My Top Mining Pick For The Next 5 Years - Freeport-McMoRan Inc ... - Seeking Alpha

Freeport McMoRan (NYSE: FCX) has made significant headway recently, that despite its share price recovery, make it a continued strong investment. As we will see throughout this article, the company's strong financials, supported by recovering copper markets, combined with the company's growth potential, especially after its recent Grasberg Mine negotiations, make the company a strong investment going forward and my top mining pick for the next five years.

Freeport McMoRan - Freeport McMoRan

Market Recovery Supports Freeport's Financials

Freeport McMoran operates primarily in the copper market, as one of the largest copper producers in the world. The market has strong recovery prospects going forward. There exists significant positive demand for copper across the world as manufacturing sectors perform well and copper prices have recovered by almost 50% in the past year.

Copper is fundamental to the manufacturing of almost everything required to live our current standard of living, and as the world becomes increasingly industrialized, so too does demand for copper increase. On top of this, major supply side issues remain with no new major projects on the horizon and low existing stocks.

Current estimates show that 5 million metric tons of new projects will be required over the next decade, something that won't be found in existing projects, driving prices up. This means a continued increase in cash flow for Freeport McMoRan as it continues to maintain its copper production.

Copper Market Growth - Freeport McMoRan Investor Presentation

One potential major source of copper demand I've barely touched on that is becoming more significant is the new and rapidly growing field of electric vehicles, a field that seeks to combat climate pollution from vehicles. Rapid growth is forecast from the next decade which should increase additional annual copper usage by more than 1 million metric tons by 2025, something that will require several world class copper projects to makeup for.

This doesn’t even count the additional copper required for EV charging infrastructure and should help support copper prices in the coming years. and has supported Freeport McMoran's financials recently.

Cash Flow Generation - Freeport McMoRan Investor Presentation

In 3Q 2017, Freeport McMoRan had strong results from its global operations with notable production improvement at one of the company’s largest mines in Grasberg. One of the company’s important 2017 goals is to manage long-term worker rights here which should help significantly increase the reliability of the company’s production from its Grasberg mine and cash flow.

At the same time, Freeport McMoRan is focused on its deleveraging plan which will significantly improve its financials. The company is deleveraging itself from $20.1 billion of debt at year-end 2015 to a more than 50% decrease to less than $10 billion in debt by the end of 3Q 2017. The company anticipates decreasing debt further to roughly $5 billion by year-end 2018.

These debt improvements mean that not only has Freeport McMoRan's bankruptcy risk decreased significantly, but the company saves on interest expenses to boost up its cash flow generation. Freeport McMoRan should generate an astounding roughly $4 billion in free cash flow for 2017. Out of that roughly $1.4 billion will be capex leaving the company with $2.6 billion in net cash flow.

That means the company will exit 2017 with a market cap of net cash flow ratio of less than 10, pretty amazing for a company some thought was at risk for bankruptcy less than two years ago. Freeport McMoRan's debt reductions combined with an improving copper market are two of the things that make the company one of my favorite investments going forward.

Freeport McMoRan New Growth Potential

Freeport McMoRan has been boosted by a recovering market and the company has significantly improved its finances, particularly in terms of its reduced debt and cash flow generation. However, what really supports making Freeport McMoRan my top mining pick for the next five years is the company’s growth potential.

Freeport McMoRan Growth Potential - Freeport McMoRan Investor Presentation

Freeport McMoRan has 60 billion pounds of 2P reserves at $2.00 copper which increases to 137 billion pounds of mineralized material at $2.20 contained copper. Given current copper prices of $3.25 per pound, there are likely noticeably more reserves. Overall, however, taking just these 137 billion pounds of reserves, the company has almost half a trillion dollars worth of reserves.

That reserve potential could expand significantly given the company’s potential and new massive projects such as the Timok Lower Zone that it has yet to undergo significant exploration on.

Freeport McMoRan Lone Star Project - Freeport McMoRan Investor Presentation

A significant portion of the company’s potential reserves is the company’s Lone Star Oxide Project. The project has a current resource estimate of 4 billion pounds of copper which it plans to split up into 200 million pounds of copper per year over 20 years. The project has a NPV at 8% of $1.2 billion at $3.5 copper, or roughly 7-8% above current prices. That is a significant value to Freeport McMoRan.

At the same time, the company utilizes existing infrastructure and has obtained regulatory permits. The company has minimal capital costs of $0.85 billion for the project and should start first production in just 3 years. On top of this the project provides access to a large sulfide deposit with potentially 60+ billion pounds of copper. That could provide the company a significant boost in cash flow.

Freeport McMoRan El Abra Sulfide Project - Freeport McMoRan Investor Presentation

Past this, Freeport McMoRan also has the slightly longer term El Abra Sulfide project that will have a 6-8 year lead time. The project will use a similar ramp-up to the Cerro Verde expansion, something that Freeport McMoRan already has experience with. This will result in estimated production of roughly 0.75 billion pounds a year, an incredibly significant increase.

That means this project alone could increase Freeport McMoRan’s overall copper production by almost 20%. That means a significant increase in cash flow for Freeport McMoRan and rewards for shareholders.

Freeport McMoRan Grasberg Project

A significant thorn point in Freeport McMoRan's side has been the company's Grasberg Mine, one of its largest sources of income, in Indonesia. There has been mounting public anger in Indonesia over foreign ownership of what is one of the country's most valuable assets and that along with labor negotiations led to plenty of issues.

Freeport McMoRan Grasberg Project - Freeport McMoRan Investor Presentation

The mine’s importance to Freeport McMoRan means that the company takes a large hit anytime the mines stability is hurt. However, Freeport McMoRan is currently working on a contract that will allow the company to keep operating the mine until 2041. This involves Freeport McMoRan giving the Indonesian government a 51% stake in the mine, solving the foreign ownership issue.

Freeport McMoRan is planning to commence underground block cave mining at Grasberg in 2019 to get access to almost $100 billion of reserves located underground. This deal, which should keep the mine that contributes half of Freeport McMoRan's cash flow running until 2041, means great things for Freeport McMoRan's stability going forward.

More importantly, Freeport McMoRan will be divesting part of its stake to the Indonesian government at fair market value. That means that the company will likely earn several billion in payout from selling this stake which will allow the company to reward shareholders with a onetime dividend or invest in further growth. This is in stark contrast to previous negotiations where prices differed wildly.

Overall, as investors, we would obviously prefer it if Freeport McMoRan could continue to hold on to a large stake in this valuable project. However, the Indonesian government seemed adamant on preventing that. Instead Freeport McMoRan has negotiated a deal where it will continue to earn significant cash flow from the mine while at the same time getting a several billion dollar payday from selling its stake at fair market value to the Indonesian government.

While not our preferred outcome, this means great things for the stability of Freeport McMoRan's cash flow going forward and is something that is great to see.

Conclusion

Freeport McMoRan had a difficult time and watched its stock price drop to a low of less than $4 per share in early-2016. However, since then the company has worked on aggressively improving its position. The company anticipates that by next year it will decrease its debt by almost 75% increasing the company’s financial strength and decreasing the company’s interest expenses.

Freeport McMoRan has strong cash flow and a number of strong projects that should increase its cash flow going forward. The company has managed to re-stabilize its Grasberg mine project which should provide it with continued cash flow going forward. At the same time, the company’s Lone Star Oxide and El Abra Sulfide projects could increase its production over the next 6-8 years.

As a result these strong financials and growth potential for Freeport McMoRan make it a solid investment.

Disclosure: I am/we are long FCX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.