DateWritten:2/11/2015

FreeportMcMoRan:AReviewofManagementandCompanyOutlooki

InvestmentThesis

FreeportMcMoRan(FCX)isthelargestpubliclytradedcopperminerintheworld,withmanagement
thathasasignificantrecordofdevelopingindustryleadingassets.iiThefocusoncopperandtherecent
additionsofhighqualityexploratoryoilandnaturalgasassetssetsthefirmupforlongtermsuccess
regardlessofshorttermcommoditypriceswings.Althoughconcernsaboutthepriceofcopper/oiland
managementjudgment,resultingfromtheuntimelyMcMoRanandPlainsacquisitionsareconcerns
worthyofconsideration,theyaremorenoisethansignalforthelongterminvestor.

Forinvestorswitha3to5yeartimehorizonandawillingnesstotolerate

neartermvolatility,FCXisacompanytograduallybuildapositioninover

thenext12months.Thecurrentmacroenvironmentandanilltimedmerger

haveresultedinadisconnectbetweenthepriceofthestockandthe

companys intrinsicvalue.

Lookingatseveraldifferentvaluationapproaches,andinlightofthequalitativefactorsdiscussedbelow,
FCXappearstohaveanintrinsicvaluepersharenorthof$30,avalueatleast63%abovewherethe
companyiscurrentlytrading.Thisisnotvaluethatwillberealizedquickly,barringadramaticreversal
ofcommodityprices,butitwillaccrueconsistentlytotheprudentinvestorasFCXmanagementtakes
themanysmallstepsnecessarytoimprovethebalancesheetandgrowownershipearnings

ManagementACutabovetheRest

FCXhasalonghistoryinthenaturalresourcesindustry;thecompanywasfoundedin1912andwasa
pioneerindomesticsulfurmining.Thecompanyscurrentform,asadiversifiednaturalresources
company,harkensbacktoitsearlydaysundertheleadershipofcurrentChairmanJamesMoffett,who
engineeredthefirstmergerbetweenMcMoRanOilandGasandFreeportMineralsCompanyin1981.
Sincethenthecompanyhaschangedshapetosuittheneedsofitscurrentportfolioofprojects,
divestingandacquiringassetsopportunisticallytohelpfinancelongtermexpansion.Thispractice,
althoughattimessaddlingthecompanywithsignificantdebt,hasprovenproductiveforshareholders.
OverthelasttwentyfiveyearsundertheguidanceofMr.Moffett,thecompanyhasgrownthetangible
bookvaluepersharefrom$0.54tothecurrent$17.60ashare,aCAGRof15.58%.

Althoughtheseresultsareexcellent,itisworthnotingthatthecompanyhassufferedlongspellsin
whichithaslaboredundertheburdenofheavydebtandweakcommodityprices,mostnotablyduring
the1990s.Despitethedifficulttimesandvolatility,FCXmanagementhasgrownthefirm'stangiblebook
valuesignificantlyandlargelythroughprudentlongtermcapitalallocation.Ifweassumethatcapital
allocationdisciplineischaracterizedbyinvestmentdecisionsbeingmadeirrespectiveofcurrentcash
flowfromoperations(whichistosayinvestmentinprojectsmaderegardlessofcurrentlevelsof
profitability),thenFCXappearstobeaverydisciplinedcapitalallocator.Onemeasureofthiscanbe
seenbygraphingthecorrelationbetweenoperatingandinvestingcashflowsagainsttheCashFlow
ReturnonInvestment(CFROI).Ifafirmisadisciplinedcapitalallocator,operatingcashflowsand
investingcashflowsshouldnotcorrelatehighly,asacorrelationwouldsuggestinvestmentonlywhen
fundsarefreelyavailable.Ontheotherhand,uncorrelatedinvestmentandoperationscashflowsare

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DateWritten:2/11/2015
suggestiveofinvestmentmadeirrespectiveofthecurrentstateofthebusinesswithafocusonlong
terminvestmentreturn.

Source:CreditSuisse

Asthechartabovesuggests,overthelasttwentyyearsFCXmanagementhasestablishedatrackrecord
ofdisciplinedandefficientcapitalallocationthathasgeneratedsomeofthebestcashflowreturnson
investedcapitalamongcopperanddiversifiedminingpeers.AlthoughtherecentacquisitionofPlains
ExplorationandMcMoRanExplorationmaythreatenthisrecordofaccomplishment,theresultsarevery
impressive.Thesuccessfultrackrecordraisesthequestion:Whathappenedwiththeacquisitionof
PlainsExplorationandMcMoRanExploration?

