Freeport McMoran Shares Rally Despite Weakening Copper Prices

Freeport McMoran Shares Rally Despite Weakening Copper Prices

Freeport McMoran (NYSE: FCX) third-quarter results came in weaker on the back of copper prices retreating. Copper prices had run up significantly in the previous year, and since then have declined by almost 30%. Copper is usually seen as a leading indicator, due to its inherent involvement with the global economy, and while recessionary sentiment has been largely confined, for now, the growing talk of a recession is leading many analysts and traders to turn negative on copper.
Copper has been witnessing a significant increase in demand over the past few years as global infrastructure spending and demand from the green economy combined with liquidity, drove prices to record levels. Since then prices have declined as investors have become more circumspect about the global outlook. Despite the decline in price, Freeport’s management reiterated that demand remains strong, and while LME copper stock was up 25%, during September, there isn’t any significant indication that copper demand is going away.

Profitability declines as costs increase, price of copper falls

Due to the decline in copper prices, revenue came in at $5 billion compared to $6 billion in the previous year. For the nine months revenue was still up slightly to $17 billion compared to $16.6 billion during the same quarter in 2021, and despite the weaker prices, total production came in at 1 billion pounds, slightly higher than the 987 billion pounds in the previous years. While the price of copper declined, the cost of producing copper increased from $1.88 per pound to $2.45 per pound during the latest quarter, leading to a decline in profitability. Gold production was also up slightly, coming in at 448,000 ounces, up from 374,000 ounces, and the average realized per pound of gold also declined slightly, from $1757 to $1683 during the quarter. Net income declined from $1.4 billion to $404 million, and earnings per share fell to $0.28, down from $0.94 during the same quarter in the previous year.

The biggest demand for copper historically has always been from China, and with Chinese copper demand falling over the past few years, the markets have remained on shaky ground. Copper demand from China is expected to be up 3.3%  to 25 million metric tonnes, despite the Chinese infrastructure and real estate industry witnessing a significant decline.  Copper prices may head further downward, and the latest trading values showed that copper price was around $3.39.

Due to the decline in copper price Freeport McMorans, free cash flow also declined from $4 billion to $500 million for the quarter. Despite this decline in free cash flow, cash and cash equivalents remained at a healthy level, coming in at $8.8 billion. Management continued to increase capital spending despite the weakness, and total capital expenditure for the year is expected to be around $3.6 billion in total.

Freeport has indicated that it will continue to increase spending and expand its mines across the world, including Indonesia, despite the outlook being primarily negative. Prices are expected to remain steady, around $3.5 per pound, but uncertainty continues to loom. China’s total yearly demand for real estate was down 30% YoY, and with high debt, and the Chinese government looking to get the economy back to a much more stable financial outlook, a $1 trillion fiscal shortfall is expected in the total spending by local provinces. Forecasts currently estimate that Chinese copper spending will increase by around 3%, up from previous estimates which looked at spending to be around 2%.

But, global spending on renewable infrastructure including China’s plan to add 1200 GW of renewable energy should keep demand steady, and with EVs requiring anywhere from 85 pounds to 185 pounds of copper, EVs will only add to the momentum. During August global EV sales came in at 847,000, an increase of 60%, YoY. This represents a significant upside, despite many EV stocks falling during September.

Freeport Mcmoran’s valuation remains relatively cheap with a price-to-earnings of 8x compared to the broader markets and competitors such as Southern Copper (NYSE: SCCO), whose P/E currently stands at 12x, but still above competitors such as Rio Tinto (NYSE: Rio) whose stock trades at 5x earnings. Questions remain about Copper, with multiple themes playing out, but with a stronger dollar, and rising interest rates copper prices will either be rangebound or could see small declines, which may mean another weak quarter next time.