From a logic-driven perspective, miner Freeport-McMoRan Inc (NYSE:FCX) should have done quite well last quarter. Copper has maintained its price after an impressive 2016/2017 rebound, and ditto for gold.
Yet, there it is — FCX stock tumbled to the tune of 15% Tuesday following the release of first-quarter numbers that fell short of earnings and revenue expectations.
As is always the case though, there’s more to the story. The bigger picture doesn’t look so grim. Indeed, in the right light, Tuesday’s selloff may end up being seen as a buying opportunity for an arguably undervalued stock.
For the quarter ending in March, metal mining outfit Freeport-McMoRan turned $4.87 billion worth of revenue into earnings of 46 cents per share. The figures fell short of the 56 cents per share of FCX stock analysts were collectively expecting, and the top line of $4.93 billion they’d modeled.
It may have been a case of unfair expectations, however; the stock’s 50% gain over the course of the past twelve months certainly suggests investors were expecting great growth.
To that end, revenue was up 46% year-over-year, and profits essentially tripled from the year-ago figure of 16 cents per share. Traders weren’t wrong to expect big things. They just expected more than the miner was able to deliver.
CEO Richard C. Adkerson commented on the Q1 results:
“During the first quarter, our global team maintained our focus on productivity, cost management and capital discipline. Our results reflect strong cash flows, continued strengthening of our balance sheet and advancement of initiatives to build value for shareholders.”
He wasn’t wrong. It just didn’t matter on Tuesday.
For all intents and purposes, copper’s current price of $3.16/lb is impressive. Although it hasn’t advanced meaningfully since the middle of last year, it’s held its ground at prices last seen in 2014 … before a slide to $2.00/lb. Gold, which isn’t a terribly big part of Freeport’s production pie but is a big chunk of the company’s revenue mix (due to significantly higher prices) is also near a two-year high, and testing the waters of a breakout thrust.
Some of the strength in both commodities can be chalked up to a tepid U.S. dollar. Both metals are only sold at prices buyers are willing to pay for them, however, and if their values are firm and/or rising, demand is healthy.
And demand — particularly for industrial metals like copper — is healthy.
Aluminum outfit Alcoa Corp (NYSE:AA) explained in last week’s Q1 earnings report that it’s expecting demand for aluminum to exceed supply this year by between 600,000 and one million metric tons.
Some of that shortfall is attributable to looming tariffs that could crimp supply lines. Much of it, however, reflects more consumption inspired by a strengthening economy.
ScotiaBank recently penned parallel thoughts about copper, explaining “While we believe that the market will require further years of deficits to burn through off-exchange inventories before prices rally further, our outlook sees steady supply shortfalls in each of the next 5 years that grow larger as the mine supply pipeline continues to empty.”
ScotiaBank believes copper prices will linger around $3.25/lb in 2019.
Also note that COMEX-reported levels of copper now stored in warehouses has soared within the past two month, as other miners ramp-up their production to take advantage of strong copper prices while they can. LME warehouse inventory data hints at the same. The COMEX and LME data jibes with ScotiaBank’s suggestion there’s actually a fair amount of copper that’s unaccounted for but still available to end-users.
In other words, though not likely to be ‘red hot’ anytime soon, the copper market is set for a slow simmer that many traders may be overlooking. Supply and demand are both perking up, with demand up just a bit more than supply.
Looking Ahead for FCX Stock
Last quarter, Freeport-McMoRan delivered 993 million pounds of copper, versus the one billion pounds it had suggested would be sold in Q1 several weeks ago. The company also warned FCX shareholders it only expected to produce 3.8 billion pounds of copper this year, versus a prior forecast of 3.9 billion pounds.
The reeled-in output and expectations likely reflect a combination of production headwinds as well as growing demand that will at least initially be met by copper that’s already been produced rather than copper that’s yet to be mined.
It’s not likely the company knew, or even now knows, the depths of the official and unofficial inventory it has to compete with now, and future demand — driven by ongoing economic strength — is still a “best guess” situation regarding a moving target. Priced for near-perfection and red-hot growth, shocked FCX shareholders are dishing out an unsurprising selloff today.
Take a step back though, and look at the bigger picture. Freeport-McMoRan may be playing it safe with a conservative production outlook, even if it up-ended the value of FCX shares, because it can’t offer any guidance with a great deal of certainty. The company is still growing the top and bottom line, in spades, and the forward-looking P/E of 11.3 is still a bargain price.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
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