Shares in copper miner Freeport-McMoran(NYSE: FCX) surged higher by 24.4% in March, according to data provided by S&P Global Market Intelligence. You don't have to look too far for the reasons behind the move; the price of copper started the month at $3.84 per pound and ended at $4.04 per pound. Moreover, at the time of writing, it's even higher at $4.23.
What the move in copper means to Freeport-McMoRan investors
On every quarterly earnings presentation, management publishes a chart outlining its earnings before interest, taxes, depreciation, and amortization (EBITDA), and operating cash flow sensitivity to movements in the price of copper.
Management recently modeled the sensitivities based on its expected production volumes and costs for the average of 2025 and 2026. It expects a $430 million in EBITDA with every $0.10 move in the price of copper pound and a $340 million move in operating cash flow. As such, the $0.20 move in the price of copper (if replicated across the 2025/2026 time frame) implies an increase in EBITDA of $830 million.
The table below shows how this plays out across a range of copper prices. As such, at the current price of copper of $4.23 per pound sticks, investors can expect almost $11 billion in EBITDA on average in 2025 and 2026. The current enterprise value (market cap plus net debt) at $76.3 billion implies an EV-to-EBITDA multiple less than 7 times EBITDA in 2025/2026 -- an extremely attractive valuation multiple.
Price of Copper | EBITDA in 2025/2026 | Operating Cash Flow in 2025/2026 |
|---|---|---|
$4 per pound | ~$10 billion | ~$7 billion |
$4.50 per pound | ~$12.15 billion | ~$8.7 billion |
$5 per pound | ~$14.3 billion | ~$10.4 billion |
Data source: Freeport-McMoRan presentations.
A stock to buy?
With these kinds of models and assumptions made, it's not hard to see why Freeport-McMoRan's stock price moves higher with copper prices.
Still, Freeport-McMoRan is much more than just a play on copper prices; it's very well positioned to take advantage of rising copper prices thanks to its leaching technology initiatives and substantive growth projects it can invest in to expand production volumes.
That's something to consider, as its management firmly believes in buoyant long-term demand from the electrification-of-everything trend and the clean energy transition. In my view, Freeport-McMoRan remains the top choice in the mining sector.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
