The copper market has become one of the most conspicuous financial victims of the coronavirus from China. As this global terror has spooked every major economy on Earth to “shelter in place,” demand for copper has plummeted.
As a result, shares of copper producers like my pick in the Best Stocks for 2020 contest, Freeport-McMoRan (NYSE:FCX), have suffered as well.
Copper prices will likely remain under pressure for several more weeks, if not months. Despite that frightening prospect, I expect FCX stock to recover and deliver a solid gain for 2020.
You can read my initial recommendation on the company here. Admittedly, though, the stock has become more speculative than I could have imagined at the start of the year.
First, the coronavirus has forced Freeport to mothball its Cerro Verde mine in Peru and parts of the United States, which will obviously reduce cash flow. The company is negotiating with the Peruvian government to maintain heavily restricted operations at the mine. But the outcome of these discussions is not yet public.
Freeport’s massive Grasberg mine in Papua New Guinea remains operational for now. But that could change at any time. In many of the world’s major mining jurisdictions, governments are forcing mining companies to suspend operations.
Just last week, South Africa closed all of its mines, thereby joining a growing list of countries and regions that includes Chile, Peru, Argentina, Brazil, Ecuador, New Zealand, Mongolia, most of Canada and parts of the United States.
On the plus side for copper prices, these mining closures have removed about 20% of the world’s copper production from the market. That lost supply could help to put a floor under copper prices eventually. But so far, demand is dropping even faster than supply.
A Return to Normal Would Boost FCX Stock
A second risk to FCX stock is an obvious one; the copper price could drop even lower. If that were to happen, a third risk would come into play: Freeport’s balance sheet.
Although the company has ample liquidity to weather current conditions, if the copper price were to fall sharply lower from here and/or Freeport has to close its Grasberg mine for a prolonged period of time, the company could find itself in a world of hurt.
So those are the risks. But Freeport’s decimated share price discounts most of them. It does not price in any potential upside.
The biggest potential kicker for the stock is probably just one word: normal. If the copper market simply returned to something resembling normal, Freeport’s share price could double fairly quickly from current levels.
Longer term, a couple of major trends could combine to power robust and growing demand for copper.
Demand from the electric vehicle (EV) and battery industries could ramp total global demand for the metal by 900% over the next eight years, according to Robert Friedland, founder and CEO of Ivanhoe Mines (OTCMKTS:IVPAF), which owns the world’s largest undeveloped copper mine.
To make his case, Friedland shares a few relevant data points:
- The world’s auto manufacturers will offer more than 230 different EV models by 2021.
- A plug-in electric vehicle like a Tesla Model 3 requires 240 pounds of copper, which is nearly four times what a mid-sized internal combustion vehicle requires.
- Wind and solar energy is up to 37 times more copper-intensive than conventionally generated energy.
- The copper market is on track for large and growing supply deficits during the coming decade.
Don’t Discount Copper’s Bullish Potential
And yet, the financial news is full of doom and gloom about copper.
“Copper Demand Is Being Destroyed by the Coronavirus,” a recent Bloomberg News headline warned. “Copper is unlikely to recover from its coronavirus-induced plunge.”
Yes, the coronavirus epidemic will depress economic activity short term, which will depress copper demand short term.
But this near-term interlude throws shade on what could be a brilliant new bull market in copper … especially because a new wildcard source of potential demand has slipped undetected into the copper market.
Bonus! Freeport-McMoRan Is a Coronavirus Killer
According to several scientific studies, copper destroys viruses like the coronavirus.
Odd, but true, viruses and bacteria both perish fairly quickly after coming into contact with copper. This chemical curiosity has not yet received widespread publicity. But as this open secret becomes common knowledge, healthcare-oriented demand for copper could go parabolic.
Once the current coronavirus pandemic finally recedes, scientists and medical experts around the world will be devising new treatments and tactics for thwarting the next viral pandemic that comes our way. Just maybe, copper will play a prominent role in those next-generation antiviral efforts … or maybe just a supporting role.
But even without any new demand for copper as an antimicrobial, the metal’s price should move much higher once normal economic activity resumes.
Based on EV and battery demand for copper alone, the metal seems unsustainably cheap. That means the shares of many copper-mining companies like Freeport-McMoRan have become absurdly cheap.
Of course, in this challenging market, FCX stock could become absurdly cheaper. But I believe the stock will recover relatively soon and deliver major gains over the next year or two.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.