Time to Buy This Secret EV and Renewable Energy Play?

The latest earnings from copper, gold, and molybdenum miner Freeport-McMoRan (FCX 0.52%) highlight the ongoing debate around the stock and the copper mining sector. In truth, the miner's share price will always be a function of the price of copper, but that's no bad thing. Moreover, Freeport offers copper bulls a relatively safe way to play the theme, and the recent results confirm that. Here's what you need to know before buying the stock. 

All about copper

Freeport's copper sales volumes are set to be flat for the next few years, while there's some upward pressure on its net unit cash costs in the near term. In other words, you can't rely on a volume increase to generate revenue growth at the copper miner. You can see these dynamics laid out in the chart below. 

In this scenario, there are three things to consider. First, there's the price of copper and Freeport's profitability, given the price. Second, look at Freeport's ability to invest in supporting mine development and copper production. Third, there's always a risk element to consider, not least because mining is a tough business with plenty of pitfalls. 

On all three factors, there's reason for optimism.

Data source: Freeport-McMoRan presentations.

Freeport, copper, and profitability 

The debate around the price will always be in play as long as there's a market. The bears will point to the traditional cyclicality of prices, the slowing economy (copper's widespread use in the economy means it's traditionally seen as the most economically sensitive industrial metal), and the fact that even a small drop in demand can lead to exaggerated price falls when consumption and production are as closely matched as they have historically been. 

On the other hand, the bulls' argument is a variant of "this time it's different." The bulls see marginal demand increases driven by the secular trend of electrification in the economy. This is caused by the increased adoption of electric vehicles (which use substantially more copper wiring and require charging stations and networks), renewable energy (solar, renewable energy, batteries, and storage facilities need more copper than traditional fuels), and growth in technologies that require electricity such as industrial automation, internet of things, data centers, etc. 

Meanwhile, on the supply side, increasing ESG activism and growing regulation are creating hurdles to mining developments, alongside political instability (in countries like Peru), which is seen as restricting supply. 

Whichever side you take on the matter, there's little doubt that Freeport is an attractive stock at the current price of copper. For example, on the earnings call, management gave its quarterly estimate of its earnings before interest, taxes, depreciation, and amortization (EBITDA). At a price of $3.50 per pound, Freeport would generate $9 billion in EBITDA and $15 billion at a price of $5 per pound in 2024/2025. With the current price at $4.24 per pound, Freeport could generate $12 billion in EBITDA. With an enterprise value of $76.8 billion, Freeport would trade on an enterprise-value-to-EBITDA multiple of just 6.4 times EBITDA -- that's cheap, even for a cyclical stock whose valuations tend to be cheaper to reflect the risk in their revenue streams. 

Freeport's investments and risk

Freeport's exposure to relatively low-risk mining projects in countries like Indonesia and the U.S. (it only generates around 23% of its revenue from South America) gives it a lower risk profile than in many other countries. 

In addition, it has opportunities to expand production. For example, it's investing in leaching technology (extracting copper from existing stockpiles) that management believes could result in 200 million pounds of copper leached. There's a feasibility study in progress to double production at a site in Arizona (Bagdad), and Freeport is in the "early stages in the development" of another mine in Arizona (Lone Star) with "50 billion pounds of potential resource here," according to CFO Kathleen Quirk. 

In short, Freeport has the potential to expand production in the future. 

A stock to buy

If you are bearish on copper, it's a stock worth avoiding, as there's no doubt the global economy is slowing. 

If you are bullish on copper and the secular forces driving demand growth and supply constriction, then Freeport is a buy. While near-term production is flatlining, the company has expansion potential and is relatively low-risk in the volatile world of copper mining. 

Alternatively, even if you think the price of copper will stay the same, Freeport still looks like a decent value.