Copper is at the center of the clean energy revolution underway, along with the electrification of transportation. As the conduit for the flow of electrons, analysts estimate that about 70% of copper demand will come from decarbonization initiatives -- the impetus for Goldman Sachs to declare copper as "the new oil."
While governments and industries move toward carbon neutrality by investing heavily in renewable energy, Freeport-McMoRan (FCX) , the world's largest copper miner, is poised to benefit significantly. At around $38, the stock is reasonably priced with a P/E around 12, a strong balance sheet and ample cash flows.
'The New Oil'
The buildout of renewable electricity production and transportation, including solar, wind, hydro, and nuclear, requires vast amounts of copper. The copper that goes into an electric vehicle, estimated at just under 200 pounds, is almost four times as great as a similar legacy internal combustion engine vehicle. Demand for EVs is accelerating across the globe, as is the investment in the supporting infrastructure of power generation, transmission, and energy storage.
As this wave of secular demand continues to progress, the tenuous supply/demand balance of copper will likely continue to support the price. Currently, inventories of copper are at multi-year lows and in some regions multi-decade lows. The outlook for a meaningful increase in copper supply is subdued globally by a dearth of large-scale projects in the pipeline.
China has been a significant driver of the copper demand over the last decade, but decarbonization efforts worldwide have created more balanced growth drivers for the metal. To meet the Paris Climate Accords, signed by 174 nations, demand for copper from the energy sector could rise by 40% over the next two decades, according to the International Energy Agency.
Improved Balance Sheet
Over the last few years, Freeport has made strides in improving its balance sheet and removing operational risks. Since 2015, the company has reduced net debt by $18 billion. Cash on the balance sheet has gone from a precarious $200 million to $7.7 billion currently, and debt has been reduced from over $20 billion to $9.7 billion.
The over-leveraged Freeport of 2015, which once looked like a candidate for bankruptcy, is now thriving with a strong balance sheet with only $2 billion in net debt and $5 billion in free cash flow in the last year. Freeport has also settled disputed mine ownership with the Indonesian government.
Operationally, Freeport has never been better positioned. After two decades of planning, the company has ramped up underground mining at its Indonesian Grasberg mine, one of the largest known copper deposits in the world. Plus, new low carbon intensity technologies may allow Freeport to recover more low-cost copper from material already mined.
What's Up Doc?
Historically, the price of copper has been viewed as an economic bellwether. Indeed, the metal is known as Doctor Copper due to its ability to take the temperature of the overall economy.
Some domestic demand drivers, like housing and infrastructure, have strong outlooks. The lead article in Barron's this past weekend featured insight into a housing boom potentially stretching to the end of the decade. China's economic strength is a wild card, but as a leader in EVs, investments in renewable energy and electrification infrastructure will likely continue unabated.
The shares of Freeport have recently dropped close to 10% and are almost 20% below the May highs, pulled down in part by some year-end de-risking in markets. The price of copper has held up well, currently around $4.30/pound, up 22% year to date.
Potential for stable to higher copper prices from solid investment demand toward a decarbonized future would be a boon for shareholders. With a 12 P/E and a 10% free cash flow yield, Freeport's stock has plenty of upside potential in years to come.
