freeport mcmorran
DESCRIPTION
In depth Study of Freeport McMoRan, with descriptions of mining, as well as oil and natural gas assets.TRANSCRIPT
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WilliamThomson4/27/2015
FreeportMcMoRan(FCX)
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InvestmentThesisRecommendedinvestorsbuyFreeportMcMoRan shareswithatargetpriceof$30;anupsideof44%relativetocurrentpricing. ThemarkethasseverelypenalizedFCXforthe2012/2013mergerwithPlainsExploration(PXP)andMcMoRan Energy(MMR)andthesubsequentfallincommoditypriceshasoccurredinthemiddleofacompanywideinvestmentcycle,exacerbatingthemarketperceptionofthecompanyasoverextended.
Theminingoperationsareworth$18.62ashareinourbearcase(coppertradingat$2.15lbin2015)andincludesallminingandcorporatedebt,minimizingdownside.
Managementshistoryofcapitalallocationdisciplineandeffectivemonetizationofdifficultassetsisbeingignoredbythemarket.AsisthesignificantopportunityembeddedintheOil/NatGas assets.
AtcurrentpricesFCXpresentsinvestorswithacompellingriskrewardprofileasaresultoftheimprovingFCF,worldclassmanagementandhighqualitydevelopedandexploratoryassetsinbothMiningandOil/NatGas.
Atatimewheneveryoneislookingforvalueinenergy,FCXisanopportunitytobuythelargestpubliclytradedcopperminerintheworld(atthevalueoftheminingassets)andsecureanoptiononhighvalueOil/NatGas assets.
2
SharePriceasof: 4/24/2015 $20.82Sharesoutstanding(mm) 1,039EquityMarketCap(mm) $21,632Add:Debt(mm) $20,312Less:Cash(mm) $549Add:MinorityInterest $4,993TotalEnterpriseValue $46,388
52WeekRange 39.32 16.43DividendYield 1.0%AverageDailyVolume(mm) 13.14
2015E 2016E 2017EEV/EBIT 10.1 7.7 6.0P/E 32.3 9.8 6.4P/CFPS 4.3 3.1 2.4
CurrentCapitalization
TradingStatitics
SummaryValuation
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NearTermCatalysts Grasberg:ConclusionofContractofWork(COW)negotiationswithGovernmentofIndonesia. SecuringAdditionalFundingforOil/NatGasProjects:JVPartnersforGulfofMexico(GOM)Oil/NatGasprojectswillhelprampupproductionandleadtoselfsustainingOil/NatGasOperationswithgrowingFCFsoonerthancurrentselffundingplan.
PartialCatalyst(goodforincrementalimprovementoffinancials) USDollarAppreciation:Unlikemostminingfirms,FCXderivesnearly50%ofrevenuefromsalestoUScustomers,andassucharemoreinsultedfromthenegativeimpactofarisingUSdollarthanmostminers,a10%strengtheningoftheUSDollarvstheChileanPeso,IndonesianRupiad,AustralianDollar,theEuroorthePeruvianSolequatestoacostbenefitof$145millioninEBITDAor$100millioninoperatingcashflow.FCXprovidesmorethan40%ofdownstreamcopperintheUSmarket.
PartialCatalyst EconomicInstability: FlighttoGoldresultingfromEconomicInstability(every$50increaseinthepriceofgoldadds$100millioninEBITDAand$60millioninoperatingcashflow).
CommodityPrices:Contrarytocurrentsupplysurplusforecasts,copperdemandwilllikelyexceedsupplythisyearduetolowinvestmentandmineclosuresduetoweatherandpolitics
MediumtoLongTermCatalysts OilPrices:AtcurrentpricesFCXisoneofthebestoptionsonoilpriceappreciationavailableinthemarket.FCXistheworldsleadingcopperminertradingatthefairvalueofthecompanysminingassetsbutitalsohassignificantoilassets,whicharecurrentlyvaluedatpenniesonthedollar.
InboardLowerTertiary/Cretaceous:TheInboardLowerTertiary/CretaceousNaturalGas(ILTC)playholdsnaturalgasassetsinexcessof1Tcf.FCXisaleadingplayerindevelopmentofthetrend.ThepotentialofILTCtrendisanexampleofwhyanynegativeimpactoffuturefundingdecisionsfortheOil/NatGasassetswilllikelybeovershadowedbyastutecapitalallocationdecisions.
ContinuedSlowDevelopmentofCopperAssets:Miningfirmshavedelayedbrownfieldinvestmentsandnewminediscoveriesarefewandfarbetween,withonlytwosignificantfindssince1988.TheoutlookforcopperintheLTisoneofconstrainedsupply.
Catalysts
3
RecommendedinvestorsbuyFreeportMcMoRan shareswithaneartermtargetpriceof$30ashareandathreetofiveyearpricetargetrangeof$55to$60ashare.
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Reserves:CU 29.0bn lbs,AU 28.2mmozsSales:CU 960mmlbs,AU 1.3mmozs
FCXisthelargestpublicallytradedcopperminerintheworldwithsignificantOil/GasNat,Gold,CobaltandMolybdenumassetsandrecentlyacquiredOil/NatGasassets.
ManagementhasgrowntheTangibleBookValuePerShareataCAGRof14.83%forthelast25Years. Currentmanagementhasbeeninplaceformorethanadecade.
CompanyOverviewHighQualityAssetsSpreadAcrossMultipleAttractiveIndustries
FreeportMcMoRan
PTFreeportIndonesia(90.94%)
FCXMining FCXOil&Gas
NorthAmerica
SouthAmerica
GulfofMexico
California
Haynesville/Madden/Other
Africa
Reserves:CU 35.6bn lbs,MO 2.4bn lbsSales:CU 1.9bn lbs,MO 2.4bn ozs
Reserves:CU 31.8bn lbs,MO 0.7bn lbsSales:CU 0.9bn lbs
Sales(MBOEperday):2014 39,2013 39 Reserves(MMBOE):PD 89,PUD 79
Sales(MBOEperday):2014 73,2013 72 Reserves(MMBOE):PD 89,PUD 79
Sales(MBOEperday):2014 44,2013 70 Reserves(MMBOE):PD 39,PUD 30
Reserves:CU 7.1bn lbs,MO 0.85bn lbsSales:CU 445mmlbs,CO32mmlbs
Reserves Oil(MMBbls) NatGas(Bcf) Total(MMBOE)Total Proved 288 610 390Total Probable 199 278 245
487 888 635
4
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FY2014Review NetLossattributabletocommonstocktotaled$1.3billion,$1.26ashare.NormalizedNetIncomeattributableto
commonstocktotaled$2.0billion,$1.96ashare. NormalizedNetIncomeexcludes$1.7billiongoodwillimpairmentandcertainitemsrelatedtothesaleof
Candelaria andOjosdelSaladoCopperMine. NormalizedNetIncomeexcludes$2.3billioninassetwritedownsrelatedtothecarryingvalueofoilandgas
proprieties. Operationalhighlightsinclude:PositiveexplorationresultsandwelltestsforGulfofMexico(GOM)assets,
completedsaleof80%ownershipinterestinCandelaria andOjosDelSaladocopperminefor$1.8billionincashandcompletionofMorenciMillExpansionprojectinMay2014.
FirstQuarter2015Results Netlossattributabletocommonstocktotal$2.5billion,$2.38ashare.NormalizedNetLossattributabletocommon
stocktotaled$60million,$0.06ashare. NormalizedNetLossexcludes$2.4billioninassetwritedownsforreductiontothecarryingvalueofoiland
gasproperties. Operationalhighlightsinclude:10%increaseinthevolumeofcoppersoldvs.1Q2014,initialstartofcommercial
productionatLuciusGOMfacility(25%FMO&Gworkinginterest)andHighlandernaturalgaswell.
