Copper trends favor Freeport

6/9/2008


  Recent Price
$114
  Dividend
$1.75
  Yield
1.5%
  P/E Ratio
14
  Shares (millions)
449
  Long-Term Debt as % of Capital
27%
  52-Week Price Range
$127.24 - $67.07

For at least the next year, both copper prices and demand for the metal seem likely to remain above historical norms — good news for Freeport-McMoRan ($114; NYSE: FCX), the world’s largest publicly traded copper producer.

Growth in worldwide copper demand is slowing as the American and European economies cool, but heavy use of the metal in emerging markets should maintain demand at fairly high levels. At the same time, a variety of factors are making it difficult for miners to boost supplies. Freeport is also a major producer of gold and molybdenum, both of which are well above historical average prices. Although Freeport shares have already risen 44% over the last 12 months, the stock remains attractively valued and earns Focus List Buy and Long-Term Buy ratings.

Copper’s pricing power
Past slowdowns in residential construction have led to decreases in global copper demand as builders installed fewer pipes, electric wires, and other copper products into new homes. But those were the days before emerging-market powers began their rapid industrialization.

China and other emerging economies such as India (accounting for just 3% of worldwide demand but already the fastest-growing copper consumer) should continue to offset weakness in developed economies. Copper for June delivery now fetches $3.57 per pound, and the futures market expects prices to remain above $3.45 over the next two years. Copper sold for less than $2.00 per pound as recently as late 2005.

The prices of copper and other metals remain high largely because of a failure to increase supply. “Today’s mines aren’t meeting targets,” Freeport CEO Richard Adkerson said in a May 21 television interview. Worldwide copper production in 2005 and 2006 fell 5% short of forecasts from the start of the year and missed estimates by 3% in 2007. Since the start of 2008, global copper warehouse stocks have fallen more than 30%.

A number of factors have contributed to supply problems. Many mines in Chile depend on hydroelectric power, and droughts have hampered production throughout the country, including a region that boasts 23% of the world’s copper. Labor issues also weigh on mining companies, and political and environmental pressures can make it more difficult to dig new mines or expand existing properties.

Freeport stands to benefit from two competitive advantages:

  • Copper-production costs were $1.06 per pound in the March quarter, well below the realized price of $3.69 per pound. Despite higher expected raw-materials prices and mine expansions, Freeport’s costs should remain below those of most rivals.
  • Freeport controls huge reserves (93.2 billion pounds of copper) and can grow production without acquisitions. The company projects about 8% production growth to 4.2 billion pounds this year and 7% annualized growth through 2010.

Good value
At nine times projected year-ahead earnings, Freeport trades well below its five-year average forward valuation of 15 and the average of 16 for mining companies. An annual report for Freeport-McMoRan Copper & Gold Inc. is available at 1 N. Central Ave., Phoenix, AZ, 85004; (602) 366-8100; www.fcx.com.


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