Freeport-McMoRan (FCX -1.10%) is probably the go-to option if you are interested in buying into copper. That said, the price of copper has weakened in recent months, and investors are growing concerned over the impact of a slowdown in the economy on copper demand. Nevertheless, there's still a compelling case for buying the stock, and I think its 30% dip this year is a buying opportunity. Here's why. 

Why investing in copper makes sense

The case for copper is based on an increase in long-term marginal demand from electric vehicles (EVs), renewable energy, and the electrification trend. EVs and renewable energy need significantly more copper for wiring, storage, and transmission and distribution. Meanwhile, the electrification trend in the economy is being driven by growth in EV networks, data centers, industrial automation, smart buildings/infrastructure, and a host of other connected growth industries. 

At the same time, the supply of copper is seen as being constrained by increasing environmental regulation, government interference, and windfall taxes. In addition, the current weakness in the price of copper is not inducing copper miners to invest in projects. Indeed, Freeport's CEO Richard Adkerson discussed these themes on the recent earnings call, noting that "higher prices will be required to bring on new supplies, much higher prices than we have now, simply because the current price is not sufficient to incent new supply development on the scale that will be required to meet this increasing demand."

Near-term issues? 

The case for copper stocks is a powerful one, but there are some flies in the ointment:

  • The reality is the price of copper has come down in 2022 from $4.50 per pound to around $3.40 per pound. 
  • Freeport's input costs were higher than expected in the third quarter as cost pressures remain, even as copper prices have fallen.
  • Copper is still a highly economically sensitive metal, and a recession will inevitably hurt demand temporarily. 

It's a somewhat confusing situation, and Freeport's management appears equally bemused by it. For example, Adkerson noted that the "fundamental physical copper market is strikingly tight globally right now." He pointed out that copper demand remains healthy, with customers "fighting" to get products and no reduction of orders.

The bull and bear debate

These conditions are likely to polarize the debate between copper bears and bulls. The bears will stress that lower prices have only started to kick in, and when a recession follows the price of copper will collapse. Meanwhile, the bulls will argue that speculators have already sold off copper in anticipation of a recession, but the underlying reality is physical copper demand is solid. Moreover, the fall in prices now will hold back investment in new supply, leading to higher prices down the line. 

Why Freeport-McMoRan is the pick of the sector

All bets are off in an "extended recession" scenario, but otherwise copper and Freeport-McMoRan look like a good value. There are three reasons why. First, Freeport is still highly profitable at the current level of copper ($3.40 per pound). Management outlined a price of $3 per pound would produce $6 billion in earnings before interest, taxation, depreciation, and amortization (EBITDA) in 2022. Its current market cap is only $41 billion.

Second, the company is developing a leaching technology (extracting copper from already mined materials) which it believes could produce 200 million pounds of copper by 2024. Management assumes a third of that in its guidance for 4.2 billion pounds in 2024, suggesting there's about 135 million pounds worth of potential upside to its 2024 forecast.

Third, Freeport has a strong balance sheet (just $1.3 billion in net debt at the end of the quarter), and should be able to withstand any financial pressure coming from any sustained fall in the price of copper. 

Freeport-McMoRan stock is a buy

While it's tough to predict where the economy and the price of copper are heading, Freeport is still highly profitable at the current price. Moreover, the tightness in the physical copper market could result in a big move up in the price of copper once sentiment improves. Meanwhile, the secular trend toward electrification will underpin copper demand for many years.