Update Freeport McMoRan Copper & Gold (FCX)

Freeport McMoRan Copper & Gold (FCX) has been a laggard in the rally of the last few days. Oh, the stock was up yesterday, March 8—1.3% at the close—but that trails the performance of mining stocks such as Goldcorp (GG), up 1.7%, and BHP Billiton (BHP), up 1.5%. Today the shares finished off 1.8%.

That because Freeport McMoRan and every other mining company that operates in Indonesia has a country-specific problem today. A new government regulation announced bars foreign companies from owning more than 49% of some mines.

Limiting ownership to 49% would be a big blow to companies such as Freeport and Newmont Mining (NEM), which climbed just 0.4% today.

But the decree leaves open the question of exactly which mines it would apply to—making it hard to judge the impact on specific companies. Read more

Now that oil is a long way from the $145 per barrel peak it hit in July 2008 and nobody on Wall Street is predicting, as Goldman Sachs did in 2008, that oil is headed to $250 a barrel, we’re not hearing much about peak oil anymore.

The peak oil model, initially developed by oil geologist King Hubbert and which accurately predicted a peak in U.S. oil production between 1965 and 1970, says that the production from an oil field grows exponentially over time, then peaks, and finally declines. The model has been applied to individual oil fields, national oil industries, and global oil production. Back in 2008, the fiercest proponents of peak oil as a global model were predicting that the world would start running out of oil sometime around 2020.

Now that the world is awash in oil, the only people talking about peak oil are its opponents, who are dancing on what they depict as the grave of what they call a “theory” that was never worth the graph paper it was plotted on.

Well, I still think that the peak oil model is the most useful description of what we see happening in the oil industry today—even if West Texas Intermediate, the U.S. benchmark, closed at a twitch under $100 a barrel on Friday, February 3. (Brent crude, the European benchmark closed at $114.58.)

And, I’d go on to say that the peak oil model is the best way to understand what’s happening to the prices of other commodities, especially copper.  (Full disclosure: I predicted that oil would go to $180 a barrel shortly before it began its collapse from the $145 a barrel high in 2008. And full, full disclosure: The only one predicting $250 a barrel oil right now is Iran, which is threatening that prices will reach that level if developed economies impose tougher sanctions on the Iranian economy in an attempt to slow or stop that country’s development of a nuclear bomb.)

And I think it’s even useful for thinking about how to invest in commodities such zs iron ore that, currently, don’t fit the peak oil model at all.

Let me explain why I still find so much value in this “discredited” theory. Read more

The strike at Freeport McMoRan Copper & Gold’s (FCX) huge Grasberg mine is over.

The settlement with union workers is reasonable—a 40% increase in wages over two years from current hourly wages that range, according to union spokesman Virgo Solossa, from $2 to $3.50 an hour. Credit Suisse estimates the agreement will raise costs at Grasberg by 2% in 2012 and 4% in 2013.

With the agreement in place, the company updated its estimates for copper sales in the fourth quarter to 800 million pounds of copper and 105,000 ounces of gold. That’s a reduction of 200 million pounds of copper and 200,000 ounces of gold from projections in the second quarter before the strike. The company now expects full operations to be restored at the mine by early 2012.

The biggest effect will be on fourth quarter earnings where I think the current Wall Street consensus projection of 88 cents a share, already a 46% drop from earnings in the fourth quarter of 2010, is still high. On the other hand, I think the consensus estimate for 2012 of just $4.93 a share is too low. I’m projecting something more like $5.40 to $5.50 a share.

I think the recent price of less than $38 a share would be a great buying opportunity—except that with so much fear loose in the market about a slowdown in China, I think you might be able to get the shares more cheaply sometime in the first half of 2012. Do I see $36 again?

As of December 14, I’m leaving my target price at $51 a share by September 2012. (Freeport McMoRan Copper & Gold is a member of my Jubak’s Picks 12-18 month portfolio http://jubakpicks.com/the-jubak-picks/ and my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ . )

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Freeport McMoRan Copper and Gold as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Update Freeport McMoRan Copper & Gold (FCX)

If you’re like me, today the second quarter of 2012 seems a long way off and the idea of buying anything seems, well, just plain stupid.

