Mining Margin Compression Turns Barclays Bearish On Freeport-McMoRan

Expected margin compression in the metals and mining industry has turned Barclay's analysts bearish on Freeport-McMoRan, Inc FCX.

The Freeport Analyst: Matthew Murphy downgraded Freeport-McMoRan from Equal-weight to Underweight and announced a $29 price target.

The Freeport Takeaways: Following 2021's strong demand and tight physical markets, miner margins are now at record highs, and their P/NAV multiples are also highly elevated relative to historical levels, Murphy said in a Thursday note.

Though commodity prices are still high, expected pressure on the cost side of the industry should cut into margins, the analyst said. These drivers of cost-side growth include oil prices, currencies and inputs, and challenges from host countries regarding taxes, he said. 

Copper prices have fallen off of "surprisingly lofty" highs by 10%, leading Murphy to believe peak sentiment has passed. Longer-term, copper will likely be in surplus by 2023 and eventually reach $3/lb in 2026 — primarily to reflect realized inflation — said Murphy.

Murphy said there are several additional reasons behind the Freeport-McMoRan downgrade.

According to the analyst note, these include a "fading growth profile," a drop in the mining company's ownership of the Indonesia Grasberg mine by 2023, pressure from Indonesian smelter Capex, and recently higher levels of geopolitical risk near South American operations.

FCX Price Action: Shares of Freeport-McMoRan were down 4.2% to $34.69 at the close Thursday.