Freeport-McMoRan (NYSE:FCX) stock has traded below $9 twice in the last three months. Each time, the stock has bounced back. The stock currently trades above $11. Further, I believe that FCX is poised for a sustained rally over the next 12 to 24 months. Freeport-McMoRan has strong support in the range of $8 to $10 from a technical perspective. I don’t see the equity breaking these support levels.
Investors might argue that there is a 29% probability of recession within the next 12 months. That can keep copper prices depressed. However, the Federal Reserve is pursuing expansionary monetary policies, which is positive for precious metals and commodities.
More importantly, copper is already an undervalued commodity. In the last ten years, the Global X Copper Miners ETF (NYSEARCA:COPX) touched a high of $62.13 in April 2011. The exchange-traded fund is currently lower by 71% at $18.05.
Further, a 50-year chart comparing S&P GSCI Commodity ETF (NYSEARCA:GSG) and SPDR S&P 500 ETF (NYSEARCA:SPY) shows that commodities are undervalued.
Specific to copper, prices touched a high of $4.62 per pound in February 2011. While the average price for the last 10-years is $3.07, copper currently trades at $2.65. Therefore, I believe that copper will trend higher from current levels and so will FCX stock.
I must add that strong demand will sustain for copper. In particular, 2.5 billion people from India and China will drive demand growth. As an article from Stanford University notes, “consumption of metals will only accelerate in the coming decades.” This demand growth is backed by estimates that by 2050, the human population will reach 10 billion.
Growth Coming at the Right Time
There are hopes of de-escalation of the trade war between the U.S. and China. This is a potential trigger for copper to trend higher.
Freeport-McMoRan plans to ramp up copper production by 30% between 2019 and 2021. For the same period, gold production is expected to increase by 70%. The company also expects a 100% increase in EBITDA during these years. Therefore, incremental production associated with strong EBITDA growth is a key positive trigger specific to the company.
If copper even trends higher to the last 10-year average price of $3.07, Freeport-McMoRan is positioned for EBITDA margin expansion and cash flow growth. In addition, gold has regained bullish momentum due to expansionary monetary policies. As gold production ramps up by 70%, Freeport-McMoRan’s financials will look much stronger.
Fundamentals Will Continue to Improve
In the last few years, Freeport-McMoRan has been deleveraging through asset sales. This has reduced balance sheet stress and I believe that fundamentals will continue to improve.
For year-to-date 2019, FCX reported operating cash flow of $1.3 billion, implying an annualized cash flow of $1.7 billion. For 2019, the company expects capital expenditure to $2.6 billion. A similar investment is expected for 2020.
Even if operating cash flows are at $1.7 billion for both the years, an additional cash influx of $1.8 billion will be needed for the capital expenditure. With Freeport-McMoRan having $2.2 billion in cash and $3.5 billion in undrawn credit facilities, the company is fully financed for the next 24 to 36 months.
During this period, the EBITDA bump up will translate into lower leverage and improved EBITDA interest coverage ratio. As the company’s credit profile improves in the next 18 to 24 months, FCX stock will be positively impacted.
Concluding Views on Freeport-McMoRan Stock
FCX stock has been in a very tight trading range in the recent past and I believe that a breakout is imminent. In particular, as the company plans to double EBITDA and cash flow by 2021, the stock will respond positively.
One potential headwind is the concern related to the economy. However, expansionary monetary policies and a possible de-escalation of the trade war can trigger renewed growth. Also, copper is undervalued, and I don’t see any downside for the commodity.
Overall, it’s a good time to invest in FCX stock. In a scenario where several asset classes are overvalued, copper is undervalued. And Freeport-McMoRan is probably the best copper bet.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