Thereisnosimpleanswertothisquestion;inhindsightitlookslikeitwasanerrorinjudgment,butonly
timewilltell.Themoreimportantquestionforthecurrentprospectiveinvestoris:howsevereisthe
balancesheetsituationduetotheacquisitionandwhatistheoutlookforthecompanygoingforward
givenrecentevents?

DebtConcernsandOperationalOverview

Lookingatthelatestfinancialsthecompanyisclearlynotintheexceptionalpositionitwasafewyears
ago,whendebtbottomedoutat$3.5billion.TheacquisitionofPlainsExplorationandMcMoRan
Explorationcamewithsignificantdebtandhasindeedweakenedthebalancesheet.Thehistoryofthe
firmwouldsuggestthatmanagementiscapableofskillfullydealingwiththecurrenthighdebtlevels,
though;throughoutmuchofthe1990sandearly2000sdebtwasatsimilarorgreaterlevels,when
viewedasapercentageoftotalcapital.Returnoncapitalwasnegativelyimpactedduringthistimebut
managementwasneverthelessabletoproducepositivefreecashflowforallbut6ofthelast24years
(thislastyear,2014,beingthe6thyear)generallywithalessdiverseportfolioofassets(formuchofthe
90stheonlysignificantassetFCXpossessedwasGrasberg)andatmuchlowercopperpricesand
demandlevels.

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DateWritten:2/11/2015
Inshort,thedebtismanageable,andthisisanexcellentmanagementteamforsuchatask.Thatbeing
said,thedebtwillabsorbsignificantresourcesintheneartermthatcouldprobablyhavebeenputto
betteruse,especiallyifcopperpricesremainlow.Opportunisticinvestmentsareunlikelygivencurrent
debtlevels.Thusfarmanagementhashandledthedebtlevelswell,pushingoutmaturitiesto2017and
withthebulkofthelongtermdebtmaturingafter2019(inFY2014EBITcoverageofinterestwas7.6x,
whichisafarmoreacceptablelevelthanin,say,2000or1999,whenEBITcoverageofinterestwasonly
2.3xand2.9x).Additionally,thedebtisallfixedrate,withaweightedaverageinterestrateof4.2%.
Buildingcoppermines,whicharebothgeologicallyriskyandinfrastructureheavy,isanexpensive
endeavor,andFCXcomparableshaveanaveragedebttototalcapitalratioof35.65%.AlthoughFCXhas
moredebtasapercentageoftotalcapitalthanitspeers,thecompanysFY2014totaldebttocapital
ratiowasonlyslightlyworseat39.05%,andmostcomparableshavenotreportedFY2014numbersyet.

Theeasewithwhichmanagementhandlesdecreasingthecurrentdebtlevelisgoingtodepend
significantlyontwovariables:copperprice,andcopperproductionlevels.Lookingatproductionlevels,
thereisreasontobeoptimistic.Forstarters,FCXknowshowtorunamineeffectivelyandefficiently;
thedifferencebetweenrevenuegeneratedatpeakcopperpricesin2011($3.86perpound)andyear
end2014revenue(atcopperpricesof$3.09)issignificantlylessthanthenear20%declineintheprice
ofcoppermightsuggest,withonlyaminorincreaseinoverallcopperproduction.Inaddition,the
majorityoftherevenuedifferenceisattributabletooperationsatasinglemine,Grasberg.

OperationsatGrasbergarecertainly
Revenues
FY2011
FY2014 Difference
off;thisisanunfortunatefeatureof
workinginthedevelopingworld,and
North American Operations
$5,629
$5,616
-0.23%
anissuewewilladdressatgreater
lengthshortly,butthekeypointisthat
South American Operations
$3,724
$3,532
-5.16%
despitethepriceofcopperbeingdown
20%fromitsrecentpeak,revenueona
Indonesia
$5,046
$3,071
-39.14%
minebyminebasisisonlyoffslightly.
Africa
$1,289
$1,558
20.87%
Furtherdowntheincomestatement
theimpactofdecreasingcopperprices
Total Copper Revenue
$15,688 $13,777
-12.18%
beginstobefelt,butFCXstillmaintains
anoperationaledgeonitscompetition
Copper Price Realized (Per
$3.86
$3.09
-19.95%
withsuperiorGrossandEBITDA
Pound)
margins.FY2014GrossMarginswere
Total Copper Production
2,981
3,179
6.64%
44.5%vs.comparablesmeanof30.1%,
(Millions of Pounds)
andEBITDAMarginswere40.6%vs.
comparablesmeanof26.3%.Besidesoperationalefficiency,managementhasalsodemonstratedits
capitalallocationdisciplineagainthisyearwithdecisionsregardingCapEx.