CompanyOverviewReviewofFY2014andFirstQuarter2015Results
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FinancialSummary QtoQ($inmillions,exceptpersharedata) FY2012 FY2013 4Q2014 FY2014 1Q2015 Change LTMRevenue $18,010 $20,921 $5,235 $21,438 $4,153 ($1,082) $20,606NetEarnings/(Loss) 3,041 2,658 (2,851) (1,308) (2,474) 377 (4,262)Earnings/(LossperDilutedShare) 3.20 2.65 (2.74) (1.26) (2.38) 0.36 (4.13)NormalizedEBITfromContinuingOps 5,755 5,468 1,176 4,834 102 (1,074) 3,825CashFlowfromOperations 3,774 6,139 1,118 5,631 717 (401) 5,147CapEx 3,494 5,286 1,805 8,641 1,867 62 8,896
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ValuationConsiderations
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AnOilProblemWhatifFCXwasjustthelargestpublicallytradedCopperminerintheworld?
FCXistwobusinesses:anexploratoryOil/NatGascompanyandaCopperfocusedminer.
Atthecurrenttime,theOil/NatGas businessandtheperceptionofthebalancesheetasweakareananchoronthestockprice.
AbsenttheOil/NatGas assetsbutincludingallcompanydebt(includingthatassociatedwithOil/Gasoperations)FCXminingassetsareworthanywherefrom$16.51ashareto$49.12ashare.
FCXminingassetswillcontinuetoappreciateinvalueandgeneraterichfutureFCFasmanagementcontinuestoinvestinworldclassassetsaheadofcoppershortageduetodecliningoregradesandlimitednewminescomingonline.
(1)BasedonaDCFModeloftheFCXMiningOperations,seepage31forbasecasemodelandaBullandBearScenariocommodity pricing,seeAppendixA,page37.
(1)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Copper FCX WTI
IndexLTMCopper,WTIandFCX
FCXDerived71%ofRevenuefromCopperand80%ofNormalizedEBIT
fromMiningin2014
IntheLTMCopperhastradeddown10%while,FCXandWTIhavetradeddown37%and44%,thestocknowcorrelatesbetter
withOilthenCopper
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AnOilOptionTheinclusionofnewOilandNaturalGasAssetsandthefallinthepriceofOilhasconfusedInvestorsaboutthevalueproposition.
ThemarketiscurrentlyvaluingFCXOil/NatGasassetsatclosetonothing.
AsastandaloneentitythenormalizedearningsfortheOil/NatGasbusinessimplyavaluationof$2.15ashareviaEBITMultipleDCFwith8.0xmultiple,andanetassetvalueof$8.85ashareviaaPerpetuityGrowthDCFwitha2.5%growthrate,bothataconservative$55oilandproductiongrowthassumptions.
TheportfolioofOil/NatGasassetsarerichinpossibilityandlocatedinareasoftheworldinwhichmanagementhassignificantdevelopmentexperience.FCX,withitsvaluableminingassets,offersinvestorsoneofthebestoptionsonfutureOil/NatGaspriceappreciation.
(1)
KeyTakeAway:Ifcommoditypricesremainweakthrough2019,andmanagementpoorlyexecutesOil/NatGasassetdevelopment,FCXhasanintrinsicvaluefloorof$17and$20ashare
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FY2014A FY2015E FY2016EAnadarko 15.1x Loss 39.9xApache 8.0x Loss 30.0xHess 11.7x Loss 174.8xNobleEnergy 15.4x 46.0x 32.5xOccidental 8.9x 55.9x 27.5xMarathon 8.5x Loss 114.3xFreeportMcMoRan 10.8x 10.1x 7.7x
TEV/EBIT
ComparedtoOil/NatGascompanieswithsimilarreserveprofiles,FCXtradedataslightdiscountin2014andlookstotradeatasignificantdiscountgoingforward.
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MiningOperations
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MiningOperationalOverview GivenFCXMiningOperations2014EBITof
approximately$3.87bnFCXEVistradingat11.8xtheMiningOperationsLTMEBITvsminingpeerstradingat9.46x,aslightpremiuminadepressedsector.
FCXMiningassetshaveaverageROAof11.7%overthelastfiveyearsvsminingpeerswhohaveaveraged9.4%.
2015miningCapExfocusedonbrownfieldminingprojectsthatoffersuperiorriskadjustedreturns.
KeyRisks:o OperationalRisks Executionrisk
relatedtonewCapExo GeopoliticalRisk Indonesiaandthe
DemocraticRepublicofCongoo CommodityPriceRisk
KeyTakeAway:FCXminingassetsareworldclassandcapableofgeneratingindustryleadingreturns. 10
01,0002,0003,0004,0005,0006,0007,0008,000
FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019
MiningEBITbyGeographicSegment
NorthAmerica SouthAmerica Africa Indonesia
70.18%
8.40%
5.91%
1.67% 13.84%
2014MiningRevenuebySource
Copper Gold Molybenum Cobalt Refining&Smelting
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MiningCapEx inFocus
KeyTakeAway:MiningCapExisfocusedonincrementalimprovementandexpansionofexistingassets,generatinghigherreturnswithlowerriskandsuperiorFCF.
Managementcontinuestoinvestinhighqualityprojectsregardlessofthecommoditycycle.
MiningCapExisfocusedongeneratinghigherriskadjustedreturnsthroughbrownfieldinvestmentsinmineswithlonglivesandhighoregrades.
MiningCapExFocusedonmineswithsuperiorcoppergradesvs.industryaverageof0.5%forgreenfieldprojects:o CerroVerde $700mn(OreGrade:0.39%)o Grasberg$1.5bn(OreGrade:1.17%)o Tenke $225mn(OreGrade:3.56%)
FocusonefficiencyandcostwillproducestrongFCFgrowthincomingyears,evenatlowercommodityprices.
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IndustryProductionCostbyOreGrade
(2,000)
(1,000)
0
1,000
2,000
3,000
4,000
5,000
6,000
FY2015P FY2016P FY2017P FY2018P FY2019P
LeveredFCFProjections
BearLFCF BaseLFCF BullLFCF SpotLFCF
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Refining15%
Freight5%
Mining80%
FCXanditsMiningPeersFCXhassomeofthelowestallinsustainingcashcostsinthecopperminingindustry.
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AmongthemajorcopperproducersFCXhassomeofthelowestcostminesandlowestaverageallinsustainingcashcostsintheindustry(under$2/lb).Thisfacthelpsensurecopperproductionprofitabilitycancontinueevenduringacopperpricedecline.
Q12015FCXmaintaineditsindustryleadingcombinationofproductionvolumeandcostminimization,achievinganetcashcostperpoundofcopperof$1.64
Miningaccountsforthemostsignificantcostintheindustry(accountingfor80%ofcosts), whichmakesrecentFCXinvestmentsinimprovedmineproductionandefficiencyathighoregrademinesallthemoreimportant.
CapExinvestmentsinCerroVerde,Morencia,TenkeandGrasbergwilllikelylowerFCXallinsustainingcashcostsfurther.ForwardlookingmanagementguidancefromQ12015isfor$1.53apound.ThelowestcostmineintheFCXPortfolio,Grasbergproducesataround$0.50apound.
AllinSustainingCashCostsbyProducer CostsbySource
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RiskstoMiningOperationValueMiningOperationsatFCXareexposedtoseveralimportantrisksbesidescommodityprices.
