In yesterday’s Market360, I introduced you to Eric Fry, the master of “global macro” investing. Today, I’m going to hand the mic over to Eric so he can show you how he was able to make a stunning 1,018% return on Freeport-McMoRan Inc. (FCX).
Eric, take it away!
Back in late 2019, I chose Freeport-McMoRan Inc. (FCX) as my pick in the InvestorPlace.com Best Stocks for 2020 contest.
And with 99% returns in 2020, the global copper giant came in No. 1 among the picks from InvestorPlace’s top analysts… giving me bragging rights at company cocktail parties for at least the next few years. I’ll admit, Louis was a close second. His pick, PennyMac Financial Services Inc. (PFSI), earned a 94% return in 2020.
So, why did I pick Freeport-McMoRan?
I’ll start by saying that Freeport-McMoRan is a unique company. The terms “artificial intelligence” and “copper miner” do not obviously relate to one another, but with Freeport-McMoRan, they absolutely do.
One of the world’s largest copper producers, this company has been testing an artificial intelligence, or “machine learning,” model, at its Bagdad copper mine in Arizona.
This machine learning model uses data from sensors around the mine to “tailor” the ore processing method to each of the seven distinct types of ore that come from it.
This test has been a remarkable success, so the company is now rolling out its new technology across all of its operations in the Americas.
By doing so, this company expects to increase its annual copper production by a hefty 5%.
The machine learning program is just one of three major initiatives Freeport-McMoRan said would boost its copper production by 30% in 2020.
The other two production drivers were:
- A ramp up in Freeport’s new underground mining operations at its massive Grasberg mine in Indonesia.
- The company’s new Lone Star copper development in Arizona is going into production.
Combined, I predicted that these three initiatives would produce a significant jump in earnings, even with no change in current copper or gold prices. At a minimum, I said at the time, the company should have earned about $0.55 a share in 2020 and $1.40 in 2021. (We now know that the company is on track to more than double my initial earnings estimate for 2021.)
I predicted those results would give Freeport’s stock a price-to-earnings ratio of 24 in 2020, which would then fall to just nine times earnings in 2021. Remember, though, these earnings estimates assumed no change in copper prices during the next 12 months.
But that’s not what I assumed.
I believed then that the price of copper was on the verge of a major upside move that would carry it above the five-year high of the $3.32 a pound mark it hit in late 2017.
Copper’s price did just that in late 2020. And it now stands at around $4.19 per pound.
Not surprisingly, Freeport’s share price has also made a big move along with the price of copper. It’s up more than 150% since I made it my pick in the InvestorPlace.com Best Stocks for 2020 contest.
And I don’t think copper – or FCX’s – big move up is done yet.
Five main factors will power this big move. Three of them are the “usual suspects,” while two are unusual ones.
First, the usual ones:
- Copper supply is falling short of copper demand, which is creating a deficit in the market.
- The copper deficit is likely to grow much larger over the coming decade.
- The Federal Reserve has recently stated its intention to hold interest rates low throughout 2020, which should ignite commodity prices.
In addition to these bullish forces, copper prices could gain a tailwind from two nontraditional factors:
- Improving international trade relations, especially between the United States and China.
- The global boom in electric vehicles and energy storage.
Let’s take a closer look at each of these five factors…
Fueling Up for the Copper Rally
First, Federal Reserve Chairman Jerome Powell is pursuing an “easier” monetary policy than most investors had been expecting during the last couple of years. Generally speaking, “easy money” monetary policies tend to produce periods of rising commodity prices.
Supply deficits are a second factor that could push copper prices higher. For most of the last few years, the global supply of refined copper has been falling slightly short of demand. But according to most forecasts for the copper industry, the current supply deficit will not merely persist during the next few years; it will grow much larger.
Thanks to this supply deficit, coupled with the Fed’s low interest rates, Freeport’s earnings and cash-flow results are likely to keep surprising on the upside.
But remember, Freeport also produces nearly 1 million ounces of gold per year and 92 million pounds of molybdenum (a metal that’s highly resistant to corrosion). So if either of those metals took a major swing to the upside, Freeport would benefit as well.
That said, copper is the major driver of the company’s profitability. So let’s take a closer look at the two unusual “one-off” factors that could spur strong copper demand… and a rising copper price.
First, the Trump-era trade war between the United States and China is in the past. As normalized trade continues between the U.S. and China, economic growth could gain a tailwind that boosts demand for essential commodities like copper.
Importantly, China is the world’s largest importer of refined copper. So if the Chinese economy gains renewed vitality, the copper market will notice. And let’s not forget that China is also the world’s largest producer of electric vehicles, which are “copper hogs.”
Electric vehicles require about four times as much copper as internal combustion vehicles. Therefore, as EVs continue to gain market share, they will absorb a growing slice of the global copper supply.
The Bottom Line
When I first wrote about FCX in late 2019, I expected the stock to produce triple-digit gains in 2020. And I was pretty darn close. That final gain was 99%.
In 2021, the stock rose nearly 108%. And it’s tacked on another 26% gains so far this year.
Like I said before, add it all up and it’s soared more than 150% since I made it my pick in the InvestorPlace.com Best Stocks for 2020 contest
That’s a great return.
However, I’m pleased to say that over the time period, members of my elite trading service have done even better – and it’s all thanks to my escape velocity strategy. Freeport has been the gift that keeps on giving for members of my Speculator service. They’ve taken triple-digit and even quadruple-digit profits several times over the past couple of years on various FCX positions.
Since I recommended an escape velocity-charged position on Freeport to members of The Speculator in March 2020, we’ve closed out portions of it for 407.9%… 775.6%… 1,378.7%… and 1,506.7% gains.
Add it all up – and their total gains are 1,017%!
And it’s all thanks to the escape velocity strategy that Louis and I share.
Next Tuesday, Oct. 5, at 7 p.m. Eastern, during a special Escape Velocity Event Louis and I are holding, we’ll explain how escape velocity works and how you can make big returns using this strategy, too. If you haven’t reserved your spot yet, I encourage you to do so now.
Simply click this link and we’ll save a seat for you. Louis and I hope to see you there!
Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below: