fcx research (2-11-2015)

DateWritten:2/11/2015

Page1of10Researchby:WilliamM.Thomson EMail:[email protected]

FreeportMcMoRan:AReviewofManagementandCompanyOutlookiInvestmentThesisFreeportMcMoRan(FCX)isthelargestpubliclytradedcopperminerintheworld,withmanagementthathasasignificantrecordofdevelopingindustryleadingassets.iiThefocusoncopperandtherecentadditionsofhighqualityexploratoryoilandnaturalgasassetssetsthefirmupforlongtermsuccessregardlessofshorttermcommoditypriceswings.Althoughconcernsaboutthepriceofcopper/oilandmanagementjudgment,resultingfromtheuntimelyMcMoRanandPlainsacquisitionsareconcernsworthyofconsideration,theyaremorenoisethansignalforthelongterminvestor.Lookingatseveraldifferentvaluationapproaches,andinlightofthequalitativefactorsdiscussedbelow,FCXappearstohaveanintrinsicvaluepersharenorthof$30,avalueatleast63%abovewherethecompanyiscurrentlytrading.Thisisnotvaluethatwillberealizedquickly,barringadramaticreversalofcommodityprices,butitwillaccrueconsistentlytotheprudentinvestorasFCXmanagementtakesthemanysmallstepsnecessarytoimprovethebalancesheetandgrowownershipearningsManagementACutabovetheRestFCXhasalonghistoryinthenaturalresourcesindustry;thecompanywasfoundedin1912andwasapioneerindomesticsulfurmining.Thecompanyscurrentform,asadiversifiednaturalresourcescompany,harkensbacktoitsearlydaysundertheleadershipofcurrentChairmanJamesMoffett,whoengineeredthefirstmergerbetweenMcMoRanOilandGasandFreeportMineralsCompanyin1981.Sincethenthecompanyhaschangedshapetosuittheneedsofitscurrentportfolioofprojects,divestingandacquiringassetsopportunisticallytohelpfinancelongtermexpansion.Thispractice,althoughattimessaddlingthecompanywithsignificantdebt,hasprovenproductiveforshareholders.OverthelasttwentyfiveyearsundertheguidanceofMr.Moffett,thecompanyhasgrownthetangiblebookvaluepersharefrom$0.54tothecurrent$17.60ashare,aCAGRof15.58%.Althoughtheseresultsareexcellent,itisworthnotingthatthecompanyhassufferedlongspellsinwhichithaslaboredundertheburdenofheavydebtandweakcommodityprices,mostnotablyduringthe1990s.Despitethedifficulttimesandvolatility,FCXmanagementhasgrownthefirm'stangiblebookvaluesignificantlyandlargelythroughprudentlongtermcapitalallocation.Ifweassumethatcapitalallocationdisciplineischaracterizedbyinvestmentdecisionsbeingmadeirrespectiveofcurrentcashflowfromoperations(whichistosayinvestmentinprojectsmaderegardlessofcurrentlevelsofprofitability),thenFCXappearstobeaverydisciplinedcapitalallocator.OnemeasureofthiscanbeseenbygraphingthecorrelationbetweenoperatingandinvestingcashflowsagainsttheCashFlowReturnonInvestment(CFROI).Ifafirmisadisciplinedcapitalallocator,operatingcashflowsandinvestingcashflowsshouldnotcorrelatehighly,asacorrelationwouldsuggestinvestmentonlywhenfundsarefreelyavailable.Ontheotherhand,uncorrelatedinvestmentandoperationscashflowsare

Forinvestorswitha3to5yeartimehorizonandawillingnesstotolerateneartermvolatility,FCXisacompanytograduallybuildapositioninover

thenext12months.Thecurrentmacroenvironmentandanilltimedmergerhaveresultedinadisconnectbetweenthepriceofthestockandthe

companys intrinsicvalue.



suggestiveofinvestmentmadeirrespectiveofthecurrentstateofthebusinesswithafocusonlongterminvestmentreturn.

