Freeport-McMoRan

Freeport-McMoRan's second-quarter adjusted net profit after tax of $1.1 billion, or $0.74 per share, was up 37% year over year. The booming copper price and strong gold price more than offset lower sales volumes of each metal due to lower production at Grasberg.

Why it matters: Even so, Grasberg's copper and gold production was higher than in the first quarter and is likely to continue recovering after the tragic mud rush incident in September 2025. We expect the mine to return to full capacity in 2029. Management announced minor changes to guidance, and we have increased our 2026 earnings per share forecast by 9%, given that unit cash costs are likely to be lower than we previously estimated.

The bottom line: We maintain our $30 fair value estimate for no-moat Freeport-McMoRan. The shares trade at about twice our intrinsic assessment. We think the market is projecting that the sky-high copper price of about $6.20 per pound and strong gold price of about $4,100 per ounce will continue. However, we are more cautious. Both metals trade materially above both historical levels and industry cost curve support. Based on our estimates of the long-run marginal costs of production, we assume $3.80/pound copper and $2,050/ounce gold midcycle from 2030.

Long view: This drives our expectation of a modest 1% compound annual growth rate for net profit after tax over our five-year forecast period. Lower prices more than offset higher copper and gold volumes and reduced unit costs driven by Grasberg's recovery.

Between the lines: The balance sheet is sound, with net debt around 0.5 times adjusted trailing 12-month EBITDA at the end of June. We expect it to improve further, giving capacity to increase cash returns to shareholders. Yet the quarterly dividend is still $0.15 per share, with the firm undertaking more share buybacks in the quarter. While the value dilution from these repurchases is minor, we would prefer higher dividends over expensive repurchases.

We reduce our fair value estimate to USD 30 per share from USD 31 driven by lower assumed gold prices.

We now assume gold averages around USD 4,400 per ounce from 2026 to 2028 based on the futures curve, down from about USD 4,900. However, our assumed midcycle price remains about USD 2,050 per ounce from 2030. This is based on our estimate of the long run marginal cost of production.

Cuing off the futures curve, our assumed average copper price from 2026 to 2028 remains about USD 6.00 per pound. Based on our estimate of the long run marginal cost of production, we assume a midcycle price of about USD 3.80 per pound from 2030.

We assume molybdenum prices of around USD 32 per pound from 2027 based on spot.

Cash flow is discounted at an 8.8% WACC, based on a long-term capital structure comprising 25% debt and 75% equity. We assume a 10.4% long-term cost of equity, reflecting cyclicality and operating leverage with moderate financial leverage, with the company’s higher exposure to sovereign risk meaning we think shareholders require additional return commensurate with this risk. We apply a 5.5% pretax cost of debt, reflecting what we expect Freeport-McMoRan’s long-term cost of debt will be in a normalized interest-rate environment. We value subsequent free cash flow at a terminal multiple of 6 times, lower than peers such as BHP and Rio Tinto, reflecting the higher cost of capital, in part due to greater exposure to riskier locales such as Indonesia.

We assign a no-moat rating to Freeport-McMoRan. As a commodity producer, Freeport is a price taker. Economic moats in mining require long-life, high-quality deposits that can underpin low operating costs from a capital-efficient operation.

Freeport-McMoRan’s copper unit cash costs, including byproduct credits from gold and molybdenum, of about USD 1.65 per pound for 2025 place it in the middle of the industry cost curve at around the 50th percentile. Negative unit cash costs of USD 0.54 per pound for its Grasberg operations, driven by gold byproduct credits, are more than offset by higher unit cash costs at its other copper mines.

We forecast attributable copper sales to increase at about 1.3 million metric tons midcycle in 2030, from 1.1 million in 2025, driven by Grasberg returning to full production of about 350,000 metric tons and increased production from low-grade stockpiles primarily located in North America utilizing new leaching technologies. We also expect gold volumes to rise to about 610,000 ounces in 2030, from 530,000 in 2025, driven by Grasberg. We think this will result in reduced unit cash costs then and some improvement in its position on the industry cost curve, to around the 45th percentile midcycle from 2030.