AlthoughthemajorityofWallStreetanalystsappeardisappointedthatcutsinCapExwherenotmore
significant,FCXmanagementhaswiselydecidedtocontinuecopperminedevelopmentandexpansion
projectsthatwillgeneratesignificantcashflowgainswithinthenexttwoyears,andresultinoverall
copperproductiongrowthof25%.ThetwoprojectsofnotearemillexpansionsatCerroVerdeandthe
Morencis.MorencisMilldevelopmentisalmostcompleteandshouldbeoperatingatfullcapacity(an
additional225mlbs.ofcopperperyear)bytheendof1Q2015.MilldevelopmentatCerrroVerdewillbe
completedbytheendof2015(atafurthercostof$1.5billion)andwillincreaseproductionatthemine
by600mlbs.ofcopperayear.Thecombinedyearlyadditionfrombothexpansionswillbe825mlbs.of

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DateWritten:2/11/2015
copper.Althoughrampuptofullcapacitywilltaketime,bothprojectsrepresentasignificantincreasein
productionthatwillhavealastingimpactonthebottomlineforyearstocome.

Cerro Verde Mill Expansion

Morencis Mill Expansion
Yearly Addition
2014 Production Cost - SA
Ops - $1.71, NA Ops - $1.74
Potential EBIT from
Expansion
Expansion Cost
Recovery Years

Additional
Realized Copper Price
$3.86
$3.09
$2.69
Production
600,000,000 $2,316,000,000 $1,854,000,000 $1,614,000,000
225,000,000 $868,500,000
$695,250,000
$605,250,000
825,000,000 $3,184,500,000 $2,549,250,000 $2,219,250,000
$1,417,500,000

$1,417,500,000

$1,417,500,000

$1,767,000,000

$1,131,750,000

$801,750,000

$ 9,200,000,000
5.21 Years

$ 9,200,000,000
8.13 Years

$ 9,200,000,000
11.47 Years

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.

Althoughcapexforcopperoperationswasnotcutsignificantlyfor2015,oil/natgascapexwasreduced
by34%whencomparedtomanagementprojectionsinOctoberof2014.Complicatingthedevelopment
oftheoil/natgasbusinessisthefactthatFCXmanagementwantstokeeptheoil/natgasoperations
separatefromminingoperations,aswellasselffunding.Thisplacessignificantconstraintsonthe
divisionsprojectopportunitysetatloweroilprices.Itisunlikelythat2015willbeabanneryearfor
FCXoil/natgasoperations.RealizedrevenueperBOEinthe4thQtrof2014was$59.95abarrel,well
abovethepriceofabarrelofoil(atleastuntiltherecentpricesurge),butstillabovecurrentprices.At
thatlevel,FCXgeneratedapproximately$38.02abarrelinoperatingmargin.Duetoassetimpairments
andgoodwillwritedownsyearendoil/gasoperationsresultedin$4.47billiondollarloss.Absentthe
impairmentsandwritedowns,existingoperationsgeneratedoperatingincomeof$975million.$975
millionisenoughtocoveroil/natgasrelatedinterestexpensesof$241millionbutarewellshortof
creatingtheselffinancingbusinessmanagementhadhopedforbecauseofhighcapex;oil/natgascapex
in2014was$3.205billion.

Itisnotalldoomandgloomthough;thecompanyhashadpositiveresultsfromitsInboardLower
Tertiary/Cretaceousplay(Highlander),whichislocatedonshoreinLouisiana.Thisisafascinatingproject
thatMr.Moffetthaslongbeeninvolvedin.Thisisauniquefindandthesuccessfulwellwasdrilledtoa
depthof29,400feet;forcomparison,theaveragenaturalgaswellisonlydrilledtoadepthofaround
6,500feet,sothisprojectisbreakingnewground.Managementexpectsfirstproductionfromthefind
tobegininthe1stQtr2015.FCXhasalsohadpositiveresultsfromitsexploratoryanddevelopment
workinDeepwaterGoMpropertiesincludingincreasedresourcepotentialatHolsteinDeep(positive
drillingresultsindicatereservepotentialofmorethan250MMBOEvs.thepreviousprojectionof140
MMBOE)andprogressonseveraldevelopmentstageandearlystageprojects.

