Freeport-McMoRan (NYSE: FCX), one of the largest producers of copper, has seen its stock rally by close to 30% over the last quarter. Copper futures prices have risen in recent months, rising from about $3.30 per pound in early October to almost $3.80 per pound currently, although they remain below the $4.40 levels seen about a year ago. Moreover, China – the top copper consumer – has also been easing its Covid-19 restrictions in recent weeks and the big reopening of the Chinese economy should result in rising demand from the manufacturing sector and also from the restocking of inventories. Freeport’s Q3 results were also better than expected, with adjusted earnings coming slightly ahead of estimates, although Freeport’s revenue fell due to weaker price realization year-over-year. The company has also indicated that the supply-demand picture in the copper market was tight, indicating that current prices were not sufficient to support new mine supply development. Separately, Freeport’s gold sales have also been on the upswing, rising 19% year-over-year over Q3, driven by higher recoveries and milling rates.
So what’s the outlook like for the company? The long-term outlook for the company is positive, with copper demand set to grow considerably, driven by the adoption of renewable energy and electric vehicles, which both are very copper intensive. Electric vehicles consume over 2x the copper used by traditional internal combustion engine vehicles. Renewable generation such as solar and wind requires over 5x more copper for each installed MW compared to traditional nuclear and fossil fuel-based power generation. That said, there are challenges as well. The global economy could see some headwinds due to rising interest rates and uncertainty surrounding the war in Ukraine. Moreover, inflation could continue to be an issue. For instance, the costs of smelting – which is the process of converting ore into metal – have been on the rise due to high energy costs and stronger demand. For example, Freeport-McMoRan is set to pay Chinese smelters about $88 per tonne in treatment charges for this year, marking a 35% increase from 2022 levels. We remain neutral on Freeport stock with a $39 price estimate which is roughly in line with the current market price. See our analysis on Freeport-McMoRan Valuation: Is FCX Stock Expensive Or Cheap? for more details on what’s driving our price estimate.
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