Freeport-McMoRan (FCX): Cooper Mining Company Swept the Floor with a 31% Margin Take.

Future outlook seems barred up on wider earnings as global transitioning to renewable energy rotates.

You know about FCX?

Freeport-Mc-Moran Inc.

Please let’s deduct (gradually perceiving the information passed) as we read this.

In general, the company supplies high quality produced coppers, sells it to those who create its by-products.

Currently, the firm successfully mined coopers at Peru and Indonesia. It is also gaining traction in the Americas.

On a quarter front, it got a 31% operating margin out on its latest statement release [a 2,600-basis point increase year-on-year].

Company also produces gold, and metals. With a new milling circuit in Indonesia to boost production volumes.

Copper is actually used for buildings, power, electronics and transportation. It possesses microbial properties that could be placed in drugs to treat infections. Producers in these industries would require it as an input element.

In simple terms, Freeport-McMoRan mines and sells to them in billions of pounds.

And it has other productions such as Molybdenum, Gold and Ore.

Take for example Molybdenum, it is used to convert nitrogen in the air to compounds and bacteria which also helps for treatment. Apart from its gold buyers, it would entertain a lot of firms in the health industry.

This well explains the huge cash flows from its operations over the years.

Its recent first quarter result was quiet on a great hedge; America is such a wonderful place to be. Revenues were $6.3 billion, with more productions, it spent extra $679 million, assets got depreciated by more of a $196 million, and considering its usual expenses on sales, exploration and research, coupled with environmental and shut down cost surmounting to about $250 million, operating earnings were $1.63 billion.

That earning figure was just 2.1% above last year’s quarter.

Inspite all information, the returns are quiet poor for a two-digit standard. Its capital requirements are very high, even though earning power may paddle up in years to come, that current equity number just raises difficulty for investors to achieve that two-digit return standard.

But big paper number still prints a heavy sum. So, it’s still doable.

But there’s one more thing, the global transitioning to renewable energy would cause huge demand for cooper as we know it’s used for components, such as turbines, inverters, electrical cables, and so on.

Probably the future earnings may triple causing the international firm to come into that 10% and above return space. And now that they are expecting more productions and explorations coming 2040s, I should expect more cash flows from sales and possibly better margins (Afterall, the firm is aggressively managing cost).

But the margins are great by the way. Freeport Mcmoran (FCX) keeps about 25% of revenues from its operations. Though the inconsistency in upping up margins is a little worry for me, as said before, efforts at keeping costs down may still entitle investors towards keeping a sizable sum of that sales.

In 2016, it incurred about $4.2 billion loss in operations but generated enough cash to reduce net debt by over $8 billion. I’m quite impressed by the management’s transparency at sharing the employees and contractors’ life that they’ve lost.

Though it’s a sad news, it’s rare for a CEO to outrightly share emotional messages when the norm is to syphon capital from investors whichever way possible.

On a side note, impairment on oil and gas properties, coupled with the lower turnover from copper sales contributed to that huge operating loss.

What caused the reduction in operating income from 2012 to 2013 was the rising cost of production and delivery. 2012 also had a 10% reduction in sales contributing to that downward trajectory.

Then, oil and gas impairment settled in causing a negative trend in operating earnings from 2014 down to 2016.

FCX has a lot of fluctuations when it comes to its sales, it tried to keep cost down in 2019 (saving about $340 million). But that constant swing in revenue figure may tell us its competitive advantage might be questionable to some degree. However, its recent 5-year compound annual growth rate (CAGR) in revenue premiered at 22.7%

But its currently doing better than its competitors in terms of how much it keeps from its operations. It keeps 24%, while APD (Air Product and Chemicals) runs on a 22% margin cycle. Though Linde’s (LIN) average margin is 16%, its rising very fast by a compound growth rate of 24.5%

When you think about that CAGR revenue growth, coupled with its wide operating margin, you might want to get flexible about its fair value and still consider it as a steal at its current price.???????? ?

The market prices for cooper, gold and molybdenum affects its sales figures, as it generally has no control over set price.

Richard Adkerson currently runs Freeport Mc-Moran, has over 21 years of experience in the Chairman and CEO role of the company. Also was a chairman of the international council of mining and metals.

Graduate from Mississippi State University, with a bachelor's in accounting, attended a six-week management program at Harvard Business School.

He is vice-chairman of the National World War II Museum: a highly recognizable institution in the United States.

FCX is expecting to sell over 1.3 billion pounds of coppers in North America, 1.1 billion in South America, and 1.7 billion in Indonesia, totalling a projected 4.1 billion pounds ending 2024.

It anticipates close to about 2 million ounces of gold and 85 million pounds of Molybdenum to be sold, this year. (Normally I could have said units, but copper and Molybdenum are measured in pounds while gold is in ounces.)

An extra point to note is that FCX estimates its 2024 sales at the end of the year would be less than how much volume it gets out, however so far, its second quarterly results have been showing impressive numbers. Q2 2024 brought out an operating margin of 31%, a 6% addition on last year’s second quarter.

With respect to valuation, instead of using a WACC of about 23% (which theoretically undermines the firm’s intrinsic value) I decided to go with the Oracle of Omaha’s way, as at the time of valuation, 30-year treasury yielded about 4.4% (you may use 10-year as well), with a 3% premium on it makes up 7.4% (just in case rates get a 3% up).

I know that the riskier a stock is, the higher the discount rate should be, and stocks are generally perceived to be riskier than bonds or bills, but a proper understanding of a business, and what its future cash flows can bring knocks out that philosophy.

And with a conservative growth rate of about 2%, its future cash flows yielded a value of about $59.2 billion (from a bearish sense) and a $144 billion (when we level out all optimality and pessimism). As at this point, it’s better to be accurately right than precisely wrong.

There is usually a threshold of about 1.6x max using price to fair value ratio (due to future earning potential of the company). And the treasury rate changes every time, which may cause valuation to fluctuate.

I know I’ve shared a reasonable amount of information which may polarize investing stance, but what really baffles me about FCX, is its products, the future increments in its mining operations, and the possible rise for a global demand for renewable energy.

Molybdenum is placed in drugs to cure treatment, and the health industry is necessary to the fast-aging population of the U.S, you would need a lot of coopers to produce inverters, turbines and marine recreation boats on a massive scale. Gold is luxury, and whoever has the money would always succumb to their taste for expensive jewelleries.

I spooled out the historical prices of gold tracked down from the 1970s and it has been rising consistently from about $35 to its current average value of $2310 in 2024.

Disclaimer: unending insights will always be passed, your due diligence is desired, there’s no instigation to buy, sell or hold. Have a nice time.