As a leader in copper production, Freeport McMoRan (FCX 5.14%) stands to take advantage of the global electric vehicle and renewable energy trends over the next decade. Here's why the stock could be a winner.
Freeport-McMoRan is already the third largest copper miner in the world. In 2020, it produced 1.45 million metric tons of copper, putting it close to Codelco at 1.73 million and BHP (NYSE: BHP) at 1.72 million. Unlike other miners, it's expanding. The company is near completion of a project that will add 2 million tons of annual copper capacity to its Indonesian operation. The project could allow Freeport to more than double its 2020 output and possibly supplant the incumbents. The company may need all that copper and more, since Freeport estimates that by 2032, the world will need 6.4 million more tons of copper each year than it produces.
Other miners won't be able to quickly ramp up capacity, either. Freeport committed to its Indonesia expansion in 2018 and expects it to be completed by 2024. Rival copper may be playing catch-up for several years while Freeport reaps the rewards of an intensifying worldwide electrification trend, and the copper it requires.
The copper market may get electrified
Major automakers are pledging to increase their EV production. For instance, Ford Motor Company expects almost half of its global vehicles to be fully electric by 2030. GM also set ambitious plans to be all-electric by 2035. Similarly, VW plans to go all-electric by 2035 in Europe.
Those companies will need a lot of copper to meet their goals. Hybrid cars use about three times as much copper as internal combustion engines (ICE). Battery EVs go even higher, using about four times that of ICE cars.
Piggybacking on the EV trend, charging stations will also need more copper. Although the pace of charging station installation has been slow, a recently passed U.S. infrastructure bill dedicated $5 billion over the next five years to build EV charging stations. Wood MacKenzie expects 20 million EV charging stations globally by 2030, consuming over 250% more copper than in 2019.
Lastly, but maybe most profoundly, renewable energy sources like wind and solar will require more copper in the coming years. Renewable technology uses four to five times more copper than fossil fuel power generation. Estimates show that copper used in solar and wind could double to over 2.25 million tons by 2030.
Is now the right time to buy?
Copper production is important, but Freeport's earnings also depend on the price of copper. Early in 2022, copper prices have been at 80-year highs, and the company benefited handsomely. Freeport's operating margin increased from 31.5% in Q1 2021 to 42.5% in Q1 2022.
Freeport has returned some of the additional free cash flow produced by its higher margin to shareholders. In November of 2021, its board authorized a $3 billion share repurchase program, and $1.1 billion has already been used. The company also announced a $0.60-per-share dividend for 2022, a dramatic jump from last year's $0.38 per share.
The company's debt-to-equity ratio stands at a manageable 40% -- its lowest point since 2012 and roughly in line with BHP. Though Freeport has secured a $3 billion bond offering to fund its expansion, its balance sheet should remain in good standing.
Keep in mind that commodity prices like copper tend to bounce around over time, affecting the stock price accordingly. Other uses for copper like construction, electrical applications, and consumer electronics also play a role in copper prices. Higher interest rates may reign in construction and a slowing US economy may cause a pullback in electronics, which could be the reason copper prices have fallen 20% over the last three months. That said, increased demand from EVs, charging stations, renewables, and a global supply gap with few signs of closing could support copper prices over the next decade.
Freeport stock is down about 40% from its March highs because of copper's current skid. As one of the few companies expanding into a potential great long-term copper market, the stock may be enticing for buy-and-hold investors looking to play the EV trend.