Towards the end of 2019, there were hopes of accelerating global GDP growth in 2020. In particular, the first phase of the US-China trade deal triggered optimism. This positivity translated into higher commodity prices and a sharp upside in Freeport-McMoRan (NYSE:FCX) stock. Between October 2019 and mid-January 2020, the stock surged higher by 58% to $13.53.
However, the coronavirus outbreak in China and the surge in infections have once again dampened the growth outlook. Copper prices have plunged in the recent past and Freeport-McMoRan stock declined from near-term highs of $13.53 to $10.90.
Even as worries related to coronavirus persist, Freeport-McMoRan stock has shown surprising resilience. The stock has started moving higher and currently trades at $12.20.
There is no doubt that copper demand will be impacted negatively through 2020. China accounts for half of global copper demand and estimates suggest that the new virus outbreak will impact China’s GDP growth by 1%.
At the same time, it is worth noting that Freeport-McMoRan stock is attractively valued. The stock is worth half of its value in 2010. Valuation is one factor that has kept FCX stock relatively firm. In addition, the negative impact of coronavirus on GDP growth is just for 2020. Beyond that, Freeport-McMoRan will benefit from ambitious growth plans and renewed upside in copper prices.
Copper is Undervalued With Demand Growth Visibility
In the past 10 years, commodities (copper included) have provided the worst returns among major asset classes. The next decade can be different and there are strong reasons to believe that copper prices will trend higher.
Global demand for copper is expected to double in the next 20 years. China is a major copper consumer and India is likely to do some catching-up: bBetween 2018 and 2026, India’s national copper demand is likely to double.
The global push towards electric vehicles will also trigger significant copper demand. Henry Salsibury, research analyst at Wood Mackenzie, opines that “20 million electric vehicle charging stations are expected to be deployed globally by 2030, consuming 250% more copper compared to 2019.”
Overall, demand for copper will grow and Freeport-McMoRan is well positioned to benefit. The company is opening a copper mine in United States with first production in 2020. In addition, Grasberg mine expansion will deliver volumes growth. From 3.3 billion lbs in 2019, Freeport-McMoRan expects to ramp-up sales volume to 4.6 billion pounds by 2022.
Once copper prices start trending higher, the company will benefit from higher price as well as higher sales volumes. In addition, the company will be considering inorganic growth beyond 2022 once the current expansion projects are completed. There are ambitious plans for the long-term and Freeport-McMoRan is also well positioned from a balance sheet perspective.
Strong Financial Flexibility to Support Growth
Back in 2015, Freeport-McMoRan was struggling with a net debt position of $20.20 billion. Over the last four years, the focus has been on discipline and deleveraging. The sale of the oil & gas misadventure was positive and helped in deleveraging. As of December 2019, the company’s net debt position declined to $7.8 billion.
With $2 billion in cash and $3.5 billion in undrawn credit facility, Freeport-McMoRan has high financial flexibility. Further, the company reported $1.5 billion in operating cash flow for 2019. This additionally provides cash buffer for investments.
Further, for 2020, Freeport-McMoRan expects capital expenditure of $2.80 billion and a capital expenditure of $2.40 billion for 2021. Considering the current cash, undrawn facility and assuming that operating cash flows remain stable, Freeport-McMoRan is fully financed for the next 24 months.
Therefore, when the company is looking for inorganic growth beyond 2022, there will be ample financial headroom to leverage and expand. It is also worth noting that the company is not pursuing inorganic and organic growth at the same time. This is an indication of prudent financial management and should boost investor confidence.
My Concluding Views on Freeport-McMoRan Stock
I believe that the worst is behind for Freeport-McMoRan stock. With the company’ focus shifting to expansion projects in the next three years; investors can expect higher cash flows, lower net debt and higher dividends.
In addition, the demand for copper will sustain in the coming decade and Freeport-McMoRan has the financial muscles to expand and benefit from higher copper prices.
There are near-term economic concerns, but Freeport-McMoRan stock has recovered well from a sharp downside. I believe that the stock can be accumulated at current levels and on any renewed correction.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