Source:CreditSuisse

Asthechartabovesuggests,overthelasttwentyyearsFCXmanagementhasestablishedatrackrecordofdisciplinedandefficientcapitalallocationthathasgeneratedsomeofthebestcashflowreturnsoninvestedcapitalamongcopperanddiversifiedminingpeers.AlthoughtherecentacquisitionofPlainsExplorationandMcMoRanExplorationmaythreatenthisrecordofaccomplishment,theresultsareveryimpressive.Thesuccessfultrackrecordraisesthequestion:WhathappenedwiththeacquisitionofPlainsExplorationandMcMoRanExploration?Thereisnosimpleanswertothisquestion;inhindsightitlookslikeitwasanerrorinjudgment,butonlytimewilltell.Themoreimportantquestionforthecurrentprospectiveinvestoris:howsevereisthebalancesheetsituationduetotheacquisitionandwhatistheoutlookforthecompanygoingforwardgivenrecentevents?DebtConcernsandOperationalOverviewLookingatthelatestfinancialsthecompanyisclearlynotintheexceptionalpositionitwasafewyearsago,whendebtbottomedoutat$3.5billion.TheacquisitionofPlainsExplorationandMcMoRanExplorationcamewithsignificantdebtandhasindeedweakenedthebalancesheet.Thehistoryofthefirmwouldsuggestthatmanagementiscapableofskillfullydealingwiththecurrenthighdebtlevels,though;throughoutmuchofthe1990sandearly2000sdebtwasatsimilarorgreaterlevels,whenviewedasapercentageoftotalcapital.Returnoncapitalwasnegativelyimpactedduringthistimebutmanagementwasneverthelessabletoproducepositivefreecashflowforallbut6ofthelast24years(thislastyear,2014,beingthe6thyear)generallywithalessdiverseportfolioofassets(formuchofthe90stheonlysignificantassetFCXpossessedwasGrasberg)andatmuchlowercopperpricesanddemandlevels.



Inshort,thedebtismanageable,andthisisanexcellentmanagementteamforsuchatask.Thatbeingsaid,thedebtwillabsorbsignificantresourcesintheneartermthatcouldprobablyhavebeenputtobetteruse,especiallyifcopperpricesremainlow.Opportunisticinvestmentsareunlikelygivencurrentdebtlevels.Thusfarmanagementhashandledthedebtlevelswell,pushingoutmaturitiesto2017andwiththebulkofthelongtermdebtmaturingafter2019(inFY2014EBITcoverageofinterestwas7.6x,whichisafarmoreacceptablelevelthanin,say,2000or1999,whenEBITcoverageofinterestwasonly2.3xand2.9x).Additionally,thedebtisallfixedrate,withaweightedaverageinterestrateof4.2%.Buildingcoppermines,whicharebothgeologicallyriskyandinfrastructureheavy,isanexpensiveendeavor,andFCXcomparableshaveanaveragedebttototalcapitalratioof35.65%.AlthoughFCXhasmoredebtasapercentageoftotalcapitalthanitspeers,thecompanysFY2014totaldebttocapitalratiowasonlyslightlyworseat39.05%,andmostcomparableshavenotreportedFY2014numbersyet.Theeasewithwhichmanagementhandlesdecreasingthecurrentdebtlevelisgoingtodependsignificantlyontwovariables:copperprice,andcopperproductionlevels.Lookingatproductionlevels,thereisreasontobeoptimistic.Forstarters,FCXknowshowtorunamineeffectivelyandefficiently;thedifferencebetweenrevenuegeneratedatpeakcopperpricesin2011($3.86perpound)andyearend2014revenue(atcopperpricesof$3.09)issignificantlylessthanthenear20%declineinthepriceofcoppermightsuggest,withonlyaminorincreaseinoverallcopperproduction.Inaddition,themajorityoftherevenuedifferenceisattributabletooperationsatasinglemine,Grasberg.

OperationsatGrasbergarecertainlyoff;thisisanunfortunatefeatureofworkinginthedevelopingworld,andanissuewewilladdressatgreaterlengthshortly,butthekeypointisthatdespitethepriceofcopperbeingdown20%fromitsrecentpeak,revenueonaminebyminebasisisonlyoffslightly.Furtherdowntheincomestatementtheimpactofdecreasingcopperpricesbeginstobefelt,butFCXstillmaintainsanoperationaledgeonitscompetitionwithsuperiorGrossandEBITDAmargins.FY2014GrossMarginswere44.5%vs.comparablesmeanof30.1%,andEBITDAMarginswere40.6%vs.