GrasbergMineRisks Tenke:Currentgovernmentisseekingtoimprovetheattractivenessofminingsectorwithrevisiontoregulationsscheduledforearly2015.Revisionsappearslatedtoimproveregulatoryenvironmentbutmayalsoincreasetaxationandroyalties.
UnderstandingPolRisk:PoliticalriskexistsforFCXateverymineitowns,andUSminesarenoexception.Theriskexistsintherelationshipbetweencompanyandgovernment,notthecountryitselfthough.EmergingMarketriskislikelyoverstated,anddevelopedworldrisklikelygoesunrecognized.
OperatingRisks:AllfuturedevelopmentatGrasbergisunderground,andcopperwillbeminedviaBlockCaving.FCXhasoutlinedanaggressivetimelineforrampup(onaverage50%quickerthanmostblockcaveminingtimelines).
PoliticalRisks:Negotiationswithrecentlyelected(July2014)Gov.ofIndonesiaareinprocess,withmanagementpositiveaboutconclusionofdiscussionsthisyear.AccordingtoQ12015callmostmajorpointshavebeenworkedout,suchasnewroyaltiesandtaxes.Afewissuesremaintobefinalized,suchastimelinefordivestitureofbetween10%and20%ofFMIndonesiaintheIndonesianStockMarket,andcontinuationofoperationspost2021.
TheSmelter:AspartofthenegotiationsFCXhasagreedtoexpandcapacityatitsexistingsmelter.Expenseswillnotbeginuntilpost2016period,expectedcost(sharedwithsmelterpartners)of$2billion.
Geopolitical/PoliticalRisk
OperationalRisks Tenke:Powersupplyandqualityofworkforce. CerroVerde:Watersupply.
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MiningOperationValuationTheimpactofrecentmetalpriceerosioniscompensatedforwithtimelyproductiongrowtharisingfromforwardlookinginvestmentsbymanagementinexistingassets.
PositiveRiskstoValuation FCXiscurrentlytradingatornearthevalueoftheminingbusinessinthebearcase,butat10yearcommoditycyclelow($1.26copper),notevenlowcostFCXassetsareprofitable.
OngoingGeopoliticalRisks. FailuretoproperlyexecuterampupofproductionfromnewCapEx.
Reboundincommodityprices. ConclusionofGrasbergCOW ConclusionofCapExandrampupofnewinvestmentstofullproduction.
Addedincrementalgainsfromnonecoreminingassets:Example CobaltChemicalRefinerypurchasedin2013,Molybdenum,Gold,Silver.
NegativeRiskstoValuation
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2013A 2014A 2015P 2016P 2017P 2018P 2019PRevenue $18,305 $16,728 $15,872 $19,693 $22,015 $19,455 $22,132EBITMargin 32.3% 26.8% 24.6% 26.7% 27.8% 27.3% 28.2%
EBIT 5,909.2 4,478.8 3,908.4 5,260.5 6,111.4 5,313.8 6,236.0EBITDA 6,334 5,445 5,517 7,058 7,995 6,961 7,952NOPAT 3,841 2,911 2,540 3,419 3,972 3,454 4,053ETR 35% 35% 35% 35% 35% 35% 35%
NetIncome 3,089 2,323 2,151 3,030 3,583 3,065 3,664EPS $2.97 $2.24 $2.07 $2.92 $3.45 $2.95 $3.53
FairValue Bear Base BullTEV/EBITMultiple(NTM) 12.2x 11.8x 11.3x Base SpotEVofSegment 35,637 46,096 64,297 Copper $2.5 $2.7EquityValue 19,235 29,694 47,895 Gold $1,200.0 $1,175.0ValuePerShare $18.51 $28.58 $46.10 Molybdnum $57.0 $57.2
NAVofSegment(DCF@8%) 20,754.2 33,615.3 53,596.3 Cobalt $10.0 $7.7PerShare $19.98 $32.35 $51.58
Mining Operation Financials
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OilandNaturalGas
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80%of2015Oil/NatGas CapEx directedtothehighestreturnGOMopportunities. FCXassetshaveanestimatedfindinganddevelopmentcostof$26/BOEoverthenext5years. Managementforecaststhatby2025ownedacreagecouldbeproducingasmuchas600MBOE/dayvs.2015E
of143MBOE/day withexpectedallincostsof$46abarrel.
1Q2015Highlights ThreeprojectscommencedproductioninQ12015totaling25MBOEperdaybytheendofMarch. $100millioninnetoilhedgingrealizationsinQ12015. 86%ofremaining2015oilproductionishedged,providingasmuchas$13/bbl ofpremium. CurrentDeepwaterGOMacreagehas145potentialprojectswithIRRsgreaterthan20%atcurrentforward
strippricing.
AnExcellentOptiononOilFCXhasproducingreservesinCaliforniaandHaynesville,premierDeepWaterGOMproducing/exploratoryassets,andpotentiallygamechangingacreageintheInboardLowerTertiary/Cretaceousnaturalgastrend.
2014Sales 56.8MMBOE ProvedReserves:ByRegionandCommodity(6:1Ratio)
GoM47%
California25%
EagleFord15%
Other13%
Oil71%
NGLs3%
Gas26%
GoM43%
California39%
Haynesville/Other18%
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GulfofMexicoAssetsFCXhasseveralprojectsnearingproduction,includingseveraltiebackopportunitieswhichoffershorterdevelopmentcyclesandhigherIRRthangreenfieldfinds. TheUSGOMremainsoneofthemostattractiveplacestobeintheupstreamworld,withanestimated5BN
BOEdiscoveredinthelastfewyears.43%ofFCXProvedReservesareintheGOM. DespitetechnologicalchallengesassociatedwithDeepwaterGOM,theampleaccesstounderutilizedexisting
infrastructure(bothpipelinesandrigs)andlowtaxtakehelpscompensateforrelativelyhighdevelopmentcosts.
In201580%ofFCXOil/NatGas CapEx isdirectedtowardsthehighestreturnGOMopportunities. FocusondevelopmentofCopper,HolsteinDeep,Dorado,KOQVandKingtiebackopportunities,allofwhich
requirelowerCapEx investments,shorterdevelopmentcycles,andofferfastermonetizationofresourcesthangreenfielddevelopmentsastheyleverageexistinginfrastructure.
