After the price of copper surpassed $5 a pound in May, it has fallen to around $4.12 a pound. That drop has hurt the copper mining company’s stock price Freeport-McMoRan (NYSE: FCX) with it — it’s down nearly 18% since copper crossed $5 a pound. That said, these kinds of declines often create buying opportunities in commodity stocks, which is the case now. Here are three reasons why.
The Freeport-McMoRan Leaching Initiative
The initiative involves recovering copper from existing reserves that have already been mined. As such, there is a significant opportunity for Freeport-McMoRan to produce copper at a relatively low cost per pound using its developmental leaching technology. For reference, the net cash cost of copper per unit was $1.73 per pound in the second quarter, which is similar to the point that “the cost per pound for the leaching initiatives is gradually below $1 per pound” that CEO Kathleen Quirk discussed during the earnings call.
The leach initiative is cost effective and ahead of schedule and is becoming an important part of Freeport’s copper sales.
Freeport plans to sell 4.1 billion pounds of copper in 2024. After producing 55 million pounds of copper in the second quarter through the initiative, Freeport has already achieved its target of 200 million pounds of copper in 2024. Furthermore, it plans to achieve a run rate of 400 million pounds over the next few years and 800 million pounds in the long term – the latter figure representing 19.5% of Freeport’s expected total copper sales.
Growth opportunities
While the leach initiative is the most exciting and cost-effective way for the company to expand copper production, Freeport also has a pipeline of expansion projects that could help it increase production in the long term. That’s a major plus in an industry that’s finding it difficult to secure new mining permits to expand supply.
One option is an expansion project at an existing mine in Baghdad, Arizona, with management targeting an investment decision by the end of 2025 and start-up in 2029. Quirk has set its sights on “more than doubling current production levels in the 300 million pound per year range” as a result of the expansion. In the long term, it also has significant potential expansion projects in Lone Star, Arizona, and El Abra, Chile, which could start up in the early 2030s.
Image source: Getty Images.
Valuations and the case for copper
There is no point in buying the stock unless you are optimistic about the long-term price of copper or are willing to accept the current price as a long-term estimate. The bullish arguments in favor of copper revolve around its role in the electrification trend of the economy, particularly seen in electric vehicles, charging networks, renewable energy, industrial automation, and smart connected buildings and infrastructure.
The story continues
Furthermore, investment in AI applications means more demand for data centers, which creates marginal demand for copper. Meanwhile, traditional sources of demand, including construction, transportation, and defense, will also support the copper market. These underlying long-term growth trends will support demand even when there is some cyclical weakness in demand, as is currently the case in sectors such as construction.
Meanwhile, on the supply side, as you probably noted above, it will be a long time before significant new inventory comes online. That’s the optimistic case, and if you believe that, it makes sense to get exposure to copper through a high-quality company like Freeport.
But even if you assume copper prices stay where they are today, the stock is an excellent value. For example, management believes it will generate $11 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) in the 2025/2026 period, assuming a copper price of $4 per pound, all other things being equal.
At a current enterprise value (market cap plus net debt) of $69.2 billion, the stock would trade at 6.3 times EBITDA, a favorable valuation.
Image source: Getty Images.
A stock to buy
While recent second-quarter results weren’t perfect — Freeport-McMoRan is struggling to overcome lower grades in North America — they were good enough (EBITDA came in at $2.7 billion) to support the case for buying the stock. Plus, the leach initiative is ahead of plan and promises to be a significant contributor to sales going forward.
The share therefore continues to look attractive.
Should You Invest $1,000 in Freeport-McMoRan Now?
Before you buy shares in Freeport-McMoRan, you should consider the following:
The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Freeport-McMoRan wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $692,784!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of July 22, 2024
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
3 Reasons to Buy This Great Commodities Stock When Prices Fall was originally published by The Motley Fool
EMEA Tribune is not involved in this news article, it is provided by our partners and/or the news agencies. Copyright and Credits go to the news agencies, email [email protected] Follow us WhatsApp verified channel
The post 3 Reasons to Buy This Great Commodities Stock During a Downturn first appeared on Frugals ca.