comparablesmeanof26.3%.Besidesoperationalefficiency,managementhasalsodemonstrateditscapitalallocationdisciplineagainthisyearwithdecisionsregardingCapEx.AlthoughthemajorityofWallStreetanalystsappeardisappointedthatcutsinCapExwherenotmoresignificant,FCXmanagementhaswiselydecidedtocontinuecopperminedevelopmentandexpansionprojectsthatwillgeneratesignificantcashflowgainswithinthenexttwoyears,andresultinoverallcopperproductiongrowthof25%.ThetwoprojectsofnotearemillexpansionsatCerroVerdeandtheMorencis.MorencisMilldevelopmentisalmostcompleteandshouldbeoperatingatfullcapacity(anadditional225mlbs.ofcopperperyear)bytheendof1Q2015.MilldevelopmentatCerrroVerdewillbecompletedbytheendof2015(atafurthercostof$1.5billion)andwillincreaseproductionatthemineby600mlbs.ofcopperayear.Thecombinedyearlyadditionfrombothexpansionswillbe825mlbs.of

Revenues FY2011 FY2014 Difference

North American Operations $5,629 $5,616 -0.23%

South American Operations $3,724 $3,532 -5.16%

Indonesia $5,046 $3,071 -39.14%

Africa $1,289 $1,558 20.87%

Total Copper Revenue $15,688 $13,777 -12.18%

Copper Price Realized (Per Pound)

$3.86 $3.09 -19.95%

Total Copper Production (Millions of Pounds)

2,981 3,179 6.64%



copper.Althoughrampuptofullcapacitywilltaketime,bothprojectsrepresentasignificantincreaseinproductionthatwillhavealastingimpactonthebottomlineforyearstocome.

Althoughcapexforcopperoperationswasnotcutsignificantlyfor2015,oil/natgascapexwasreducedby34%whencomparedtomanagementprojectionsinOctoberof2014.Complicatingthedevelopmentoftheoil/natgasbusinessisthefactthatFCXmanagementwantstokeeptheoil/natgasoperationsseparatefromminingoperations,aswellasselffunding.Thisplacessignificantconstraintsonthedivisionsprojectopportunitysetatloweroilprices.Itisunlikelythat2015willbeabanneryearforFCXoil/natgasoperations.RealizedrevenueperBOEinthe4thQtrof2014was$59.95abarrel,wellabovethepriceofabarrelofoil(atleastuntiltherecentpricesurge),butstillabovecurrentprices.Atthatlevel,FCXgeneratedapproximately$38.02abarrelinoperatingmargin.Duetoassetimpairmentsandgoodwillwritedownsyearendoil/gasoperationsresultedin$4.47billiondollarloss.Absenttheimpairmentsandwritedowns,existingoperationsgeneratedoperatingincomeof$975million.$975millionisenoughtocoveroil/natgasrelatedinterestexpensesof$241millionbutarewellshortofcreatingtheselffinancingbusinessmanagementhadhopedforbecauseofhighcapex;oil/natgascapexin2014was$3.205billion.Itisnotalldoomandgloomthough;thecompanyhashadpositiveresultsfromitsInboardLowerTertiary/Cretaceousplay(Highlander),whichislocatedonshoreinLouisiana.ThisisafascinatingprojectthatMr.Moffetthaslongbeeninvolvedin.Thisisauniquefindandthesuccessfulwellwasdrilledtoadepthof29,400feet;forcomparison,theaveragenaturalgaswellisonlydrilledtoadepthofaround6,500feet,sothisprojectisbreakingnewground.Managementexpectsfirstproductionfromthefindtobegininthe1stQtr2015.FCXhasalsohadpositiveresultsfromitsexploratoryanddevelopmentworkinDeepwaterGoMpropertiesincludingincreasedresourcepotentialatHolsteinDeep(positivedrillingresultsindicatereservepotentialofmorethan250MMBOEvs.thepreviousprojectionof140MMBOE)andprogressonseveraldevelopmentstageandearlystageprojects.ManagementhasalsoindicatedthatitwillpursueJVstofinancefurtherdevelopmentofitsportfolioofDeepwaterGoMprojects.Detailsremainlimited,andappetiteforsuchprojectsatcurrentoilpricesisdifficulttogauge,butsuchventurescanbeandoftenhavebeenexecutedprofitablybysmalleroil/natgasfirms.Currentmanagementisalsoveryfamiliarwiththisapproachtoassetdevelopment,andhasutilizeditfrequentlythroughoutthecompanyshistory.TheonlyreadilyavailableandrecentexampleofsuchaJVthatFCXhasengagedinistheLuciusTrussSparoperationsinDeepwaterGoMwhichFreeportMcMoRanOilandGasacquiredrightstoinSeptemberof2009.Productionattherigcommencedin

