At least they were honest. Executives at Freeport McMoRan Copper & Gold (FCX) told Wall Street on July 21 that they weren’t seeing any signs of a recovery in developed economies that would lead the company to restart its idled U.S. copper mines.

So where did the amazing 69 cents a share earnings surprise, that the company announced on July 21, come from?

Not from revenue, that’s for sure. Revenue fell by 32% from the second quarter of 2008.

And not from a  huge increase in production. Second quarter production of gold did did rise by 600,000 ounces (and that sure didn’t hurt), but production of copper just inched up (by about 10%) and molydenum production fell.

Rather look at an unexpected jump in the price of copper and a huge drop in costs. Any investor buying in now is hoping that those moves can be duplicated next quarter. The company itself has some doubts.

In the quarter Freeport was able to sell copper at an average of $2.22 a pound. That’s a huge improvement from January–a 75% gain in price–but still a daunting 37% decline from the price a year ago. Freeport sees a $200 million increase in cash flow for every 10 cent a pound increase in the price of copper.

But increases in copper prices–and in gold production–only hit the bottom line if costs are stable or falling. Toward the end of the commodities boom in 2007 production costs for everything from diesel fuel to truck tires were rising so fast that they were eating into mining company profits even though commodity prices were at peaks. Now the companies are seeing the other side of the cycle as costs plummet. With commodity prices stabilizing that can produce a huge swing in profits like that Freeport reported this quarter.

This quarter the company saw a 55% drop in the cost of diesel fuel and a 30 fall in the post of power. The production cost of producing a pound of copper fell to $1.24 from $1.84 in the second quarter of 2008.

For the third quarter Freeport expects sales of copper to retreat about 10% from this quarter’s numbers, gold sales to fall by about 25%, and molybdenum sales to decline by about 25%.

Investors buying these shares now are then looking for a big increase in copper and molybdenum prices for their profits. That’s iffy unless the developed world economies do grow faster than current projections.Pretty much everyhbody in the mining industry is sitting on idle capacity so it will take a big pickup in demand to keep copper prices climbing once that capacity comes back into production.

Deutsche Bank now projects that colpper prices will decline for current spot prices near $2.40 a pound to $1.90 by the end of 2009, recovery only slightly in 2010, and not return to the $2.40 level until 2011.