ManagementhasalsoindicatedthatitwillpursueJVstofinancefurtherdevelopmentofitsportfolioof
DeepwaterGoMprojects.Detailsremainlimited,andappetiteforsuchprojectsatcurrentoilpricesis
difficulttogauge,butsuchventurescanbeandoftenhavebeenexecutedprofitablybysmalleroil/nat
gasfirms.Currentmanagementisalsoveryfamiliarwiththisapproachtoassetdevelopment,andhas
utilizeditfrequentlythroughoutthecompanyshistory.Theonlyreadilyavailableandrecentexampleof
suchaJVthatFCXhasengagedinistheLuciusTrussSparoperationsinDeepwaterGoMwhichFreeport
McMoRanOilandGasacquiredrightstoinSeptemberof2009.Productionattherigcommencedin

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DateWritten:2/11/2015
Januaryof2015,andalthoughtherearenoinitialproductionresultsmanagementbelievesthatLucius
willrampuptoacapacityof80MBbls/doverthecourseof2015.Moredetailsfrommanagementare
neededtounderstandtheimpactoftheJVapproachtodevelopmentonthelongtermvalueofnewly
acquiredoil/natgasassets.

ThefinalpieceoftheFCXpuzzleisGrasberg,longthecrownjeweloftheFCXportfolioandoneofthe
mostprolificminesintheworld.Atthecurrenttime,politicaleventscontinuetohinderareturntofull
production,asdosomegeologicalissues,butitdoesappearthatprogressisbeingmade.OnJanuary
22,2015thecompanyannouncedplanstoinvest$17billiontobuildacoppersmelterandfurther
developGrasbergundergroundminingoperations.Thecoppersmelterwilllikelybeconstructedata
costof$2billion,andFCXwillinvestafurther$15billioninlongtermdevelopmentofunderground
operationsatGrasberg.Theannouncementraisesmanyunansweredquestionsthough,themost
pressingofwhichishowthisinvestmentwillbefinanced.ApossiblesaleorIPOofpartofFreeport
Indonesiaseemsprobable,astheIndonesiangovernmentwouldliketoseeincreasedlocalownership.It
isworthnotingthatthistooisastrategythatFCXmanagementhasusedbeforetofinanceproject
expansionsatothersites.Withtheinvestmentannouncement,theIndonesiangovernmentextended
thecompanysexportpermitatareducedexporttaxrateanothersixmonths.Furtherextensionswill
likelydependonfurtherdetaileddevelopmentsurroundingthenewcoppersmelter.

WhenexaminingFCXitisimportanttonotoverlookthegoldreservesatGrasberg,whichoftenseemto
gounnoticedinothersanalysis.CopperistheprincipaldriverofthebottomlineatbothFCXasawhole
andatGrasbergasastandalonemine,butsignificantGoldreservesshouldnotbeoverlooked.Asof
FY2014,managementreportedgoldreserves(principallyatGrasberg)totaling28millionozs.In2014the
grossprofitFCXachievedonaperounceofgoldbasiswas$458,givingthereservesaroughvalueof
$12.8billiontothecompany.

Despiteneartermcomplications,theFCXportfolioofcopperassetsissignificantandofhighquality.
TheconclusionofcapexatbothCerroVerdeandMorenciswillresultinanoteworthyexpansionof
production,which,evenatlowercopperprices,willresultinbothtoplineandbottomlinegrowthand
improvedcashflow.Grasbergremainsamoatworthyminethatwilleventuallyreturntoform,although
politicsmaydelaythisreturnlongerthanmanagementandinvestorsmaylike.Thegradeandvolumeof
copperandgoldoreatthemineremainincredible.Althoughpayingdowndebtwillnotoccuronthe
timelineinitiallyoutlinedbymanagement,thecompanyremainswellsituatedfinanciallyandisunder
littleimmediatepressuretopaydowndebt.Oil/natgasoperationsremaindifficulttoappraiseandare
principallyindevelopmentandexploratorystages;theyarebestviewedasaslowdeveloping,longterm
investment.

ANoteontheCopper

Thisanalysisislargelydevoidofanydiscussionofmacroconcerns,butthatisnotasuggestionthat
macroissuesareunimportant.Farfromit,theyareveryimportantforFCX.Insteadoffocusingon
forecastingcopperpricesthough,thisanalysisisbasedontheconclusionthatFCXiscapable,atleast
whenitcomestocopperproduction,ofoperatingprofitablyatlowercopperpricesthanmostofthe
companyspeers,asevidencedbyitssuperioroperatingmargins.Profitabilitymightstillsufferinthe
nearterm(andthestockpricewithit),butFCXownsfourofthetwentylargestcopperminesinthe
worldandproducescopperatanaveragecashcostperpoundof$1.51.Thecurrentdeclineincopper
pricesispainfulbutnotdebilitating;ifcopperpricesdivetothelevelsseenintheearly2000s(whenit

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DateWritten:2/11/2015
tradedinandaround$1.00apound)allcopperminers,includingFCX,willsuffer,andthereislittle
anyonecandoaboutthat.