Expected1st productionfromHolsteinDeepandCoppertiebacksin2016. GOMtiebackoffermuchhigherreturns(43%averageIRR)thanlargergreenfield(25%IRR)projectsas
theyleverageexistinginfrastructure. FCXGOMAcreageincludes145potentialprojectswithIRRsgreaterthan20%atcurrentfuturesstrip
pricing.17
Source:CreditSuisse,"USGulfofMexico:AllYouNeedtoKnowabouttheGOM"
29.50%25.50% 23.00% 22.60% 21.00% 18.80%
15.70% 15.40% 14.30%
0%
10%
20%
30%
40%
Brazil GOM Other Angola Nigeria Norway Russia CanadianOilSands
AustralianLNG
WeightedProjectIRRbyRegion
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DeepwaterGOMProjects
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UtilizationCapacity(BOPD)
Capacity(MCFD)
RegionFirst
ProductionDevelopmentPlan EstimatedReserves
Operator/WorkingInterest
Marlin 40% 60,000 235,000 MississippiCanyon 2000FMO&GOperated
with100%WI
HornMtn 12% 75,000 72,000 MississippiCanyon 2002FMO&GOperated
with100%WI
Holstein 12% 113,500 142,300 GreenCanyon 2004 7Wells(20142016)Opportuntiesforupto75MBOEperdayby2020
FMO&GOperatedwith100%WI
Lucius 80,000 450,000 KeathleyCanyon 4Q20146WellDevelopment
Program295MMBOE
FMO&G25.1%WIAnadarkoOperated
PowerNap MississippiCanyon PositiveDrillingResults 54MMBOEFMO&G50%WIShellOperated
Vito MississippiCanyon 300MMBOEFMO&G50%WIShellOperated
Heidelberg 80,000 GreenCanyon 2016 6WellInitialProgram 300MMBOEFMO&G12.5%WIAnadarkoOperated
Copper GreenCanyon 2016 1WellBeingDrilled 35MMBOEFMO&GOperated
with100%WI
HolsteinDeep GreenCanyon 2016 9ProposedWellsFMO&GOperated
with100%WI
Dorado MarlinTieback MississippiCanyon1stProduction
AchievedinMarchFMO&GOperated
with100%WI
KOQVHornMtnTieback
MississippiCanyonDevelopmentDrilling
2H2015FMO&GOperated
with100%WI
King MarlinTieback MississippiCanyonCompletionOperations
UnderwayFMO&GOperated
with100%WI
DeepSleepShellPreparingtostart
drillingFMO&G50.0%WIShell
Operated
InboardLowerTertiary/Cretaceous
HighlanderSouthLouisiana 2015
1stProductionAchievedinQ12015
FMO&G72.0%WI
FarthestGateWestDrillingCommenced
Oct2014Source:CompanyFilings,CreditSuisseEstimates,BankofAmericaEstimates
OperatingAssets
DevelopmentAssets
TiebackOpportunities
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InboardLowerTertiary/CretaceousIndustryleadingpositioninthedevelopingnaturalgasplay.
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FCXbegancommercialproductionatitsHighlanderdiscoverylocatedonshoreinSouthLouisianaintheInboardLowerTertiary/Cretaceoustrendinthe1st Qtr 2015.Theproductiontestindicatedaflowrateofapproximately75MMcf/d.
UltraDeepWells(whichrunasdeepat30,000feet)aresignificanttechnologicalchallengeswithreservoirtemperaturesexceeding440degreesandbottomholepressureashighas27,000PSI(4xthepressureittakestolaunchthespaceshuttle).
TheUltraDeepInboardLowerTertiary/CretaceoustrendliesbelowthesaltweldthatcutsthroughtheGulfCoastsedimentlayers.ThusfarmostGOMOil/NatGas hasbeenfoundinreservesabovethesaltweld.
ThetrendintheLowerTertiary/Cretaceouslayerarepartofthesamegeologicalstructuresthathavebeensoprofitableforoilcompaniesexceptthattheyhavebeenisolatedandbisectedbythesaltweld.
JamesMoffett,ChairmanoftheBoardofFCXbelievesthatthatInboardLowerTertiary/Cretaceoustrendholdsreservesinexcessof1TcfofNaturalGas.ThepotentialoftheLowerTertiary/CretaceousacreagethatFCXhastitletoisnotyetrepresentedonthebalancesheetasreserves.
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TheFundingQuestion
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FCXOilandNatGas assetsofferthepotentialofrichrewardsforthecompanyandinvestorsregardlessofadditionalfunding,butadditionalfundingwillhelprampupproductionquicker. ThefocusontiebackopportunitiesintheGOMandonsustainingproductioninallotheroilfieldswill
generatecashflowtohelpdevelopprojectsinthelongterm,atthemomentFCXissearchingforadditionaloutsidefunding(JVpartners)whichcanrampupthespeedatwhichassetsaredeveloped.
Existing,validatedGOMacreageisproducing130,000to140,000MBOE/Day,withoutadditionalfundingmanagementprojectsthatnumbercouldreach173MBOE/Dayby2017,withadditionalfundingthatnumbercouldbe217MBOE/Dayby2017.
$2.8
$2.8
$2.9
$2.9
$3.0
0
50
100
150
200
2015e 2016e 2017e
C
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p
E
x
P
r
o
d
u
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t
i
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CurrentProductionandCapExPlan
Production(MBOE/Day) CapEx($inBil)
$0.0
$1.0
$2.0
$3.0
$4.0
0
50
100
150
200
250
2015e 2016e 2017e
C
a
p
E
x
P
r
o
d
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t
i
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WithAdditionalFunding
Production(MBOE/Day) CapEx($inBil)
$0.0$0.5$1.0$1.5$2.0$2.5$3.0$3.5
2015e 2016e 2017e
AditionalFundingEBITDA($inbil)
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
2015e 2016e 2017e
CurrentFundingEBITDA($inbil)
(1)
(1)SeeAppendixB:PossiblePEPartners.
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KeyTakeAway:Buyagreatcopperminerandgetagreatoptiononreboundingoilprices.
Oil/NatGasoperationsdonotlooktoreachpositiveleveredFCFuntil2018underBaseCaseCommoditypricingandconservativeproductiongrowthassumptions.InbasecaseOil/NatGasoperationslooktotradeatasignificantdiscounttoNetAssetValuecalculatedviaDCFwithadiscountrateof8%.
Oil/NatGas OperationValuationThedeclineinthepriceofoilhasnegativelyimpactedneartermvalueofFCXassets,buthedgeswillhelpblunt2015impact.Longtermpotentialisveryreal,andsellingatadiscount.
PositiveSurprisestoValuation Continuederosioninthepriceofoil. FallinOilDemand. Failuretofindadditionalfundingwillslowdevelopment.
Reboundinoilprices. SecuringJVPartnersforadditionalfunding. SignificantreservesnotyetaddedtoBalancesheet.
NegativeRiskstoValuation
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2013A 2014A 2015P 2016P 2017P 2018P 2019PRevenue $2,616 $4,710 $3,017 $3,061 $3,694 $4,834 $4,908EBITMargin 69.3% 69.3% 69.3% 69.3% 69.3% 69.3% 69.3%
EBIT 450 975 572 580 700 916 930EBITDA 1,814 3,266 2,092 2,122 2,562 3,352 3,403NOPAT 293 634 372 377 455 595 605ETR 35% 35% 35% 35% 35% 35% 35%
NetIncome 112 393 201 206 284 425 434EPS $0.11 $0.38 $0.19 $0.20 $0.27 $0.41 $0.42
FairValue Bear Base BullTEV/EBITMultiple(NTM) 1.8x 5.0x 8.1x Base SpotEVofSegment 1,733 4,845 7,880 WTI $55.0 $57.2EquityValue 835 2,277 5,312 NatGas $3.3 $2.6ValuePerShare $0.80 $2.19 $5.11
NAVofSegment(DCF@8%) (531.6) 9,174.6 19,765.2PerShare ($0.51) $8.83 $19.02
Oil/NatGasFinancials
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CapitalStructure
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AmpleLiquiditytoAddressNearTermChallenges:FCXhas$5.3billioninuntappedcreditlinesandimprovingcashflow.
ActiveResponsebyManagementtoMarketConditions:ManagementhasactivelyrespondedtoshiftsincommoditypricesbystrategicallyprioritizingMiningCapExtoincreasevolumeandreducecost,andfocusedOil/NatGasCapExonprojectswithneartermreturns.CapExreductionsof$1.2and$1.7billionin2015and2016.
LeveragePastExperience:FCXmanagementhasbeguntoexplore3rd partydevelopmentfundingarrangementswhichithasemployedsuccessfullyinthepastinbothminingandOil/NatGas.FCXmanagementalwayslookstoinvestinqualityprojectsregardlessofcommoditycycleandcurrentprofitability.
Challenges,ButNoProblemsManagementfocusedonstrengtheningbalancesheetwithoutimperilinglongtermvalue.
