RTNTF - Freeport-McMoRan: Keeping My Bullish Call Before Earnings

2023-07-18 09:00:59 ET

Summary

• Investors in Freeport-McMoRan Inc. are likely focused on a second-half recovery, anticipating more aggressive stimulus by the Chinese government, given weak recent GDP numbers.
• Freeport-McMoRan's robust buying sentiment demonstrates that investors have not been perturbed by the tepid recovery in China's economy.
• Investors are likely confident that the secular growth in the renewable energy transition should provide robust demand to underpin copper's long-term thesis.
• While Freeport-McMoRan has recovered remarkably from its July 2022 lows, its valuation isn't aggressive.
• I see the potential for Freeport-McMoRan to continue grinding higher from here. Investors shouldn't wait until economists declare we wouldn't have a recession before returning.

Investors in Freeport-McMoRan Inc. (FCX) have not been unduly concerned with the tepid recovery in the Chinese economy, even as Wall Street economists downgraded their outlook. Keen FCX investors often assess the momentum in China's recovery as a pivotal yardstick on the underlying growth drivers for copper demand.

Despite that, FCX buyers remain focused on a potentially stronger second-half recovery, coupled with more aggressive stimulus by the Chinese government. As such, investors must consider FCX's buying sentiments to assess its potential recovery rather than relying on backward-looking indicators like China's GDP growth in Q2 (quarter ended June). As a reminder, Freeport-McMoRan is slated to release its Q2 earnings on July 20.

I upgraded my thesis on FCX in late May, as I anticipated constructive price action, and an attractive valuation should appeal to dip buyers returning. These buyers defied the bearish sentiments back then, as FCX has significantly outperformed S&P 500 (SP500) since my previous article.

Therefore, I believe it's opportune for me to reassess whether buyers who missed dipping into FCX lows could still consider buying the current levels.

I believe it's critical for investors to assess Freeport-McMoran's underlying growth drivers that could proffer further upside support, despite China's unexpectedly weak economic recovery. Moreover, it's also important to consider the significant battering that Copper futures ( HG1:COM ) received in mid-2022.

While a more robust recovery in China's economy could further bolster investors' sentiments in HG1 and FCX, it's not the only critical growth driver. Renewable energy investors know the importance of copper in driving the green energy transition. Notably, electric vehicle ("EV") growth in the U.S. remains robust. In addition, China's focus on driving consumption growth through its EV market remains important . As such, copper's use cases in the renewable energy transition should continue to help underpin its recovery, despite China's disappointing GDP growth in the first half.

Rio Tinto Group ( RIO ) also highlighted in early July that it " plans to increase its exposure to copper, lithium, and nickel." The company sees the opportunity to help "meet the growing demand associated with the global energy transition." Notably, Rio Tinto stressed that the global supply of copper to meet the underlying demand remains in a "shortage." As such, I'm confident that Freeport-McMoRan's market leadership places it in a solid position to leverage its scale and cost advantages against its peers.

With that in mind, I'm not surprised that FCX's valuation remains above its broad metals and mining peers. Accordingly, FCX last traded at a forward EBITDA multiple of 7.1x, discernibly above its peers' median multiple of 5.6x (according to S&P Cap IQ data). In addition, it's also above its 10Y average of 6.5x.

While the best opportunity to enter FCX was likely in July last year (which I encouraged in an article), as it entered peak pessimism, I believe the buying opportunity in FCX remains intact.

As seen above, FCX remains well above its July 2022 lows, defying the copper bears as the world didn't fall into a debilitating recession. However, things didn't look this rosy back then. A reminder that Bloomberg Economics even put out a " 100% recession call over the next twelve months" in mid-October 2022, which we know hasn't worked out.

However, astute dip buyers didn't focus on the doom-and-gloom forecasts of these macroeconomists but instead likely gleaned the capitulation move in FCX's price action.

In addition, FCX formed its subsequent lows in late May, bolstering a higher-low market structure in FCX's price action. FCX bulls have also regained control of its bullish bias as the 20-week moving average or MA (red line) has crossed above its 50-week moving average (blue line). Therefore, I think FCX should continue attracting more momentum investors on board, looking to partake in its continued recovery.

The critical resistance level to watch is still the late-January high of $46.5. Therefore, I gleaned that while Freeport-McMoRan Inc. is much less attractive than in late May, it's still apt for investors to consider adding more exposure.

Rating: Maintain Buy.

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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