After years of deleveraging, Freeport-McMoRan (NYSE: FCX) were finally able to turn over a new leaf in 2021 with their returns to shareholders set to increase in 2022, as my previous article discussed. A trace Analysis is provided in this article which examines their subsequently released results for the fourth quarter of 2021 and also updates the outlook for 2022, which now sees them saying goodbye to debt and hello to higher yields for shareholders.
Executive summary and ratings
Since many readers are likely short on time, the table below provides a very brief summary and scores for the main criteria assessed. This Google document provides a list of all my equivalent grades as well as more information regarding my grading system. The following section provides a detailed analysis for readers wishing to delve deeper into their situation.
*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to use free cash flow as it provides the strictest criteria and also best captures the true impact on their financial situation.
After seeing their operating cash flow increase in the first nine months of 2021, high copper prices continued through the fourth quarter, ending the year at $7.715 billion, nearly equaling to their total of $8.362 billion over the period 2018-2020. Unsurprisingly, this has seen their free cash flow reach a whopping $5.129 billion in 2021, which has helped transform their financial situation discussed later and, by extension, sees them turn over a new leaf which leads to higher returns. high for shareholders, as shown in the slide below.
While copper prices, and therefore their free cash flow, will naturally continue to fluctuate throughout 2022 and beyond, it can be seen that management has provided indicative guidance for approximately $3.3 billion in return. to shareholders, which equates to a shareholder return of approximately 5% against their current market capitalization of approximately $68 billion. While this would already be significant returns for shareholders, it looks like higher returns are likely to be forthcoming later in 2022 as they say goodbye to their debt and therefore increase cash flow share. available for their shareholders.
When looking at their operating cash flow forecast for 2022, it is around $9 billion when copper prices are at $4.00/lb and around $10.50 billion when ‘They’re at $4.50/lb, according to slide twenty-two of their Q4 2021 earnings presentation. Given that copper prices have often traded near or above the latter through 2022, it currently seems reasonable to base expectations for 2022 on operating cash flow of around $10 billion, which should leave a huge free cash flow of $6.9 billion after subtracting their accompanying forecast. for $3.1 billion in capital expenditures. Given that it’s essentially the equivalent of about 10% of their market capitalization, they could easily deliver a high single-digit return to shareholders on the current cost while still retaining a few billion dollars of cash flow. available cash.
Although they are very positive for their future, there is an additional aspect to consider before continuing this analysis, which concerns Chile and its possible upcoming nationalization of the copper and lithium mining industries. Fortunately, their El Abra mine in Chile contributed just 5% of their production in 2021, according to the Q4 2021 earnings announcement. Also, as Bloomberg explains, this legislation still has to go through various other hurdles, such as a referendum that makes the proposal unlikely, but nonetheless, it highlights a risk looming on the horizon for investors to consider with a significant portion of their copper production in the political framework . countries at risk, such as Peru and Indonesia.
Following the strong end to their cash performance in 2021, it was natural to see their net debt decline even further to end the year at $1.382 billion and therefore down from its level of $1.993 billion at the previous analysis after the third quarter. In addition to representing a massive improvement from its $6.054 billion level at the end of 2020, it is now so low that their net debt is all but guaranteed to be completely eliminated by Q1 2022 given their cash flow. available cash estimated at $6.9. b for the full year. Realistically, that leaves no choice but to push their shareholders’ returns high, because there’s only so long management can justify building up their net cash position, and they showed no indication of wanting to pursue major acquisitions during their recent quarterly earnings conference calls.
Since they are basically about to say goodbye to their debt, it would be rather redundant to reevaluate their leverage in detail as it will soon cease to exist, but if new readers are interested, please refer to my article previously linked. Meanwhile, their cash balance of $8.068 billion is virtually unchanged from its previous level of $7.672 billion and so, by extension, their liquidity also remains virtually unchanged, which also makes it rather redundant to reassess in detail. without material change since the publication of the previous link. article. Fortunately, their current ratio of 2.52 and cash ratio of 1.37 both indicate that a strong rating is undeniably warranted.
One of the enemies of shareholder returns is debt and its servicing burden, although fortunately in this situation they are expected to say goodbye to their debt any day now. Since there are no other uses for their immense free cash flow, that means saying hello to higher shareholder returns that could easily provide a high single-digit shareholder return on the current cost for 2022. Unsurprisingly, I think continuing my buy rating is appropriate, although the risk of possible nationalization in Chile looming on the horizon needs to be watched closely.
Notes: Unless otherwise stated, all figures in this article are taken from Freeport-McMoRan’s SEC Filingsall calculated figures were performed by the author.