$3.86 $3.09 $2.69Cerro Verde Mill Expansion 600,000,000 $2,316,000,000 $1,854,000,000 $1,614,000,000Morencis Mill Expansion 225,000,000 $868,500,000 $695,250,000 $605,250,000Yearly Addition 825,000,000 $3,184,500,000 $2,549,250,000 $2,219,250,0002014 Production Cost - SA Ops - $1.71, NA Ops - $1.74

$1,417,500,000 $1,417,500,000 $1,417,500,000

Potential EBIT from Expansion

$1,767,000,000 $1,131,750,000 $801,750,000

Expansion Cost 9,200,000,000$ 9,200,000,000$ 9,200,000,000$ Recovery Years 5.21 Years 8.13 Years 11.47 Years

Realized Copper Price

Note: $3.1 billion of the $4.6 billion Cerro Verde Mill expansion has been incurred as of year ended 2014, and the Morenci mill expansion has been completed, expected to reach full rates by 1Q2015.

Additional Production



Januaryof2015,andalthoughtherearenoinitialproductionresultsmanagementbelievesthatLuciuswillrampuptoacapacityof80MBbls/doverthecourseof2015.MoredetailsfrommanagementareneededtounderstandtheimpactoftheJVapproachtodevelopmentonthelongtermvalueofnewlyacquiredoil/natgasassets.ThefinalpieceoftheFCXpuzzleisGrasberg,longthecrownjeweloftheFCXportfolioandoneofthemostprolificminesintheworld.Atthecurrenttime,politicaleventscontinuetohinderareturntofullproduction,asdosomegeologicalissues,butitdoesappearthatprogressisbeingmade.OnJanuary22,2015thecompanyannouncedplanstoinvest$17billiontobuildacoppersmelterandfurtherdevelopGrasbergundergroundminingoperations.Thecoppersmelterwilllikelybeconstructedatacostof$2billion,andFCXwillinvestafurther$15billioninlongtermdevelopmentofundergroundoperationsatGrasberg.Theannouncementraisesmanyunansweredquestionsthough,themostpressingofwhichishowthisinvestmentwillbefinanced.ApossiblesaleorIPOofpartofFreeportIndonesiaseemsprobable,astheIndonesiangovernmentwouldliketoseeincreasedlocalownership.ItisworthnotingthatthistooisastrategythatFCXmanagementhasusedbeforetofinanceprojectexpansionsatothersites.Withtheinvestmentannouncement,theIndonesiangovernmentextendedthecompanysexportpermitatareducedexporttaxrateanothersixmonths.Furtherextensionswilllikelydependonfurtherdetaileddevelopmentsurroundingthenewcoppersmelter.WhenexaminingFCXitisimportanttonotoverlookthegoldreservesatGrasberg,whichoftenseemtogounnoticedinothersanalysis.CopperistheprincipaldriverofthebottomlineatbothFCXasawholeandatGrasbergasastandalonemine,butsignificantGoldreservesshouldnotbeoverlooked.AsofFY2014,managementreportedgoldreserves(principallyatGrasberg)totaling28millionozs.In2014thegrossprofitFCXachievedonaperounceofgoldbasiswas$458,givingthereservesaroughvalueof$12.8billiontothecompany.Despiteneartermcomplications,theFCXportfolioofcopperassetsissignificantandofhighquality.TheconclusionofcapexatbothCerroVerdeandMorenciswillresultinanoteworthyexpansionofproduction,which,evenatlowercopperprices,willresultinbothtoplineandbottomlinegrowthandimprovedcashflow.Grasbergremainsamoatworthyminethatwilleventuallyreturntoform,althoughpoliticsmaydelaythisreturnlongerthanmanagementandinvestorsmaylike.Thegradeandvolumeofcopperandgoldoreatthemineremainincredible.Althoughpayingdowndebtwillnotoccuronthetimelineinitiallyoutlinedbymanagement,thecompanyremainswellsituatedfinanciallyandisunderlittleimmediatepressuretopaydowndebt.Oil/natgasoperationsremaindifficulttoappraiseandareprincipallyindevelopmentandexploratorystages;theyarebestviewedasaslowdeveloping,longterminvestment.ANoteontheCopperThisanalysisislargelydevoidofanydiscussionofmacroconcerns,butthatisnotasuggestionthatmacroissuesareunimportant.Farfromit,theyareveryimportantforFCX.Insteadoffocusingonforecastingcopperpricesthough,thisanalysisisbasedontheconclusionthatFCXiscapable,atleastwhenitcomestocopperproduction,ofoperatingprofitablyatlowercopperpricesthanmostofthecompanyspeers,asevidencedbyitssuperioroperatingmargins.Profitabilitymightstillsufferinthenearterm(andthestockpricewithit),butFCXownsfourofthetwentylargestcopperminesintheworldandproducescopperatanaveragecashcostperpoundof$1.51.Thecurrentdeclineincopperpricesispainfulbutnotdebilitating;ifcopperpricesdivetothelevelsseenintheearly2000s(whenit



