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Freeport-McMoran: Should You Sell and Book Profits?

By Mohit Oberoi, CFA - Published 3 Months ago. 0 Comment
Freeport-McMoran: Should You Sell and Book Profits?
  • Freeport-McMoRan stock has recouped its 2020 losses after more than doubling from its March lows. Copper prices have bounced back helping copper miners like FCX to move to higher price levels
  • From a demand-supply perspective, supply disruptions have helped balance out sagging demand for copper. Meanwhile, after the sharp rally in Freeport-McMoRan stock is it time to sell and book profits? We’ll explore in this article.

Freeport-McMoRan stock

In April, I had noted that both FCX and AA look good long-term buys, and investors who can brace the short-term volatility should consider the stock. FCX has more than doubled from those price levels. To be sure, the uptrend isn’t specific to FCX stock alone as broader US markets have bounced back sharply from their March lows. US stock markets have now closed with gains for three consecutive months and the S&P 500 has recouped its 2020 losses. Mining stocks like Freeport-McMoRan are high beta and fall and rise more than the broader markets. It's, therefore, no surprise that FCX stock has outpaced market returns over the last three months.

FCX outlook

Freeport-McMoRan is the largest publicly traded pure-play copper miner. The company’s mines are in relatively stable jurisdictions barring its Grasberg mine in Indonesia where the government has frequently looked to impose new conditions and taxes. While Freeport-McMoRan agreed to the government’s terms and the issue of stake dilution was settled, there is always a hanging sword that something new might come from the Indonesian government. Given the economic distress amid the COVID-19 pandemic, it wouldn’t be surprising to see countries raising taxes or coming up with other methods to raise money from corporations. What better way to raise money than milking an American corporation!

Freeport-McMoRan: An electric vehicle play?

Electric vehicle stocks are up sharply this year as investors look super excited about an all-electric future. The copper intensity of electric vehicles is much higher than traditional internal combustion cars and a move towards vehicle electrification should support copper demand as well.

Copper assets have been in demand even as the metals markets have been largely subdued over the last five years. In 2016, Freeport-McMoRan managed to sell its copper mines ar good valuation despite the slump in copper prices.

A short-term pullback?

Meanwhile, talking of the near-term outlook, I would be apprehensive of holding Freeport-McMoRan stock at current levels. While equity markets can stay ahead of economic fundamentals for long, commodity prices revert to economic realities much sooner.

The global economy and hence global copper demand are not reverting to the pre-pandemic levels anytime soon. We could see a pullback in copper prices from current levels that would eventually weigh on miners’ stock prices also.

There are several investment risks that markets are ignoring that I discussed in Key Investment Risks In a Post COVID-19 World.

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