Freeport-McMoRan Inc (NYSE:FCX) stock is down 11% year-to-date and 34% off its 52-week high, which it reached in January. Meanwhile, the price of copper soared in November following the election, as Trump promised to ramp up infrastructure spending in the United States.
Copper prices have since lost some ground amidst worry over copper imports plunging in China, the world’s No. 1 consumer of the metal (consuming around 45%). Demand from China, which used more cement in three years than the United States did in the 20th Century, pushed up the prices of commodities including copper.
But around 2011, Chinese growth began to slow, and demand for commodities weakened. An article published in October by Sue Chang of Marketwatch citing Bank of America data stated that the ten-year rolling return on commodities .
China’s massive infrastructure boom was mostly funded by debt, and as I wrote last year, China’s debt has some investors and fund managers worried. Kyle Bass of Hayman Capital Management, who and earned a 212% return that year, sees trouble brewing in China.
If the global economy falls into recession, FCX would run into trouble.
But FCX stock also might benefit from some tailwinds in the years to come. Electric cars will increase demand for copper, and Glencore International (OTCMKTS:GLCNF) CEO Ivan Glasenberg says the is occurring faster than he expected. Also, a global infrastructure boom could be on the horizon. And while China may slow, India’s copper consumption is expected to triple in the coming decade.
Freeport McMoRan: The Risks
If the macro picture does get worse, Freeport-McMoRan stock would get hit hard. Freeport-McMoRan is loaded with debt and might have trouble repaying this if copper prices fell. In the most recent quarter, FCX’s debt-to-equity ratio stood at 2.43, meaning that for every dollar of shareholder’s equity, Freeport owed $2.43 in debt.
And in 2016, Freeport’s cash-flow to debt ratio was 0.23. This means that if FCX were to devote all operating cash flow to repaying its debt, it would need over four years. For the trailing twelve months, FCX’s operating income to debt ratio is 0.109. Freeport-McMoRan also has an Altman Z-Score of 0.43, suggesting the possibility of bankruptcy within two years. Ratings agency Fitch downgraded FCX’s debt in March.
Also, Freeport-McMoRan is a highly cyclical stock, with a beta of 2.51. This means that it if the stock market declined 10%, FCX would fall 25.1%. There’s evidence that things are deteriorating. A lot of the post-election euphoria seems to be giving way to pessimism.
In the United States, GDP in the first quarter grew at the : an annualized rate of 0.7%. Trump’s election boosted copper prices, but now some worry that Trump won’t be able to deliver on campaign promises of tax reform and infrastructure spending. The , which is an indicator of economic health, flattened, suggesting weakness ahead.
China’s economy also appears to be slowing as the Chinese government clamps down on credit growth. Retail sales, fixed asset investment and industrial production all disappointed.
FCX already has a somewhat weak balance sheet, and lower copper prices could send FCX into the red again. If we do enter a bear market, Freeport stock would get clobbered.
Freeport-McMoRan: The Rewards
We’ve seen that FCX is not for the faint of heart. But high risk can translate into high return. If you buy Freeport stock now and the global economy improves, you could gain a lot.
Freeport stock trades at relatively low valuations, meaning high potential upside. FCX stock changes hands at 8.45 times forward earnings, 1.16 times sales, 2.69 times book value, 4.32 times cash, and 9.72 times free cash flow.
states that analysts forecast a price of $15.03 per share, 30.5% higher than Freeport’s current price.
We’ve seen the glass half empty view, but some signs point to an increase in copper demand in the years ahead. Yes, U.S. GDP growth in the first quarter underwhelmed, but the projects 4.1% GDP growth in the second quarter. And U.S.
remains high.
Some secular tailwinds are on the horizon. Electric cars use a lot more copper than cars running on internal combustion engines, and sales of electric vehicles are heating up. Tesla Inc’s (NASDAQ:TSLA) sales surged, and BMW (OTCMKTS:BMWYY) reported that its sales of electric vehicles doubled in the first quarter.
Governments are increasing their support for electric vehicles. Rich countries like Germany and have offered EV buyers subsidies for years, but now even poorer ones like are talking about electrifying their vehicles to reduce pollution. The two countries hold over 2.5 billion people and will be biggest markets for cars in the years ahead.
Also, there’s talk of a global infrastructure boom. In a bid to reshape global trade and gain influence, China plans to in over 60 countries in Europe, Africa and Asia.
This has prompted a response from China’s rivals. plan to finance infrastructure projects in southeast Asia, East Africa and Iran. The UN projects that infrastructure spending will increase next year. India also plans to build from 2018 to 2024.
The UN projects that India will have the in 2024; perhaps India with its fast-growing economy could replace a slowing China as the main driver of global copper demand.
Bottom Line on FCX Stock
It looks like global copper demand could bounce back in the years to come, but timing this will be difficult. Yes, India, infrastructure, and electric vehicles will probably all increase demand. But it could be a few years before these trends start to move the needle.
India accounted for 4% of in 2014, less than a tenth of China’s share. And it will take time for batteries to replace the internal combustion engine. Electric vehicle sales may be growing fast, but they’re growing from a very small base. Germany’s chancellor, Angela Merkel, recently that the country wouldn’t meet its goal of putting 1 million electric cars on the road by 2020.
Also, it often takes a long time before construction starts on infrastructure projects, especially in unstable regions like Central Asia and East Africa. Four years after China’s “One Belt One Road” project was announced, some it hasn’t amounted to much.
Investors who think Freeport-McMoRan stock is too risky have other options. They can invest in diversified mining companies like Rio Tinto plc (ADR) (NYSE:RIO), which looks cheap, yields 4.24% and has a stronger balance sheet than FCX. They can also invest in copper ETFs, such as the iPath Bloomberg Copper Subindex Total Return Sub-Index ETN (NYSEARCA:JJC)
Or they can invest in copper mining ETFs, like the Global X Copper Miners ETF (NYSEARCA:COPX), which also yields 0.55%. One copper mining company like FCX might run into problems, but it’s less likely that the entire industry will disappear.
I like mining ETFs; you get a dividend, so it’s like owning a metal with a coupon. I bought 40 shares of the iShares Inc. (NYSEARCA:SLVP) on May 9.
As of writing, Lucas Hahn was long SLVP, PPLT and SLV.
