Shares in copper miner Freeport-McMoRan (FCX 2.23%) rose 14.1% in December, according to data provided by S&P Global Market Intelligence. The move comes as a consequence of two related factors.
First, the price of copper moved higher again in December. After hitting a low of $3.55 per pound in October, the price moved higher through November and then December, hitting a peak of $3.93, and at the time of writing, it stands at $3.85.
While it's never a good idea to get too wrapped up in short-term price movements, the reality is Freeport-McMoRan's earnings and cash flow are highly sensitive to movements in the price of copper.
Copper is used in a wide range of applications. Image source: Getty Images.
Freeport-McMoRan's sensitivity to copper
For example, management usually outlines its sensitivity in its earnings presentations. It did so on its third quarter presentation, outlining that a $0.10-per-pound move in the price of copper would result in a $420 million movement in earnings before interest, taxation, depreciation, and amortization (EBITDA) in 2024 to 2025. Meanwhile, the same move in the price of copper would result in a $325 million shift in operating cash flow.
As such, the $0.30 move from the October low to the price now represents a $1.26 billion difference in EBITDA in 2024 to 2025.
The growth outlook could be improving
Commodity prices don't move in isolation, particularly not one as economically sensitive as an industrial metal like copper. It's used in a wide variety of industrial goods, ranging from electricity networks through transportation (where it plays a vital role in the clean energy transition) to construction and industrial and consumer goods.
Copper's exposure to electrical networks means it is essential to the global electrification of everything, whereby new technologies such as smart factories, infrastructure, and cities; data centers; industrial automation; electric vehicle EV charging networks; and a host of internet-enabled technologies are receiving investment.
So when the market starts pricing in the possibility of the Federal Reserve cutting interest rates in 2024 (the 10-year Treasury yield fell from 4.3% at the start of December to 3.96% at present), then commodities like copper are likely to do well on hopes of a better growth environment in 2024.
All told the strength in Freeport-McMoRan reiterates how good the stock is as a play on economic growth with the underlying driver of secular demand from the electrification of everything and clean energy transition to support it.
