Freeport-McMoRan (FCX): A bet on the price of copper

The shares of the global copper industry giant, Freeport-McMoRan (FCX), are going through a period of boom in the short term: they have had an increase of more than 30% in the last 3 months.

This performance is mainly explained based on the company’s results, which exceeded analysts’ forecasts in the last quarter. In turn, the main determinant of the firm’s profits is the price of copper, and that metal seems to be presenting encouraging prospects.

Freeport-McMoRan reported $5.041 billion in sales during the fourth quarter of 2017; the figure represents a growth from $4.377 billion compared to the fourth quarter of 2016. The company’s sales exceeded the forecasts of the analysts by $664 million. Earnings per share amounted to 0.51 per share, exceeding market estimates by $0.03. Although production volumes were low during the quarter, higher copper prices were the main trigger behind the company’s results.

A position in Freeport-McMoRan is necessarily a bet on the price of copper, since the price of the metal is a fundamental determinant of the financial performance of the business. Since copper is used intensively in all kinds of industrial applications, demand tends to be quite cyclical and difficult to predict. Beyond this, the supply and demand equation seems encouraging in the long term.

The management team of Freeport-McMoRan explained at the last press conference that demand for copper has remained above expectations, due to solid industrial production data in China, the United States and Europe.

Over the next few years, the boom in electric cars could be a fundamental tailwind for metal prices. It is estimated that an electric vehicle requires between three and four times the amount of copper that a traditional automobile demands. In addition, the infrastructure for recharging batteries is also intensive in the use of this metal.

According to estimates by Wood Mackenzie, an industry analyst, demand requirements in the copper industry could exceed an additional five million tons over the next decade. Taking the largest ten copper mines in the world, the annual production does not currently exceed five million tons, which implies a potential imbalance in the equation of supply and demand in the market.

Currently, there are not many large-scale reservoirs available, and it is estimated that between 7 and 10 years are required to develop a new large-scale deposit. The management of Freeport-McMoRan estimates that potential new copper mines require a price above $3 per pound to operate profitably.

The production of established mines has fallen in recent years, and no large-scale projects have been started. Freeport-McMoRan has 2 of the 10 largest deposits in the world in terms of reserves, and 3 of the 10 most important in terms of annual production.

Considering these factors, there are reasons to think that the fundamentals in the copper market present promising prospects, and the firm is in a privileged position to capitalize on a possible upward trend in the price of the metal in the medium term.

The shares of Freeport-McMoRan marked a minimum of prices in the first months of 2016, before undertaking a remarkable recovery loaded with volatility. The range of between $18 and $18.21 per share works as price support.

In terms of valuation, Freeport-McMoRan shares offer a reasonable entry price. The company is quoted at a price-earnings ratio of 15.29 times last year’s results, while the average price-earnings ratio for companies in the industry is at levels of 31.4.

It is particularly complex to compare valuations for companies in the mining business, since different firms exhibit exposure to different metals and dissimilar cost structures. Beyond this, it can be said that the Freeport-McMoRan valuation is broadly in line with the industry average.

In the event that copper prices remain on the upward path and this is reflected in the financial performance of the firm, the shares offer an attractive potential in 2018.