Lower copper prices
We’ve seen that Freeport-McMoRan (FCX) is a major copper producer. Copper prices are determined by prevailing copper prices on the London Metal Exchange (or LME). Copper prices are a key driver for copper producers such as Teck Resources (TCK) and Southern Copper Corp. (SCCO).
Copper prices have corrected
The above chart shows the movement in copper prices. Copper prices have corrected by ~20% since the start of 2014. Freeport’s average realized copper prices have dropped to $2.95 per pound in 4Q14. Its realized copper prices averaged $3.09 per pound in 2014.
Lower copper prices are due mainly to the slowdown in the Chinese economy. China is the world’s largest consumer of copper. Chinese copper demand has been a key driver of the global copper industry. Analysts expect the weakness in copper prices to continue for some time.
Freeport’s EBITDA (earnings before interest, taxes, depreciation, and amortization) is quite sensitive to copper prices. Freeport’s annual EBITDA goes up by $500 million for every $0.10 per pound increase in copper prices.
Similarly, Freeport’s EBITDA is expected to go down by $500 million for every $0.10 per pound fall in copper prices. Freeport investors should closely track copper prices.
The SPDR S&P Metals and Mining ETF (XME) is also impacted by movement in copper prices. It seeks to invest in companies that operate in the metals and mining space. Hecla Mining Company (HL) forms 4.99% of XME.
Oil and gas prices also impact Freeport’s profitability. We’ll look at the impact of energy prices on Freeport in our next part.