Update Freeport McMoRan Copper & Gold (FCX)

On July 21 Freeport McMoRan Copper & Gold (FCX) reported second quarter earnings of $1.43 a share, 7 cents a share above Wall Street projections. Revenue climbed to $5.81 billion, a 50.5% increase from the second quarter of 2010. (The stock is member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )

There were three especially positive parts of the Freeport McMoRan story this quarter.

Sales grew from last year’s levels. Sales of copper climbed to 1 billion pounds (from 914 million in the second quarter of 2010), molybdenum to 21 million pounds (from 16 million) and gold to 356,000 ounces (from 298,000.)

Cash costs fell with net cash costs for copper, for example, dropping to 93 cents a pound from 97 cents a pound in the second quarter of 2010.

And projects that are estimated to add 20 million pounds of molybdenum production in 2013 and 975 million pounds of copper production by 2016 continued on track at very modest capital cost. Read more

I think it’s a good time to give shares of Thompson Creek Metals (TC) a rest. Say a three to six month rest. Today I’m selling Thompson Creek Metals out of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ .

The market seems to be rotating away from commodities and materials stocks as fears about an economic slowdown in the United States, China, Brazil, India or the economy of your choice move to the fore. I don’t think the bottom is about to fall out of the sector in a replay of 2008, but I do think it will be hard for stocks in this sector to move up significantly against this tide. A month or two back it seemed like it would be time to look for a bottom in a commodity such as copper in July or so.

I think global economic growth is on a less certain path today than it was a month or two ago. I’d still start looking for a bottom in selective commodities in July but I wouldn’t be completely surprised if I didn’t see one arriving on that schedule like the 4:10 to Yuma.

I think there are also stock specific reasons to give Thompson Creek a rest right now. The company is scheduled to report earnings after the markets close on Thursday May 5. (The company has scheduled its conference call for 8:30 a.m. I don’t think the company is going to report a clear road map to future growth.

On April 25 Thompson Creek announced that it had ended an option it had signed in 2008 to buy a stake in the Mount Emmons molybdenum project in Colorado from U.S. Energy. Ending the option won’t have any material effect on the company’s financial results but it is likely to focus attention on the company’s difficult transition in 2012.

By the company’s own guidance production at its big Thompson Creek mine will go from 22-24 million pounds of molybdenum in 2011 to 15-16 million pounds in 2012. Costs will go up at the mine, the company notes in its most recent investor presentation, to $8.50-$9 a pound in 2012 from $6-$7 a pound in 2011.

Eventually, as in 2013, Thompson Creek will bring new mines into production, such as the mixed copper/molybdenum Mt. Milligan mine projected to begin operation that year, that will replace most of the production from the Thompson Creek mine and lower costs again. The new Berg mine, still in development, could follow shortly on that.

But until Thompson Creek Metals gets closer to production at those new properties, one of which (Mt. Milligan) it only acquired in 2010, the company is going to strike a lot of investors as one caught short by production trends that the company should have been able to anticipate.

I’d like to let that kind of dissatisfaction among investors build—while I sit on the sidelines—and then move back into the stock when it has either broken down further in price (the current range is a very tight $12.09 for support and $12.55 for resistance) or the company is closer to production at Mt. Milligan. (And maybe in the best of all worlds, both.)

I’m selling these shares with a 24% loss since I added them to the portfolio on June 26, 2007.

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, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Thompson Creek Metals as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

Update Freeport McMoRan Copper & Gold (FCX)

On April 20 Freeport McMoRan Copper & Gold (FCX) reported first quarter earnings of $1.57 a share, 28 cents a share above the Wall Street analyst consensus, and 57% above the $1 a share reported in the first quarter of 2010. Revenue increased by almost 31% from the first quarter of 2010 to $5.71 billion versus the $5.31 billion Wall Street projection.

Sales for the first quarter totaled 926 million pounds of copper, 480,000 ounces of gold, and 20 million pounds of molybdenum. That was down from sales of 960 million pounds of copper in the first quarter of 2010 but was well above the company’s own estimating in January of 840 million pounds. Sales of gold and molybdenum, however, climbed from that quarter in 2010 when they totaled 478,000 ounces of gold and 17 million pounds of molybdenum.

