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Why Freeport-McMoran Stock Has Slumped This Week

what happened

shares of Freeport McMorran (FCX 0.75%) was holding up pretty well in August, but crashed this week. Copper shares gained some gains on Friday but are still down about 11.6% as of 2:20 p.m. ET, according to data provided by S&P Global Market Intelligence.

Freeport-McMoRan stock has been under selling pressure for good reason.

So what

Copper prices hit a one-month low this week and have now fallen for the fifth straight month. In fact, prices of most base metals, and with it, most metals and mining stocks have taken a big hit over the past few days as concerns about weaker demand are growing thanks to China.

China is the world’s largest consumer of copper, but its economy appears to be in trouble. The country is battling a severe drought that has hit the power industry and businesses in major industrial areas. Elsewhere, spikes in coronavirus cases and lockdowns are forcing factory closures.

These factors are hampering industrial and manufacturing activity in a country already facing severe property crises. China’s factory activity, as measured by Purchasing Managers’ Index, weakened in August, signaling a weak economy.

Due to its wide range of industrial uses, copper demand is directly related to economic health. China’s economic slowdown, combined with the European energy crisis and fears of a US recession, has spooked copper investors and sent copper prices crashing. Freeport-McMoran shares fell as copper fell.

Freeport-McMoRan is also selling gold, and the price of gold has fallen further this week. This may be due to the Federal Reserve’s tightening monetary policy to keep inflation in check. As gold is usually seen as a hedge against inflation, the Fed’s efforts to cut gold have driven gold prices down.

So

Freeport-McMoRan numbers had already shown bearish signs last quarter. Revenues were down approximately 6% year-over-year due to lower average realized copper prices. Gross margin and net income declined as well. Now, with copper prices falling further, investors fear the company’s performance could be even worse in the future.

In its second-quarter earnings call, Freeport-McMoRan forecast “very favorable” fundamentals for the copper market over the medium to long term, fueled by surging demand for copper. Still, the company alluded to near-term uncertainty and said it would closely monitor market conditions and adjust its “operational plans” as necessary.

It’s this short-term uncertainty that has led investors to sell off Freeport-McMoran shares this week.

Neha Chamaria has no positions in any of the mentioned stocks. The Motley Fool has no positions in any of the companies mentioned. The Motley Fool’s U.S. headquarters has a disclosure policy.

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