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Freeport McMoran: With Copper Prices Rising, It's Still a Buy

by: Market Folly July 03, 2008 | about stocks: FCX    

Market Folly

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On Wednesday, we saw a disconnect between the price of copper and one of the world's leading copper producers Freeport McMoran (FCX). Copper futures have been rising steadily the past few days and are approaching overhead resistance, looking to breakout. Yet, during this rise in copper prices, you will notice that the copper producer FCX was beaten down in the market. So, we seem to have a disconnect here. If you take a look at copper futures, you'll notice an area of strong overhead resistance. If it breaks this to the upside, copper could really take off. We're talking about a multi-year ascending triangle building here.

click to enlarge


Then, compare this with FCX and you see a tale of two charts. FCX is now bordering on its 200-day moving average and I like it down here. Technically, the stock has been in a long uptrend and is a direct beneficiary of high copper prices and growing copper demand. In addition, to top it off, FCX has the added bonus of exposure to molybdenum, a metal hardly anyone knows about. I would be remiss if I didn't mention that Atticus Capital has a large stake in FCX. Atticus is the 13th largest hedge fund in the world based on assets as recently cataloged by Alpha, which I posted about here. Moreover, you can read more about Atticus Capital's portfolio holdings in the 13F analysis I did here.

Even if the selloff in FCX continues, I'm buying here because:

  1. Copper prices are high and look to go even higher.
  2. FCX is one of the best copper producers out there and benefits from higher prices.
  3. FCX has exposure to molybdenum.
  4. IFCX is cheap on valuation as it trades at only 13.1 times trailing and 8.6 times forward earnings.
  5. The company still is cranking out operating margins of 42% and a return on equity of 20.4%.
  6. Each time the stochastics have reached oversold levels, FCX has presented us with a buying opportunity, and that's exactly what is about to take place. If you look at the chart of FCX below, you will see the green circles on the main chart highlight the buyable dips. On the bottom of the chart, you will notice those buying opportunities coinciding with oversold stochastic levels.

click to enlarge

Therefore, the action we saw yesterday was very puzzling to say the least. There was a clear disconnect between the price of copper and the copper producer FCX. I believe this is because we have reached the stage in the market sell-off where even the market leaders are taken behind the woodshed and beaten. All of the weaker sectors have already sold off and now it is time for the strong sectors to be taken down.

After all, we're in bear territory. We saw this same scenario play out a few months ago when energy, commodities and the like all saw massive selling. In addition, after massive run-ups, we're back to the rinsing cycle of the rinse and repeat strategy. Watch FCX as it should provide a solid entry for a longer-term investment. We may see continued selling because hedge funds and the like are seeing redemptions and have to scrounge up cash to give back to their investors who want out. Moreover, when you're short on cash, you have to sell your winners, which is exactly what they're doing.

Copper prices are rising and are close to really breaking out. Although Freeport McMoran Copper & Gold Inc has the word 'gold' in it, don't let that fool you. Copper is its game. Toss in the fact that the company has exposure to molybdenum (think steel alloys), and this miner truly has exposure to some booming industries. Take advantage of the disconnect that exists here between FCX and copper prices, since it benefits from these higher prices, and hedge funds and the like still are forced to sell their winners due to redemptions. Their loss is our gain.

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This article has 19 comments:

  •  
    Jul 03 08:45 AM
    Excellent article, good analysis. A play on gold and copper, molybdenum[for steel]. Timing for entry seems good.
    Reply
  •  
    Jul 03 09:48 AM
    Check out PCU for similar reasons...
    Reply
  •  
    Jul 03 10:31 AM
    triple top - bearish
    Reply
  •  
    Jul 03 10:45 AM
    A world-wide recession is going to cause copper to pullback as much as 50%. It is close to being topped out.
    Reply
  •  
    Jul 03 12:24 PM
    - Wow - "moly" . . .
    FCX has the "added bonus of exposure to molybdenum, a metal hardly anyone knows about".
    . . . "Toss in the fact that the company has exposure to molybdenum (think steel alloys)"
    I would be hesitant to take advice on a mining company from someone that thinks "hardly anyone knows about molybdenum" - LOL!
    Take a look at the chart of TC - one of the largest private produces of "moly" - if you think moly is so wonderful and mysterious, there's a stock for you - 30 % correction in about 6 weeks!
    Reply
  •  
    Jul 03 01:56 PM
    I thought RIO made a great investment when it got into nickel. Stainless steel, alnico magnets - what could go wrong? Then miners go south in general and RIO decides to dilute the stock by selling more. Although the CMO and RSI indicate oversold, the MACD is still going down. I would wait till next week - this stock falls a lot faster than it goes up - you might miss a percent or two, but you can get hammered 6% in a day if you aren't careful.
    Reply
  •  
    Jul 03 03:41 PM
    There is a fundamental reason for the selloff. There is a nationwide strike going on in Peru, and FCX is caught up in this. This will obviously drive up copper prices, but companies like FCX and PCU will have to leave money on the table.

    www.mineweb.com/minewe...

