While U.S. stock markets have hit new record highs this year, base metals have sagged, including the once sought-after battery metals. Specifically, aluminum prices (ALK24) are in the red this year, while copper (HGH24) is trading largely sideways.
The price action of base metals is also reflected in the stock prices of the companies that produce them. For instance, Alcoa (AA) - which is the largest U.S.-based aluminum producer - has lost almost 21% of its value YTD. At the same time, Freeport-McMoRan (FCX), the world’s largest listed copper producer, has lost nearly 13%.
Here’s the outlook for FCX stock as base metals, including copper, look weak.
Copper’s 2024 Outlook Still Looks Hazy
To begin with, it's important to understand that the outlook for mining companies largely boils down to the commodity that they produce – which is primarily copper, in Freeport’s case. Now, copper is among those rare metals that do not face a structural overcapacity. That said, there are several levers – both bullish and bearish – that could have a bearing on the prices in the short to medium term. Let’s begin by looking at the bullish factors first.
- A supply-side deficit: During its Q4 2023 earnings call, Freeport-McMoRan said that global copper markets were in a deficit in 2023 (which, in mining parlance, means demand outstripping supply). It also said that while previously, markets expected copper to enter into a long-term deficit starting 2025, it foresees a deficit beginning in 2024, which will lead to tighter markets. Goldman Sachs is of the same view, and predicts a deficit of half a million tons in 2024, with copper prices rising to as high as $15,000 by 2025.
- Rising incentive prices for new exploration: Thanks to the spike in inflation over the last couple of years, the incentive price for both greenfield and brownfield exploration has risen. To put it simply, miners need a high copper price to hunt for new mines or expand production at existing mines - and given the current pricing environment, not many new discoveries are happening, which only strengthens the case for the deficit.
- Expectations for Fed rate cuts: The Fed’s projected rate cuts, coupled with expected weakness in the U.S. dollar, are theoretically positive for copper prices. Since most commodities are priced in the greenback, a weaker U.S. dollar invariably fuels demand, and by extension, prices.
But all is not well with the “red metal,” as copper is often known. The macroeconomic environment remains challenging, and while China is looking to grow its GDP by “around 5%” in 2024 - a forecast that it outlined at the annual meeting of the National People's Congress - the lack of concrete details on how the country plans to achieve that rate of growth dampened sentiments.
China’s Real Estate Woes Sour the Mood in Copper Markets
China’s property sector – the single largest copper end-user - has been in turmoil, to say the least, which is hurting copper market sentiments. In the medium term, vehicle electrification and the enhancement of renewable energy production were expected to spur copper demand. As things stand currently, electric vehicle (EV) demand is not growing as fast as previously expected, while the renewable energy transition has also been slower, partially due to high interest rates.
Overall, I believe that unless markets see a clearer path for Fed rate cuts and more clarity on the Chinese economy, the copper market lacks any real immediate catalysts. That said, given the supply deficit and low inventory levels, copper's downside also looks minimal.
Should You Buy FCX Stock?
In my previous article, I noted that Freeport stock looks somewhat overvalued, with unattractive risk-reward. Fast forward to 2024, and its next 12-month enterprise value-to-earnings before interest tax, depreciation, and amortization (EBITDA) multiple has retreated somewhat, and now stands at 7.12x.
Wall Street analysts have given the stock a “Moderate Buy” rating overall, while the mean target price of $45.39 is 22.2% above yesterday's closing price.
Meanwhile, even as Freeport’s outlook is to a large extent interlinked with copper prices, there are some company-specific factors also at play – especially its Indonesia operations. The company’s Grasberg mine in Indonesia is among the biggest copper and gold (GCJ24) deposits globally. Thanks to the massive gold production, the mine’s per-unit economics after byproduct credit is the most favorable in FCX’s portfolio. The recent rise in gold prices is also positive for Freeport-McMoRan, as it means that the company's unit cash costs will dip even further.
However, FCX's Indonesian operations have faced regulatory issues in the past. Notably, after hectic negotiations, Freeport agreed to part ways with a majority stake in its Indonesia operations to state-owned PT Inalum in 2018, while also agreeing to construct a smelter in the country.
Looking long-term, Freeport-McMoRan is also in discussions with Indonesia to extend its operations beyond 2041. The country might seek more concessions from Freeport-McMoRan if it agrees to extend its operations beyond this date.
Overall, I believe that FCX’s risk-reward looks much more balanced now than it did in December, when I last analyzed the stock. Any meaningful rise in FCX stock is, however, contingent upon several macro factors, which include stabilization in the Chinese economy, the Fed’s rate cuts, and improvement in the global macro environment.
On the date of publication, Mohit Oberoi had a position in: AA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