But I think it’s worth paying attention to this report on copper out of Goldman Sachs yesterday. It’s just the kind of long-term thinking (what does it say that I’m calling six months long term?) that we could all use a dose of in a market like this.

Copper may be set for a strong rally in the second quarter of 2012, Goldman says. And its argument is a reassuringly familiar one: Demand—even demand depressed by a low-growth United States and a no-growth Europe—will exceed supply by 180,000 metric tons in 2012. That will follow upon a deficit of 176,000 metric tons in 2011.

And since the laws of supply and demand haven’t been repealed even in the current global economy that will end the current bear market in copper and push supper to $8,000 a ton over the next three months and to $9,500 by the end of 2012.

Copper has tumbled from a record high of $10,190 a metric ton in February to $7,356 at the November 21 close of New York trading.

The supply shortfall and the recovery in copper prices won’t be the result of a big resurgence in demand. If that were the Goldman Sachs argument, I wouldn’t be paying any attention to Goldman’s thinking.  Goldman’s projections, in fact, assume that Europe, a region that accounts for abut 20% of global copper consumption, will see little or no economic growth in 2012.

No, the positive fundamentals for copper prices are on the supply side where production disruptions and delays in bring new mines into production have resulted in actual additions to supply lagging projections. Read more

Update Freeport McMoRan Copper & Gold (FCX)

In the short-term everything looks terrible for Freeport McMoRan Copper & Gold (FCX), a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ . Copper prices hit a new low for 2011 of $3.28 a pound on Friday, September 9. The HSBC/Markit Economics China Manufacturing Purchase Managers Index fell to 49.4 in September from 49.9 in August, signaling that China’s manufacturing sector, a big user of copper, had started to contract. (On this survey the 50 level marks the difference between contraction (below 50) and expansion.) Strikes have hit the company’s big Grasberg mine. The union originally said it planned on a month-long strike to force the company to pay higher wages, but now says that the work stoppage could go on for longer.

In the long-term, though, the picture looks totally different. Long-term copper demand continues to outstrip additions to industry supply. Codelco, the state-owned Chilean company that is the largest copper producer in the world, said on September 3 that “the global copper market is headed for its biggest deficit since 2004 as suppliers fail to keep pace with demand led by China.”

Investors, afraid that they’re about to see a replay of 2008 when copper and other commodity prices collapsed and shares of Freeport McMoRan fell to $8.40 in December from $56 in June, pushed the price of these shares to $32.55 at Friday’s close from $56 at the end of July.

I can’t tell you that this is as low as the stock will go. (It’s up today, September 26, by 1.8% as of 2:15 p.m. New York time.) Fear that the European debt crisis will slow global growth, that the U.S. economy will slip back into recession, and that China’s growth engine will slow significantly will keep pressure on copper prices in the near term. Copper could move lower and gold, well, gold is selling off as traders liquidate positions to meet margin calls from their brokers.

But I can tell you that the stock is now cheap on the fundamentals. For example, Jefferies just cut its estimate for 2011 earnings per share to $5.30 from $5.66. At that lowered estimate the stock traded Friday at a price to earnings multiple of 6.1. The mid-point of the stock’s price-to-earnings range over the last 10 years is 10.4, Standard & Poor’s calculates. At that mid-range P/E ratio, Freeport McMoRan would sell for $55 a share, almost 70% above Friday’s close of $32.55.

And this is a company with a lot sounder fundamentals today than it had in 2008. Long-term debt, for example, was $9.2 billion at the end of 2008 but was just $4.7 billion at the end of 2010. Free cash flow was $5.5 billion for the trailing 12-months.

I think the current price of $32 is a reasonable place—even with today’s risk—to begin building or to add to positions. Keep some powder dry so that you can add shares if this bargain becomes even more of a bargain. But adding a position or adding to a position (since the stock is already a member of my Jubak’s Picks portfolio) in Freeport McMoRan to a portfolio at $32 a share strikes me as a good long-term bet. As of today September 26, I’m lowering my target price of $55 a share by June 2012 from the current $75 a share by July 2012.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Freeport McMoRan Copper and Gold as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/