Copper Is the Future. Freeport-McMoRan Is the Stock to Buy.


Copper prices are getting ready to run—and


stock is the way to play it.

The industrial metal got off to a slow start in 2023, and so did Freeport (ticker: FCX). With the possibility of a U.S. recession dominating the conversation in the U.S. and China’s reopening running out of steam, copper prices fell 4% through the first five months of the year. That weighed on Freeport, which gets three-quarters of its sales from copper, dragging shares down 9.6% over the same period.

But things are starting to look up for Freeport. The Phoenix-based company already has the strongest balance sheet of any copper miner, a strong management team, and the ability to return capital to shareholders. And it will benefit from the long-term adoption of electric vehicles and other forms of alternative energy. Now, copper prices are starting to tick higher amid signs of economic resilience, and if they continue to, so will Freeport stock.

“You could be in the early innings of a long-term copper cycle,” says Vertical Research Partners analyst Mike Dudas, who has a $57 price target on Freeport, up 42% from Wednesday’s $40.06 close. “In that environment, the stock should have some upside.”

Let’s get one thing straight: As copper goes, so goes Freeport stock. The metal more than doubled from the $2.11-per-pound low in the early days of Covid-19 to its record high of $4.93, hit in March 2022, when sanctions imposed on Russia after its invasion of Ukraine restricted its supply.

Freeport’s stock rose more than 800% during the same period because miners have a lot of fixed costs that remain the same no matter how much copper is sold. Of course, the reverse is also true, so when copper prices fall, as they have since early last year, Freeport stock falls, too.

Copper, though, looks resilient. That starts with China, the world’s largest copper consumer. While the country’s reopening has been disappointing thus far—its real gross domestic product is expected to grow 5.6% this year from 3% last year—its policy makers are taking steps to boost demand, with the People’s Bank of China cutting its seven-day reverse repurchase rate, its equivalent of the federal-funds rate, to 1.9%, from 2%, this past Tuesday. If China’s economy responds, copper should get a boost.

There are also signs that U.S. demand could be on the verge of a recovery. After peaking in March 2021 and declining for the better part of two years, the Institute for Supply Management’s manufacturing purchasing managers index is finally starting to improve, though it remains below 50, the level that indicates a contraction. Seaport Global Securities macro strategist Victor Cossel notes that the manufacturing

order-to-inventories ratio has started to improve, as well, a sign that the overall index should continue to rise. Historically, improvements in that metric coincide with a bottoming in copper prices.

Copper prices are behaving as if that is the case. They have found support near $3.60 a metric ton several times in the past year and have rallied to $3.83. That’s still 22% below their record high. If the U.S. and China economies continue to improve, copper should make a run at that level—and carry Freeport with it.

“We continue to expect cyclical copper demand recoveries aided by early [economic] cycle expansion,” writes Dudas.

There are long-term drivers for copper, as well. Electric vehicles, for instance, require at least three times more copper than internal-combustion vehicles. As consumers continue to adopt electric vehicles, that factor alone could help push global copper demand to just over 28 million metric tons by 2030, according to the International Energy Agency. Supply could have trouble catching up to that demand, with a potential shortfall of six million metric tons by that year, according to McKinsey.

Freeport also has the balance sheet to weather lower copper prices, if it comes to that.

Courtesy of Freeport-McMoRan

If everything goes right, copper could hit $5 by next year, says Matthew Tuttle, chief investment officer at Tuttle Capital Management, which owns Freeport stock. If copper only gets back to its 2023 peak, shares would hit $47, Tuttle says.

Freeport’s profits would get a big boost if copper prices continue to rise. Right now, analysts expect earnings per share to come in at about $1.92 in 2023, from $2.44 last year, even as sales rise to $23.5 billion from $22.8 billion last year. Don’t expect earnings estimates to go much lower—the consensus has already dropped 39% from its peak in July 2022—but they could go higher. Copper at $5 would bring earnings before interest, tax, depreciation, and amortization, or Ebitda, to over $12 billion, the company said on its latest earnings call, more than 11% above analyst estimates for $10.8 billion in 2024.

“If copper is moving higher, generally that pushes estimates higher,” says RBC Capital Markets analyst Sam Crittenden, who has a $50 price target on the stock, reflecting a 25% upside.

Freeport also has the balance sheet to weather lower copper prices, if it comes to that. It has $2.7 billion in net debt versus $9.6 billion in Ebitda this year, for a net-debt-to-Ebitda ratio of 0.28, better than rival

Southern Copper
(SCCO) 0.78. It also has a variable dividend yield of 1.5%, with the payments rising or falling based on earnings, cash needs, and other factors.

“Investors continue to debate the near-term trajectory for copper prices, but those more positively inclined and looking for medium-/longer-term copper exposure continue to favor Freeport, given the balance sheet strength, consistent operational execution track record, and favorable capital returns policy,” writes Goldman Sachs analyst Emily Chieng.

Buy Freeport for higher copper prices today—and tomorrow.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

#Copper #Future #FreeportMcMoRan #Stock #Buy

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