With Copper Prices Falling, What’s Next For Freeport Stock?

The shares of Freeport-McMoRan (NYSE: FCX) have lost 30% of their value year-to-date and remain down by almost 45% from their March 2022 highs.  The sell-off comes as multiple macroeconomic factors appear to cloud the outlook for copper, which is Freeport’s primary product. Copper prices are down from a high of about $4.86/lb in early March 2022 to about $3.96/lb currently, marking a decline of almost 20%, with prices now near 16-month lows. There are a couple of factors weighing on the commodity, including China’s zero-Covid policy, which has resulted in stringent lockdowns in several provinces, hurting demand. Moreover, the U.S. Federal Reserve and other global central banks have also been hiking interest rates at a more aggressive pace to combat surging inflation, and the markets are betting that this will hurt economic growth. Demand from the construction and electrical applications sectors – which are the largest consumers of copper – typically takes a hit during downturns and this could impact the copper market, which has had a strong run in recent quarters.

That said, we remain optimistic about Freeport for a couple of reasons. Freeport results have been very strong in recent quarters. Over Q1 2022,  Freeport-McMoRan revenues rose 36% year-over-year with operating income rising 84%, driven by stronger copper and gold production as well as improved price realizations. Freeport’s valuation also looks attractive, considering that estimates point to earnings of about $3.90 per share for the full year, meaning that the stock trades at just about 7.5x forward earnings at the current market price of $29.50 per share. Although cyclical stocks like Freeport see lower multiples when the markets project that earnings and revenues are approaching a near-term peak, some trends still make Freeport stock worth looking at, at current levels.

Although there are macroeconomic concerns, there are a few trends that could help the copper market. The EIA’s lower benchmark oil projections for 2023 and prospects of leniency in China’s Zero-Covid policy after Shanghai’s announcement to end lockdowns, may help demand to a certain extent if China’s industrial output picks up. Moreover, copper is seen as a strategically important metal in the long run, given its application in the renewable energy sector including electric vehicles, charging infrastructure, and solar & wind power plants. For perspective, a study by the International Copper Association has indicated that an electric vehicle requires over 3.5x the amount of copper as a traditional internal combustion engine vehicle. Thus the recent stock price decline could be an opportunity for longer-term investors to enter.

Freeport is also well-positioned in the copper market.  The company has been strengthening its balance sheet in recent years, moving from being a cash-strapped player to holding cash and cash equivalents totaling about $8.3 billion as of the last quarter, with net debt standing at just $1.3 billion. The company also has the scale, given that it is the undisputed leader in the copper space, with mining assets located in North America, South America, and Indonesia. We estimate Freeport-McMoRan valuation at about $47 per share, which is about 55% ahead of the current market price.

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