Growth in artificial intelligence (AI) applications means more demand for data center power capacity to fuel it, which means more demand for copper. That's the latest argument from copper bulls. While it's easy to be cynical and conclude it's merely the newest fad latching onto the market's love for anything AI-related, the reality is the case for copper is compelling, and it's one that investors in Freeport-McMoRan (FCX 2.48%) believe in.
The case for copper
Copper is essential for data centers, with larger hyperscale data centers requiring even more to power the growth in AI applications. J.P. Morgan recently released a research report arguing that global data center power demand could lead to a requirement for 2.6 million tons (Mt) of new copper demand by 2030. That comes on top of its existing forecast for a supply gap of 4 Mt by 2030 on the back of burgeoning demand from clean energy-related sources and limitations on new copper supply.
While it's easy to see the impact of AI data center demand on copper usage, the clean energy transition needs some explaining. Simply put, the transition to electric vehicles over internal combustion engines, the shift in power generation from traditional fossil fuels to renewable energy, and the transmission and distribution networks needed to support both imply a significant increase in copper demand.
For example, here are a few International Energy Agency (IEA) estimates to consider:
- The average electric car requires 53.2 kg of copper compared to 22.3 kg for a conventional car
- Offshore wind requires 8,000 kg of copper per megawatt, solar and onshore wind requires 2,800-2,900 per megawatt, while natural gas requires just 1,100 kg.
In fact, in its "stated policies" scenario, the IEA sees the share of copper demand for clean energy technologies rising from 24% in 2020 to 32% in 2040.
Moreover, the broader electrification-of-everything trend involves the increasing use of smart cities, smart buildings, industrial automation, and many other wireless-enabled technologies that require electrification. AI will only strengthen this trend as it increases the value of using internet-enabled technology.
Image source: Getty Images.
At the same time, increasing environmental legislation and government interference are making acquiring new copper mining permits an increasingly difficult game. Moreover, new copper mines require multiyear feasibility studies and developmental investment before they can start producing -- reacting to a copper supply shortfall could take time.
Why Freeport-McMoRan is well positioned
Suppose data centers, clean energy, and the electrification-of-everything trend will drive copper prices higher over the long term. In that case, investing in a copper miner makes sense, and Freeport-McMoRan stands ideally placed.
I've previously discussed its sensitivity to the price of copper, and the rising price of the metal is mainly behind the 19.8% increase in the stock price this year. However, I think the move has legs, not least because the stock remains a good value based on the current price of copper.
For example, management estimates its earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2025/2026 will be $10 billion at a price of $4 per pound for copper and $14 billion at a price of $5 per pound. With the current price at $4.38 per pound, penciling in an EBITDA of $11.5 billion seems reasonable. Given that the current enterprise value (market cap plus net debt), or EV, is $76 billion, a forward EV to EBITDA multiple of 6.6 times EBITDA is attractive.
The other reason to favor buying Freeport-McMoRan is its potential to increase copper production. Management plans to expand its copper sales from 4.1 billion pounds in 2024 to 4.2 billion pounds in 2025 and 4.3 billion pounds in 2026. However, there's upside potential to its copper production/sales coming from two sources.
The first is its leaching initiative, which management believes could produce 800 million pounds per annum over the next three to five years from a run rate of 200 million at the end of 2023.
The second reason is its capability to react to rising prices by investing in brownfield projects. For example, the company has identified projects in the Americas that could result in 1.7 billion pounds of copper in extra production, with 400 million able to be brought online within three years.
Image source: Getty Images.
The best mining stock to buy
All told, Freeport-McMoRan's leading position in the copper market and its potential to increase production at a time when the market could be heading for a supply shortfall due to rising demand from AI, renewable energy, and electrification trends make it a great stock for copper bulls to buy.