Reserve life is about 25 years at Dec. 31, 2025. While reserve life for Grasberg is shorter and only extends to 2041, consistent with the expiration date of its current mining license, we think it is highly likely that it receives an extension to its mining license in return for selling down 12% of Grasberg to an Indonesian state-owned entity effective in 2041. Freeport has additional resources exclusive of reserves equating to about three decades of production.

The company averaged returns on invested capital of about 14% in the five years and 9% in the 10 years ended Dec. 31, 2025. We estimate that it will generate a ROIC midcycle in 2030 slightly above its weighted average cost of capital, or WACC, of about 9%. Despite operating costs modestly below the industry average, and long reserve life, forecast returns only slightly above its WACC support our qualitative no-moat assessment. The modestly below-average operating costs are insufficient to generate excess returns, given the high capital intensity of Freeport’s operations.

In addition, Freeport’s operating cost advantage is limited to the Grasberg mine, which is very low on the industry cost curve. This is driven by significant gold byproduct credits. However, Grasberg is subject to significant geopolitical risk. This includes numerous violent protests at the mine, sabotage of mining infrastructure, deaths from attacks by Papuan separatists, and the Indonesian government constantly changing the rules. In 2017 the government changed the law to, among other things, require at least 51% domestic ownership of Indonesian mines. Freeport obtained an extension of mining rights to 2031 in return for its ownership being reduced to 49% from 91% previously. It also agreed to build a smelter and precious metals refinery at Gresik in Indonesia at a cost of USD 4 billion in return for an additional extension of mining rights to 2041.

Further extensions of its mining license beyond 2041 are contingent on it agreeing to sell another 12% in Grasberg to an Indonesian state-owned entity effective in 2041 at the then book value, which is likely to be materially below the then fair value of this stake. More recently, the Indonesian government reneged on a deal to lower export duties on copper concentrate while the smelter ramps up to full capacity.

Former Rio Tinto CEO Jean-Sébastien Jacques once described Grasberg as a world-class deposit that might not be a world-class mining investment. As such, due to the significant risk of material value destruction from geopolitical risk, we don’t deem Grasberg moatworthy.

Its South American and North American mines have unit cash costs that on average place them well within the fourth quartile of the industry cost curve (in the 85th and 95th percentiles, respectively). As a result, we don’t deem them moatworthy either.

In calculating ROIC, we have not added back to invested capital roughly USD 20 billion in asset and intangibles write-downs taken on the now sold oil and gas business over the past decade. While this diversification was a mistake, we think it is unlikely to be repeated and note that there have been minimal write-downs in its core copper business.

Given reserves grades similar to current grades, all things equal, Freeport is unlikely to materially move down the industry cost curve as its existing reserves are mined. Grades for its resources (exclusive of reserves) are also similar to current grades, except for Grasberg, whose resource grades are materially below its existing and reserve grades. Assuming it converts resources to reserves to fully offset reserve depletion through production in future, we don’t think the potential conversion of these resources to reserves will be sufficient to move Freeport’s unit cash costs into the lowest quartile of the cost curve.

In terms of commodity prices, our midcycle price assumptions for copper and gold are about USD 3.80 per pound and USD 2,050 per ounce, respectively, from 2030 based on our estimate of the marginal costs of production.

Utilization of new leaching technologies to exploit previously uneconomic tailings could increase production by about 140,000 metric tons at much lower capital intensity than building a new mine from scratch.

Grasberg is a world-class copper deposit with unit cash costs among the lowest in the industry, helped by substantial gold byproduct credits.

Incremental copper demand from renewables, electric vehicles, data centers, and investment in the electricity grid could support higher long-term or midcycle copper prices than in our base-case assumption.

Freeport sits close to the middle of the copper cost curve, making it more leveraged to movements in copper and, to a lesser extent, gold prices compared with its lower-cost competitors.

Headlined by the Grasberg mine in Indonesia, Freeport has higher sovereign risk than many of its competitors.

China's fixed-asset investment boom has been the biggest driver of copper demand growth during the past two decades. A shift toward consumption-driven growth entails a less copper-intensive Chinese economy.