Freeport-McMoRan: Revoking Dr. Copper’s Honorary Doctorate? (NYSE: FCX)

Copper – Think about demand

When most people think of copper, some think of the old green copper roofs on mansions and government buildings from a century or more ago. Some think of water pipes and copper wires which are common build and power homes and businesses. To me, that means most people are seeing the biggest demand for copper from emerging markets as the new growing middle class wants to build new homes and businesses. This happened at a significantly higher rate in Asia and South America than in North America. I see this trend continuing, but more focused on India and other Southeast Asian countries.

The reality, in my view, is that the biggest drivers of new copper demand (percentage change) over the next decade will be from electrical infrastructure and electric vehicles. This is simply based on the targets set by the government in Europe and the United States. New infrastructure in developing countries will also add significant demand. India will seek to improve its electricity grid to be more reliable, to drive business growth and to provide power to as many who want and can afford it now.

Examples include that a 1 MW wind turbine uses three (3) tons of copper, and an electric vehicle uses 3-4 times more copper than a traditional internal combustion engine vehicle.

However, new sources of copper do not “magically” appear overnight. It takes years and sometimes decades of investment, engineering, approvals and construction to go from the discovery phase to adding net new copper to the market. Governments and industry peers continue to pressure mining companies to continue to do better in reducing the environmental impact of these mining activities. This is potentially a good thing for the local environment, but has an impact on the cost of copper produced.

If that wasn’t enough, there are protests against the new copper production by locals who could be affected by such developments. This only adds to the time and risk that development costs. These additional expenses are often not recovered.

I have personal experience with this when it comes to developing linear infrastructure in North America. It is extremely difficult to build new industrial projects in North America and Europe. Operational assets are worth significantly more when it is difficult to build new ones. This in turn adds to the value of mines that operate in stable environments and have large reserves that can produce over the long term.

Many economists like to use copper as a barometer for the economy. Some even go so far as to suggest that copper has a “Ph.D. in economics.” Others say that Dr. Copper has knowledge of economics and tries to translate that into market indices. To really simplify this, if the economy is strong, copper prices and demand will be strong. If copper prices are weak and supply is high, that should tell us that the economy is weakening and that we should expect a recession in the near term.

In early August, Avi Gilbert wrote a public article in his Sentiment Speaks series titled: Reasons For A Crash. In the article, Avi talks about how the SPX reached its long-term target range. He also discusses how risk appetite has changed and how he has changed his approach in recent months to certain parts of the market. It’s a great read on the long-term markets from an Elliott Wave point of view.

Based on government mandates, I see demand for copper continuing to grow, even as investor sentiment towards North America and Europe pauses. Why? Simple, governments imposed it. So if the market looks lower in the long term, but the price and demand for copper is rising, maybe we should revoke the “honorary degree?”

There has to be a reason why two of the world’s largest gold companies (Newmont and Barrick) are diversifying and focusing their growth dollars on copper production. We have discussed this in recent articles as growth catalysts.

Article Newmont Mining (NEM).

Barrick Gold (GOLD) Article

But what about some of the “pure” copper focused companies with strong operating mines?

Background on Freeport-McMoRan

Freeport-McMoRan (NYSE: FCX) was founded in 1987 and is headquartered in Phoenix, Arizona.

Freeport-McMoRan operates facilities on three continents: North America, South America and Southeast Asia (Indonesia). North American facilities are focused on copper in the southwestern states of Arizona, New Mexico and 2 molybdenum mines in Colorado. The Morenci mineral district is the largest producing area. The South American operations are Cerro Verde in Peru and El Abra in Chile. Cerro Verde produces molybdenum and silver concentrate in addition to copper. Operations in Indonesia are concentrated in the Grasberg mineral district, comprising old and new operations, open and underground pits and the recovery of both copper and gold. These are all mature assets with low cost operations.

Why we fundamentally like Freeport-McMoRan

Production and financial:

In their 2023 annual report, Freeport-McMoRan reported sales of 4.1 billion kilograms of copper, 1.7 million ounces of gold and 81 million kilograms of molybdenum. Consolidated reserves from their units were 104.1 billion pounds of copper, 24.5 million ounces of gold and 3.3 billion pounds of molybdenum. Copper sales numbers and production were fairly flat compared to 2022, after a 10% increase the previous year. Gold production increased by 10% in 2023 compared to 2022.

Sales in 2023 were at significantly lower prices than realized prices for copper and gold in 2024.

Freeport-McMoRan, being a copper-focused company, likes to use sales and cost values ​​in USD/lbs.

Source: Freeport-McMoRan Q2, 2024 presentation

So far in 2024, key metrics continue to significantly outperform last year.

Key fundamental reports (year-on-year)

Click to enlarge

Financial policy:

Freeport-McMoRan has also done an excellent job of managing its balance sheet, paying down debt and mandating its management team through financial policy to keep debt low. While some might see this as risky growth potential, the slow and steady replacement of assets and the wise use of cash in a high-interest environment seems very prudent.

FCX generated consolidated operating cash flows of $5.3 billion in 2023. As of December 31, 2023, FCX had total consolidated debt of $9.4 billion, consolidated cash and cash equivalents of $4.8 billion (excluding cash of USD 1.1 billion associated with PT-FI export earnings required to be temporarily deposited in banks in Indonesia for a period of 90 days).

FCX’s financial policy is aligned with its strategic objectives of maintaining a strong balance sheet, delivering cash returns to shareholders and promoting future growth opportunities. The policy includes a base dividend and performance-based payment framework, whereby up to 50% of available cash flows generated after planned capital expenditures and distributions to non-controlling interests would be allocated to shareholder returns, with the remainder to debt reduction and value investments. consolidation of growth projects, subject to FCX maintaining its net debt at a level not exceeding its net debt target of US$3.0 billion to US$4.0 billion (excluding net project debt for Indonesia smelter projects ). The FCX Board reviews the structure of the performance-based pay framework at least once a year.

Source: FreePort-McMoRan 2023 Annual Report

To summarize the state of Freeport-McMoRan: they have steady production with plans to increase and maintain reserves, low debt levels (which they have policies to maintain), several world-class mines with very low cost production, flow of excellent cash, pays a dividend and even started buying back shares in 2024.

Elliott Wave Technical View of Freeport-McMoRan

In terms of reliability, FCX has been the “gold standard” for several years at Stock Waves. We have had no less than six long Wave setups since November 2021. For those less familiar with our work, Wave setups are defined as follows:

Highly liquid charts displaying clear proportions (aspect) and favorable risk-reward will be posted to members in a format called Wave Setup. These settings can be days, weeks, months or years in time. These include an entry price range, a stop price and a target price. While there is plenty of suggestions, guidance and education, we are a self-service information provider. It is up to the members to monitor and evaluate what is the right setup for them to trade and when.

The chart for FCX has shown a reliable long-term pattern and is following the Fibonacci price levels in a very reasonable manner.

The latest Wave setup was published on August 2, 2024 by senior analyst Zac Mannes:

Since then, FCX has moved closer to stated support and dropped 17% to the low before pulling back in the last few trading sessions. Where do we go from this enlarged view?

Other copper mining charts show similar action following recent August lows.

Stock Waves continues to identify high probability targets at the intersection of fundamentals and technicals. We continue to see a very bullish 2020 for commodities, but not all charts are the same. We enjoy the diverse patterns we see even among precious metal stocks, as they present more opportunities for rotation than in an “all the same” market.