The copper market has seen a significant uptrend in 2024, with prices surging more than 20% from mid-February to late May. However, shortly after that, copper prices fell below $10,000 per metric ton on the London Metal Exchange (LME) due to increasing global inventories and sluggish U.S. job openings data.
Meanwhile, COMEX copper futures continued their downward trend, dipping below $4.5 per pound in June, nearing their lowest level in over a month, completely erasing the gains made in May that pushed copper prices to a record high of $5.2. This price decline is primarily due to evidence of lower near-term demand.
After the official Manufacturing Purchasing Manager Index (PMI) indicated an unexpected contraction in China's manufacturing sector, trade data for the period revealed a 7.1% decrease in imports of copper ore turnover, despite the previous price surge, as refiners have increasingly turned to using scrap to sustain production. As a result, Chinese inventories have grown to their highest levels since 2020, surpassing seasonal trends that usually favor a drawdown.
So, the price of deliveries from Shanghai bonded warehouses has remained at a discount to the LME for two consecutive weeks. Moreover, the LME three-month contract has lost nearly 12% since it hit a record high of $11,104.50 on May 20, 2024.
Despite this, copper prices have risen by around 15% year-to-date, driven by speculative bets on impending shortages. This speculation is fueled by copper’s critical role in electrification, particularly in grid-scale energy and data center infrastructure, and the challenges associated with launching new projects for fresh ore supply.
Bullish Long-Term Trend
The long-term COMEX copper futures chart, dating back to 1971, reveals that futures never surpassed the $1.6475 per pound level before 2005. However, since then, the market dynamics have shifted significantly, with copper prices not falling below $2 since early 2016 and have stayed above $3 per pound since October 2020. The price action pattern indicates that a new all-time high has followed every correction in copper.
Similarly, the long-term London Metals Exchange (LME) copper chart exhibits a bullish technical pattern.
Overall, these patterns suggest a robust and ongoing upward trend in copper prices, driven by increased demand, limited supply, and copper’s critical role in various industries. Despite short-term volatility, this long-term bullish trend indicates a positive outlook for copper investments.
However, the recent correction prompts investors to reassess their positions in copper stocks such as Freeport-McMoRan Inc. (FCX) and Southern Copper Corporation (SCCO), considering both the potential for future growth and the current risks involved.
Freeport-McMoRan Inc. (FCX)
With a $69.76 billion market cap, Freeport-McMoRan Inc. (FCX) is a prominent metals company with a primary focus on copper. The company manages seven copper operations in North America: Morenci, Bagdad, Safford (including Lone Star), Sierrita, and Miami in Arizona, as well as Chino and Tyrone in New Mexico. Additionally, FCX operates a copper smelter in Miami, Arizona.
FCX has a potential expansion project to surpass the concentrator capacity of its Bagdad operation in northwest Arizona. With a life expectancy exceeding 80 years, Bagdad's reserve supports an expanded operation. In late 2023, the company finalized technical and economic studies, indicating the opportunity to build new concentrating facilities to boost copper production by 200-250 million pounds annually, exceeding Bagdad’s current output rate.
At its Safford/Lone Star operation, FCX is completing projects aimed at increasing copper production from oxide ores to 300 million pounds per year. It marks an expansion from the initial design capacity of 200 million pounds per year.
For the first quarter that ended March 31, 2024, FCX’s copper sales were 1.1 billion pounds, 11% higher than the January 2024 estimate of 1 billion pounds, and 33% up from the prior year’s quarter, mainly reflecting higher mining and milling rates and ore grades at PT-FI. Its revenues rose 17.3% year-over-year to $6.32 billion.
Further, average unit net cash costs for FCX’s copper mines of $1.51 per pound were below the January 2024 estimate of $1.55 per pound and first-quarter 2023, primarily reflecting higher copper volumes at PT-FI. During the quarter, the company’s operating cash flows were $1.9 billion, net of $0.1 billion of working capital and other uses. As of March 31, 2024, cash and cash equivalents totaled $5.2 billion.
Kathleen L. Quirk, FCX’s President, stated, “Our first-quarter results reflect strong execution of our operating plans, consistent with our long-standing focus on operational execution.”
“Market fundamentals for copper are positive, supported by copper’s increasingly important role in the global economy and limited available supplies to meet growing demand. Freeport is strongly positioned for the future as a leading producer of copper with multiple options for future growth and an experienced team with a track record of accomplishment,” Quirk added.
Moreover, the company’s financial policy aligns with its strategic objectives of maintaining a solid balance sheet, delivering cash returns to shareholders, and pursuing opportunities for future growth. On March 27, 2024, FCX’s Board of Directors declared cash dividends of $0.15 per share on its common stock, paid on May 1, 2024, to shareholders of record as of April 15, 2024.
