September, Freeport reached an agreement with the Indonesian government to sell a portion of its stake in the Grasberg mine. Glencore will also sell its stake in the mine to the Indonesian government. After the transactions are complete, the government will effectively own roughly 51% of the Grasberg mine, while Freeport will own the remaining 49%. We expect these transactions to close by mid-2019 at the latest.
During the third quarter, copper prices fell from an average of $3.16 per pound in June to $2.75 in September, a 13% decline. As of Oct. 24, copper prices remain around $2.75 per pound. The price decline is in line with our outlook that copper prices would fall after averaging $3.14 per pound during the first half of 2018. We continue to point to slowing demand growth in China causing global demand to grow slower than supply as mine restarts and new production comes online. As such, we maintain our 2019 and 2020 copper price forecasts of $2.70 per pound and $2.40 per pound, respectively, in nominal terms.
Since reaching a 52-week high of $20.25 per share earlier this year, Freeport's stock has fallen over 45% and now trades at roughly $11 per share. However, we continue to view the stock as overvalued, trading roughly 34% above our $8.20 per share fair value estimate as we forecast that lower copper prices will continue to weigh on shares.
For more information on our outlook for the Freeport deal with the Indonesian government, see our July 12 note, "We View Freeport’s Deal With Indonesian Government as Value-Neutral; We Maintain Our $8.30 FVE."
Freeport-McMoRan is a holding company. Through its subsidiaries, the company is a mining company. The company operates assets with proven and probable reserves of copper, gold and molybdenum, and the company is a publicly traded copper producer. The company's portfolio of assets includes the Grasberg minerals district in Indonesia, copper and gold deposits; and mining operations in North America and South America, including the Morenci minerals district in Arizona and the Cerro Verde operation in Peru. The company has organized its mining operations into four primary divisions: North America copper mines, South America mining, Indonesia mining and Molybdenum mines.
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