Despitesomeimmediateconcerns,longtermcopperdemandappearstosupportapositiveoutlookfor
pricingandeventhepossibilityofpriceappreciationin2015.Onlytimewilltell,butseverallarge
copperminerscutproductionforecastsfor2015(BHP,RioTintoandCodelcoallannounceddowngrades
totheir2015copperoutput),andseveralgeopoliticalrisksmayfurtherreduceoutput(Indonesian
exportpolicyandtheimpactofchangestotheZambiantaxcode).Demand,asalways,willdepend
significantlyontheChineseeconomy,asitisthelargestconsumerofcopperintheworld.FCX
managementbelievesthatoverthenexttenyearsrefinedcopperdemandisexpectedtogrowby7.6
milliontonswhileproductionfromexistingminesisexpectedtodeclineby3.1milliontons,creatinga
10.7milliontonshortfall.

KeyRisks

CyclicalBusiness:FCXoperatesinahighlycyclicalindustrydependentontheoverallmacro
economy,andinparticularonthehealthoftheChineseeconomy.
Geopolitical:FCXhassignificantoperationsinthedevelopingworld,thesinglemostsignificant
ofwhichisthepreviouslydiscussedGrasbergmineinIndonesia,butalsotheDemocratic
RepublicofCongoandminesinSouthAmerica.
Technical/Execution:TheInternationalCopperStudyGroupestimatesthatby2018themajority
ofcopperwillbeminedunderground,ratherthaninopenpits.Thistransitiontobulk
undergroundminingposessignificantengineeringchallenges.FCXhasoutlinedambitious
productiontargetsforthetransitionatGrasbergwhichareseveralyearsquickerthanthe
companyspeerstypicalbudgetforrampupatanewundergroundblockcavemine.
CopperandOil/NatGasPricing

Catalyst

Atthecurrenttime,thereareseveraldifferentpotentialcatalystsfortherealizationofFCXintrinsic
value,andtheyvarygreatlyintermsofpotencyandmanagementcontrol.Themostobviousandmost
likelytoresultinanimmediateappreciationofthestockpriceisariseincommodityprices.Although
theoutlookforcopperismixed,thevolumeof2015globalcopperproductiondoesnotlookas
significantasitmayhaveappearedinthe1sthalfof2014,whichbodeswellforprice.Thiscatalystis
largelyoutofthehandsofmanagementthough;theywillreceivethebenefitbutarenotcapableof
creatingthecatalyst.

Themoreinterestingcatalystsarethoseinthehandsofmanagement,andwhilethereisnosingle
catalystforcompleterealizationofintrinsicvalue,thereareseveralcatalystforthepartialrealizationof
intrinsicvalue.ThefirstpartialcatalystwillbethecompletionofcapexatbothCerroVerdeand
Morencis;thisshouldoccuroverthenextyearandahalfandwillhaveapositiveimpactonmarginsand
cashflow.Thenextcatalystforpartialrealizationofvaluewillbeeffortstomonetizenewlyacquiredoil
andnaturalgasassetsviajointventures.JVsatdevelopmentalpropertieswilltaketimetohitthe
bottomline,butthereshouldbeampleevidencethatmanagementistakingpositivestepstowardsthe
completionofJVsinthefirsthalfof2015.

Therearetwowildcardcatalysts;oneisafinalagreementbetweenthegovernmentofIndonesiaand
FCXregardingsmelterconstructionandanextensionoftheContractofWork(COW).Anagreementis
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DateWritten:2/11/2015
goingtohappen,anditisnotunreasonabletosuspectitwillhappenin2015,butforecastingthe
timelineofgovernmentdecisionmakinginthedevelopingworldisfarfromascience.Afinalagreement
betweenthegovernmentandFCXshouldclearthewayforareturntoformofoneoftherichestcopper
andgoldminesintheworld.