A good part of the company’s jump in earnings is attributable to the rising price of copper and gold. Freeport McMoRan expects prices to stay near current levels for 2011. For the year the company’s financial estimates assume gold at $1400 an ounce (versus $1500 on April 20) and copper at $4.25 a pound (versus $4.30 on April 20). The company is confident enough in those projections to announce a supplemental dividend of 50 cents a share to shareholders of record on May 15. The supplemental dividend, to be paid in June, is in addition to the company’s regular quarterly dividend of 25 cents a share.

The increase in Freeport McMoRan’s earnings from higher copper and gold prices isn’t exactly a surprise. Read more

Update BHP Billiton (BHP)

As tea leaves go, those presented to investors in BHP Billiton’s (BHP) February 16 post-earnings-report conference call could have been a bit clearer. I think the way to decide buy/sell/hold on BHP and on the mining sector as a whole is to look past the very confusing top down strategic message to the nitty gritty of the key commodities of iron ore and copper. (BHP Billiton is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ )

Let’s start with the murky top-down stuff first, okay?

CEO Marius Kloppers said the company would increase its dividend for the first half of 2011 to 46 cents (U.S.) from 42 cents. I’m not clear what that is a sign of since the increase barely keeps pace with appreciation in the Australian dollar—for Australian shareholders, in other words, the increase is no increase at all.

Kloppers also announced an expansion of the company’s current $4.2 billion share buy-back to $10 billion. That amounts to about 4% of the company’s outstanding shares.

And he said that the company wasn’t actively looking at any acquisitions right now although the company has plenty of cash and cash flow: BHP Billiton reported six month profits of $10.7 billion on February 16.

So was BHP Billiton saying that it thinks mining stocks are expensive now, so no acquisitions? Hard to tell because Kloppers may be feeling a bit burned on the acquisition front after a failed bid for Potash of Saskatchewan (POT) in 2010.

And are the increases in the dividend and in the share buy-back plan a signal that the company thinks the commodities boom is getting near an end and it’s time to pull back on investments in its business? Read more

The sky’s the limit. The sky is falling. In the short term pretty that much describes the behavior of commodity stocks.

And it’s all too easy to get caught up on the drama of those short-term moves because the possible profits if you can outguess the market are all too tempting. (I know because I get caught up in it myself.)

But for most of us who aren’t blessed with market-beating 20/20 foresight, playing the short-term volatility of commodity stocks isn’t the best way to make money in this sector.

For most of us most of the time, it’s the long-term swings between scarce supply (which sends prices up and up) and scarce demand (which sends prices down and down) that can last for years and years and years that are the best source of profits.

And right now the long-term pattern says we’re an upswing that has at least two more years to run before it sees a significant downside challenge.

Why do I think that? Supply and demand tell me so. I’m going to end this post with my take on the supply/demand picture as I see it for several important industrial commodities. But first, let me try to put the current short-term volatility in some context.

It’s the potential rewards that get our attention in the short term. Iron miner Vale (VALE) was up 42% from the August 2010 low to the January high. One-stock commodities portfolio BHP Billiton (BHP) was up 44% from the August low to the February high. Molybdenum and copper miner Thompson Creek Metals (TC) was up 88% from the August low to its January high.

But the volatility? Who can stand the drops? Look at just one stock, Freeport McMoRan Copper & Gold (FCX).

On January 11, 2011 shares had rallied to $60.90. Two weeks, January 25, later the stock had dropped 12.6% to $53.22.

On November 11, 2010  it traded at $54.01. Six days later, on November 17, at $48.42. That’s a 10.3% drop, a correction, in just six days.

But by November 11 the stock had soared 62% from its August 25, 2010 low at $33.33. That’s 62% in two and a half months.

And just in case this volatility wasn’t enough by itself to make you insane, hovering over all of these moves is the memory of great commodity rally of 2007 when Freeport McMoRan climbed 86% and the great commodity collapse of 2008 when the stock dropped 74% for the year. The volatility in 2008 was even worse than that if you looked at just the last six months of the year. Freeport McMoRan fell from $61.65 on June 13, 208 to $9.03 on December 3 of that year.

But if this kind of short-term volatility is what you’re focused on, you’re paying attention to the wrong time frame. Read more