Copper (HGZ23) has an essential role in electrical wiring, grid infrastructure, wind turbines, and electric vehicles (EVs). So as we seek to electrify everything, from power generation to transportation to heating (heat pumps), copper is the one material that’s an absolute must-have for the green energy transition.
And make no mistake - the energy transition is happening.
In 2022, a little more than $1 trillion was plowed into new technologies such as renewable energy, energy storage, carbon capture and storage, EVs, and more. Not only was this a new annual record amount, but – for the first time ever – it matches what was invested in fossil fuels, according to Bloomberg New Energy Finance (NEF).
Why Copper?
The decarbonization of the world’s power grids and auto fleets will drive up demand for copper. Electric cars are copper intensive; on average, electric vehicles use up to four times more copper than regular fossil fuel vehicles. And renewable energy systems uses up to five times the amount of the metal needed for traditional power generation sources. (That last multiple doesn’t even take into account the additional copper needed to connect wind and solar power sources to existing energy grids.)
Not surprising, then, that demand for copper is forecast to rise to 40 million metric tons a year by 2030, up from 25 million tons a year in 2021, according to estimates from S&P Global. The International Energy Agency (IEA) is largely in agreement, estimating that global copper demand will increase to 33 million tons a year by 2040.
Meanwhile, much of the world’s most accessible, high-grade copper deposits have already been mined. This reality was laid out clearly by S&P Global, which stated that most of the copper currently being produced comes from assets that were discovered in the 1990s!
There has been a dramatic slowdown in the number of new deposits discovered, as well as the quality of those deposits. Ore reserves at some of the world’s largest copper mines are in decline, as production has fallen due to capital-intensive projects designed to move operations from open-pit to underground as the mines age. And new mine sites are increasingly remote or in politically difficult locations.
In other words - where it’s easy to get copper, it’s already been obtained.
A Copper Shortage is Inevitable
Given that it takes up to a decade to open a producing copper mine, the coming shortfall is inevitable.
Separate analyses from both McKinsey and Rystad Energy point to a global supply shortfall of more than 6 million metric tons by the end of the decade. That is equivalent to 20% of anticipated production - or the annual output of Chile, the world’s top producer. The result is a lot of industry charts that show, in 10 years time, supply is short of demand by about 20% or so.
To put it another way - a copper market that is more than 20% short is like the oil market if Saudi Arabia and Russia were to stop producing.
The commodities consulting firm Wood Mackenzie estimates that, if the world is to reach carbon neutrality by mid-century, the amount of additional copper required for low-carbon projects over the next 20 years will amount to 60% of current production. Under that scenario, Wood Mackenzie estimates that the copper price, now $8,350 a ton, will move to $11,000 within five years. This seems reasonable.
This would give a boost to the long-suffering shareholders of Freeport-McMoran (FCX), which is one of the world’s largest publicly traded copper producers. It is also a major producer of gold and molybdenum.
The Case for Freeport-McMoran Stock
The company supplies around 9.5% of the world's mined copper and is the largest producer of molybdenum, which is essential for wind power generation. The company also operates the world's largest gold mine. Importantly, it boasts one of the strongest balance sheets in the industry, with net debt dwarfed by Ebitda – a big advantage when commodity prices aren’t in its favor.
Its portfolio of assets includes the Grasberg minerals district in Indonesia, one of the world’s largest copper and gold deposits, and significant mining operations in the Americas, including the large-scale Morenci minerals district in North America and the Cerro Verde operation in South America.
The company achieved strong growth in sales volume in 2021 (copper up 19% and gold up 59%), as well as in 2022 (copper up 11% and gold up 34%), driven mostly by the ramp-up of underground mining at the Grasberg mine in Indonesia and the Lone Star mine expansion in Arizona. It should have stable copper production this year at around 4.2 billion pounds.
Freeport-McMoran has significant leverage to copper prices. Each 10-cent per pound increase in the copper price adds around $425 million to the company’s annual EBITDA, and $335 million to its annual cash flow.
The miner has a consistent record of solid operational execution and, although its investment case is clouded by uncertainty surrounding Indonesian export duties, its near- to medium-term project pipeline is solid. Plus, the longer-term outlook for copper is bullish.
The stock is up 176% over the past 5 years, and 39% over the past year, but is down 3% year-to-date. Take advantage of this weakness and buy it anywhere below $37 a share.