tradedinandaround$1.00apound)allcopperminers,includingFCX,willsuffer,andthereislittleanyonecandoaboutthat.Despitesomeimmediateconcerns,longtermcopperdemandappearstosupportapositiveoutlookforpricingandeventhepossibilityofpriceappreciationin2015.Onlytimewilltell,butseverallargecopperminerscutproductionforecastsfor2015(BHP,RioTintoandCodelcoallannounceddowngradestotheir2015copperoutput),andseveralgeopoliticalrisksmayfurtherreduceoutput(IndonesianexportpolicyandtheimpactofchangestotheZambiantaxcode).Demand,asalways,willdependsignificantlyontheChineseeconomy,asitisthelargestconsumerofcopperintheworld.FCXmanagementbelievesthatoverthenexttenyearsrefinedcopperdemandisexpectedtogrowby7.6milliontonswhileproductionfromexistingminesisexpectedtodeclineby3.1milliontons,creatinga10.7milliontonshortfall.KeyRisks

CyclicalBusiness:FCXoperatesinahighlycyclicalindustrydependentontheoverallmacroeconomy,andinparticularonthehealthoftheChineseeconomy.

Geopolitical:FCXhassignificantoperationsinthedevelopingworld,thesinglemostsignificantofwhichisthepreviouslydiscussedGrasbergmineinIndonesia,butalsotheDemocraticRepublicofCongoandminesinSouthAmerica.

Technical/Execution:TheInternationalCopperStudyGroupestimatesthatby2018themajorityofcopperwillbeminedunderground,ratherthaninopenpits.Thistransitiontobulkundergroundminingposessignificantengineeringchallenges.FCXhasoutlinedambitiousproductiontargetsforthetransitionatGrasbergwhichareseveralyearsquickerthanthecompanyspeerstypicalbudgetforrampupatanewundergroundblockcavemine.

CopperandOil/NatGasPricingCatalystAtthecurrenttime,thereareseveraldifferentpotentialcatalystsfortherealizationofFCXintrinsicvalue,andtheyvarygreatlyintermsofpotencyandmanagementcontrol.Themostobviousandmostlikelytoresultinanimmediateappreciationofthestockpriceisariseincommodityprices.Althoughtheoutlookforcopperismixed,thevolumeof2015globalcopperproductiondoesnotlookassignificantasitmayhaveappearedinthe1sthalfof2014,whichbodeswellforprice.Thiscatalystislargelyoutofthehandsofmanagementthough;theywillreceivethebenefitbutarenotcapableofcreatingthecatalyst.Themoreinterestingcatalystsarethoseinthehandsofmanagement,andwhilethereisnosinglecatalystforcompleterealizationofintrinsicvalue,thereareseveralcatalystforthepartialrealizationofintrinsicvalue.ThefirstpartialcatalystwillbethecompletionofcapexatbothCerroVerdeandMorencis;thisshouldoccuroverthenextyearandahalfandwillhaveapositiveimpactonmarginsandcashflow.Thenextcatalystforpartialrealizationofvaluewillbeeffortstomonetizenewlyacquiredoilandnaturalgasassetsviajointventures.JVsatdevelopmentalpropertieswilltaketimetohitthebottomline,butthereshouldbeampleevidencethatmanagementistakingpositivestepstowardsthecompletionofJVsinthefirsthalfof2015.Therearetwowildcardcatalysts;oneisafinalagreementbetweenthegovernmentofIndonesiaandFCXregardingsmelterconstructionandanextensionoftheContractofWork(COW).Anagreementis



