Freeport McMoRan Copper & Gold (FCX)
The Dynamic Wealth Report
May 19, 2008
Profiting From Record Copper Prices - A Stock Pick
Just a few days ago I had a problem. The water pipe running into my
house started leaking. The small drip, drip, drip, which I ignored for a
few days turned into a small stream. I was fortunate. My leak could have
been much worse.
Once I realized how bad the leak was I shut off the water. Then I called
a plumber. Several hours and several hundred dollars later the leak and
a few other things were fixed. While I was watching the plumber fix my
problems, I noticed something. It was a small thing, but very important.
I noticed that all of the plumbing in my house was copper.
I was surprised. I started doing a bit of research, and of course I
asked the plumber several thousand questions. (I think I got my money’s
worth out of him.) Here’s a very interesting fact. Did you know that 46%
of all the copper produced is used in building construction? And two-thirds of that is for residential construction?
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If you’re quick on the math, 30% of the copper being produced in the
entire world is going right into our homes!
The average single family home uses about 440 pounds of copper. Most of
it’s in the electrical wiring and plumbing. Needless to say, copper’s
important to our lives, and I bet most of us had no idea.
Copper is one of the oldest metals used by humans.
Some estimates place our first use of the metal at over 10,000 years
ago. When you add a small bit of tin to copper it becomes bronze- a key
ingredient to the advancement of humans during the Bronze Age.
Copper has proven itself very useful over the last several thousand
years. Today, copper usage is widespread, and production is big
business. Mining for copper’s a huge task however. Open pit mines are
miles wide and thousands of feet deep. Miners extract millions of tons
of copper bearing ore. The metal is found around the world, with most of
it coming from countries like Chile, Peru, Indonesia, and the United
States.
Copper resources are finite.
Like the oil we pump from the ground, copper is a finite resource. Some
analysts estimate our deposits of copper will be exhausted within the
next 25 years. Now, I don’t believe we’ll run out that soon. But
eventually we will. Lucky for us, copper can be recycled.
Over the last decade the price of copper has had an amazing run.
In the late 1990’s copper was selling at 60 year lows. About $0.60 per
pound. Today, that same pound of copper will fetch more than $3.80 on
the open market.
I know some investors are looking to profit from the continued rise of
copper prices. Many are looking to the commodity markets. Personally, I
prefer to profit from the stocks of the copper producers. My favorite is
Freeport-McMoRan Copper & Gold (FCX).
Why I like Freeport.
Other than the fact that the company name is a mouth full, I have
several reasons I like this company. First, in the interest of full
disclosure, I do have a family member who works at the company. So feel
free to take everything I say with a grain of salt.
The company was created in March of 2007 when Phelps Dodge merged with
Freeport. These companies have a long history in the mining industry.
The Phelps Dodge part of Freeport started mining in 1881. They grew
their business significantly over the last century. Today the company
can be found on the Fortune 500.
Not only is Freeport the world leader in copper production, but they
have significant mines focused on gold and molybdenum. I like that their
mines are located all over the globe. These two facts may seem small but
they’re significant. By mining multiple metals they limit the risk of
price fluctuations in a single element. And, by having multiple mine
sites they eliminate the risk of production problems at a single mine.
But those aren’t the only reasons I like this firm.
They also make money hand over fist. The company’s focused on generating
cash flows from their mining operations. And management has proven adept
at using the cash they generate. In 2007, they generated over $16
billion in revenue and $6 billion in cash flow. In addition, Freeport’s
managed to pay down almost $10 billion of debt they acquired during the
merger.
My favorite part.
Reserves are huge at Freeport. At the end of last year they estimated
their copper reserves at more than 93 billion pounds of copper, 41
million ounces of gold, and 2 billion pounds of molybdenum. Now keep in
mind reserves are only counted if they can be profitably developed. Freeport uses a conservative price estimate for the metals. $1.20 a
pound on copper, $450 per oz on gold, and $6.50 per pound of molybdenum.
This is great. It shows just how conservative management is. Can you
imagine what their reserves would look like at current prices?
But wait, it gets better.
The company pays a nice stock dividend – about $1.75 per share. And the
board has authorized the repurchase of 20 million shares. There are lots
of other reasons why Freeport is at the top of my list. I could go on
and on. But take a look at the stock. I’m sure you’ll see the tremendous
investment potential as well.
• Basic Resources Index (Up 19%)
Since the beginning of the year the basic resources sector has posted
some amazing gains. The index is made up of companies in the minerals
and mining industry. Leading the group are companies like Arch Coal
(ACI) and Freeport (FXC).
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