    Check up Otto Rock's postings under PCU regarding his analysis on how long this strike could go. In fact, if you want good coverage on metals and south america, I would highly recommend his blog.

    www.incakolanews.blogs.../
    Reply
  •  
    Jul 03 08:53 PM
    You can get gain for short term until 2nd quarter earning report. I doubt for long term, beside strike FCX is seemed push too much on the past to pay their M&A for Phelp Dodge and likely their production will be short on this year and perhaps next year.
    Reply
  •  
    Jul 03 09:53 PM
    First of all, the Cerre Verde strike will derail only 8% of their total copper and 5% of their total moly, so don't get too worried over it. I used their website for that calculation. As for Q2 2008, using the Conference Call Statement "Two-thirds of our copper sales are sold under industry standard contracts. What this means for us is that about half of our sales in any quarter are going to be priced at the price at the end of the quarter and not at the average price during the quarter". Price on last day was $3.86, average for quarter was around $3.70, giving us $3.78 x 930M lbs copper (Conference Call expected Q2 quantities) plus 225T x $896 Gold plus 18M lbs Moly x $34 = $4.33M revenue from metal sales. Last quarter the misc revenues were $1.4B so let's use that same number and we've got $5.73B revenues. The EPS is tricky, not due to energy costs or dollar conversions (which can be difficult to gage), no, this quarter it's tax rate. Last quarter was 33% but that was unusual. I'm going with 39% and yielding $2.54/share EPS. Right now Q3 and Q4 have $6.72B Revenue and $4.08/share EPS based on the Q1 CC quantities, but I'll update when Q2 CC is held. This stock is math, not geopolitical mumbo jumbo, lines drawn on graphs or something you heard Adami say. Financial Analysis is the long term investors friend.
    Reply
  •  
    Jul 04 08:44 PM
    this stock has had a huge bounce off the january and march lows and is probably ready to tip over just like all the others.
    Reply
  •  
    Jul 06 02:23 AM
    IMHO it is quite plausible that due to the high energy cost (and inflation) and bear market for stocks that there is also a pullback for the FCX s.p.
    The candlestick shows that the pullback is NOT YET over. Most likely there will be a pullback well below the 200-DMA.
    Wait and see....
    Reply
  •  
    Jul 06 07:42 AM
    BxCap provided solid homework and real valuation analysis versus the technician 'astrologers' who provided opinions 'as if' they 'know' the future chart for FCX.

    No technicians have succeeded in 'forecasting' their way into the Forbes 400. Only hard working fundamentalists build and grow real businesses.

    Thank you BxCap for shining the light on these voodoo technicians.
    Reply
  •  
    Jul 06 04:31 PM
    went long with options on that $7.00 dip. Be patient. It'll go back up...
    Reply
  •  
    Jul 06 09:49 PM
    Anyone gonna start writing about MMR?
    Reply
  •  
    Jul 07 04:55 PM
    A Citi analyst just upgraded copper and surgical coal stocks? FCX upgraded? This must be based on some combination of squiggly lines, yes? Oh, wait, I see it's based on higher expected copper prices. So, that higher price multiplied by higher volumes of metal, will yield higher revenues?
    Reply
  •  
    Jul 08 12:32 AM
    When you substitute math mumbo jumbo for geopolitical mumbo jumbo you still end up with mumbo jumbo. Or as the economists say (economists: those who lie with numbers), garbage in, garbage out. Point: look at all of it, then make up your mind.
    Reply
  •  
    Jul 08 12:38 AM
    PS: "Booming industries." Who says they're still booming?
    Reply
  •  
    Jul 17 09:15 AM
    Still like copper whether its FCX, PCU, or SLT
    Reply
  •  
    Jul 22 06:31 PM
    Here's another recommendation for FCX- www.greenfaucet.com/tr...
    This author believes its poised to move up in the next week
    Reply
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