What happened
Shares in copper miner Freeport-McMoRan (FCX -1.33%) rose by a whopping 25.6% in November, according to data provided by S&P Global Market Intelligence. A look across the sector shows it was a move in concert with its peers.
And that move was driven by an appreciation in the price of copper over the month of November from around $3.39 per pound to about $3.78 per pound at the end of the month. Copper's strength in November relates to investors taking a brighter view of global growth prospects -- this industrial metal's prospects align with the economy at large.
The move sent all the sector higher, and in particular, a stock like Hudbay Minerals did well, as it's often seen as a potential takeover target.
Data by YCharts
So what
The rise in Freeport-McMoRan's share price highlights one aspect of the investment case that should be considered: "asymmetric investing." In other words, the probability of a profit is greater than the probability of a loss. Note that this could be the case even if the likelihood of a loss is greater (provided the upside to a win is greater than the downside of a loss). Still, let's not complicate matters and, instead, assume the probability of copper and Freeport's revenue moving higher or lower is 50%.
Back on Freeport's third-quarter earnings call, management argued that a price of copper of $3 per pound would generate $6 billion in earnings before interest, taxation, depreciation, and amortization (EBITDA) on average in 2023 and 2024, to around $14 billion for $5 per pound.
Freeport's enterprise value (EV) is currently around $60.1 billion, so a copper price of $3 per pound would mean $6 billion in EBITDA and an EV/EBITDA valuation of just 6.7 times. That's a good enough value in itself, but consider that the copper price is currently $3.78 per pound.
Now what
If you proscribe a 50/50 chance that copper will go higher or lower from here and you accept management's estimates, it looks like Freeport is an asymmetric investment. The rise in the stock price in November, driven by a $0.39 increase in the price of copper, is a reminder of that argument.
