Investing in commodities can be a real challenge. Prices can change on a dime, which can lead to an unexpected change in the business outlook and a devastating stock price drop for producers. However, over the longer term, commodity producers can create a lot of wealth for investors when the commodity rebounds.
Because of this, the key to investing in commodities is to have a long-term outlook. Further, it's imperative to be invested in a company that can withstand the tough times by having low-cost production and a solid balance sheet. In the copper sector, there's really one company that stands above the rest: Freeport-McMoRan (NYSE:FCX).
Before we delve too deeply into why Freeport-McMoRan is the best copper stock, we need to first take a look at why one would want to be invested in copper in the first place. Copper is a key metal because it is very good conductor of heat and electricity. Because of this, it's used for wires and cables. It's also used for electronics, electric motors, and architecture, as well as a number of other applications.
This versatility leads to strong demand for copper as the world's economy grows. In fact, over the next decade, the expectation is for 2.5% annual global economic growth, which is expected to yield 28% total growth in annual copper consumption, as noted on the following slide:
The other key factor noted on that slide is the fact that production from existing copper mines is expected to decline by 17% over that same time frame. This means new mines will need to be brought online to meet the expected shortfall between supply and demand. This is where Freeport-McMoRan comes into play.
Freeport-McMoRan is the world's largest publicly traded copper producer. In fact, it's the second largest copper producer overall as it sits just behind Codelco, which is owned by the government of Chile. Its size alone is certainly one of the major reasons it's the best copper stock to buy.
The other big reason Freeport-McMoRan is the top copper investment is its copper-driven future. While the company has diversified into oil and gas in recent years, and also produces gold, silver, molybdenum, and cobalt, much of its future growth is expected to come from copper projects it currently has in development. These major projects include the Cerro Verde mill expansion and the underground mine development at its Grasberg mine.
These expansion projects are expected to push the company's copper production from 960 million pounds as of the second quarter of this year up to an average of 1.37 billion pounds next year, as noted on the following slide:
Even better, the new production will push its net cash costs from $1.64 per pound all the way down to $1.20 per pound next year. This will lead to stronger cash flow, even if copper prices don't budge. Meanwhile, capex spent on major projects is expected to decline by a billion dollars, which will boost its free cash flow. The company could reinvest that cash in new copper projects; Freeport is currently working on a number of brownfield development studies to expand its current mines to capture the growing demand in the copper market.
In the meantime, however, much of that growing supply of free cash flow will be used to reduce the company's debt load, which was taken on to fund copper expansion as well as its recent oil and gas acquisitions. While Freeport-McMoRan is sitting on $19.8 billion in net debt, its credit metrics are expected to improve as its copper expansion projects come online over the next year.
Further, the company is looking for ways to cut its debt and reduce its capex burden, which will strengthen its balance sheet. While the balance sheet isn't as strong as it could be, its not that big of a concern at the moment because of the expanding cash flow on the horizon.
Freeport-McMoRan is the best stock for investors looking to invest in the copper market. It's not only the second largest copper producer in the world, but production is expected to grow over the next year, with more growth in the works. Further, the new production will bring down its costs, which will really drive cash flow growth and could create a lot of value for Freeport's investors.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.