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Freeport-McMoRan under Pressure as Copper Prices Fall



Copper prices fall

Previously, we noted that Freeport-McMoRan (FCX) recently reached a new 52-week low. One of the reasons for Freeport’s dismal stock market performance is the steep correction in copper prices, which are trading near multiyear lows.

In this part, we’ll analyze the recent trend in copper prices.

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Copper prices drift lower

The above chart shows the movement in spot copper prices on the LME (London Metal Exchange). They hit a fresh six-year low of $5,136 per metric ton on August 7. Copper prices are down ~20% year-to-date.

The rout isn’t limited to copper. Other base metals have also taken a beating on weak global macros. Spot aluminum prices are trading below $1,600 per metric ton while the benchmark iron ore prices recently recovered from their decade-low prices.

Lower copper prices negative for Freeport-McMoRan

Freeport’s earnings are sensitive to copper prices. The company estimates its EBITDA (earnings before interest, taxes, depreciation, and amortization) fall by $500 million for every $0.10 per pound fall in copper prices.

Earnings of other copper producers, including Turquoise Hill Resources (TRQ) and Southern Copper (SCCO), are also negatively impacted by falling copper prices.

Goldman now expects copper prices to reach $4,500 per ton, or approximately $2.04 per pound, by the end of 2016. This represents a ~12% downside from current copper prices.

Freeport, which is the second-largest copper producer after the Chilean government–owned Codelco, is a part of several leading ETFs. It currently forms 2.16% of the Materials Select Sector SPDR Fund (XLB) and 3.18% of the SPDR S&P Metals and Mining ETF (XME).

In the next part, we’ll explore how copper prices could play out in the second half of 2015.


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