Shares of mining giant Freeport-McMoRan (FCX 0.04%) rose 6.7% Thursday during a trading session when many so-called "inflation plays" benefited from bounces in the commodities that underlie their businesses. In Freeport-McMoran's case, the commodity is copper. It's not only that copper stocks are subject to violent near-term fluctuations driven by sentiment -- the price of copper is too.
And the copper price certainly has moved sharply recently. From $4.80 per pound in late April, it zigzagged down to around $4.05 in May, then popped back up to $4.50 per pound as of the start of June, and then tanked to a near-term low below $3.40 per pound in July. Well, on Thursday, it bounced to $3.55 per pound, and that was enough to send Freeport-McMoran's share price higher.
The price of copper does matter to Freeport-McMoran. According to management, it's sensitive enough to shifts in the commodity that a $0.10 increase in the price per pound would add $425 million to its annual earnings -- and a $.10 per pound decrease would have the opposite effect. Moreover, management's 2022 guidance for operating cash flow of $8.6 billion is based on a price assumption of $4.75 per pound.
Given this degree of sensitivity to the copper price, it's not surprising that the stock price has been volatile too, but it's important to remember that Freeport-McMoran is still likely to be highly profitable at current copper prices. Meanwhile, the long-term case for copper as a play on electric vehicles, renewable energy, and electrification in the global economy remains intact.
Meanwhile, Freeport-McMoran is relatively well-positioned among copper stocks, with major expansion projects in the U.S. and Indonesia -- countries seen as more friendly to investment in mining.
The price of copper was never going to fall forever, but at the same time, Thursday's bounce doesn't mean a trend reversal is in place. Instead of worrying about short-term fluctuations, investors should focus on the long-term trends, which are backed by supply-and-demand dynamics rather than speculative trading. These continue to look positive for copper, and for Freeport-McMoRan in particular.