Having crossed $5 per pound in May, the price of copper has declined to around $4.12 per pound, and that fall has taken the share price of copper miner Freeport-McMoRan (NYSE: FCX) with it -- it's down almost 18% since copper crossed $5 per pound. That said, these kinds of dips often create buying opportunities in commodity stocks, which is the case now. Here are three reasons why.
Freeport-McMoRan's leaching initiative
The initiative involves recovering copper from existing stockpiles that have already been mined. As such, there's a major opportunity for Freeport-McMoRan to produce copper at a relatively low cost per pound using its leaching technology in development. For reference, its unit net cash cost of copper was $1.73 per pound in the second quarter, which compares with the point that "cost per pound for the leach initiatives are under $1 per pound incrementally" that CEO Kathleen Quirk discussed on the earnings call.
The leaching initiative is cost-effective and is developing ahead of schedule, and it is starting to be a significant part of Freeport's copper sales.
Freeport plans to sell 4.1 billion pounds of copper in 2024. Having produced 55 million pounds of copper using the initiative in the second quarter, Freeport has already hit its target run rate of 200 million pounds of copper in 2024. Moreover, it plans to hit a run rate of 400 million pounds in the next couple of years and 800 million over the long term -- the latter figure represents 19.5% of expected total Freeport copper sales.
Growth opportunities
While the leaching initiative represents the most exciting and cost-effective way for the company to expand copper production, Freeport also has a pipeline of expansion projects with which it can increase long-term production. That's a key plus in an industry that's finding it tough to obtain new mining permits to expand supply.
Among the opportunities is an expansion project in an existing mine in Bagdad, Arizona, with management targeting an investment decision by the end of 2025 and start-up in 2029. Quirk has her sights "on more than doubling current production levels in the 300 million pounds per annum range" as a result of the expansion. In the long term, it also has significant potential expansion projects in Lone Star, Arizona, and El Abra, Chile, which could start in the early 2030s.
Image source: Getty Images.
Valuations and the case for copper
There's no point buying the stock unless you are either bullish on the long-term price of copper or are willing to accept the current price as a long-term estimate. The bullish arguments in favor of copper revolve around its role in the economy's electrification trend, most notably seen in electric vehicles, charging networks, renewable energy, industrial automation, and smart connected buildings and infrastructure.
In addition, investment in AI applications means more demand for data centers, creating marginal demand for copper . Meanwhile, traditional sources of demand, including construction, transportation, and defense, will also support the copper market. These long-term underlying growth trends will support demand even when there's some cyclical weakness in demand, as there is now from industries like construction.
Meanwhile, on the supply side, as you've probably noted above, significant new supplies will take a long time to come online. That's the bullish case, and if you believe it, it makes sense to get exposure to copper through a high-quality company like Freeport.
However, even if you assume that the price of copper will stay where it is now, the stock is an excellent value. For example, management believes it will generate $11 billion in earnings before interest, taxation, depreciation, and amortization ( EBITDA ) in the 2025/2026 time frame, assuming a price of copper of $4 per pound, all things being equal.
With a current enterprise value (market cap plus net debt) of $69.2 billion, the stock would trade at 6.3 times EBITDA, a favorable valuation.
Image source: Getty Images.
A stock to buy
While the recent second-quarter results weren't perfect -- Freeport-McMoRan is battling to overcome lower ore grades in North America -- they were good enough (EBITDA came in at $2.7 billion) to support the case for buying the stock. Moreover, the leaching initiative is ahead of plan and promises to become a significant contributor to sales in the future.
As such, the stock continues to look attractive.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .
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