For the year 2024, the company’s sales are expected to approximate 4.15 billion pounds of copper, and unit net cash costs are anticipated to average $1.57 per pound of copper. Further, FCX expects operating cash flows to be nearly $7.4 billion, net of $0.2 billion of working capital and other uses, for the year.
Street expects FCX’s revenue and EPS for the fiscal year (ending December 2024) to increase 10.5% and 5.8% year-over-year to $25.26 billion and $1.63, respectively. Moreover, the company has topped the consensus revenue estimates in all four trailing quarters.
Shares of FCF have surged more than 30% over the past six months and approximately 31% over the past year. However, the stock has declined nearly 5% over the past month.
Southern Copper Corporation (SCCO)
With a market cap of $84.35 billion, Southern Copper Corporation (SCCO) engages in mining, exploring, smelting, and refining copper and other minerals. The company operates the Toquepala and Cuajone open-pit mines and a smelter and refinery in Peru; and La Caridad, an open-pit copper mine, alongside copper ore concentrator, a SX-EW plant, a smelter, refinery, and a rod plant in Mexico.
In addition, the company operates Buenavista, an open-pit copper mine, as well as two copper concentrators and two operating SX-EW plants in Mexico.
During the first quarter that ended March 31, 2024, SCCO’s net sales grew 13.3% from the previous quarter to $2.60 billion. The growth was mainly driven by a surge in the sales volumes of copper (+9.6%) and silver (+15.3%) and an uptick in metal prices for all its products. Its operating cash cost per pound of copper dropped 14.2% quarter-over-quarter.
Notably, copper production registered a quarter-on-quarter rise of 6,181 tons (+2.6%) and 16,998 tons (+7.6%) compared to the prior year’s quarter. Year-over-year growth was mainly attributable to a rise in copper from concentrate production at all its mines (+12.7%), including 2,158 tons of copper from the new zinc concentrator.
Furthermore, SCCO’s operating income grew 37% from the prior year to $1.19 billion. The company’s net income was $736 million, or $0.95 per share, an improvement of 65.4% and 63.8% quarter-on-quarter, respectively. Its adjusted EBITDA rose 34.3% from the previous year to $1.42 billion.
Cash inflows from operating activities were $659.9 million, a 22% increase from the $540.9 million reported in the fourth quarter of 2023. This improvement was due to strong cash generation from its operations, driven by higher sales and effective cost-control measures. As of March 31, 2024, the company’s cash and cash equivalents were $1.25 billion, compared to $1.15 billion as of December 31, 2023.
On April 19, 2024, SCCO’s Board of Directors declared a quarterly stock dividend of 0.0104 shares of common stock, paid on May 23, 2024, for shareholders of record at the close of business on May 8, 2024.
During the last earnings call, SCCO stated that it sees robust market demand, driven by both a resilient US economy and emerging needs in decarbonization technologies and artificial intelligence. These factors will play a substantial role in bolstering long-term copper demand, thereby maintaining favorable copper prices. Demand is anticipated to increase by nearly 2.5% this year.
Analysts expect SCCO’s revenue and EPS for the second quarter (ending June 2024) to increase 14.4% and 27.7% year-over-year to $2.63 billion and $0.90, respectively. Additionally, the company’s revenue and EPS for the fiscal year 2024 are anticipated to grow 11.3% and 25.1% from the prior year to $11.01 billion and $3.89, respectively.
SCCO’s stock has surged more than 44% over the past six months and approximately 54% over the past year. However, the stock has plunged around 10% over the past month due to a recent correction.
Bottom Line
The recent correction in copper prices, marked by a decline from a record high hit on May 20, can be attributed to several factors affecting supply and demand dynamics in the market. Higher global inventories and evidence of lower near-term demand, particularly highlighted by an unexpected contraction in China's manufacturing sector, led to a downturn in copper prices.
For investors, this correction serves as a reminder of the inherent volatility in commodity markets. However, it does not necessarily negate the long-term bullish trend driven by increased demand, limited supply, and copper’s critical role in various industries, especially in electrification and decarbonization initiatives. Despite short-term fluctuations, the fundamental drivers supporting copper’s growth trajectory remain intact.
Investors should consider strategies to navigate periods of high volatility. Diversification across different assets can help mitigate risks associated with individual commodities or stocks. Furthermore, hedging options such as futures contracts or options can safeguard against adverse price movements.
In the case of FCX and SCCO, their robust operational performances and strategic initiatives position them for long-term solid growth. However, investors should remain vigilant, continuously reassessing their positions and adjusting strategies as market conditions evolve. They can navigate copper price fluctuations by staying informed and adopting a diversified approach while capitalizing on the long-term potential.
