Freeport McMoran (FCX) options are unusually active. About one hour into Thursday's trading, two puts and two calls are in the top seven regarding volume to open interest.
I can't see any news that would drive this interest in the gold and copper miner. Its options volume is already 39,873, more than its 30-day average volume, and we’re less than two hours into trading.
I have to admit that I'm not big on commodities. However, when I'm asked to write about unusual options activity, that's what I'm going to do, and in this instance, FCX has risen to the top of the charts, worthy of my consideration.
The even split between calls and puts suggests investors aren’t sure whether Freeport is a buy or sell. Here are my two cents on the stock and four options.
Is the Boom Over?
From its high of $46.73 in late January, FCX stock is down 27%, trading within 3% of its 52-week low and nearly 50% off its May 2008 all-time high, reached after a long run-up in commodity prices in the first decade of the 21st century.
Sure, prices aren’t nearly as low as in the 2000s -- sub-$5 in January 2016 and March 2020 -- but if things continue to deteriorate, you never know.
Copper prices are down 15% since hitting a seven-month high in January when FCX reached its 52-week high. According to Mining.com, analysts expect the price of copper to average $8,625 per metric ton in 2024. Over the past month, copper prices have moved between $7,775 and $8,156, suggesting the average price will increase by 8% over the next 12 months.
As for gold, some predict the yellow mineral could hit $3,000 in 2024. That’s a tad ambitious, I would think. However, Noble Gold Investments CEO Collin Plume believes it will push beyond $2,000 in 2024 -- it’s currently $1,962 -- settling in slightly above its all-time high of $2,074. Gold will likely see a similar move higher.
Prices Stable But What About Supply/Demand?
Freeport-McMoran reported Q3 2023 results in October. Revenues were up (16%), operating income was up (55%), and earnings per share were up (11%). Copper production was up slightly, while gold was up 19%. Average prices realized were up across the board.
“Despite near-term global economic and market uncertainties, our conviction on the favorable long-term fundamentals for copper underpins our strategy that is centered on being 'Foremost in Copper,’” CEO Richard Adkerson stated in its press release.
S&P Global Commodity Insights published a report in October quoting Russian mineral producer Nornickel that global copper demand will rise 20% by 2035 to 30 million metric tons per year. It also suggests that in 2024, there looks to be a deficit of 54,000 metric tons of copper, so prices shouldn’t fall but probably won’t increase by much.
Due to AI, the industrial demand for gold is expected to increase in 2024, along with silver, platinum, and palladium. Precious metals consultancy Metals Focus says silver should be the biggest beneficiary from AI-driven demand as it “possesses the lowest electrical resistance among all metals at standard temperatures and is a vital component in many electronic applications,” OilPrice.com reported.
The Bottom Line on FCX Stock and Options
From a valuation perspective, it's safe to say that FCX is reasonably priced relative to any of its metrics in 2020 and 2021. So, I don’t think you’ll lose your shirt buying its stock at current prices. However, you’ll probably not strike it rich in 2024 owning FCX.
As for the two calls and put options, they all expire in 29 days on Dec. 8. The calls have strike prices of $36 ($0.56 ask) and $37 ($0.34). The puts have strike prices of $32 ($0.48 bid) and $34 ($1.17).
Based on a current share price of $33.85, I’d either buy the $36 call or sell the $34 put. The former’s ask price is a 1.6% down payment on its stock, and you’ll double your money on the call if it increases in price by $1.94 over the next month and you sell before expiration.
The bid on the $34 put is an annualized yield of 44% if you sell it, with a net price of $32.83, $1.02 below where it’s currently trading. It’s an excellent income play that may or may not get you shares at a slightly lower price.
As I said in the intro, I’m not a commodities person, but both are appealing, which is why today’s high Vol/OI ratios make total sense.
On the date of publication, Will Ashworth 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.
