Freeport-McMoRan (NYSE:FCX) has grown by 5.69% since the last time I wrote about it and hit a new 52-week high of $38.09. However, the stock could not hold its new high and currently trades at $36.20. The stock price has shown an impressive trend over the past six months - the stock is up about 35% in the last six months. The economic conditions and expected movement of the copper prices will result in another good year for Freeport-McMoRan in my opinion.
Copper is used heavily in a number of industries - lately, the prices for copper have been dropping because of the oversupply. China is the biggest importer of copper in the world. Its share among the world refined copper consumers increased from 38% to roughly 45% of the total copper extracted worldwide. In the recent years, the demand for copper in China has been increasing. This made the copper producers to produce more and more to an extent that they ended up supplying it in excess amounts. Producers of copper had a hard time in the last two years as the stockpiles on the LME rose from 250,000 tonnes to roughly 600,000 tonnes in a small period. As of December 2013, LME stockpiles fell to 365,700 tonnes, which were recorded as the lowest of the year.
Copper represents the biggest part of revenues of Freeport-McMoRan and any increase or decrease in the prices of copper has a direct impact on its share price. The condition, however, is certainly getting better. As China increases its demand slowly in this year and the stockpiles have come even lower than 365,700 tonnes, there is a possibility that copper price slowly rises again. Copper is a commodity and the prices for commodities move as the economic cycle goes on. So the prices are bound to come up in the near future when either the demand comes up or the oversupply diminishes.
On the contrary, gold prices are increasing and as of today, gold hit a two week high. The premium for instant delivery in China, which is the largest consumer of gold, rose to $20 as compared to the December average of $15.35. Moreover, the Istanbul Gold Exchange has shown that the imports of Turkey rose by 64% in December. According to the London-based World Gold Council, gold consumption in China in terms of jewelry, coins and bars increased by 30% in the trailing twelve months. The gold demand of China is expected to remain solid in the build up to the Lunar New Year on January 31st, where they give gold as a gift traditionally. On the other hand, consumption in India, the second-largest consumer of gold, increased by 24%.
Indonesian Ban: A Threat
A huge amount of copper and gold for Freeport-McMoRan comes from Indonesia. Lately, the Indonesian Government has been planning to put a ban on ore export with the idea that the ore should be processed in locally and the final product should be exported bringing in higher amounts of money in their country. Unfortunately, this makes the ore extractor need huge smelting facilities which they don't have, putting them in a dilemma. Freeport-McMoRan estimates that 60% of their output would be cut by this ban which would result in a 65% drop in sales and $5 billion loss a year. Additionally, the company would have to let go 16,000 employees which is about half of their work force. The company owns 25% share of Smelting through its subsidiary Freeport Indonesia which processes their ores in Indonesia. However, its capacity is not enough to meet the requirements of the company.
The government of Indonesia seems firm to go through with the ban and if it does, Freeport-McMoRan is going to take a huge hit and it will be at least a year or two before it stabilizes. Luckily, the company is on its way to development in Latin America. At Cerro Verde, Peru, the company is expanding their concentrator which would roughly cost $4.4 billion and would enlarge the concentrator facilities from 120,000 metric tons of ore per day to 360,000 metric tons of ore per day. It will allow the company to have an increased yearly production of roughly 600 million pounds of copper and 15 million pounds of molybdenum at the start of 2016.
Freeport-McMoRan is facing favorable economic conditions for its business and things will get better in the future as the prices of copper start to go up. However, it is going to take some time. The stock price had been growing steadily since mid-December after which it started dropping. The fall could simply be explained by the fact the investors are selling their stocks to book their profits. On the other hand, if Indonesia goes through with the ban, which is very likely, the company will likely face production issues if it fails to convince the government to export ore for value addition. As a result, Indonesian ban remains a threat. However, the overall economic conditions are in favor of the company and the South American investments will certainly start to pay off. Furthermore, the diversification in business by acquiring Plains Exploration will reduce the risk of the company and support the growth in revenue.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.