Freeport-McMoRan Stock Overvalued After Rising 3x In 6 Months

After rising more than 3x since its March lows of this year, at the current price of $16 per share, we believe Freeport-McMoRan stock (NYSE: FCX) has reached its near-term potential. FCX stock has rallied from $5 to $16 off its recent bottom compared to the S&P 500 which increased 52% from its March lows. The stock was able to beat the broader market in the last 6 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, with gold prices being volatile recently and, in fact, having declined over last few weeks, FCX stock could drop close to 10% from its current level. Our dashboard What Factors Drove -11% Change In Freeport 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 2-year transition from an open pit to underground mine. During this period, the P/S multiple declined from 1.6x 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 2020, it has recovered beyond its 2019 level now and currently stands at its 2017 level of 1.6x. We believe the company’s P/S multiple could drop in the near term considering the downside bias in commodity prices.

What’s the downside?

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 Freeport-McMoRan’s revenues declined by 26% and 14%, respectively (on a y-o-y basis).

However, the gradual lifting of the lockdowns has seen 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 $2.90/pound in October 2020. 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 $1,910/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 recovery 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.

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 is unlikely to lead to a further rise in the stock price. This is because the Grasberg event is already accounted for in the stock price rise of over 200% over recent months. Thus, with investor focus having shifted to 2021 numbers, higher revenue and earnings (due to higher volume sold) is likely to be offset by a drop in the P/S multiple driven by copper prices having peaked and a possible downside to gold prices. Based On Freeport-McMoRan valuation by Trefis, we have a price estimate of $15 per share for FCX stock, reflecting a downside of close to 10% from its current level.

For further insight into the gold and copper mining space, see how Barrick Gold’s rivals Newmont and Freeport-McMoRan compare with each other.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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