Copper (HGX24), which is also known as the red metal, has been red-hot, and hit record highs last month. However, copper prices are now in the correction zone after having fallen by over 10% from their recent highs, and share prices of copper miners have also followed suit.
Freeport-McMoRan (FCX), which is the world’s largest listed pure-play copper miner, is now down over 10% from its 52-week highs, and - like copper - it's also in the correction zone. Should you buy the dip in FCX stock? We’ll explore in this article.
Copper Prices Come Off Highs on China Slowdown Blues
China is the world’s biggest importer and consumer of copper, and concerns over the Chinese economy have pulled down prices.
The meltdown in the Chinese real estate sector – which is the single biggest consumer of metals, ranging from steel (HVN24) and copper to aluminum (ALU24) – coupled with a structural slowdown in the Chinese economy, continues to be a major headwind for industrial metals.
Copper’s Outlook Looks Positive
While those concerns over the Chinese economy are not unfounded, the outlook for copper is much better than many other industrial metals.
Copper is a play on multiple themes, like renewable energy, electric cars, and more recently, artificial intelligence (AI). As data centers fuel copper demand – directly, through components like cables and connectors, and indirectly, through higher electricity usage - analysts are getting increasingly constructive on copper.
Saad Rahim, chief economist at Switzerland-based Trafigura, believes that AI could add 1 million tons to global copper demand by the end of this decade.
Notably, copper markets are expected to be in a structural supply deficit by 2030, and incremental copper demand might only widen the demand-supply mismatch. According to Rahim, "That's (incremental copper demand due to AI) not something that anyone has actually factored into a lot of these supply and demand balances."
And he's hardly the only observer with a bullish view of copper. Hedge fund manager Pierre Andurand expects prices to more than quadruple, rising to $40,000 over the next few years.
Even mining companies are gung-ho about the red metal, and that was precisely the reason BHP Group (BHP) tried to acquire Anglo American (NGLOY). While the leading miner's bid failed, it nonetheless illustrates that as new copper discoveries are scant, mining companies are looking to grow their portfolio inorganically.
Is Freeport-McMoRan a Good Copper Stock to Buy?
There is a dearth of pure-play listed copper miners, and Freeport-McMoRan is one of the few names that ticks all the right boxes. First, the company has a rising production profile. It produced 4.1 billion pounds of copper in 2023 - a metric that it expects to rise to 4.15 billion pounds this year, and 4.3 billion pounds by 2026.
Second, its consolidated net unit cash costs (after byproduct credits) are expected at $1.57 per pound in 2024, which is quite healthy. Thanks to higher gold production at its Grasberg mine in Indonesia, the operation's net unit cash costs are negative, and help to offset higher costs in its North American operations.
Finally, FCX has a strong balance sheet, and had a net debt of only $3.3 billion at the end of March. The net debt to adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) is 0.4x, which looks quite healthy.
To be sure, there are risks that FCX investors need to watch, especially in its Indonesia operations. The company is 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.
FCX Stock Forecast
Brokerages have also been turning incrementally bullish on FCX, and nearly two-thirds of analysts covering the stock now rate it as a “Strong Buy” or a “Moderate Buy,” while the corresponding figure three months back was 50%. FCX’s mean target price of $55.09 is 14% higher than current prices.
While FCX’s next 12 months (NTM) enterprise value to EBITDA multiple of 8.3x is higher than its average multiples over the last three years, I believe the stock can command a slight premium, considering the bullish view of copper prices.
That said, I don't find FCX stock a screaming buy at these prices, considering the current macro environment, and would wait for prices to correct a bit more. However, FCX is surely among the names that I have on my watchlist to play the expected boom in copper markets.
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.
