Despite its recent rise, Freeport-McMoRan (FCX) stock is up by only 11% in 2023, and is underperforming the S&P 500 ($SPX). FCX, which is among the world’s largest copper producers, was in the red last year as well, but outperformed the markets as investors pivoted to commodity and value stocks amid the turmoil in growth names.
Copper (HGH24) is quite a cyclical commodity, and its prices depend on multiple variables, including global (and especially Chinese) growth, interest rates, and the U.S. dollar, as well as supply.
Copper Prices Have Been Moving Sideways
Copper mining is concentrated in Latin America, and faces chronic supply disruptions from issues like labor actions, government regulations, protests from local communities, and adverse weather conditions. In 2023, copper prices have moved sideways, and the current price levels are only marginally higher than what they were at the beginning of the year. While prices have rebounded over the last month – partially because of hopes of a Fed pivot in 2024 – they are still below their 2023 highs.
Freeport-McMoRan is among the limited pure-play listed copper producers. Here’s the 2024 forecast for the stock, and a look at whether it’s a good cyclical bet for the next year.
Copper’s 2024 Outlook Looks Mixed
Since Freeport-McMoRan’s fortunes are interlinked with copper prices, its 2024 forecast depends to a great extent on how copper prices play out in 2024. Notably, a few months back, markets were expecting a “surplus” year for copper in 2024 – which, in simple terms, means supply outstripping demand.
However, there have been multiple developments that have made analysts go back to the drawing board on the projected supply surplus. First, the Panama government ordered the closure of the Cobre Panama mine, which is operated by Canadian miner First Quantum Minerals (FQVLF). Separately, Anglo American (NGLOY), and Vale (VALE) have also lowered their 2024 copper production guidance.
At the same time, even as economic growth is expected to taper down next year, analysts now expect copper demand to be a lot more resilient than they previously modeled.
Copper TC/RCs Fall in Sign of a Tight Market
Copper’s improving fundamentals were exemplified when Chinese copper smelters agreed to lower treatment charges (TCs) and refining charges (RCs) while negotiating 2024 contracts with copper miners. It was the first annual drop in three years, and signaled that the market is getting tight and refiners are scrambling to secure concentrate supplies. Goldman Sachs, incidentally, lowered its 2024 copper supply growth projection to 3% from the previous forecast of 5%, and sees a deficit of over half a million tons next year.
The Fed’s projected rate cuts, coupled with expected weakness in the U.S. dollar, are theoretically positive for copper prices. I believe copper prices should hover around $4 per pound over the next few months before markets get more clarity on the Fed pivot, as well as the health of the global economy.
Freeport-McMoRan’s Indonesia Issues
Returning to Freeport-McMoRan specifically - its Indonesia operations are its most profitable, and if not for those royalties and export duties, the company would have had negative copper unit net cash costs in Q3 (thanks to massive gold production). However, the mine is also the most problematic for the company, and it has had chronic issues with the government.
The company is in discussion with the Indonesian government over export duties. However, earlier this month Reuters reported that Indonesian state auditors have recommended a fine of over $500 million on Freeport over the delay in smelter construction in the country.
Looking long-term, Freeport-McMoRan is also in discussions with Indonesia to extend its operations beyond 2041. Notably, after hectic negotiations, Freeport in 2018 agreed to part ways with a majority stake in its Indonesia operations to state-owned PT Inalum, while also agreeing to construct a smelter in the country. The country might seek more concessions from Freeport-McMoRan if it agrees to extend its operations beyond 2041.
Freeport-McMoRan 2024 Forecast: Should You Buy FCX Stock?
Freeport-McMoRan’s balance sheet is in a much stronger position now, and excluding the debt for the smelter construction in Indonesia, its net debt is now a mere $0.8 billion. Wall Street analysts, however, are not too bullish on Freeport-McMoRan shares, and the stock has a consensus rating of “Hold.”
Of the 13 analysts covering FCX, only 3 rate it as a “Strong Buy” and 1 more calls it a “Moderate Buy." Its mean target price of $43.76 is just about 4% higher than the current prices.
Overall, while FCX is among the most attractive copper plays, I would give the cyclical stock a pass at these price levels. Its next 12-month enterprise value-to-earnings before interest tax, depreciation, and amortization multiple of 7.67x looks a bit stretched, especially with copper's 2024 outlook looking somewhat hazy at this point.
On the date of publication, Mohit Oberoi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
