Freeport-McMoRan and Rio Tinto are top picks of Jefferies analyst Chris LeFemina. Above, copper rods used to machine parts.
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mine copper and iron ore. But their stocks could turn out to be golden.
These cheaply valued shares discount a deep recession but don’t reflect the huge improvement in their industry’s balance sheets since the last commodity downturn in 2016.
At $29, shares of top global copper miner Freeport-McMoRan (ticker: FCX) are 44% below their March peak, as copper has slid 25%, to about $3.60 a pound. Freeport now trades for seven times 2022’s projected earnings and nine times 2023’s—with next year’s estimate reflecting expected lower copper prices. The stock yields 2%—including its base and variable dividends.
Freeport and Rio Tinto (RIO) are top picks of Jefferies analyst Chris LaFemina. “The market, in the past month, has gone from pricing in a stagflation where commodities would be strong to a deflationary downturn,” he says.
LaFemina is more upbeat on commodity demand, noting that the economic situation in China—the dominant consumer of industrial commodities—has improved in the past month. “There still is earnings cyclicality, but the catastrophic risk for these companies, from a balance-sheet perspective, has been resolved,” he says.
Freeport, for instance, has cut its net debt to $1 billion from $20 billion since 2016. “Freeport is leveraged to a longer-term recovery in the global economy,” he observes. The multiyear copper outlook looks strong, owing to the growth of copper-intensive electric vehicles and renewable power. That’s why some call copper the greenest metal.
Shares of Rio Tinto, a copper miner that also is one of the leading global iron-ore producers, are down to $59 from $85 in March. They fetch five times the 2022 earnings estimate and seven times next year’s. And the company has net cash on its balance sheet. “Rio is trading at a global financial-crisis valuation,” LaFemina says. He sees its dividend yield staying in the high single digits, even if iron-ore prices fall further.
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