Freeport-McMoRan (NYSE: FCX) Recovery Flies Past 100% Mark

By the time Monday’s session drew to a close, there was no denying that shares of mining giant Freeport-McMoRan (NYSE: FCX) had successfully tapped into value hunting investors who have been rushing back into equities in the aftermath of March’s lows. It might have been hard to see it happening back in the depths of Q1 when the stock was trading at 2016 levels and close to all time lows, but Freeport’s shares are within touching distance of their pre-COVID levels on the back of a three month 160% rally.

Share’s came back from the long weekend and made a statement straight away with a 11% jump to start the week yesterday. The big driver to this rally has been the surge in copper prices over recent months. As one of the world’s largest producers of copper, Freeport has understandably seen a similar jump in demand for their stock.

Swinging Pendulum

As part and parcel of the coronavirus pandemic, copper prices fell to multi-year lows in March as both production and consumption fell off a cliff. This drag on shares was accentuated by investors fleeing equities en masse for the safe harbors of bonds and gold. However as economies around the world started to reopen quicker than expected in May and June, particularly in China, copper prices turned around as consumption increased and they’ve been putting in consistent weekly gains since. This unexpected recovery and jump in demand is coinciding with a pinch in supply, as many mines and operations are still in limbo, meaning there’s a perfect storm supporting the current rally.

Deutsche Bank noted back in June that these conditions were causing bearish speculators to close out their positions, fuelling what is typically known in equities as a short squeeze. Jeffries also picked up on the situation that month when they observed: "many of the fast-moving signals that copper tends to key off are screaming higher, including the recent breakout of the Australian dollar, which is highly correlated with copper prices and reflective of Chinese demand".

In the longer term, copper inventories around the world over the past two years have been trending lower which is of course supporting the current jump in demand. In the shorter term, reports this week from Chile are also doing their part. Chile, which produces up to 25% of the world’s copper, has said that the state’s flagship El Teniente mine, run by state-owned Codelco, had ceased operations and halted construction. Thousands of miners have fallen ill with coronavirus and so a further pinch to supply has been created which can only make the bears more nervous and the bulls more optimistic. As BMO Capital's Colin Hamilton noted, with the new Chilean development “a 2020 copper deficit is not beyond the realms of possibility”.

Perfect Storm

This bullish momentum is certainly flowing through to Freeport’s shares which are up 16% in the past six sessions alone and are now less than 7% from their January levels. Management has not been quiet on recent events either and in a press release, yesterday said they expect copper sales for 2020 to exceed previous guidance. This was music to the bull’s ears because as recently as April, management had gone so far as to cut all guidance for sales and production this year as they reeled from the sudden uncertainty brought about by COVID-19.

Now with momentum having swung the other way, the dark days of Q1 are being quickly forgotten. Instead of multiple double-digit percentages down weeks, we’re possibly at the start of multiple double-digit percentage up weeks. The conditions are certainly there to make it happen.

As oil and gas stocks, mining companies are fickle creatures in that they’re so dependent on good market conditions in the underlying asset. When the underlying sneezes, they often catch cold, but when the underlying is in hot demand and supply is tight, there’s no better stock to hold.