Copper prices are preparing to run and
Freeport-McMoRan
the stock is the way to play it.
Industrial metal got off to a slow start in 2023, as did Freeport (ticker: FCX). With the possibility of a US recession dominating the conversation in the United States and China’s reopening losing steam, copper prices fell 4% in the first five months of the year. That weighed on Freeport, which derives three-quarters of its sales from copper, driving the stock down 9.6% over the same period.
But things are starting to look up for Freeport. The Phoenix-based company already has the strongest balance sheet of any copper miner, a solid management team and the ability to return capital to shareholders. And it will benefit from the long-term adoption of electric vehicles and other forms of alternative energy. Now copper prices are starting to rise amid signs of economic resilience, and if they continue, so will Freeport shares.
“You could be in the early innings of a long-term copper cycle,” says Vertical Research Partners analyst Mike Dudas, who has a price target of $57 on Freeport, up 42% from the Wednesday’s close of $40.06. “In this environment, the stock should have some upside.”
Let’s get one thing clear: As copper goes, so does Freeport stock. The metal has more than doubled from a low of $2.11 a pound at the start of Covid-19 to its all-time high of $4.93, reached in March 2022, when sanctions imposed on Russia after its invasion of the Ukraine have limited its supply.
Freeport shares are up more than 800% over the same period as miners have many fixed costs that remain the same regardless of how much copper is sold. Of course, the reverse is also true, so when copper prices fall, as they have since early last year, shares of Freeport also fall.
The copper, however, seems resistant. It starts with China, the largest consumer of copper in the world. While the country’s reopening has been disappointing so far – its real gross domestic product is expected to rise 5.6% this year from 3% last year – its policymakers are taking steps to boost demand, the People’s Bank of China cutting its seven-day reverse repurchase rate, its equivalent of the federal funds rate, to 1.9%, from 2%, last Tuesday. If the Chinese economy reacts, copper should be boosted.
There are also signs that US demand may be on the verge of picking up. After peaking in March 2021 and falling for the better part of two years, the Institute for Supply Management’s Manufacturing Purchasing Managers Index is finally starting to improve, albeit still below 50, the level which indicates a contraction. Seaport Global Securities macro strategist Victor Cossel notes that manufacturing
GPA
It is
The orders-to-inventory ratio has also started to improve, indicating that the overall index should continue to rise. Historically, improvements in this metric coincide with a trough in copper prices.
Copper prices behave as if it were. They found support near $3.60 per metric ton several times over the past year and rallied to $3.83. This is still 22% below their all-time high. If the US and Chinese economies continue to improve, copper should reach this level and take Freeport with it.
“We continue to expect cyclical recoveries in copper demand, helped by [economic] expansion of the cycle,” writes Dudas.
There are also long term drivers for copper. Electric vehicles, for example, require at least three times as much copper as internal combustion vehicles. As consumers continue to adopt electric vehicles, this factor alone could help push global copper demand to just over 28 million metric tons by 2030, according to the International Energy Agency. Supply could struggle to catch up with that demand, with a potential shortfall of six million metric tons that year, according to McKinsey.
Freeport also has the balance sheet to weather declining copper prices, should they arise.
Courtesy of Freeport-McMoRan
If all goes well, copper could hit $5 next year, says Matthew Tuttle, chief investment officer at Tuttle Capital Management, which owns shares in Freeport. If copper only returned to its 2023 high, stocks would hit $47, Tuttle says.
Freeport’s earnings would get a big boost if copper prices continue to rise. Currently, analysts expect earnings per share to be around $1.92 in 2023, up from $2.44 last year, even as sales rise to 23.5. billion versus $22.8 billion last year. Don’t expect earnings estimates to drop much – the consensus has already fallen 39% from its July 2022 peak – but they could go higher. Copper at $5 would lift earnings before interest, taxes, depreciation and amortization, or Ebitda, to more than $12 billion, the company said in its latest earnings call, more than 11% above estimates. analysts of $10.8 billion in 2024.
“If copper rises, that usually pushes estimates higher,” says RBC Capital Markets analyst Sam Crittenden, who has a $50 price target on the stock, reflecting a 25% upside.
Freeport also has the balance sheet to weather declining copper prices, should they arise. It has $2.7 billion in net debt compared to $9.6 billion in Ebitda this year, for a net debt to Ebitda ratio of 0.28, better than its rival
Southern Copper
It is
(SCCO) 0.78. It also has a variable dividend yield of 1.5%, with payouts rising or falling based on earnings, cash flow needs and other factors.
“Investors continue to debate the near-term trajectory of copper prices, but those more inclined to be positive and looking for medium/long-term copper exposure continue to favor Freeport given the strength of the balance sheet. , a track record of consistent operational execution and a favorable capital return policy,” writes Goldman Sachs analyst Emily Chieng.
Buy Freeport for higher copper prices today and tomorrow.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com