It's easy to see why miner Freeport-McMoRan's (FCX 1.89%) stock rises and falls with copper prices. The metal reached a new record high in early March 2022 at around $5 per pound, but it's since plummeted to the $3 range.
Shares of Freeport-McMoRan have moved in lockstep with copper prices, peaking at around $50 in early March and remaining there until mid-April. As a result, investors may want to take clues from copper price movements to gauge where Freeport-McMoRan shares might go next.
Supply and demand trends for copper and prices
Of course, supply and demand are key for copper prices, although they do tend to respond to recessions as well, which is likely why the metal is performing so poorly right now. Copper saw an uptick following the news that China had imported 373,000 tons of refined copper in June, the highest monthly total year to date. China consumes about half of the world's copper, so the announcement was excellent news.
Concerns about the possibility of a recession have weighed on the copper price since April, but those worries lack the big-picture view. Given that the U.S., Europe, and other parts of the world are transitioning to green energies like electric vehicles and solar power, demand for copper should never shrink dramatically.
Copper is a key material used in EVs, solar panels, and other green-energy products because its conductivity is second only to silver. However, even though copper prices plunged in July, S&P Global reported that copper demand was skyrocketing while demand couldn't keep up. The firm expects demand for the metal to double by 2035.
The world's largest publicly traded copper miner
These long-term trends put copper miners like Freeport-McMoRan in an excellent position for the coming years. Unfortunately, near-term price trends took a sizable bite out of the company's second-quarter earnings results, causing it to miss profit estimates. Freeport-McMoRan posted an adjusted net income of $0.58 per share, compared to the consensus of $0.66 per share.
However, Freeport-McMoRan also reported that sales volumes were 5% higher than the guidance provided in April, demonstrating that the demand for copper remains robust despite the precipitous decline in the price.
Of course, no stock is right for every investor, but given that a long-term mindset tends to provide greater success in investing, it might make sense to include this copper miner due to the long-term copper story.
Freeport-McMoRan's mining properties
According to Freeport-McMoRan's second-quarter earnings report, it operates seven open-pit copper mines in North America, many of which also produce molybdenum concentrate, gold, and silver. All but one of its North American copper mines are wholly owned, and Freeport-McMoRan holds 72% of the joint venture on the last one. The exposure to gold and silver adds further support to the company's asset portfolio through diversification.
Freeport-McMoRan also owns two copper mines in South America and one of the world's largest copper and gold mines in Indonesia. In its second-quarter earnings release, the company noted that a sizable number of new mine developments will be needed to meet the goals of the green energy transition.
Further, Freeport-McMoRan said current copper prices are insufficient to support new development, which means they will have to increase to prevent widespread shortages that derail the transition. With sales of 1.1 billion pounds of copper during the second quarter marking a 17% year-over-year increase in sales volumes for the company, it looks like the only direction for the company's future earnings is up.
Additionally, Freeport-McMoRan shares are down by about 20% year to date, potentially providing a buy-the-dip opportunity. The company's current P/E ratio is 9.5, a significant drop from where it stood five years ago. In March 2017, Freeport-McMoRan's P/E spiked at 36.32, although it ended the year at 14.43. The miner's P/E spiked at 139.56 at the end of September 2020.
According to the Freeport-McMoRan's second-quarter earnings release, some key risks to watch include supply and demand for copper and copper prices, regulatory or industry conditions, including those resulting from tension in Ukraine and potential violence in Indonesia, and the possibility of a global economic downturn or recession. Other possible concerns include the political and social risks associated with mining.