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Morningstar | Trimming Our Freeport-McMoRan FVE to $8.20 On Lower Medium-Term Grasberg Production. See Updated Analyst Note from 25 Jul 2018

Freeport McMoRan reported solid second-quarter earnings as higher copper prices drove operating income growth of roughly $1 billion year on year to $1.7 billion during the quarter. In the earnings release, management gave updated five-year guidance on the Grasberg mine, which typically generates roughly two thirds of Freeport's profits. Management lowered its copper production guidance for 2020 and 2021 by 300 million pounds combined as the mine transitions to underground mining. Although management increased production guidance for 2022 and beyond by 200 million pounds, Freeport will not fully realize the benefits from the higher volumes as the Indonesian government will take a 51% economic interest in the Grasberg mine beginning in 2022. Having updated our model, we're trimming our Freeport fair value estimate to $8.20 per share from $8.30 to account for the lower medium-term production. Our no-moat rating is unchanged.

Our copper price forecast is unchanged. We continue to forecast 2018 copper prices to average $3.00 per pound. Although prices averaged $3.14 during the first half of the year, they have fallen over 10% in July and now sit around $2.80 per pound as of July 25. As new supply ramps up and demand growth in China continues to slow, we expect prices to fall further in 2019 and average $2.70 per pound for the year. Our long-term 2022 copper price forecast is also unchanged at $2.34 per pound (in nominal terms).

We continue to view Freeport as overvalued, with the stock trading at slightly below 2 times our fair value estimate. At the current stock price at $15.86 per share on July 25, we think the market is assuming higher long-term copper prices and higher free cash flow generation. Given our long-term forecast for lower copper prices, we forecast the company to generate lower future free cash flows.