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$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019
ForwardLookingFCXLiquidityMap
DebtMaturities Interest Dividends CapEx Exploration/DrillingCosts CFO CFO+Cash CFO+Cash+UndrawnRevolvers
-
ManagementTrackRecord
-
KeyManagement
25
JamesMoffettisChairmenofFCX,PresidentofPRFreeportIndonesiaandleadsexplorationprogramsforFCX.Hehasworkedforthecompanyinsomecapacitysince1964.HeservedastheChairmanofMcMoRanExplorationfrom1984to2007andwasthedrivingforcebehindthedevelopmentofGrasbergmineinIndonesia.Between1984and2003Mr.MoffettwastheChairmanandCEOofFCX.WhenaskedtocommentonMr.MoffettstrackrecordintheE&PbusinesslegendaryoilinvestorT.BoonePickenscommentedthat:Youjudgeatrapperbyhispelts,andoldJimBobsgotalotofpelts.
RichardAdkersonhasservedasCEOofFCXsince2003andhasworkedwiththecompanyinvariousrolesofincreasingresponsibilitysince1980.Mr.AdkersonandMr.Moffetthavealonghistorytogetherthatdatesbacktothe1970s.Mr.AdkersonservedasPresidentofFCXunderMr.MoffettduringhistenorasCEO.Mr.AdkersonhasalsoservedinvariousseniormanagementpositionswithPTFreeportIndonesiaandoversawthemergerofFCXwithPhelpsDodge,creatingthelargestpublicallytradedcoppercompanyintheworld.
JamesFloresistheViceChairmanoftheBoardandPresident/CEOofFreeportMcMoRanOilandGas.PriortojoiningFCX,Mr.FloreswastheCEOofPlainsExplorationandProductionsincethecompanysinception.HehasworkedinOilandGasforover25yearsservingastheCEOoffourdifferentpublicallytradedoilandgasE&Psduringhiscareer.
FollowingthemergerwithPlainsExplorationandMcMoRanExploration,managementreworkedcorporategovernanceandcompensationincentivestobetteraligninterestswiththoseofshareholders.Highlightsinclude:o Additionoffournewindependentdirectorstotheboard.o Compensationcommitteestaffedwithindependentdirectorsonly.o Basesalaryofthreekeydirectorsreducedto$1.25millionwithtotalAnnualIncentivecappedat$7.5million.o Additionalcompensationinexcessofbasesalarydrivenbyoperatingcashflownetofworkingcap(50%),copperand
oilequivalentproductionvolumes(25%)withtheremaindertiedtoSafetyandEnvironmentalvariables. KeycompensationdriversalignreasonablywellwithoperatingaccomplishmentsnecessaryforLTgrowthinshareholder
value.
-
20
10
0
10
20
30
40
6000
4000
2000
0
2000
4000
6000
8000
10000
12000
CapEx UnleveredFCF NetDebt TBVPerShare ROA
AnEnviableTrackRecord
KeyTakeAway:FCXhastheresourcestomanagebalancesheetconcernsinacommoditydowncycleandahistoryofbuildingassetsthroughcommoditycycletroughstotake
advantageofcyclepeaks.
Duringtheperiodfrom1990to2000FCXfocusedonthedevelopmentoftwoworldclassassetsGrasbergandtheMainPasssulfuroilgasdeposit.Duringtheperiodmanagementdevelopedbothprojectsdespiteunrivaledtechnicalchallenges,depressedcopperprices(averaging$0.92perlb)andacapitalstructurethatwas53%debt.
From2000to2006FCXmanagementnavigatedcopperpricevolatility($1.25to$4.62),theendofSuhartoregimeinIndonesia,andclosureofMainPass.FCXpaiddowndebtandpositionedthemselvestosuccessfullybuyPhelpsDodgein2007,whichquicklyprovedasmartinvestment.
ManagementTrackRecord
FocusonGrasbergandMainPass BenefitsofLTCapExFocusAccrue
CyclerepeatedwithpurchaseofPhelpsDodge
26
-
FCXCaseStudy Althoughmostinvestorsdontknowit,FCXwasoriginallyaspinofffromFreeportMcMoRanInc,asFreeportMcMoRan CopperandGoldinordertoseparateminingassetsfromsulfur&fertilizerbusinessesandtosecureadditionalcapitaltodevelopGrasbarg andMainPassprojects.
ThespinoffwastheideaofcurrentChairmenoftheBoardJamesMoffett,andremained73%controlledbyFreeportMcMoRanInc.(liketheproposedFMOilandGasspinoff).
ThespinoffwasmajoritycontrolledbyFreeportMcMoRanInc.untilitbecamemoresuccessfulthantheparentandwasfullyspunoffin1995.
In2014FreeportMcMoRanCopperandGoldcompletedthetransition,takingthenameofitsformerparent,FreeportMcMoRanInc.
M&AHistory
27
ThepurchaseofPlainsEnergywaswidelycriticized(withscepticsclaimingvictoryinthewakeofthe1stQtr2015statementofapossiblepartialIPOofapercentageofFMO&G)buthindsightisalways20/20.
Anyfocusontherightorwrongofthemergerismisplaced,themoneyhasbeenspentandthecostissunk,allthatmattersisthepathforwardandhowFCXmanagementintendstomonetizetheassetsforthebenefitofshareholdersinthefuture,whichhistorysuggeststheyarecapableof.
Successfulmanagementdoesnotalwaysmaketherightdecisions,buttheyalwaysmaketheirdecisionright.
CaseStudy:1988FCXCaseStudyPhelpsDodgeCaseStudy $26billionacquisitionin2007 Transformationaltransaction,bothassetandgeographicdiversification
Reserveadditions:+46billionlbs Cu Effectivelymanagedthrough2008/2009Economiccrisis
ValuationOverview(USDMM)CashOfferperShare 126.46PremiumPerShareOffer(1Day) 33.1%Premium(30Days) 28.0%ImpliedEquityValue 25,604.2NetDebt -3,164.5ImpliedEnterpriseValue 23,867.0LTMEBITDA 3,922.5ImpliedEV/EBITDA 6.1xNetIncome 1,882.5ImpliedEquityValue/NetInc 13.6xTotalDebt/EBITDA 0.2xNetDebt/EBITDA -0.8x
$0
$1
$2
$3
$4
$0
$5
$10
$15
$20
AtTimeofPDAcquisistioninMarch2007
Dec07 12/31/2012
RapidDeleveraging($inbns)
Debt ConsolidatedCash
-
CommodityPrices
-
BearArgument:IncreasedproductionisilladvisedasChina(theworldslargestcopperconsumer)shiftstoaconsumerdriveneconomy,threateningdemand.Paincurrentlyfeltbyironoreminersisjustaroundthecornerforcopperproducers.
Counter:Thecomparisondemonstratesalackofunderstandingofthedifferencesbetweenminingcopperandironore.Copperismorecomplicatedthanironore(by2018morecopperwillbeminedfromundergroundminesthanopenpit)butrequiresmorevolumethangoldordiamonds.
Counter:Supplyisconstrainedinthelongterm(evenwithdecreasedChinademand)bythetimenecessarytobringacomplexmineonlineandbythelackofeconomicdiscoveriesofuntappedresources.Onlytwonewsignificantcopperdiscoverieshavebeenmadebytheminingindustrysincethe1988FCXdiscoveryofGrasberginIndonesia.
Counter:Thesupplysituationintheshorttermismoreconstrainedthanbelieved,asminers(forexampleAngloAmericanandTeckResources)haveannouncedpostponementofinvestmentsneededtoincreaseproductionatexistingmines.Thousandsoftonsof2015productionhavealsobeenlostduetofloodsintheAtacamaDesertinChileearlierthisyear.
