Freeport-McMoRan (FCX), which carries our highest investment recommendation of 5-STARS, or Strong Buy, is one of the world's largest copper producers and a major producer of gold and molybdenum, explains analyst Matthew Miller in CFRA Research's flagship newsletter, The Outlook.
FCX's portfolio of assets includes the Grasberg minerals district in Indonesia, one of the world's largest copper and gold deposits, and significant mining operations in the Americas, including the large-scale Morenci minerals district in North America and the Cerro Verde operation in South America.
The Grasberg mine in Indonesia has ramped up its production from the new underground mining operations (the largest block caving operation in the world), following the conclusion of mining at the Grasberg open pit mine.
Our Strong Buy opinion is driven by our bullish view on the copper market and FCX's impressive production growth outlook (we forecast copper production up 12% in 2022 and 5% in 2023), mostly driven by Grasberg and Lone Star.
We expect the copper market to remain strong both in the short term and long term given copper's role in global decarbonization and technological innovations as well as the limited ability of the industry to increase supply.
More than 70% of copper is consumed for applications that deliver electricity, and copper is a critical ingredient in decarbonization. Electric vehicles use two to three times more copper than vehicles with internal combustion engines. Renewable energy technologies (wind and solar) use four to six times more copper than fossil fuel power generation.
Given challenges related to geology, local community support, permitting, and longer lead times, there are a limited number of meaningful new copper mines in the pipeline. CFRA Research thinks supply will struggle to keep up with demand in the coming years, and structural deficits in the copper market should result in continued appreciation in copper prices.
Our 12-month target price of $61 assumes FCX will trade at an EV/EBITDA multiple of 7.6x our 2022 EBITDA estimate, in line with FCX's three-year average forward EV/EBITDA. We think China's rebound from Covid-19 lockdowns is a key positive catalyst for higher copper prices and FCX shares.
Risks to our opinion include lower copper, gold, and molybdenum prices and an unexpected appreciation of the U.S. dollar.