goingtohappen,anditisnotunreasonabletosuspectitwillhappenin2015,butforecastingthetimelineofgovernmentdecisionmakinginthedevelopingworldisfarfromascience.AfinalagreementbetweenthegovernmentandFCXshouldclearthewayforareturntoformofoneoftherichestcopperandgoldminesintheworld.Asecondwildcardcatalystisthepriceofgold.Aspreviouslystated,goldisanoverlookedassetforFCX,whichisunfortunateasevery$50moveinthepriceofgoldadds$100millioninEBITDAand$60millioninoperatingcashflow.In2014,FCXmined1.2milouncesatarealizedpriceperounceof$1,231.Ifgoldpricesreboundto$1,500anounce,whichgiventheexistingmacroeconomicenvironmentisnotanunreasonableexpectation,FCXislookingatanadditional$538millioninEBITDAand$322millioninoperatingcashflow,allatcurrentproductionlevels.Managementforecastsproductionofgoldisgoingtoincreasethough;productionshouldrisefrom1.2millionouncesin2014to1.3in2015,1.9in2016and2.5in2017asrichergradesoforeareminedatGrasberg.Atcurrentprices,forecastedproductionincreasesresultinthefollowingadditionalgrossrevenuepershare:

AtcurrentpricesFCXrepresentsacompanywithworldclasscopperassets,significantoilandnaturalgaspotentialandtossedin,almostasanafterthought,asignificantoptionongold,allatadiscount.ValuationAtthecurrenttime,valuingFCXisasignificantchallenge.NotonlyarecommoditypricesinfluxbuttherewillalsobesubstantialadditionstocopperproductionoverthenexttwoyearsandapossibleresolutionofissueswiththegovernmentofIndonesiainthenearfuture,allofwhichcouldcreatesignificantpositivegainsforthecompany.Belowwepresentseveraldifferentapproachestovaluationthatgeneratethefollowingcurrentpotentialpersharevalues:

GoldProduction(millionozs)

RealizedPrice

GrossProfit

(perozs)

GoldGrossProfit

(millions)

AddedGrossPerSharevs2014Actual

2014(a) 1.20 $1,248 $458 $549.60 $0.532015(e) 1.30 $1,248 $458 $595.40 +$0.042016(e) 1.90 $1,248 $458 $870.20 +$0.312017(e) 2.50 $1,248 $458 $1,145.00 +$0.57

$31.05

$23.72

$33.57

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

PerpetuityGrowth EBITDAMultiple OwnershipEarnings



Afewnotesregardingmodelassumptions:

SalesprojectionsinboththePerpetuityGrowthandEBITDAMultipleDCFmodelbelowarebasedonanalystconsensusfromCapitalIQ.2015projectionsappearoverlynegativeinouropinion,andwebelievethatrevenuewillbeinlineorslightlyhigherthan2014.

CapExprojectionsinboththePerpetuityGrowthandEBITDAMultipleDCFmodelbelowarebasedonacombinationofmanagementguidanceandanalystconsensusfromCapitalIQ.

TheownershipearningsmodelisthesimplestmodelandisbasedontheconceptofownershipearningsasarticulatedbyWarrenBuffettinhis1986lettertotheshareholdersofBerkshireHathaway.Mr.Buffettdefinesownershipearningsas:"(a)reportedearningsplus(b)depreciation,depletion,amortization,andcertainothernoncashcharges...less(c)theaverageannualamountofcapitalizedexpendituresforplantandequipment,etc.thatthebusinessrequirestofullymaintainitslongtermcompetitivepositionanditsunitvolume....OurownerearningsequationdoesnotyieldthedeceptivelyprecisefiguresprovidedbyGAAP,since(c)mustbeaguessandonesometimesverydifficulttomake.Despitethisproblem,weconsidertheownerearningsfigure,nottheGAAPfigure,tobetherelevantitemforvaluationpurposes.

MaintenanceCapExisestimatedastheaverageoffiveyearsofD&A. Inkeepingwiththemodelsabove,netincome,depreciationandamortizationprojectionsused

intheOwnershipEarningsmodelarefromanalystconsensus.Additionally,D&Ahasbeengrownata5%rateafter2019,andnetincomeata3%rate.



