How Is Freeport Likely To Be Impacted If Copper Prices Continue To Decline?

Copper prices have displayed significant volatility since the beginning of the current year and the price prediction for the red metal has become increasingly difficult given the current scenario of the U.S.- China trade war. In this note, we will be highlighting the potential impact on Freeport-McMoRan’s (NYSE: FCX) stock price in case copper is not able to maintain its price through the remainder of the year.

(Source: LME website)

Investors have become increasingly wary of the U.S.- China trade war outcome as China hinted towards retaliatory trade measures in case the U.S. continues with the imposition of stringent tariffs on Chinese imports on 6th July. Commodities such as copper are indicators of global economic growth and a restrictive trade practice across the world would lead to an environment of stagnant growth. Copper has particularly been impacted by these recent developments as China consumes more than half of the global copper produced and such trade restrictions could imply a significant cut in global copper demand.

Copper has been gaining considerable strength over the past one year due to an environment of strong demand conditions and also due to the prevailing supply constraint factors. Thus, in case the demand for copper weakens, the concern over supply constraint would languish and copper prices would decline.

In such a scenario, major copper producers such as Freeport-McMoRan, which have a considerable exposure to copper, are likely to experience a decline in revenue and earnings if copper prices display a downtrend. Per Trefis estimates, Freeport’s copper division contributes close to 82% to the company’s overall value and hence a slight decline in realized copper prices is expected to have a detrimental impact on the company’s overall performance.

To understand the impact of the same, we have created a scenario over our base case estimate which implies that the stock price for the company would decline by almost 6% in case copper prices decline by 6% year-on-year (y-o-y) in 2018, in comparison to our base case estimate for prices to rise by 5% in 2018.

A 6% decline in expected copper prices for 2018, would imply a 10% reduction in the company’s copper revenue and a 6% decline in its expected total revenue. This decline is expected to result in a 5% reduction in the company’s 2018 expected EBITDA and thus a 6% decline in our year-end fair price estimate.

Thus, Freeport’s stock price will remain highly volatile to the changes in the price of copper in the near term until the current environment of tariff uncertainty becomes clearer. In case you have an outlook contrary to our assumptions, you can modify our estimates and arrive at your own fair price estimate for the company by using our interactive dashboard for Freeport’s Sensitivity to Changes in Copper Prices.

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