Asecondwildcardcatalystisthepriceofgold.Aspreviouslystated,goldisanoverlookedassetforFCX,
whichisunfortunateasevery$50moveinthepriceofgoldadds$100millioninEBITDAand$60million
inoperatingcashflow.In2014,FCXmined1.2milouncesatarealizedpriceperounceof$1,231.Ifgold
pricesreboundto$1,500anounce,whichgiventheexistingmacroeconomicenvironmentisnotan
unreasonableexpectation,FCXislookingatanadditional$538millioninEBITDAand$322millionin
operatingcashflow,allatcurrentproductionlevels.Managementforecastsproductionofgoldisgoing
toincreasethough;productionshouldrisefrom1.2millionouncesin2014to1.3in2015,1.9in2016
and2.5in2017asrichergradesoforeareminedatGrasberg.Atcurrentprices,forecastedproduction
increasesresultinthefollowingadditionalgrossrevenuepershare:

Gross GoldGross AddedGross

Gold
Realized
PerSharevs
Profit
Profit
Production
Price
(perozs) (millions) 2014Actual
(millionozs)
2014(a)
2015(e)
2016(e)
2017(e)

1.20
1.30
1.90
2.50

$1,248
$1,248
$1,248
$1,248

$458
$458
$458
$458

$549.60
$595.40
$870.20
$1,145.00

$0.53
+$0.04
+$0.31
+$0.57

AtcurrentpricesFCXrepresentsacompanywithworldclasscopperassets,significantoilandnatural
gaspotentialandtossedin,almostasanafterthought,asignificantoptionongold,allatadiscount.

Valuation

Atthecurrenttime,valuingFCXisasignificantchallenge.Notonlyarecommoditypricesinfluxbut
therewillalsobesubstantialadditionstocopperproductionoverthenexttwoyearsandapossible
resolutionofissueswiththegovernmentofIndonesiainthenearfuture,allofwhichcouldcreate
significantpositivegainsforthecompany.Belowwepresentseveraldifferentapproachestovaluation
thatgeneratethefollowingcurrentpotentialpersharevalues:

$40.00
$35.00

$33.57
$31.05

$30.00
$23.72

$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
PerpetuityGrowth

EBITDAMultiple

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OwnershipEarnings

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DateWritten:2/11/2015
Afewnotesregardingmodelassumptions:

SalesprojectionsinboththePerpetuityGrowthandEBITDAMultipleDCFmodelbeloware
basedonanalystconsensusfromCapitalIQ.2015projectionsappearoverlynegativeinour
opinion,andwebelievethatrevenuewillbeinlineorslightlyhigherthan2014.
CapExprojectionsinboththePerpetuityGrowthandEBITDAMultipleDCFmodelbeloware
basedonacombinationofmanagementguidanceandanalystconsensusfromCapitalIQ.
Theownershipearningsmodelisthesimplestmodelandisbasedontheconceptofownership
earningsasarticulatedbyWarrenBuffettinhis1986lettertotheshareholdersofBerkshire
Hathaway.Mr.Buffettdefinesownershipearningsas:"(a)reportedearningsplus(b)
depreciation,depletion,amortization,andcertainothernoncashcharges...less(c)theaverage
annualamountofcapitalizedexpendituresforplantandequipment,etc.thatthebusiness
requirestofullymaintainitslongtermcompetitivepositionanditsunitvolume....Ourowner
earningsequationdoesnotyieldthedeceptivelyprecisefiguresprovidedbyGAAP,since(c)
mustbeaguessandonesometimesverydifficulttomake.Despitethisproblem,weconsider
theownerearningsfigure,nottheGAAPfigure,tobetherelevantitemforvaluationpurposes.
MaintenanceCapExisestimatedastheaverageoffiveyearsofD&A.
Inkeepingwiththemodelsabove,netincome,depreciationandamortizationprojectionsused
intheOwnershipEarningsmodelarefromanalystconsensus.Additionally,D&Ahasbeengrown
ata5%rateafter2019,andnetincomeata3%rate.

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DateWritten:2/11/2015

Discounted Cash Flow Analysis for Freeport-McMoRan Inc.

Historical year ending 12/31/__
2012
2013
2014

USD in millions

FCX
Sales
Cost of goods sold
Gross Profit
SG&A
EBITDA
EBITDA Margin

Less: Depreciation
Less: Amortization
EBIT
Less: Taxes @ 37.5%
Tax-effected EBIT

2015

Projected year ending 12/31/___

2016
2017
2018

2019

18,010.0
10,382.0
7,628.0

20,921.0
11,840.0
9,081.0

21,438.0
11,904.0
9,534.0

19,285.5
10,708.8
8,576.7

24,862.3
13,805.5
11,056.9

26,811.1
14,887.6
11,923.5

25,251.3
14,021.5
11,229.9

25,536.0
14,179.5
11,356.5

550.0
7,078.0

642.0
8,439.0

837.0
8,697.0

753.0
7,823.8

970.7
10,086.2

1,046.8
10,876.8

985.9
10,244.0

997.0
10,359.5

39.3%

40.3%

40.6%

40.6%

40.6%

40.6%

40.6%

40.6%

(1,179.0)
(135.0)
5,764.0
(2,161.5)
3,602.5

Plus: Depreciation and amortization

Less: Capital expenditures
Less: Additions to intangibles
(Increase)/decrease in working capital
Unlevered Free Cash Flow
Discount period
WACC
Discount factor
Present value of each Unlevered Free Cash Flow