Discounted Cash Flow Analysis for Freeport-McMoRan Inc.USD in millions Historical year ending 12/31/__ Projected year ending 12/31/___ 2014-2019

FCX 2012 2013 2014 2015 2016 2017 2018 2019 CAGR

Sales 18,010.0 20,921.0 21,438.0 19,285.5 24,862.3 26,811.1 25,251.3 25,536.0 3.6%Cost of goods sold 10,382.0 11,840.0 11,904.0 10,708.8 13,805.5 14,887.6 14,021.5 14,179.5Gross Profit 7,628.0 9,081.0 9,534.0 8,576.7 11,056.9 11,923.5 11,229.9 11,356.5 3.6%

SG&A 550.0 642.0 837.0 753.0 970.7 1,046.8 985.9 997.0EBITDA 7,078.0 8,439.0 8,697.0 7,823.8 10,086.2 10,876.8 10,244.0 10,359.5 3.6%

EBITDA Margin 39.3% 40.3% 40.6% 40.6% 40.6% 40.6% 40.6% 40.6%

Less: Depreciation (1,179.0) (2,797.0) (3,863.0) (3,345.9) (3,408.0) (3,738.3) (3,930.3) (4,000.0)Less: Amortization (135.0) (174.0) 0.0 (87.0) (87.0) (87.0) (87.0) (87.0)EBIT 5,764.0 5,468.0 4,834.0 4,390.9 6,591.2 7,051.4 6,226.7 6,272.5 5.3%Less: Taxes @ 37.5% (2,161.5) (2,050.5) (1,812.8) (1,646.6) (2,471.7) (2,644.3) (2,335.0) (2,352.2)Tax-effected EBIT 3,602.5 3,417.5 3,021.3 2,744.3 4,119.5 4,407.1 3,891.7 3,920.3 5.3%

Plus: Depreciation and amortization 2,971.0 3,863.0 3,432.9 3,495.0 3,825.3 4,017.3 4,087.0Less: Capital expenditures (5,286.0) (8,641.0) (6,000.0) (5,100.0) (4,800.0) (4,419.0) (4,000.0)Less: Additions to intangibles 0.0 0.0 0.0 0.0 0.0 0.0 0.0(Increase)/decrease in working capital (275.0) (317.0) 385.9 (999.7) (349.3) 279.6 (51.0)Unlevered Free Cash Flow 827.5 (2,073.8) 563.0 1,514.8 3,083.1 3,769.6 3,956.3Discount period 1.0 2.0 3.0 4.0 5.0WACC 8.9% 8.9% 8.9% 8.9% 8.9%Discount factor 0.918 0.843 0.775 0.711 0.653Present value of each Unlevered Free Cash Flow 517.1 1,277.7 2,388.4 2,681.9 2,585.1

Perpetuity Growth Method EBITDA Multiple Method

Weighted average cost of capital: 8.9% Weighted average cost of capital: 8.9% Net present value of free cash flow 9,450.2 Net present value of free cash flow 9,450.2Terminal growth rate 2.5% Terminal multiple 5.0xTerminal value 63,524.5 Terminal value 51,797.4 Present value of the terminal value 41,507.6 Present value of the terminal value 33,845.0

Enterprise value 50,957.8 Enterprise value 43,295.2 Less: Net debt* (18,506.0) Less: Net debt* (18,506.0) Equity value 32,451.8 Equity value 24,789.2

Diluted shares: 1,045.000 Diluted shares: 1,045.000

Equity Value Per Share 31.05 Equity Value Per Share 23.72

Current share price: 19.13

2012 2013 2014 2015 2016 2017 2018 2019Sales growth NA 16.2% 2.5% Consensus Consensus Consensus Consensus Consensus Cost of goods sold (as a % sales) 57.6% 56.6% 55.5% 55.5% 55.5% 55.5% 55.5% 55.5%SG&A (as a % sales) 3.1% 3.1% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9%CapEx (as a % sales) NA 25.3% 40.3% Guidance Guidance Guidance Consensus Consensus Depreciation (as a % of CapEx) NA 52.9% 44.7% 55.8% 66.8% 77.9% 88.9% 100.0%Additions to intangibles (amount) NA 0.0 0.0 0.0 0.0 0.0 0.0 0.0Amortization (amount) NA 174.0 0.0 87.0 87.0 87.0 87.0 87.0

