The terms “artificial intelligence” and “copper miner” do not obviously relate to one another.
But in the case of Freeport-McMoRan (NYSE:FCX), they do.
And this connection is one of several reasons why the stock has become a compelling speculation — and my pick in the Best Stocks for 2020 contest.
Freeport-McMoRan, one of the world’s largest copper producers, has been testing an artificial intelligence, or “machine learning,” model at its Bagdad copper mine in Arizona.
This machine learning model uses data from sensors around the mine to “tailor” the ore processing method to each of the seven distinct types of ore that come from it.
This test has been “a remarkable success,” Freeport CEO Richard Adkerson said. So the company is now planning to roll out its new technology across all of its operations in the Americas. By doing so, Freeport expects to increase its annual copper production by a hefty 5%.
Boosting Production
The machine learning program is just one of three major initiatives Freeport says will boost its copper production by 30% in 2020.
The other two production drivers are:
- Ramping up Freeport’s new underground mining operations at its massive Grasberg mine in Indonesia
- Bringing the company’s new Lone Star copper development in Arizona into production
Combined, these three initiatives should produce a significant jump in earnings, even with no change in current copper or gold prices. At a minimum, the company should earn about 55 cents a share in 2020 and $1.40 in 2021.
Those results would give Freeport’s stock a price-to-earnings ratio of 24 in 2020, which will then fall to just 9 times earnings in 2021. Remember, though, these earnings estimates assume no change in copper prices during the next 12 months.
But that’s not what I’m assuming.
I believe the price of copper is on the verge of a major upside move that will carry it above the five-year high of $332 a pound it hit in late 2017.
Five main factors will power this big move. Three of them are the “usual suspects,” while two of them are unusual ones. First, the usual ones:
- Copper supply is falling short of copper demand, which is creating a deficit in the market.
- The copper deficit is likely to grow much larger over the coming decade.
- The Federal Reserve’s recently stated intention to hold interest rates low throughout 2020 should light a fire under commodity prices.
In addition to these bullish forces, copper prices could gain a tailwind from two nontraditional factors:
- Improving international trade relations, especially between the United States and China.
- The global boom in electric vehicles and energy storage.
Let’s take a closer look at each of these five factors.
Fueling Up for the Copper Rally
First, Federal Reserve Chairman Jerome Powell stated clearly last week that the Fed would refrain from raising short-term interest rates in 2020. Instead, he plans to hold rates below 1.75% throughout the year.
I have no idea what the “appropriate” level of interest rates ought to be. But as recently as one year ago, the members of Powell’s Federal Open Market Committee expected the appropriate level for short-term rates in 2020 to be 3.13%.
Clearly, the Fed is pursuing an “easier” monetary policy than most investors had been expecting during the last several months. Generally speaking, “easy money” monetary policies tend to produce periods of rising commodity prices.
Supply deficits are a second factor that could push copper prices higher. For most of the last few years, the global supply of refined copper has been falling slightly short of demand.
But according to most forecasts for the copper industry, the current supply deficit will not merely persist during the next few years; it will grow much larger.
Thanks to this supply deficit, coupled with the Fed’s low interest rates, Freeport’s earnings and cash-flow results are likely to surprise on the upside in 2020 — especially as the copper price breaks out of its current basing formation around $2.60 a pound and challenges its 2017 highs closer to $3.50.
Even a modest move to $3.25 a pound would produce a major lift to Freeport’s results. The company’s annual operating cash flow would swell by more than $1 billion — from roughly $3 billion to $4 billion.
Electric Vehicles
But remember, Freeport also produces nearly 1 million ounces of gold per year and 92 million pounds of molybdenum (a metal that’s highly resistant to corrosion). So if either of those metals took a major swing to the upside, Freeport would benefit as well.
That said, copper is the major driver of the company’s profitability. So let’s take a closer look at the two unusual “one-off” factors that could spur strong copper demand … and a rising copper price.
First, the two-year trade war with China may be lurching toward a favorable resolution — at least that’s what both parties to the conflict have been signaling lately. If this is true, trade frictions between the world’s two largest economies could dissipate.
As normalized trade resumes between the U.S. and China, economic growth could gain a tailwind that boosts demand for essential commodities like copper.
Importantly, China is the world’s largest importer of refined copper. So if the Chinese economy gains renewed vitality, the copper market will notice. And let’s not forget that China is also the world’s largest producer of electric vehicles, which are “copper hogs.”
Electric vehicles require about four times as much copper as a typical internal combustion vehicle. Therefore, as EVs continue to gain market share, they will absorb a growing slice of the global copper supply.
The Bottom Line on FCX Stock
Freeport-McMoRan is a stock that could produce triple-digit gains in 2020, both because its copper production will ramp up over the next several months and because copper prices will likely soar toward $3.50 a pound.
I began research for this year’s Best Stocks contest a few weeks ago and immediately saw the potential in Freeport. Clearly I was on the right track, because the stock has jumped 20% since then. That’s good news.
The even better news is that I still expect much larger gains throughout 2020.
— Eric Fry
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Source: Investor Place