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Why Freeport-McMoRan Inc's Stock Slumped Nearly 10% in August

By Matthew DiLallo - Sep 5, 2018 at 2:41PM

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Worries weighed on the copper company last month.

What happened

Shares of Freeport-McMoRan Inc. (FCX 2.07%) fell 9.8% in August, which was a volatile month for the copper market.

So what

Copper prices sold off 3% at the beginning of August after the trade dispute between the U.S. and China intensified amid reports that the Trump administration had proposed raising tariffs on $200 billion worth of Chinese goods from 10% to 25%. The concern was that the escalating trade war would impact global growth, which could dampen demand for copper.

An open pit copper mine.

Image source: Getty Images.

Copper continued selling off during the month, enduring its worst day of the year on Aug. 15, when it declined 4.4% and fell to a 13-month low, which pushed it 22% below the four-year high set in June. Driving that sell-off were continued worries that the global economy would slow down due to the intensifying trade war between the U.S. and China.

Copper prices would go on to rebound a bit by month end due to better-than-expected inventory data, though they remained 18% below the peak reached in June. The reason this sell-off had a notable impact on Freeport-McMoRan's stock is due to the company's leverage to copper prices. The company noted in a recent investor presentation that it expected to generate $4.3 billion in operating cash flows this year, assuming copper averaged $2.75 per pound in the second half of 2018. However, the company also pointed out that each $0.10 per pound change in copper during the second half would impact cash flow by $185 million. While copper ended the month right around that $2.75-a-pound level, the concern is that it could fall well below that level if the escalating trade war stunts global growth, which would impact Freeport-McMoRan's cash flow.

Now what

As one of the largest copper producers in the world, Freeport-McMoRan makes most of its money producing that metal. Accordingly, its stock tends to ebb and flow with the price of copper. While there are some near-term concerns for copper prices, the longer-term outlook for the metal is much more bullish.

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