Assumptions



EndnotesiTheAuthoriscurrentlylongFCX.iiTheFCXmanagementteamisanimpressivegroupofminingandoil/natgasprofessionalswhohavealmostuniversallybeenwiththecompanyfortenplusyears:Chairman:ThecurrentChairmanoftheBoardisJamesMoffett.Mr.MoffetthasworkedwithFreeportinoneformoranotherforhisentirecareer,startingasaconsultinggeologistin1964.In1969,heandtwoassociates(W.K.McWilliamsandB.MRankin)formedMcMoRanCompany.McMoRanCo.wasadomesticfocusedoil/natgasdrillerthatprincipallydevelopedprojectsviaJVwithlargerpartners.McMoRanCo.waseventuallyacquiredbyFreeportin1981;sincethenMr.MoffetthasservedinvariousseniormanagementrolesthroughouttheparentcompanyandsubsidiariesofFCX,includingasCEOfromJuly1995untilDecember2003.MoreinformationonMr.MoffettcanbefoundinanexcellentprofileofhiscareerwrittenbyBloombergin2012entitledWildcatterMoffettsDavyJonesWellBetTestsInvestors.LegendaryenergyinvestorT.BoonePickensprobablysummedhimupbest,stating:Youjudgeatrapperbyhispelts,andoleJimBobsgotalotofpelts.CEO:RichardAdkersonhasservedastheCEOofFCXsince2003andhasworkedwiththecompanyinvariousrolesofincreasingresponsibilitysince1980.Mr.AdkersonandMr.Moffetthavealonghistorytogetherthatdatesbacktothe1970s.Mr.AdkersonservedasPresidentofFCXformostofMr.MoffettstenureasCEO.Mr.AdkersonhasalsoservedinvariousseniormanagementpositionswithPTFreeportIndonesiaandoversawthemergerofFCXwithPhelpsDodge,creatingthelargestpublicallytradedcoppercompanyintheworld.Thecurrentmanagementteamalsoincludes,MichaelArnold,CAOandExecutiveVicePresident.Mr.ArnoldhasbeenwithFCXsince1991andservedastheCFOandCAOofPTFreeportIndonesiaforsevenyearsbetween2000and2007.KathleenQuickisthecurrentCFOandhasspent25years(herentirecareer)withFCXandhasworkedherwayupfromthebottomhavingservedinpositionsofincreasinglyresponsibilitythroughoutthetreasury,investing,andfinancedepartments.ThenewestadditiontothemanagementteamisJamesFlores,whowasCEOofPlainsExplorationpriortoitsmergerwithFCXin2013.

Year FY2011 FY2012 FY2013 FY2014Total Equity $18,553.00 $21,311.00 $25,947.00 $23,225.00Tangible Book Value $15,317.00 $17,209.00 $18,638.00 $18,287.00 AssumptionsTBV Per Share $16.04 $18.04 $18.53 $17.60 D&AGrowthRate 5.00%Net Income $4,560.00 $3,041.00 $2,658.00 ($1,308.00) Net Income Growth Rate 3.00%D&A $1,168.00 $1,314.00 $2,971.00 $3,863.00 Discount Rate for NPV 10.00%

$798.67 $904.02 $1,178.04 $2,100.60Other Non Cash Items $0.00 $836.00 $887.00 ($1,746.00)Ownership Earnings $4,929.33 $4,286.98 $5,337.96 ($1,291.60)

Year FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025Net Income ($1,308.00) $2,861.36 $4,042.82 $3,212.00 $2,843.00 $2,928.29 $3,016.14 $3,106.62 $3,199.82 $3,295.82 $3,394.69D&A $3,863.00 $4,382.02 $4,105.00 $3,910.00 $3,769.50 $3,957.98 $4,155.87 $4,363.67 $4,581.85 $4,810.94 $5,051.49

$2,100.60 $2,100.60 $3,836.80 $4,024.60 $4,005.90 $4,024.90 $3,979.67 $4,031.40 $4,165.77 $4,374.06 $4,592.77Other Non Cash Items ($1,746.00)Ownership Earnings ($1,291.60) $5,142.78 $4,311.02 $3,097.40 $2,606.60 $2,861.37 $3,192.34 $3,438.89 $3,615.90 $3,732.70 $3,853.42

Intrinsic Value FY2011 FY2012 FY2013 FY2014Intrinsic Value + TBV $37,579.00 $37,600.77 $37,747.36 $34,874.65Market Cap $34,873.65 $32,468.86 $39,179.98 $24,273.80Shares OutStanding 955 954 1,006 1,039

IV Per Share 12/31/2011 12/31/2012 12/31/2013 12/31/2014 CurrentStock Price $36.79 $34.20 $37.74 $23.36 $19.18IV Per Share TBV $39.35 $39.41 $37.52 $33.57 $33.57Margin of Safety $2.56 $5.21 ($0.22) $10.21 $14.39Earnings Yield 14% 13% 14% -5%

Maintenance CapEx

Discounting Projections

Maintenance CapEx

Ownership Earnings Model for Freeport McMoRan

Historical

fcx research (2-11-2015)

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