FCXManagementThinkingonCopper
KeyTakeAway:Ifcopperdemandgrowsat2.5%ayearoverthenexttenyears,theindustrywillneedtoexpandby10millionmetrictons,orbyover50%ofitsglobalinstalledcapacitytomeetthatrateandaccountfordepletionatagingmines.
ProductionVolume
TechnicalMiningComplication
Gold Diamonds
IronOre Coal Copper
HighlyTechnicalMining InfrastructureChallenge
HighVolumesLowVolumes
(1)Source:Bloomberg FreeportBetsCoppersNoOilWithGrowthtoGrabTopSpot
(1)
FCXwillcontinuetoclosetheproductiongapbetweenitselfandthelargestcopperminerintheworld(Codelco)asaresultofcontinuedexpansionofexistingmines.
29
-
CommodityPrices/FCXSensitivities
30
FCXSensitivity CommodityMarketDrivers Positive(+),Negative()orUnknownRisk(?)toCommodityPrice
DemandgrowthinChina(?):Chinademandhasbeenmixed,economicslowdowncouldleadtodecreaseddemand,butincreasedfocusonpowersectorcouldfillthegap.Additionally,Chinareexportsfinishedproductswithcopper.
GlobalDemand(USandEUMarketsstillimportant
():ThusfarEUrecoveryhasbeenweakandUSrecoveryismixedwithsignificantquestionsaboutthefalloutofexperimentalfiscalpolicybycentralbanks
ChinahasbeendestockingCopperthroughmostof2014,restockingsuppliesmayliftimports
(+):StrongrestockingthroughthesupplychainaccordingtoWallStreetBanks
MineSupplyvs.GlobalDemand (+):Longtermsupplydeficitandslowstartto2015production
EmergingMarket(EM)Demand (+):EMDemand,especiallyChinaandIndiaremainsstrongConcernsoverassetpricesandequitymarketcorrection
(+):Globalconcernsaboutthenatureofeconomicrecoveriespost2008remain.Hotmarketsstokefearsaboutcorrection.
InterestRates (?):ExperimentalFiscalPolicy.Whoknowshowitends?
SteelProduction():DemandforMolyisheavilytiedtosteel,demandfromsteelproducingcountrieslikleylowerin2015.
MineSupply(?):Increasedsecondarysupplyfromcopperminesinrecentyearswithlowerprimarymolyminesupply.
GlobalDemand ():ShakyrecoveryintheUS,QuestionsaboutChinaandEU,andFallingdemandinDM.
EUNatGasPriceIndexation(+/?):ContinuedshiftinEUmarketfromOilIndexedpricingofNatGastospotmarket,goodforoveralindustry/marketstructure,neartermpricingimplicationsareunknown.
MarketStructure ():SignificantsupplybuildGloballylikelytokeeppricesrelativlylow
OPEC(?):Traditionalrolekeepingsupplyanddemandinbalancehasbeenabandoned,forthemoment.
USExportPolicy(?):ChangetoUSCrudeOilexportpolicycouldresultinfloodofUSinventoryintomarket,changewouldbebadforpricingintheneartermbutlongtermimpactisdifficulttoanticipate,asislikelyhoodofchange.
NatGas(+/)$0.50/MCFEBITDA:$35CFO:$28
(+/)$1.00/ozEBITDA:$100CFO:$80
(+/)$50.00/ozEBITDA:$100CFO:$60
(+/)$0.10/lbEBITDA:$500CFO:$350
Copper
Gold
Molybdenum
Oil/NatGasOil(+/)$5.00/bbl
EBITDA:$190CFO:$150
-
ChinaandCommodityPrices
31
FCXhaslimiteddirectexposuretoChinabutstillhassignificantindirectexposureviaprices.ThereismoretocopperthanChina,afewideasworththinkingabout
0
2000
4000
6000
8000
10000
12000FCXRevenuebyCustomerLocation
2012 2013 2014
FCXprovidesover40%ofdownstreamcopperfortheUSMarket.
Moreimportantthantheofftakeofanyindividualplayerforcopperpricingistheoverallglobalgrowthindemand.
Copperdemandindifferentregionshasshiftedregularlyoverthelastthirtyyears:
Inthe80sgrowthwasdrivenbythedevelopedworld(DM).
Inthe90sgrowthwasspiltattimesdrivenbytheDWandattimesbyEMs.
Since2000EMdemandhasdrivenglobaldemand.
Althoughdifficulttopinpointexactlyintermsofvolumes,EMdemandinrecentyearshasasignificantoutsourcingcomponent(importedcopperintoChina,reexportedinfinalproducts).
ThelackofdirectsalestoChinaoffersFCXampleopportunitytoexpandsalesintoChina,acountrythatwill,regardlessofanyeconomicmissteps,stillconsumesignificantquantitiesofcopper,eveninrecessionordepression.
0
5000
10000
15000
20000
25000
30000
2011 2012 2013 2014 2015F 2016F 2017F 2018F
CopperSupplyandConsumption
WorldSupplyRefinedSupply(kt) WorldRefinedConsumption(kt)
ChinaConsumption(kt)
-
Valuation
-
DCFofMiningAssets
33
BaseCase ProjectedYearEnding 20142019USDInMillions 2012 2013 2014 2015 2016 2017 2018 2019 CAGRSales $18,010 $18,305 $16,728 $15,872 $19,693 $22,015 $19,455 $22,132 5.8%Costofgoods sold (10,382) (11,158) (10,667) (9,655) (11,889) (13,252) (11,790) (13,443)Gross Profit 7,628 7,147 6,061 6,217 7,805 8,763 7,665 8,689 7.5%SG&A (635) (813) (616) (700) (747) (768) (704) (738)EBITDA 6,993 6,334 5,445 5,517 7,058 7,995 6,961 7,952 7.9%EBITDAMargin 39% 35% 33% 35% 36% 36% 36% 36%
Less:DD&A 1,179 1,433 1,572 1,609 1,797 1,884 1,647 1,716EBIT 5,814 4,901 3,873 3,908 5,261 6,111 5,314 6,236Less:Taxes (35%) (2,035) (1,715) (1,356) (1,368) (1,841) (2,139) (1,860) (2,183)NOPAT 3,779 3,186 2,517 2,540 3,419 3,972 3,454 4,053Plus:Depreciationandamortization 1,433 1,572 1,609 1,797 1,884 1,647 1,716Less:Capital expenditures (3,794) (3,988) (3,700) (2,800) (2,400) (2,400) (2,400)Less:Intersest (337) (389) (678) (669) (611) (499) (484)(Increase)/decreaseinworkingcapital 275 (113) (141) 413 468 (163) 436LeveredFreeCashFlow 763 (401) (370) 2,160 3,313 2,039 3,321
LeveredFreeCashFlow (370) 2,160 3,313 2,039 3,321Discountperiod 1.0 2.0 3.0 4.0 5.0WACC 8.0% 8.0% 8.0% 8.0% 8.0%Discountfactor 0.926 0.857 0.794 0.735 0.681PresentvalueofeachLeveredFreeCashFlow (342)$ 1,852$ 2,630$ 1,499$ 2,260$
Weightedaveragecostofcapital: 8.0% Weightedaveragecostofcapital: 8.0%Netpresentvalueoffreecashflow 7,898.3 Netpresentvalueoffreecashflow 7,898.3Terminalmultiple 9.0x TerminalGrowthRate 2.5%Terminalvalue 56,124.4 Terminalvalue 61,886.6Presentvalueoftheterminal value 38,197.3 Presentvalueoftheterminal value 42,119.0
Enterprisevalue 46,095.6 AssetValue 50,017.3Less:Netdebt (16,402.0) Less:Netdebt (16,402.0)Equityvalue 29,693.6 NetAssetValue 33,615.3
Dilutedshares: 1,039 Dilutedshares: 1,039EquityValuePerShare 28.58 NetAssetValuePerShare 32.35