(2,797.0)
(174.0)
5,468.0
(2,050.5)
3,417.5

(3,863.0)
0.0
4,834.0
(1,812.8)
3,021.3

(3,345.9)
(87.0)
4,390.9
(1,646.6)
2,744.3

(3,408.0)
(87.0)
6,591.2
(2,471.7)
4,119.5

(3,738.3)
(87.0)
7,051.4
(2,644.3)
4,407.1

(3,930.3)
(87.0)
6,226.7
(2,335.0)
3,891.7

(4,000.0)
(87.0)
6,272.5
(2,352.2)
3,920.3

2,971.0
(5,286.0)
0.0
(275.0)
827.5

3,863.0
(8,641.0)
0.0
(317.0)
(2,073.8)

3,432.9
(6,000.0)
0.0
385.9
563.0
1.0
8.9%
0.918
517.1

3,495.0
(5,100.0)
0.0
(999.7)
1,514.8
2.0
8.9%
0.843
1,277.7

3,825.3
(4,800.0)
0.0
(349.3)
3,083.1
3.0
8.9%
0.775
2,388.4

4,017.3
(4,419.0)
0.0
279.6
3,769.6
4.0
8.9%
0.711
2,681.9

4,087.0
(4,000.0)
0.0
(51.0)
3,956.3
5.0
8.9%
0.653
2,585.1

Perpetuity Growth Method

Weighted average cost of capital:
Net present value of free cash flow
Terminal growth rate
Terminal value
Present value of the terminal value

Weighted average cost of capital:

Net present value of free cash flow
Terminal multiple
Terminal value
Present value of the terminal value

50,957.8
(18,506.0)
32,451.8

Enterprise value
Less: Net debt*
Equity value
Diluted shares:

1,045.000

Equity Value Per Share

31.05

Equity Value Per Share

23.72

Current share price:

2013
16.2%
56.6%
3.1%
25.3%
52.9%
0.0
174.0

5.3%
5.3%

19.13

Assumptions
2014
2015
2016
2017
2018
2019
2.5%
Consensus Consensus Consensus Consensus Consensus
55.5%
55.5%
55.5%
55.5%
55.5%
55.5%
3.9%
3.9%
3.9%
3.9%
3.9%
3.9%
40.3%
Guidance
Guidance
Guidance Consensus Consensus
44.7%
55.8%
66.8%
77.9%
88.9%
100.0%
0.0
0.0
0.0
0.0
0.0
0.0
0.0
87.0
87.0
87.0
87.0
87.0

Researchby:WilliamM.Thomson

3.6%

43,295.2
(18,506.0)
24,789.2

1,045.000

Sales growth
Cost of goods sold (as a % sales)
SG&A (as a % sales)
CapEx (as a % sales)
Depreciation (as a % of CapEx)
Additions to intangibles (amount)
Amortization (amount)

3.6%

8.9%
9,450.2
5.0x
51,797.4
33,845.0

Diluted shares:

2012
NA
57.6%
3.1%
NA
NA
NA
NA

3.6%

EBITDA Multiple Method

8.9%
9,450.2
2.5%
63,524.5
41,507.6

Enterprise value
Less: Net debt*
Equity value

2014-2019
CAGR

Page9of10

EMail:william.m.thomson@gmail.com

DateWritten:2/11/2015

Ownership Earnings Model for Freeport McMoRan

Historical
FY2012
$21,311.00
$17,209.00
$18.04
$3,041.00
$1,314.00
$904.02
$836.00
$4,286.98

FY2013
$25,947.00
$18,638.00
$18.53
$2,658.00
$2,971.00
$1,178.04
$887.00
$5,337.96

FY2014
$23,225.00
$18,287.00
$17.60
($1,308.00)
$3,863.00
$2,100.60
($1,746.00)
($1,291.60)

FY2015
($1,308.00)
$3,863.00
$2,100.60
($1,746.00)
($1,291.60)

