Whether in the news, in macroeconomic analyses or in exchanges among investors, the "R" word has been making the rounds frequently of late. The concern about a recession is not only perceptible on the various communication channels. The price of copper also speaks a clear language: within three months, the front month futures contract has fallen by almost one fifth. Due to its diverse fields of application - ranging from the automotive sector and construction to the electrical industry and the production of renewable energy - the industrial metal is strongly linked to the general economic climate. Copper is therefore also referred to as "Dr. Copper". As the world's largest publicly traded copper producer, Freeport-McMoRan felt the full impact of the global economy's recent coughing. In the three-month period, the share price of the U.S. mining group fell by a good quarter (see chart).
The correction in the copper price has also left its mark on the company's figures. For Q2 2022, Freeport-McMoRan posted a more than one-fifth drop in earnings to an adjusted USc 58 per share. Analysts on average had expected USc 3 more. Sales also shrank more than expected. At USD 5.42 billion, revenues were 5.8% below the level of Q2 2021. Per pound of copper sold, the Phoenix, Arizona-based group took in USD 4.03, down from USD 4.34 in the year-ago period. CEO Richard Adkerson expressed surprise at the sudden change in sentiment in the copper market. He says demand for the red metal has proven robust. "Today's market is tight," the CEO said July 21. While inventories are already tight, he said, the global energy transition, among other factors, would ensure a sustained increase in demand. But at current copper prices, developing new mining sites is of little interest, according to Adkerson. As a result, the shortage of this important raw material could worsen.
Freeport-McMoRan operates mines in North and South America as well as in Indonesia. In the Southeast Asian country, the group owns just under half of the Grasberg mine. The site, located on the western half of the island of New Guinea, contains one of the largest mineable copper reserves and the most exploitable gold deposit in the world. A good third of the copper mined by the Group comes from the Grasberg mine. Although Freeport-McMoRan has had to scale back its plans moderately due to various problems in Indonesia and at other locations, copper sales are expected to increase by a good tenth to 4.2 billion pounds in 2022. For the coming year, the CEO is targeting a further increase before the industry giant is expected to slow the pace somewhat in 2024 (see chart). How much the company earns with the planned production volumes depends heavily on the further price development for copper.
Consequently, Freeport-McMoRan's stock turned upward in the second half of July along with the red metal's quotation. The double rebound was probably due less to renewed economic optimism than to weak production data from Chile, declining inventories in China, a falling dollar exchange rate and a technical counter-reaction. What is certain is that Freeport-McMoRan is showing relatively high volatility. So far this year, the price fluctuation range is more than 50%. By comparison, the historical volatility of the S&P 500 Index, of which the mining giant is a member, is less than half. It is not least this discrepancy that makes Freeport-McMoRan an interesting underlying for barrier reverse convertibles (BRCs). Leonteq has launched three new variants of the popular product structure. As a single-underlying, the mining share yields a high coupon of 16% p.a. in the product currency CHF. In USD, the quarterly payout is another 200 basis points p.a. higher. The barriers are set at 59% of the initial level in each case. This also applies to the multi-BRC on Freeport-McMoRan, Barrick Gold and Newmont. Based on the mining trio, the guaranteed coupon amounts to 19% p.a. No opportunity without risk: As soon as a share touches or falls below the barrier, the partial protection expires. In this case, the Single products would be exposed to the full price risk of Freeport-McMoRan. With the Multi variant, the "worst of" principle applies. Due to the integrated softcallable function, all issues can be called and, if necessary, redeemed on a quarterly basis. For the first time, the issuer has this right after six months.
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