Currentshareprice: 20.82 Currentshareprice: 20.82MarginofSafety: 7.76 MarginofSafety: 11.53
6.00% 7.00% 8.00% 9.00% 10.00% 6.00% 7.00% 8.00% 9.00% 10.00%7.0x $23.74 $22.03 $20.41 $18.87 $17.42 0.5% $24.35 $22.61 $20.96 $19.40 $17.928.0x $28.23 $26.31 $24.49 $22.77 $21.14 1.5% $29.64 $27.66 $25.78 $24.00 $22.329.0x $32.71 $30.59 $28.58 $26.67 $24.87 2.5% $36.86 $34.54 $32.35 $30.28 $28.31
10.0x $37.20 $34.87 $32.66 $30.58 $28.60 3.5% $47.28 $44.49 $41.85 $39.34 $36.9711.0x $41.68 $39.15 $36.75 $34.48 $32.32 4.5% $63.66 $60.11 $56.76 $53.59 $50.58
Term
inal
Multip
le
WACC
FiscalYearEnded
PerpetuityGrowthMethodEBITMultipleMethod
WACC
Grow
thRate
Term
inal
-
DCFofOil/NatGasAssets
34
BaseCase ProjectedYearEnding 20142019USDinMillions 2012 2013 2014 2015 2016 2017 2018 2019 CAGRSales $2,616 $4,710 $3,017 $3,061 $3,694 $4,834 $4,908 0.8%Costofgoods sold (682) (1,237) (789) (801) (967) (1,265) (1,284)Gross Profit 1,934 3,473 2,227 2,260 2,727 3,569 3,624 0.9%SG&A (120) (207) (135) (137) (166) (217) (220)EBITDA 1,814 3,266 2,092 2,122 2,562 3,352 3,403 0.8%EBITDAMargin 69% 69% 69% 69% 69% 69% 69%
Less:DD&A 1,364 2,291 1,520 1,542 1,861 2,436 2,473EBIT 450 975 572 580 700 916 930Less:Taxes (35%) (158) (341) (200) (203) (245) (321) (326)NOPAT 293 634 372 377 455 595 605Plus:Depreciationandamortization 1,364 2,291 1,520 1,542 1,861 2,436 2,473Less:Capital expenditures (1,436) (3,205) (2,800) (2,300) (2,400) (2,400) (2,400)Less:Interest (181) (241) (171) (171) (171) (171) (171)(Increase)/decreaseinworkingcapital 275 (113) (141) 413 468 (163) 436LeveredFreeCashFlow 315 (634) (1,220) (139) 214 298 943
LeveredFreeCashFlow (1,220.4) (138.7) 213.6 297.6 943.1Discountperiod 1.0 2.0 3.0 4.0 5.0WACC 8.0% 8.0% 8.0% 8.0% 8.0%Discountfactor 0.926 0.857 0.794 0.735 0.681PresentvalueofeachLeveredFreeCashFlow (1,130.0) (118.9) 169.6 218.7 641.8
Weightedaveragecostofcapital: 8.0% Weightedaveragecostofcapital: 8.0%Netpresentvalueoffreecashflow (218.8) Netpresentvalueoffreecashflow (218.8)Terminalmultiple 8.0x Terminalmultiple 2.5%Terminalvalue 7,440.9 Terminalvalue 17,575.2Presentvalueoftheterminal value 5,064.2 Presentvalueoftheterminal value 11,961.4
Enterprisevalue 4,845.4 AssetValue 11,742.6Less:Netdebt (2,568.0) Less:Netdebt (2,568.0)Equityvalue 2,277.4 NetAssetValue 9,174.6
Dilutedshares: 1,039 Dilutedshares: 1,039EquityValuePerShare 2.19 NetAssetValuePerShare 8.83
Currentshareprice: 20.82 Currentshareprice: 20.82MarginofSafety: (18.63) MarginofSafety: (11.99)
6.00% 7.00% 8.00% 9.00% 10.00% 6.00% 7.00% 8.00% 9.00% 10.00%6.0x $1.54 $1.36 $1.18 $1.02 $0.86 0.5% $6.47 $6.02 $5.60 $5.19 $4.827.0x $2.21 $2.00 $1.79 $1.60 $1.42 1.5% $7.97 $7.45 $6.96 $6.50 $6.068.0x $2.88 $2.63 $2.40 $2.18 $1.98 2.5% $10.02 $9.41 $8.83 $8.28 $7.779.0x $3.55 $3.27 $3.01 $2.76 $2.53 3.5% $12.98 $12.23 $11.53 $10.86 $10.23
10.0x $4.22 $3.91 $3.62 $3.35 $3.09 4.5% $17.63 $16.67 $15.76 $14.90 $14.09
WACC
FiscalYearEnded
EBITMultipleMethod PerpetuityGrowthMethod
WACC
Term
inal
Multip
le
Term
inal
Grow
thRate
-
CombinedDCF
35
BaseCase ProjectedYearEnding 20142019USDInMillions 2012 2013 2014 2015 2016 2017 2018 2019 CAGRSales $18,010 $20,921 $21,438 $18,888 $22,754 $25,709 $24,289 $27,040 4.8%Costofgoods sold (10,382) (11,840) (11,904) (10,444) (12,690) (14,218) (13,055) (14,727)Gross Profit 7,628 9,081 9,534 8,444 10,065 11,490 11,234 12,313 5.2%SG&A (635) (933) (823) (835) (884) (934) (921) (958)EBITDA 6,993 8,148 8,711 7,609 9,180 10,557 10,313 11,355 5.4%EBITDAMargin 39% 39% 41% 40% 40% 41% 42% 42%
Less:DD&A 1,179 2,797 3,863 3,129 3,340 3,745 4,083 4,189EBIT 5,814 5,351 4,848 4,480 5,841 6,811 6,230 7,166Less:Taxes (35%) (2,035) (1,873) (1,697) (1,568) (2,044) (2,384) (2,180) (2,508)NOPAT 3,779 3,478 3,151 2,912 3,796 4,427 4,049 4,658Plus:Depreciationandamortization 2,797 3,863 3,129 3,340 3,745 4,083 4,189Less:Capital expenditures (5,230) (7,193) (6,500) (5,100) (4,800) (4,800) (4,800)Less:Intersest (518) (630) (849) (840) (782) (670) (655)(Increase)/decreaseinworkingcapital 275 (113) (141) 413 468 (163) 436LeveredFreeCashFlow 802 (922) (1,449) 1,609 3,059 2,499 3,828
LeveredFreeCashFlow (1,449) 1,609 3,059 2,499 3,828Discountperiod 1.0 2.0 3.0 4.0 5.0WACC 8.0% 8.0% 8.0% 8.0% 8.0%Discountfactor 0.926 0.857 0.794 0.735 0.681PresentvalueofeachLeveredFreeCashFlow (1,342)$ 1,379$ 2,428$ 1,837$ 2,605$
Weightedaveragecostofcapital: 8.0% Weightedaveragecostofcapital: 8.0%Netpresentvalueoffreecashflow 6,907.8 Netpresentvalueoffreecashflow 6,907.8Terminalmultiple 8.0x TerminalGrowthRate 2.5%Terminalvalue 57,329.3 Terminalvalue 71,333.9Presentvalueoftheterminal value 39,017.3 Presentvalueoftheterminal value 48,548.6
Enterprisevalue 45,925.2 AssetValue 55,456.5Less:Netdebt (18,970.0) Less:Netdebt (18,970.0)Equityvalue 26,955.2 NetAssetValue 36,486.5
Dilutedshares: 1,039 Dilutedshares: 1,039EquityValuePerShare 25.94 NetAssetValuePerShare 35.12
Currentshareprice: 20.82 Currentshareprice: 20.82MarginofSafety: 5.12 MarginofSafety: 14.30
6.00% 7.00% 8.00% 9.00% 10.00% 6.00% 7.00% 8.00% 9.00% 10.00%6.0x $19.86 $18.16 $16.56 $15.03 $13.59 0.5% $25.82 $23.85 $21.99 $20.22 $18.557.0x $25.01 $23.08 $21.25 $19.52 $17.87 1.5% $31.92 $29.67 $27.54 $25.53 $23.628.0x $30.17 $28.00 $25.94 $24.00 $22.16 2.5% $40.24 $37.61 $35.12 $32.76 $30.539.0x $35.32 $32.91 $30.64 $28.48 $26.44 3.5% $52.25 $49.07 $46.06 $43.21 $40.51
10.0x $40.47 $37.83 $35.33 $32.96 $30.72 4.5% $71.13 $67.08 $63.25 $59.63 $56.19
Term
inal
Multip
le
Term
inal
Grow
thRate
FiscalYearEnded
EBITMultipleMethod PerpetuityGrowthMethod
WACC WACC
-
RelativeValuationAcrossmostmetricsFCXtradesatadiscounttoitspeers.
