Freeport-McMoRan Copper & Gold: Success is in Gold not Copper

Posted: May 10, 2012 at 6:13 am

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By John Mylant - May 8, 2012 | Tickers: FCX, NEM | 0 Comments

John is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

Freeport-McMoRan Copper & Gold Inc (NYSE: FCX) has struggled recently as the 3 month strike in its Grasberg gold mine in Indonesia struck hard on gold production. A recent stoppage in mid February of the same mine for a day caused fear to rise in the hearts of investors again and a reactionary selloff ensued. Presently the stock is trading at 36.40. What will it take for the stock to really move up this year?

In the second half of April, Citigroup upgraded Freemont to a buy position with a price target of $45which represents a 23% upside! What will it take to get it there? Citigroup sighted the stock's recent underperformance relative to copper, but will it be copper that lifts the stock?

Copper prices were rising the first quarter and prices are expected to rebound in 2012, as demand continues to outstrip supply for the third straight year. Credit Suisse analyst Stefan Garber predicts that copper prices may reach $9,500 per metric ton over the next 12 months. But there are problems with that price projection looming. A leading Chinese Copper smelter stated it would begin to export the metal to ease the global shortage. Copper prices fell to $8,300 a ton. And the export can carry on for a while in 2012. Copper inventories in China, the largest consumer and importer of the metal, are currently at record levels.

It does not look like copper will be a short term answer to lifting Freemont stock, at least not for the next couple quarters.

It is going to be in the Grasberg mine. If they can make it work this year, money might just pour into it and notNewmont Mining (NYSE: NEM). Newmont has a headyprice-to-earnings ratio of 65 and a low earnings-per-share of 0.73. Does this signify investor confidence or is itsigns of an over valued company? On the other hand, Freeport-McMoRan has an EPS of $4.80 and a price to earnings ratio of 7.9. Could it be that Freeport is an undervalued company?

But it looks like it is all in the gold. At the end of February they had a new labor agreement but were experiencing work interruptions in connection with its efforts to resume normal operations so the mine was again temporarily suspended. But it is doing well in restoring operations at the mine. Freemont officials expressed optimism that negotiations with the government over contract extensions to keep operating in Indonesia will eventually be satisfactorily resolved.

Gold has a good chance of going up very soon! With the new developments in European debt and recession fears, the poor U.S.economic news, and the slow down in China, it may not take much for investors to flock back to gold. This could be the catalyst Freemont needs to start on a bullish run sometime this year.

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Freeport-McMoRan Copper & Gold: Success is in Gold not Copper

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May 10th, 2012 at 6:13 am

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