Some perspective is needed when looking at mining stocks, and definitely when looking at an industrial metal and mining stock like Freeport-McMoRan (FCX +2.14%). Its core metal, copper, is usually seen as the commodity most sensitive to economic growth – not least due to its importance in electrification.
In a year of slowing global growth, Freeport has maintained an excellent level of profitability and has several catalysts enabling it to benefit from any copper price increase. As such, the stock remains an excellent choice for commodity investors.
The upside potential for copper
It's impossible to avoid discussing the future direction of the price of copper when looking at Freeport. The company's realized price of copper per pound was $3.85 in 2023, following $3.90 in 2022. But don't be fooled by how stable those numbers seem. The price of copper per pound fluctuated from $4.25 last January to as low as $3.54 in October.
NYSE: FCX
Key Data Points
Still, an overall decline of just $0.05 per pound in a year of slowing global growth is a good result for Freeport and indicates a good level of support for the price of copper.
In addition, as company president Kathleen Quirk said on the earnings call: "It's obvious that there haven't been new projects sanctioned in our industry for some time. And what's happened recently in recent years with the copper prices rallying and then falling off has just caused more delays, more cautiousness by developers in developing the project."
In other words, the supply is being constrained by the decline in price. At the same time, CEO Richard Adkerson said, inventories of copper around the world are at historically low levels, "and the inventory levels are really inconsistent with the current copper price."
Given these dynamics, any upside surprise in demand in 2024 will likely lead to upward pressure on the price of copper.
Conservatively valuing Freeport-McMoRan
That said, most economic forecasters predict slightly slower global growth in 2024, which could weigh on demand growth. As always, there are puts and takes when looking at commodities.
Image source: Getty Images.
It makes sense to take a conservative approach and assume the price approximates to its current level, at $3.86 per pound. Freeport's management estimates its earnings before interest, taxation, depreciation, and amortization (EBITDA) will be $10 billion per annum in 2025/2026 at a copper price of $4 per pound. Its current enterprise value (EV) of around $61 billion would put the stock on a forward EV/EBITDA multiple of 6.1 times EBITDA.
That's an excellent valuation if you like the long-term outlook for the price of copper, driven by demand from the economy's electrification trend.
Freeport-McMoRan is well placed to benefit
It isn't just about the price of copper; after all, Freeport still has to produce more to benefit from any positives in the metal's prices. Fortunately, the company is in a good position for two reasons.
First, it's making good progress on its low-cost leaching initiative, having hit its target of an annual run rate of 200 million pounds of copper in the fourth quarter. Management forecasts it will produce 200 million pounds of copper from leaching in 2024 and get to a run rate of 400 million pounds "within a couple of years," according to Quirk. It has the potential to hit 800 million pounds per annum over time. For reference, Freeport expects to sell 4.1 billion pounds of copper in 2024, so the leaching initiative is significant.
Second, management outlined it had a "brownfield growth pipeline" of 1.7 billion pounds of copper within eight years, with 400 million pounds able to be added within two to three years. Consequently, Freeport has the potential to invest in projects and take advantage of higher prices or better conditions.
A stock to buy
All told, if you believe that the risk for the price of copper in 2024 is on the upside, then Freeport is a great stock to invest in. Its leaching initiatives and brownfield development potential mean it has the resources to ramp up production in a world that's finding it increasingly hard to add supply. Meanwhile, the demand kicker from the electrification-of-everything trend has a multiyear growth pathway ahead.