FY2016
$2,861.36
$4,382.02
$2,100.60

FY2017
$4,042.82
$4,105.00
$3,836.80

FY2018
$3,212.00
$3,910.00
$4,024.60

$5,142.78

$4,311.02

$3,097.40

Intrinsic Value
Intrinsic Value + TBV
Market Cap
Shares OutStanding

FY2011
$37,579.00
$34,873.65
955

FY2012
$37,600.77
$32,468.86
954

FY2013
$37,747.36
$39,179.98
1,006

FY2014
$34,874.65
$24,273.80
1,039

IV Per Share
Stock Price
IV Per Share TBV
Margin of Safety
Earnings Yield

12/31/2011
$36.79
$39.35
$2.56
14%

12/31/2012
$34.20
$39.41
$5.21
13%

12/31/2013
$37.74
$37.52
($0.22)
14%

12/31/2014
$23.36
$33.57
$10.21
-5%

Year
Total Equity
Tangible Book Value
TBV Per Share
Net Income
D&A
Maintenance CapEx
Other Non Cash Items
Ownership Earnings

FY2011
$18,553.00
$15,317.00
$16.04
$4,560.00
$1,168.00
$798.67
$0.00
$4,929.33

Year
Net Income
D&A
Maintenance CapEx
Other Non Cash Items
Ownership Earnings

Assumptions
D&AGrowthRate
Net Income Growth Rate
Discount Rate for NPV

Discounting Projections
FY2019
FY2020
$2,843.00
$2,928.29
$3,769.50
$3,957.98
$4,005.90
$4,024.90
$2,606.60

$2,861.37

5.00%
3.00%
10.00%

FY2021
$3,016.14
$4,155.87
$3,979.67

FY2022
$3,106.62
$4,363.67
$4,031.40

FY2023
$3,199.82
$4,581.85
$4,165.77

FY2024
$3,295.82
$4,810.94
$4,374.06

FY2025
$3,394.69
$5,051.49
$4,592.77

$3,192.34

$3,438.89

$3,615.90

$3,732.70

$3,853.42

Current
$19.18
$33.57
$14.39

Endnotes

TheAuthoriscurrentlylongFCX.

ii
TheFCXmanagementteamisanimpressivegroupofminingandoil/natgasprofessionalswhohavealmost
universallybeenwiththecompanyfortenplusyears:

Chairman:ThecurrentChairmanoftheBoardisJamesMoffett.Mr.MoffetthasworkedwithFreeportinoneform
oranotherforhisentirecareer,startingasaconsultinggeologistin1964.In1969,heandtwoassociates(W.K.
McWilliamsandB.MRankin)formedMcMoRanCompany.McMoRanCo.wasadomesticfocusedoil/natgasdriller
thatprincipallydevelopedprojectsviaJVwithlargerpartners.McMoRanCo.waseventuallyacquiredbyFreeport
in1981;sincethenMr.Moffetthasservedinvariousseniormanagementrolesthroughouttheparentcompany
andsubsidiariesofFCX,includingasCEOfromJuly1995untilDecember2003.MoreinformationonMr.Moffett
canbefoundinanexcellentprofileofhiscareerwrittenbyBloombergin2012entitledWildcatterMoffettsDavy
JonesWellBetTestsInvestors.LegendaryenergyinvestorT.BoonePickensprobablysummedhimupbest,
stating:Youjudgeatrapperbyhispelts,andoleJimBobsgotalotofpelts.

CEO:RichardAdkersonhasservedastheCEOofFCXsince2003andhasworkedwiththecompanyinvariousroles
ofincreasingresponsibilitysince1980.Mr.AdkersonandMr.Moffetthavealonghistorytogetherthatdatesback
tothe1970s.Mr.AdkersonservedasPresidentofFCXformostofMr.MoffettstenureasCEO.Mr.Adkersonhas
alsoservedinvariousseniormanagementpositionswithPTFreeportIndonesiaandoversawthemergerofFCX
withPhelpsDodge,creatingthelargestpublicallytradedcoppercompanyintheworld.

Thecurrentmanagementteamalsoincludes,MichaelArnold,CAOandExecutiveVicePresident.Mr.Arnoldhas
beenwithFCXsince1991andservedastheCFOandCAOofPTFreeportIndonesiaforsevenyearsbetween2000
and2007.KathleenQuickisthecurrentCFOandhasspent25years(herentirecareer)withFCXandhasworked
herwayupfromthebottomhavingservedinpositionsofincreasinglyresponsibilitythroughoutthetreasury,
investing,andfinancedepartments.ThenewestadditiontothemanagementteamisJamesFlores,whowasCEO
ofPlainsExplorationpriortoitsmergerwithFCXin2013.

Researchby:WilliamM.Thomson

Page10of10

EMail:william.m.thomson@gmail.com