Freeport-McMoRan share (NYSE: FCX) has risen an astonishing 6x from its March 2020 lows and at the current price of $ 30, we think the stock is slightly overvalued. FCX stock fell from $ 5 to $ 30 from its recent low against the S&P 500, which was up 70% from its March low. The action has been able to beat the market as a whole in recent months, with gold prices rising dramatically and remaining high during the ongoing pandemic, while copper prices, which fell after the The coronavirus epidemic, have also recovered at a significant rate with stimulus measures announced by various economies. However, gold prices have remained volatile recently and, in fact, have risen from over $ 2,000 / ounce in August 2020 to around $ 1,860 / ounce in January 2021. Although FCX’s revenue will see a sharp rise in 2021 Due to higher production from Indonesia, gold price volatility could affect earlier projections on FCX revenue growth. We believe the market has been too enthusiastic and that FCX stock has potential downward of around 10% from its current level. Our dashboard What factors caused the Freeport-McMoRan stock to change 60% between 2017 and now? provides the key figures of our thinking.
Part of the decline in the stock price between 2017 and 2019 is justified by Freeport-McMoRan’s 12% drop in revenue during this period, while the company reported losses in 2019 after making a profit in 2017 and 2018. FCX revenue declined mainly in 2019 and reached even below its 2017 levels, with gold and copper production falling sharply in 2019 due to negligible production from the mine Indonesian leader of Grasberg, who is undergoing a transition from an open pit to an underground mine. During this period, the P / S multiple fell from 1.7x in 2017 to 1.3x in 2019, as the share price also experienced a significant decline as well as a decline in earnings per share. While FCX’s P / S multiple declined further in early 2020 due to the pandemic, it has recovered above recent historic levels and currently stands at over 3x. We believe the company’s P / S multiple may decline in the near term given the volatility of commodity prices.
The global spread of the coronavirus and lockdowns in various cities, which have affected industrial and economic activity, have caused copper prices to drop sharply as gold prices have recovered. In addition, production has slowed down. This was reflected in the company’s Q1 and Q2 2020 results where FCX turnover decreased by 26% and 14% respectively (on an annual basis). FCX saw some recovery in the third quarter of 2020 when revenue rose 22% due to increased copper shipments and higher gold and copper prices.
The gradual lifting of lockdowns has led to a strong recovery in copper prices in recent months. Copper prices appear to have risen, but have peaked as of now, having risen significantly from $ 2.10 / pound in March 2020 to nearly $ 3.70 / pound in January 2021. Additionally, the rally gold also seems to have stopped after the price. rose from $ 1,500 / ounce at the start of 2020 to over $ 1,950 / ounce in September 2020. In fact, with the opening of the economies, the price of gold has fallen in recent weeks to around $ 1,860 / once currently. The price of gold is likely to remain volatile in the near term with a slight downward bias as locks are gradually lifted and investor sentiment regarding the economic recovery has improved. The actual movement of commodity prices and its timing depend on the wider containment of the spread of the coronavirus. Our dashboard Trends in Covid-19 cases in the United States provides insight into the spread of the pandemic in the United States and contrasts with trends in Brazil and Russia.
Although the company’s production, shipments and revenue are expected to increase sharply in 2021 with the mine’s transition to Grasberg nearing completion, it has already been incorporated into the rally in recent months and is unlikely to be lead to a major increase in the share price from here. Expectations of higher revenues and profits (due to a higher volume of sales) will likely be offset by a decline in the P / S multiple, due to the spike in the price of copper and the volatility of copper prices. gold. This put FCX at risk of seeing its share price drop. We believe the stock is already overvalued and should experience a decline of almost 10% in the near term. According to Trefis, FCX valuation equals $ 28 per share.
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