Freeport-McMoRan: Buy The China Induced Weakness

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About: Freeport-McMoRan Inc. (FCX), Includes: AAUKF, AAUKY
by: Stone Fox Capital
Summary

Freeport-McMoRan trades at the yearly lows in the mid-$13 range.

The long-term cash flow machine isn't altered by the current weakness in copper prices.

China economic weakness supports resolution of the trade war with the U.S.

Freeport-McMoRan (FCX) trades near the lows of the last year in the mid-$13 range. The stock generally trades based on the price of copper that recently hit a double bottom around $2.65/lb. The trade discussions with China set up a potential rally in the red metal and the stock of the copper miner.

Similar Quarters

The last time copper traded at these levels was last Q3. For the quarter, Freeport-McMoRan reported operating cash flows of $1.2 billion on an average copper price of $2.94/lb. The Q2 results last year generated operating cash flows of $1.0 billion on average copper prices of $2.65/lb. The current prices would suggest that this Q3 falls somewhere within those numbers where the average quarterly cash flows were $1.1 billion.

The point being that Freeport-McMoRan can generate billions of dollars in cash flows despite the weak ongoing market conditions for copper. The long-term picture isn't exactly altered by the weak prices. In fact, the theory remains that the next decade will be even more bullish for copper prices the longer weakness persists. Miners just aren't going to develop new copper mines when prices are this low.

Recent activity had really picked up on the copper front. A prime example was the Anglo American (OTCQX:AAUKF, OTCPK:AAUKY) decision to move forward with the Quellaveco project in Peru. The project is expected to cost $5 billion and take until 2022 to reach production with initial capacity of only 127,500 tonnes. The ultimate capacity will reach ~300,000 tonnes/year again reinforcing how new mines take up to five years to reach meaningful production levels.

The interesting part of the story is that the announcement for the mine development took place towards the end of July when the price of copper was closer to $2.85/lb and had spent a long period above the crucial $3.00/lb level. One has to wonder what the development project will look like with copper prices crashing. Anglo American might decide to slow some of the startup dates though the project is more concerned about copper prices starting in 2022 than the price this month.

China In Focus

The recent weakness in the Chinese market suggests Beijing might be willing to negotiate with the U.S. on the trade wars. The manufacturing sector printed a PMI at 14-month lows this week. The index fell to 50.6 in August, down from 50.8 in July. The manufacturing sector is barely in expansionary mode.

With export sales down for a fifth month in a row, confidence and employment have remained weak in the Chinese manufacturing sector. Even Newsweek supports that Trump is winning the trade war due to weak economic data in the Communist country. The reporter suggests that Trump should make a deal while in a position of power. Such a move would support higher copper prices that have slumped along with the Chinese economy.

Image Source: Newsweek

The leaders of both governments are expected to meet in November for detailed discussions on the trade wars. Lower level officials of both governments are expected to meet prior to this summit between Trump and Xi JinPing occurs.

Any positive news such as the recent outcomes with Mexico on NAFTA discussions would no doubt shoot copper prices higher followed quickly by the stock of Freeport-McMoRan.

Takeaway

The key investor takeaway is that a trade war resolution between the U.S. and China is all that Freeport-McMoRan needs for a quick rally back to $20. The copper miner has a stock valuation now below $20 billion while the company was on a path to annual free cash flows in the $3-4 billion range. The best part of my previous investment thesis is that the company is still positioned with strong operating cash flows in the current weak market conditions while waiting on the decade on steroids to develop.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

Disclosure: I am/we are long FCX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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