Copper miner Freeport-McMoRan (FCX 2.23%) is an ideal choice if you are looking to add some commodity exposure to your portfolio. Industrial metals are traditionally seen as plays on a combination of the impact of cyclical global economic growth and, in particular, growing demand from China. However, there's reason to believe that the current cycle might be a bit different, and for two interconnected reasons, Freeport-McMoRan is ideally placed to benefit.
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The case for copper
First, there's the case for copper, which is based on rising demand drivers and increasing challenges to supply growth. Together, these conditions will create an environment of rising prices.
As noted above, investors usually look at global growth prospects in general, and then factor in the state of cyclical industrial demand in China as the "swing" factor in predicting the direction of the price of copper. As such, the recent disappointing economic data from China might lead investors to view the price outlook negatively.
That said, there's no disputing the powerful trend of electrification in the economy, not least from the emergence of electric vehicles, renewable energy, data centers, smart buildings/cities/infrastructure, industrial automation, electric trains, charging networks, 5G infrastructure, etc. These secular growth trends (also powerful in China) have the potential to offset any cyclical weakness in copper demand for more traditional uses.
Turning to the supply issue, some of the same forces driving secular demand growth are also leading to supply constraints. In a nutshell, it's getting harder for miners to acquire permits. Potential political instability in certain countries such as Chile and Peru (where Freeport-McMoRan is also active) could further constrain supply.
Why Freeport-McMoRan can outperform in this environment
There are two key reasons why the company is excellently placed:
- Based on management's outlook and assumptions for copper, even if the price of copper just holds steady, that leaves Freeport-McMoRan trading at an excellent valuation.
- The miner has critical assets, relationships, and expansion opportunities in countries (the U.S. and Indonesia) where operations are seen as less risky.
Freeport-McMoRan and the price of copper
If you are bullish about the outlook for the price of copper, it makes sense to look favorably at buying stock in a copper miner, but even with an agnostic view, Freeport-McMoRan looks like a good value. For example, on every quarterly earnings call, management estimates its earnings before interest, taxation, depreciation, and amortization (EBITDA) in the future based on a range of copper prices.
The current price of copper is $3.92 per pound, and Freeport-McMoRan realized a price of $3.84 in the first quarter. Based on a copper price of $4 per pound, management estimates it would generate $11 billion in EBITDA in 2024/2025, putting the stock on an enterprise-value-to-EBITDA multiple of less than 6.
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Favorably positioned on the supply
The company has assets in relatively less politically volatile countries, with slightly more than 70% of its estimated copper production coming from North America and Indonesia (somewhat more from the latter). It has a special mining license (IUPK) in Indonesia that allows it to mine there until 2041. After that, Freeport-McMoRan will likely look to extend its relationship.
In case the eventual expiration of the license concerns you, CEO Richard Adkerson noted on the earnings call that "because of the IUPK term, we only report reserves through 2041. But with our work to develop our mine plans to 2041, we've already identified production that would extend production of significance that would extend beyond that."
For reference, the company reports 111 billion pounds in reserves and 235 billion pounds in resources of copper, and its estimate for production in 2023 is 4 billion pounds.
Freeport-McMoRan also has an exciting opportunity with a leaching technology it believes it can use to recover copper from its stockpiles. The initial aim is to reach an annual run rate of 200 million pounds of copper from that technology, with CFO Kathleen Quirk believing there's a "clear opportunity of expanding the initial 200 million pounds of copper per annum to 800 million pounds per annum over the next three years to five years."
In addition, management has expansion plans for assets in North America, Indonesia, and Chile.
A stock to buy
All told, Freeport-McMoRan looks like the best stock in the copper sector. Provided you are comfortable with the idea that secular growth and the electrification trend will more than offset softness in traditional sources of demand for copper, then the stock looks like a good value for long-term investors.
