Despite a prolific slowdown in the Chinese economy due to covid lockdowns, the price of copper has remained stubbornly high. Freeport-McMoRan (NYSE:FCX) fell dramatically in the last month, but the high prices for copper are a very positive sign for the copper miner. My investment thesis remains very Bullish on the stock due to the strong copper demand cycle and weak supply growth.
Stubbornly High Copper Prices
Freeport-McMoRan fell from a high near $52 to a low of $35 in early May due to perceived weakness in copper prices and demand. The key here is that any weakness in China will ultimately be made up when the country fully reopens and clean energy is set to absorb all free supplies in the decade ahead.
Copper prices did fall along with the recent market weakness, but a quick review of the 5-year chart will help alleviate any fears on the impacts of the financials of the copper miner. Copper prices are still over $4.32/lb and close to the yearly highs.
Only a year ago, Freeport-McMoRan wasn’t even quoting cash flow and EBITDA targets based on copper prices exceeding $4/lb. Now, even in an extended period where recession fears are rampant and the major market for copper consumption was shut down, copper prices have held up above the key pricing threshold.
Copper supplies continue to head towards a major deficit in the future. Rystad Energy has forecast a 6 million tonnes deficit in copper supplies by 2023. The crazy part about the forecast is the supply deficit cuts as much from a 12% decrease in supplies by 2030 as existing mines face declining reserves and ore quality.
In addition, geopolitical issues remain a major problem for copper. Peru continues to promote raising taxes on miners, while Chile has a new government that proposed a major mining overhaul. In addition, Russia accounts for ~4% of copper production and the war in Ukraine places those supplies at risk.
Another prime reason for an under supplied copper market in the decade ahead is the conversion to electric vehicles. Each BEV uses an estimated 183 lbs of copper, while some conventional cars only utilize 18 lbs.
Each 1 million of EVs utilize somewhere around 150 million lbs. of additional copper. With China producing 3.3 million EVs last year and Europe buying 2.3 million, the market can quickly see how much additional copper supply is needed to fuel the growing demand for EVs. Remember, these figures are just for the vehicle production, the amounts don’t include the additional copper needed for charging networks and electricity delivery.
Despite the higher prices and signs copper prices are likely to remain elevated, Freeport-McMoRan has a current mining plan where output starts falling in 2024. The copper miner forecasts 2024 copper production dipping to 4.2 billion lbs from the 4.45 billion lb peak in 2023.
The company only forecast a net unit cash cost of $1.44/lb, so the profit margins remain very strong at much lower copper prices. The volatility of copper prices in the past and the time to develop new mines make aggressive spending less desirable.
The planned Kucing Liar mine in Indonesia has the ability to produce ~600 million lbs of copper and 500K ounces of gold per annum, but Freeport-McMoRan estimates a 10-year development timeframe. The whole EV revolution will have unfolded by the time this mine reaches production.
Freeport-McMoRan should remain a cash machine in the decade ahead. The ability of copper to hold prices near $4.25/lb in this environment suggests copper prices can test the $5/lb levels. The copper miner has very impressive financials as the price of copper rises due to the mostly fixed production costs.
The company could approach $15 billion in annual EBITDA and operating cash flows approaching $12 billion at $5/lb. After all, each $0.10 of additional copper prices adds $330 million in operating cash flows. The difference between $4.30/lb and $5.00/lb is $2.3 billion in additional operating cash flows.
The stock only has a market cap of $55 billion now. With no debt, Freeport-McMoRan trades below 4x these $5/lb adjusted EBITDA targets.
The stock is so cheap that Freeport-McMoRan can continue to use the large free cash flows to repurchase shares. The company has a capital return plan to return 50% of cash flows to shareholders.
The key investor takeaway is that Freeport-McMoRan is incredibly cheap, while the company doesn’t have the debt issues of past cycles. The biggest risk to the stock is a major recession that causes a lot of the EV plans to be scrapped, along with China lockdowns continue to dampen copper demand.
The stock is just too cheap for the risk/reward scenario, with the copper miner trading at such a low EBITDA multiple.
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