Freeport-McMoRan (FCX +2.83%) is best known as a play on copper, and rightly so. The industrial metal is its most essential earnings generator, and that won't change anytime soon. However, it's often overlooked that it's also a gold and molybdenum miner. And the latter is what investors should be focusing on right now, not least because it adds upside potential to the stock. Here's why.
How Freeport-McMoRan makes money
Here's a look at some key statistics for its metals to give readers a flavor of how Freeport makes money. As you can see below, copper is its most important metal. Using realized prices for each metal for 2022 and the estimated sales volume for 2023 produces a rough estimate of $16.4 billion for copper sales, $3 billion for gold sales, and $1.5 billion for molybdenum.
Note these are rough estimates, as the price of metals moves around a lot.
The most relevant column in the table below for our discussion is the sensitivities column. This is management's estimate for how much earnings before interest, taxation, depreciation, and amortization (EBITDA) is changed by movement in the metal's price. So, for example, the price of copper ended 2022 at around $3.70 per pound but now trades at $4.06 per pound, a difference of $0.36 per pound. Based on the sensitivity figure of $425 million for every $0.10c movement, the move is worth around $1.5 billion in revenue in the 2024/2025 timeframe. So it's not hard to see that copper really is the key to Freeport-McMoRan's prospects. Still, there's an important story to tell about molybdenum.
|
Freeport-McMoRan |
Sales Volume 2023 |
Freeport-McMoRan Realized Price 2022 |
Sensitivities Average EBITDA 2024/2025 |
|---|---|---|---|
|
Copper |
4.2 billion lbs |
$3.90 per lb |
+/-$0.10 per lb move results in a $425 million change |
|
Gold |
1.7 million oz |
$1,787 per oz |
+/-$50 per oz move results in an $80 million change |
|
Molybdenum |
80 million lbs |
$18.71 per lb |
+/-$1 per lb move results in an $80 million change |
Data source: Freeport-McMoRan. EBITDA = earnings before interest, taxation, depreciation, and amortization. Chart by author.
What about molybdenum?
The metal is commonly used as an alloy in steel to improve its hardness and temperature strength. As such, its demand is tied to demand for steel, particularly the steel used in harsh environments, such as the oil and gas industry.
While molybdenum may seem a relatively small part of Freeport's operations, the miner is the "world's largest producer by a significant margin," according to CFO Kathleen Quirk on the recent earnings call. That's not surprising as molybdenum is typically mined as a byproduct of copper mining -- a point I'll return to later.
In addition, the price of molybdenum has almost doubled this year. As such, if it stays where it is now, at slightly above $40 per pound, through the year, Freeport will generate something like $3.2 billion in revenue from molybdenum in 2023.
It may prove unsustainable.
It's wonderful to pencil all sorts of assumptions for molybdenum into Freeport's earnings, but the reality is prices are volatile. In addition, it's likely a combination of resurgent demand in China as steelmakers rebuild molybdenum inventory in anticipation of the economy reopening and supply restrictions due to the impact of lockdowns on China's molybdenum miners. As such, don't be surprised if the price moderates from the current elevated level once supply improves and the demand growth tails off.
NYSE: FCX
Key Data Points
What it means to Freeport-McMoRan investors
On the other hand, the recent spike in molybdenum prices adds another bow to the bullish quiver for Freeport-McMoRan, at least in terms of the favorable demand/supply calculator for copper and molybdenum. It illustrates the susceptibility of these metals to price spikes and long-term price rises due to a combination of increasing demand and, more importantly, in this case, supply constraints.
If molybdenum is a byproduct of copper and it's becoming increasingly difficult to obtain permits for new copper mines or expansion projects due to a myriad of environmental and regulatory hurdles, then the supply of molybdenum will be similarly constrained. That's bullish for copper and molybdenum prices, as well as Freeport-McMoRan, and recent events highlight that for investors.
