Goldman Sachs recently upgraded Freeport McMoRan to "Buy" with a price point about 27% from where it is presently trading. Evidently they are bullish on copper and FCX has strong exposure to the commodity. Bank of America/Merrill Lynch also recently upgraded Freeport-McMoRan from Neutral to Buy. It appears certain analysts are turning bullish on FCX because it is down over 25% from its recent highs in October. There are signs it has reached bottom but I am not of the opinion that the stock will see an extended long-term bullish run this year. If I think multiple years for an investment, I might be interested and one of our own writers here on Seeking Alpha makes a good argument for that point.
Chris Lau is an excellent writer here on Seeking Alpha and I enjoy reading his articles immensely. He recently wrote an article on Freeport McMoRan taking the position that the stock should be looked upon favorably. His title was: "4 Reasons to Like Freeport McMoRan Again." This is how Chris concluded his article:
"Reaching lower debt-level targets for Freeport will take between 2.5 and 3 years. The leveraged balance sheet heightens risk for conservative shareholders, but Freeport-McMoRan is positioning itself for achieving a higher cash flow over the next few years. The company is forecasting rising cash flow while sustaining capital expenditure levels of over $1 billion each year until 2015."
I like Chris's research and approach, agreeing with his long-term assessment of the company, but in the short term I am wondering if the company will remain in a trading channel because of the pricing forecasts for copper.
What is Copper Doing?
China's top producer of refined copper, Jiangxi Copper Company Ltd. is responsible for producing about 18% of China's overall copper production and believes world copper prices and production is on a slow but steady increase. Wu Yuneng, deputy general manager of Jiangxi Copper had this to say the recent press conference:
"The economy in the United States is recovering ... and China's demand from urbanization would rise. Copper prices should be better than last year."
Even if this is true, it could be short-lived because copper smelts in China are planning to increase their refined copper exports now that a rule change last year cutting the price of export costs which makes trading more attractive for the copper companies. If demand doesn't increase at a sufficient level increased production could add to the copper stock in the London Metal Exchange warehouses which in turn would weigh on global prices. It's not like copper is growing by leaps and bounds. Last year copper gained 4% in value but the first three months of this year has seen copper dropped 3% so it hasn't moved much.
Barely eking out a 1% gain so far from last year the future does not look bright for the metal through 2013. With a production surplus of about 170,000 metric tons as 2012 ended, this is supposed to rise and have an adverse influence on copper prices this year. Australia's Bureau of Resources and Energy Economics stated that the copper surplus is being caused by recently commissioned minds in Indonesia, Peru, and Mongolia. Rio Tinto (RIO) recently secured loans topping $3.7 billion to finance its project in Mongolia as an example of one of the companies revamping things up this year. These mines are expected to ramp up full production which is going to cause the price of copper to drop by 4% this year and the Australian Bureau expects the red metal to continue to decline through 2016.
While there is no question that the stock is in decline and has been this way for six months now after it peaked in October but I am also observing what looks like a well-defined symmetrical triangular pattern. This occurs when the highs get lower in the lows get higher signifying a consolidation. We can see this in both the RSI indicator and the MACD indicator through the trend lines that I have drawn. As the stock continues to move between the upper and lower Bollinger bands I believe in the next six weeks we may see it reach a point where it can break out one way or the other.
With copper prices having a dismal outlook over the next few years, I would expect FCX trade in the channel. This does not necessarily mean it would be a bad investment right now even. It is not uncommon for the stocks to have large peak and valley formations. I wouldn't be surprise if the stock moved up 20% this year, and I wouldn't be surprised if it moved back down 20% this year. For a short term gain after it peaks it might be a good investment to sell at that point. Or it might be a good long-term investment after copper prices stabilize and start a long-term trend up, but analysts do not expect that take place just yet.