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/

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

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

What if you’re wrong? Always a possibility worth contemplating.

Last week (January 20 and 21), I gave you a pretty pessimistic view of the prospects for the world’s emerging stock markets—and emerging-economy-dependent stocks such as those of commodity producers–over the next six months. The fight to control inflation in these economies will require repeated interest rate increases that will slow economic growth. That will result in a correction of about 20%, I concluded.

If that were a dead certainty, we’d all know what to do right now. Sell all your emerging market stocks and all the shares you own of commodities and materials companies.

But very little is a certainty in investing. U.S. economic growth could pick up quickly and strongly enough so that increased demand from the United States balances out lower demand from China and the rest of the emerging economy gang. Inflation in China could succumb to measures short of repeated interest rate increases when a bountiful summer vegetable harvest crushes food inflation like an over-ripe tomato.

The scenario I laid in my inflation fighting posts is the most likely, in my opinion, over the next six months, but there’s still a non-trivial chance that it could be wrong.

This is where I remind you that your goal right now is to find a strategy that minimizes two potential costs.

First, there’s the cost of a market correction—if I’m right. I noted yesterday that it’s important to remember that a 20% market correction is only a 20% average drop. Some stocks will get hit much worse and others much more. You’d like to avoid the 20% drop, of course, but even more you want to avoid owning stocks that will take a bigger than average hit. Hence my advice to cull second and third-tier stocks and markets from your portfolio.

Second, there’s opportunity cost—if I’m wrong. If instead of dropping 20%, emerging markets go up 20%, you’d like to capture some of that gain instead of missing it all.

So how do you strike the best balance on these two kinds of potential costs? Let me use copper miner Freeport McMoRan Copper & Gold (FCX) as an example. Read more