Freeport-McMoRan (NYSE: FCX), one of the largest producers of copper, has seen its stock underperform over the last month, falling by 8% compared to the S&P 500 which was up 1%. Does this come as a surprise at a time when gold realizations have gone up 35% year-to-year to $2,568 per ounce in Q3 of 2024, and copper realizations are also up 13% to $4.30 per ounce?
Not really. We believe Freeport valuation to be around $47 per share, which is almost in line with the current market price. All the positivity surrounding copper and gold seem to already be priced in.
Freeport, being one of the world’s largest copper producers and with its future growth pipeline, is expected to benefit from the future outlook of copper. While global economic data weighed down demand for copper, rate cuts by the Fed, and the large economic stimulus in China, have largely helped. Demand for copper has been increasing due to substantial investments in electrical infrastructure and AI data centers, which need power cables. This growing sector has offset weakness in the traditional auto and residential construction sectors.
Freeport stock also derives value from rising gold prices, having generated around 11% of it revenues from gold sales in 2023. With uncertainties surrounding the U.S. Presidential elections, prices of the safe metal have witnessed record highs. For FCX, gold sales volume in Q3 of 2024 increased by a substantial 40% to 554 thousand ounces year-on-year.
The increase in FCX stock over the last 3-year period has been far from consistent, with annual returns being more volatile than the S&P 500. Returns for the stock were 61% in 2021, -7% in 2022, and 14% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is much less volatile. And it has outperformed the S&P 500 each year over the same period.
Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could FCX face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?
Though the long term demand for copper remains positive, Freeport’s business remains susceptible to fluctuations that can plague the commodity market. Given the large uptick in copper prices in recent years, any changes in the long term outlook for copper or change in government policies could be a downside for the stock. Additionally, the company’s lengthy El Abra project in Chile, which is expected to commission in 2033, could adversely impact the company in case of any delays or increase in envisaged costs.
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