Freeport-McMoRan (NYSE:FCX) is the world's largest publicly traded copper producer. Changes in the price of copper therefore have a significant impact on Freeport's earnings and cash flow, which in turn impacts its stock price. For example, the uptick in market conditions over the past year has driven the copper giant's stock up a jaw-dropping 200% from its bottom in early 2016. That said, shares are still down nearly 65% over the past five years due to the company's ill-fated diversification attempt and a weaker copper market overall.

That still-depressed stock price suggests Freeport-McMoRan could have much more upside if copper continues to recover. However, that doesn't necessarily mean investors should rush out and buy Freeport's stock. Here's a closer look at the bull and bear cases for the copper giant.

Stacks of copper.

Image source: Getty Images.

The bull case on Freeport-McMoRan

On Freeport-McMoRan's third-quarter conference call, CEO Richard Adkerson gave the bull case for the copper market. He noted:

There's continued absence of major new projects, declining production from existing mines, and exchange stocks remain historically low. And as we look forward into the future, there are looming significant deficits that will require significant investments to meet the global demand for copper and the prices required to meet that demand are significantly over $3 a pound.

As Adkerson looks out to the future, he sees the potential for a significant shortfall in copper supply because producers aren't spending enough to increase capacity. However, that's because they need copper to be well over $3 a pound to justify the investment required to bring on these new supplies.

He put the shortfall potential in perspective by noting that Wood Mackenzie, which is well respected for its analysis of commodity markets, estimates that the industry needs to bring 5 million tons of new capacity on line over the next decade to meet projected demand. He then pointed out that the world's 10 largest mines currently produce less than 5 million tons per year, which "shows the extent of the amount of copper projects that will be required to be developed."

The implication here is twofold. First, copper prices need to rise high enough to incentivize the investment necessary to bring on this new supply, which would be great for Freeport's bottom line. For example, every $0.10-per-pound improvement in the price of copper could produce an additional $270 million in operating cash flow each year. Second, given the company's enormous resource potential, it's one of the few producers with viable investment options to meet this growing demand. Add these two factors together and Freeport could potentially deliver accelerated profit growth in the years ahead if copper supplies tighten as anticipated.

An open pit copper mine.

Image source: Getty Images.

The bear case on Freeport-McMoRan

While Freeport-McMoRan clearly has upside to the price of copper, it's not as high as it could have been. That's because the company recently reached a new framework agreement with the government of Indonesia for the long-term operating rights on its crown jewel Grasberg copper and gold mine. Even though that deal will finally settle their dispute, Freeport had to give up a lot in return. For starters, the company had to transfer a controlling 51% stake in the mine's operating company to the government, which will significantly cut into Freeport's current copper production since that mine supplies about a quarter of its copper output as well as the bulk of its gold production. That means Freeport will also see a smaller portion of the mine's growing copper production, and therefore a more modest slice of the expanding profits in an improving copper market.

However, that missed upside assumes the copper market plays out as expected, which might not happen. For example, the global economy could hit a speed bump that might cause demand to come in well under expectations and keep a lid on prices. On the other hand, a spike in copper prices over the next year could cause producers to green-light a slew of new projects that could eventually create another glut and push down prices.

It's also worth noting that Freeport-McMoRan is a pure play on the copper market. So, it's riskier than global mining giants Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP), which not only produce copper but other commodities as well. In Rio Tinto's case, it's also the global leader in aluminum, as well as a major producer of iron ore, diamonds, energy, and minerals. Meanwhile, BHP Billiton is one of the top iron ore producers and a leader in coal and petroleum. Thus, both companies have diversified cash flow streams that help insulate them from weakness in one of their markets. Furthermore, their diversification also provides them with more growth options outside of copper. 

Buying Freeport is a bet on copper

Investors who are unabashedly bullish on copper's prospects could do very well buying Freeport-McMoRan since it has a nearly unrivaled upside to improving prices. However, I think it's a high-risk gamble that might backfire since it's possible that the optimistic outlook for copper might not materialize. In the meantime, it lost some of its upside when it agreed to hand over control of its crucial Grasberg mine. That's why I'd consider buying one of its more diversified rivals like Rio Tinto or BHP Billiton instead since they possess similar exposure to the copper market, with the bonus of additional upside potential from several other commodities. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.