36
2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017ENYSE:FCX FreeportMcMoRan 21.48 USD 20.66 27.2 10.0 6.4 10.1 7.7 5.9 3.7 3.0 2.5
CopperLSE:ANTO Antofagasta 10.99 GBpUSD 11.14 18.0 14.7 12.1 9.0 6.8 5.5 8.2 6.3 5.9TSX:FM FirstQuantumMinerals 8.17 CADUSD 13.61 19.6 8.0 5.1 24.0 9.1 5.8 6.6 3.8 3.1LSE:KAZ KAZMinerals 1.56 GBpUSD 3.50 NM 17.4 4.8 30.7 8.4 4.1 16.1 5.0 2.2WSE:KGH KGHMPolskaMiedz 6.41 PLNUSD 32.05 9.1 9.5 7.6 8.3 8.3 6.7 5.5 6.6 5.4NYSE:SCCO SouthernCopperCorp 24.20 USD 30.00 20.6 15.1 10.6 13.6 9.9 7.2 13.9 11.7 8.1TSX:LUN LundinMining 2.98 CADUSD 4.15 10.7 9.3 6.2 9.5 9.2 7.1 4.3 4.2 3.7Average(simple) 15.6 12.4 7.7 15.9 8.6 6.1 9.1 6.3 4.7
DiversifiedMiningLSE:AAL AngloAmerican 21.71 GBpUSD 15.48 12.1 9.0 6.6 9.9 7.9 6.0 3.7 3.3 2.6ASX:BHP BHPBilliton 122.48 AUDUSD 23.02 15.9 19.2 14.3 10.6 12.7 9.7 6.7 6.8 6.0LSE:RIO RioTinto 78.61 GBpUSD 42.87 14.6 11.7 10.6 11.9 10.3 8.9 7.2 6.1 5.4NYSE:VALE Vale 28.07 USD 5.87 NM 3.8 3.4 14.4 9.4 6.1 3.2 4.1 NMTSX:TCK.B TeckResources 8.00 CAD 13.86 16.3 12.1 8.1 11.6 8.8 6.7 4.6 3.9 3.4LSE:GLEN Glencore 58.43 GBpUSD 4.52 18.1 11.6 9.4 19.2 13.3 11.3 5.1 4.9 4.4Average(simple) 15.4 11.2 8.7 12.9 10.4 8.1 5.1 4.9 4.4
Exploration&ProductionNYSE:APC AnadarkoPetroleum 47.76 USD 93.30 NM 155.0 43.4 NM 39.9 19.7 10.5 7.5 6.9NYSE:APA Apache 24.99 USD 66.96 NM 93.0 30.2 NM 30.0 21.3 5.8 4.6 4.6NYSE:HES Hess 21.62 USD 75.26 NM NM 90.2 NM 174.8 31.7 6.8 4.9 4.8NYSE:NBL NobleEnergy 19.59 USD 49.90 122.9 66.7 31.6 46.0 32.5 18.7 8.5 7.0 6.5NYSE:OXY Occidental 61.40 USD 79.72 67.7 26.4 24.6 55.9 27.5 15.2 11.2 8.1 7.4Average(simple) 95.3 85.3 44.0 50.9 60.9 21.3 8.6 6.4 6.0
NameTickerPE EV/EBIT CFPSShare
PriceCurrencyMktCap
($bn)
FCXtradesatadiscounttobothcopperpeersanddiversifiedminingfirms. FCStradesatasignificantdiscounttoE&Pswithsimilarreserveprofiles.
-
Appendix
-
AppendixA:CommodityPriceDeck
38
Commoditypricedeckbasedonfutures,CreditSuisseandBankofAmericaEstimates.
CommodityForecastBear Base Bull Bear Base Bull Bear Base Bull Bear Base Bull Bear Base Bull
Copper $perLB 2.15 2.5 3.22 2.3 2.65 3.5 2.65 2.95 4 2.6 2.95 4 2.95 3.27 4Gold $perOz 1,000 1,200 1,550 1,000 1,250 1,650 950 1,250 1,500 900 1,250 1,500 950 1,300 1,500WTI $perbbl 45 57 76 52 67 85 53 72 94 63 78 95 64 81 97Molybdnum $perLB 7 10 14 7 11 15 9 11 16 8 12 16 8 12 16Cobalt $perLB 9 14 17 9 13 15 10 13 16 10 13 16 11 13 16
FY2015 FY2016 FY2017 FY2018 FY2019
-
AppendixB:PossiblePEPartners
39
Company Fund Vintage FundSize CapitalCalled(%) TotalValue Company Fund Vintage Target ExpectedCompletionAPO ApolloNaturalResources 2012 1,300 45% 568 APO EnergyCreditOpps 2015 600 Apr15BX EnergyPartners 2011 2,500 51% 1875 NaturalResourceII 2016 2,500 Jun16
EnergyII 2003 1,100 96% 212 EnergyPartnersI 2015 4,500 Jan15EnergyIII 2005 3,800 100% 1527 GSODistressedEnergy 2015 3,000 Dec15EnergyIV 2008 5,980 93% 3322 InternationalEnergyII 2015 2,500 Jan15NGPX 2012 3,586 73% 3037 PowerII 215 1,250 Sep15InterationalEnergy 2013 1,780 11% 147 NGPXI 2015 5,300 Jan15KKRNaturalResources 2010 1,250 81% 629 EnergyMezzII 2015 2,500 Jun15EnergyandIncome 2013 2,000 18% 359 KKR SpecialSitsII 2016 2,750 Mar16KKRGlobalEnergy Various 1,028 12% 76 OAK PowerOppsIV 2015 1,000 Mar15PowerOppsI 2000 454 85% 0PowerOppsII 2005 1,020 56% 75HighstarCapital 2007 3,500 112% 3769PowerOppsIII 2010 1,040 50% 550
Source:Prequin,CompanyData,CreditSuisseEstimates
OAK
PEFocusedEnergyFundsAlreadyRaised PEEnergyFocusedFundsBeingRaised
CG
BX
CG
KKR
AlthoughlargeamountsofcapitalhavebeenraisedbyenergyfocusedPEfirms,verylittlehasactuallybeendeployed.