 Good day, fellow investors! As I told you yesterday in the news, I'm bullish on Tesla, but I'm investing in copper in basic metals that have to be the basis of that EV trend, electrification of the whole world, renewables, etc. One company that I want to discuss today is Freeport McMoron, which is, let's say, the largest copper-based miner that is traded. Kodelko is a little bit bigger, but you cannot simply buy shares that. And I want to say, okay, I'm bullish on copper, but then also we discussed about timing and how to invest the value of an investment. So I first look, okay, what's the value of an investment? What's the risk? And then I compare it to the potential upside. And that's exactly what we are going to do with Freeport McMoron. So I'm going to give you overview of the company, my earnings models, explain the risks and the upside. And then you will see whether Freeport is something you want to have in your portfolio, given the potential copper has. The fundamentals of copper are pretty simple. There is not enough investment at current low copper prices, but this story has been going on for the last four or five years, which means there has to be a supply gap for copper in the future and much higher copper prices. And Freeport McMoron is betting on higher copper prices. It has diversified portfolio across the Americas and Indonesia. So huge reserves, they can mine those mines for the next 20, 25, 30 years. The mining costs are not that high. You compare the unit net cash cost of 1.20 to the price of copper of 2. something. And you think it's a great business. The reserves per company, okay, really large reserves, especially Freeport's equity share. However, I didn't find the technical reports on the mines and I can't really make a correct estimation of what will happen with Freeport McMoron. Neither they can. For example, on July 25, 2018, they announced that they expect Grassberg production to be 20% lower in 2020 due to mining harder ore. So not even they know exactly what awaits them five to 10 years in the future. So all we can do is an approximate model and valuation of Freeport McMoron. So 2017, the operating cash flows were very high, 5 billion total debt was 14 billion. Now it's lowered, but also the cash flows have been really lower. Freeport McMoron expected cash flows of 5.8 billion in 2018 if copper prices remain at 3.15. Now copper prices are much lower, hovering around 26, 27, 28, which has a big impact on Freeport McMoron and the operating cash flows for the year are not 5.8 billion, but 3.9. And this sensitivity to copper prices is something one should keep always in mind. Actually, the fourth quarter of 2018 didn't have a positive operating cash flows at all, as those were at 62 million negative. Copper unit net cash costs were a bit higher, 1.54 for the fourth quarter and expected higher for 2019, but that is a transitional year. Now we have to see what are their mines, mine per mine, trying to make a model about what will happen there in the future. North America has 9 mines that have sold 1.5 billion pounds of copper at net cash costs of 1.57. Long-term reserve we can expect another 20 year of production and at cash costs of 1.6, let's say sustaining costs are 2 and a little bit of taxes, let's say that they make money if the price of copper is above 2.4 and if prices stay at around these levels 2.8, 2.7, then I come out to about 450 million per year as a conservative estimation of free cash flows. At the price earnings ratio of 10, we are at 4.5 billion. Americas have similar characteristics, so we can say another 450 million per year in cash flows, so that's another value of 4.5 billion. The Indonesia issue is a very interesting issue because after 2022, Freeport's ownership will change from the current 90% to 49%. And Rio Tinto was supposed to get 40% of the mine from 2022 onwards, but they sold their stake to the Indonesian government for 3.5 billion. This means that from 2022 onwards, we can assume its stake is worth currently 4 billion. Up till then, I have calculated the cash flows, putting in the costs, the transition year and everything. I think 1 billion has to be invested per year, paying taxes, the future free cash flows after tax will be around 400 million over the next 4 years. Approximately value, let's say 1 billion when discounted at the 4 billion of Grasberg, it should be around 5 billion. The sum of parts, we are at 5 billion for Grasberg, another 4.5, 4.5 for South and North America and we are at 14 billion. Similarly, from a cash flow perspective, cash flow, free cash flow, let's say 1 billion, price to free cash flow 12, then the value is 12 billion. So we are there on a sum of parts and cash flow valuation. At copper prices, let's say 2.8, something like that. However, this is the real part of the story. Freeport is not an investment, it's an option, an option on higher copper prices. Copper prices, they expect them to be above $3, above 3.5 per pound, 4 per pound and if that happens, then Freeport will do extremely well. However, if that doesn't happen, as we have seen in the last quarter, Freeport will not do that well. So Freeport is an option on higher copper prices and therefore, as options are, it will be extremely volatile and that is what you have to take into account when investing in Freeport. At copper prices, at 2.6, 2.7, Freeport isn't making much money at all, practically a zero. So really, you have to estimate that Freeport will be much better in the future. Copper prices hit 3.5, the cash flows will be probably 5 billion per year over the future 2021-2022. A little bit lower when we deduct Grasberg, so let's say then 2.5 minus 1 billion in CapEx, then it comes to let's say 1.5, 2 billion in free cash flows times 10, so it's 20 billion deducted debt. You are then around a market cap of 10 billion, but that's even when copper prices are higher. So what would I expect? I expect high, high volatility. When I put everything into my model with a 15% discount rate, I get to a sum of parts value, to a present value of 12.67 billion, deduct the debt 10 billion, I get to zero at current copper prices. When I lower the discount rate from 15% to 8%, I get to a much higher free cash flow sum, present value 21 billion deduct the debt. We are at 10 billion, even at current copper prices, if we lower the discount rate. However, the debt, they say it's 11 billion, which is correct from the balance sheet, but there are other things on the balance sheet. Total liabilities are 25 billion, which is something to think about. Okay, total current assets are 11 billion, current liabilities are much, much lower, so there is a 7 billion difference, but one should keep in mind the long-term debt. So asset retirement obligations are 8 billion in addition there, so that's also something to keep in mind. Those will have to be paid sometimes in the future, depending on legal issues, etc. Another interesting thing is how Freeport changed the slide on the Lone Star project for its potential new big mine. So in 2018, the key was, okay, the value of this project was 1.2 billion at 3.5 copper, but they also showed only if copper goes to 2.4, then the net present value at 8% discount rate is zero. Now the new slide in 2019 doesn't show the net present values anymore because the net present values at current copper prices is zero and this investment actually shouldn't be done from the short-term perspective. So the conclusion is simple. At copper prices around 2.7, their operating cash flows are negative at the taxes, add the debt that they have to pay the interest rates and it leads to trouble over the short-term. I don't think the company will go bust because they can always sell some assets, but the stock price might be really, really under pressure and that's also shown in the 5-year change. It was really low in 2016 due to their oil investments, but the 5-year change is 63% down. Also the 1-year change is 40% down. So expect pressure, expect volatility because they are on the higher end of the cost curve, which is very important, higher costs, higher end of the cost curve, add debt, which means they have a lot of leverage to copper prices and therefore the volatility as they are an option on copper, not an investment in copper at current prices. So this would be the conclusion. Don't look at Freeport as an investment. It cannot be undervalued or overvalued because nobody knows whether copper prices will explode in 2025 or in 2021. I've been hearing about the copper supply story for already now about 3-4 years. It was bound to happen in 2018 when we were looking at it in 2015. It didn't happen. So copper prices are still low and that's something one should keep in mind that depending on the economy, supply, new mines, etc., it might be prolonged for a few years, which would really lower the value of Freeport. Therefore consider it an option and see how that fits your portfolio. Thank you for watching. Looking forward to your comments. If you like this way of analyzing company, if you'd like to see more copper miners, simply check my stock market research platform in the link in the description below on the podcast or on the YouTube video. See you in the next video.