Copper's importance to the clean energy transition and the digital economy can't be overstated. Electric vehicles (EVs) require multiple times more copper than internal combustion engines, and the industrial metal is widely used in renewable energy farms. Moreover, copper is a critical component of the transmission and distribution networks needed to connect renewable energy to the grid and to support the growth of smart buildings and infrastructure.
These arguments are music to the ears of copper bulls, and if you are one of them, then it makes sense to look closely at buying stock in Freeport-McMoRan (FCX 2.23%).
Freeport-McMoRan and copper
Freeport-McMoRan also mines gold and molybdenum, and while their share of revenue bounces around a bit due to their relative price movements, copper tends to represent three-quarters of the company's revenue. As such, its earnings and cash flow are sensitive to movements in the price of copper.
The underlying case for copper is based on a combination of the secular growth drivers (discussed above) coming through to supplant the traditional markets for copper, which tend to be cyclical. Meanwhile, on the supply side, copper bulls believe the increasing difficulty of obtaining mining permits amid increasing environmental regulation will restrict supply growth in the future. .
It's somewhat of a catch-22 that the world wants more copper to support investment in clean energy while, at the same time, it's becoming harder to acquire permits. Still, this is not the place to discuss the merits of the situation; right or wrong, that's the situation as it stands, and it looks like a positive scenario for the price of copper.
That said, after a spike to $4.25 per pound in early 2023, the price of copper has drifted downward through the year to about $3.53 per pound, as I write. For reference, Freeport realized a price of $3.80 per pound. The decline is almost certainly down to a weaker growth environment, and the trend could continue while interest rates rise -- something for investors to consider.
Image source: Getty Images.
The long-term investment case for Freeport-McMoRan
If you are nervous about the near-term economic outlook and don't like holding stocks with the potential for volatility, then this stock won't suit you. That said, it's tough to predict the interest rate cycle, even more challenging to try, and equally difficult to try to time the equity markets.
At the same time, the long-term demand coming from the clean energy transition is secular in nature. It's a point picked up by Freeport's management on its recent third-quarter earnings call. CFO Kathleen Quirk noted that China copper demand continued to grow backed by "massive investments in wind and solar and growth in electric vehicle production. And the recent signs we're seeing that economic activity is picking up in China" as well as "growth in copper consumption in India."
Meanwhile, there are pockets of demand strength in the developed world, too. "In the U.S., several of our customers are reporting growth in power cable and building wire for utilities and data centers and rising demand from the automotive sector," Quirk continued.
Investments in EVs, electrification, and renewable energy will likely support the market in times of weak cyclical demand from traditional sources and then pick up as the interest rate cycle eases.
Freeport-McMoRan stands well placed to benefit
Quirk also argues that the recent weakness in the price of copper will make it "more difficult to justify new project development," and the price will need to rise to "incentivize new supplies" in the industry.
If Quirk is correct, then Freeport is positioned to profit for two reasons related to its supply. First, its near-term production estimates call for solid sales volumes in the coming years.
Data source: Freeport-McMoRan presentations. Chart by author.
Second, the copper miner has near- and medium-term production expansion opportunities from a combination of its leaching technology initiative (recovering copper from existing stockpiles) and brownfield expansion projects.
Its leaching initiative is expected to add 200 million pounds worth of copper to annual production in the near term, growing to 600 million pounds of annual production over the medium term.
Meanwhile, management continues to work on creating the feasibility for investment in its existing Bagdad, Arizona, and El Abra, Chile mines. The former can add 200 million pounds of copper annually, with the latter potentially contributing 650 million pounds. They are investment options management can take up given the right conditions.
Turning to the issue of downside protection should copper prices decline, note that the Bagdad and El Abra expansion projects are options that can be shelved given a protracted decline in the price of copper. In addition, they are brownfield expansions, not highly costly greenfield projects that require significant new financing. Moreover, Freeport's net debt (excluding debt taken on to build smelters to support its mining in Indonesia, which will be finalized in 2024) is just $800 million, so it has some financial flexibility to support itself in a downturn.
A stock to buy
Freeport offers exposure to a long-term rise in the price of copper driven by the clean energy transition. Its existing reserves and near-term production expansion plans, whether through its leaching technology development or brownfield expansion options, mean it is ideally placed to react to a rising price environment.
