How To Turn Copper Into Gold

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Want to strike gold on Wall Street? Think copper. Or, more specifically, consider the shares of Freeport McMoRan Copper & Gold, the world’s seventh largest copper miner with annual sales of $4.1 billion.

That’s the pitch one of the most respected investment newsletters around, the Dow Theory Forecasts of Hammond, Ind., is making to its clients.

The recent pullback in metals prices — which has seen gold and copper undergo sharp declines and has taken its toll on the company’s shares — is thought to offer investors a golden opportunity. The stock, trading at $60.48, has tumbled about 20% from its 52-week high of $72.20, though it’s still up roughly 10% from its 2005 close of $53.80.

The sellers goofed. The sharp pullback is a market overreaction, veteran investment advisor and DTF editor Richard Moroney tells me. “I wouldn’t dump Freeport — it’s still a gold mine,” he says. “You’re looking at a very attractive valuation (8.7 times earnings), a healthy yield (more than 2%), and a lot of upside (about 20%),” observes Mr. Moroney, who expects the stock to rebound to the $72 range in the next year.

The key to the company’s operations is its Granzberg mine in Indonesia, which is the second largest copper mine and the largest gold mine in the world. It contains high grades of copper ore, making Freeport one of the lowest cost producers in the industry. The ore is mixed with gold, and, to a lesser degree, silver, which creates strong byproduct revenue and high operating margins.

In July, Freeport revised its five-year mine plan, deferring some mining of high-grade ore from 2007 and 2008 to 2009 and 2010. Management said that copper output between 2006 and 2010 would be 4.6% below previous guidance and that gold production would be 3.1% below guidance.

Although the prices of copper and gold have dipped in recent months, they still remain well above historical norms. As a result, Mr. Moroney says, high average prices for copper and gold should help offset the effects of lower production.

Futures markets project declines in copper prices during the next two years. But demand for the metal, particularly from Asia and especially China, is expected to exceed supply, which should keep prices fairly high relative to historical levels. Factor in the existing low level of copper inventories and Mr. Moroney figures the company’s copper results could exceed Wall Street’s expectations.

As for gold prices — which are down about 21% from their highs reached in May but still up around a similar amount from year-earlier levels — our Freeport bull says they’re tough to handicap. But the prices implied in the futures markets, he points out, suggest Wall Street’s less than golden outlook for the precious metal could be unduly bearish.

On the earnings front, Freeport has beaten earnings estimates by at least 16% in each of the last four quarters, roughly doubled its profits in the most recent quarter, and management has already projected a strong fourth quarter.

In April, consensus estimates called for per-share earnings of $3.98 this year and $3.34 next year. While the stock has fallen since then, estimates have jumped to $6.56 for 2006 and $5.49 for 2007.

Meanwhile, in the first six months of the year, Freeport has reduced its total debt by $184 million, paid out $352 million in dividends, and bought back $100 million worth of its stock, which, Mr. Moroney notes, is trading well below its five-year average p/e of 17.

Given the unpredictability of copper and gold prices, he figures Freeport’s stock is likely to remain volatile, but the shares, he believes, offer superior capital gains potential. Or, as he sees it, you don’t need a pick and shovel to strike gold on Wall Street. Just include Freeport McMoRan in your portfolio.

dandordan@aol.com


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