Copper Prices Will Boost Freeport McMoRan In 2012

Jan.13.12 | About: Freeport-McMoRan Inc. (FCX)

As I noted in a previous article, demand for steel from the auto industry and the oil and gas industry rose 12% and 24.3% respectively in the first three quarters of 2011, and a rebound in the U.S. auto industry combined with increased capex from oil majors should help to fuel a continuation of the trend into 2012.

As for aluminum, Alcoa's (NYSE:AA) CEO Klaus Kleinfeld said he expects demand to rebound in 2012 to the tune of 7% worldwide and 12% in China on the back of an aluminum deficit of around 600,000 tons. On Tuesday, investors got a sneak peak at how the outlook for another important metal is shaping up for 2012 -- copper.

China imported a record 508,942 tons of copper in December, up 13% from the previous month and up an impressive 48% from 2010, according to The Wall Street Journal. The report was critical for copper bulls, as "China accounts for 40 of world consumption of the metal, which is used in everything from wiring and plumbing to electronics and automobiles." Copper prices, which fell 23% last year, rose 3% on the news.

Shares of Freeport McMoRan (NYSE:FCX), the world's second-largest copper producer, leaped 5% Tuesday and climbed another 2% Thursday, as copper reached a one month high on the back of a strong Spanish debt auction which boosted the euro against the dollar and eased investors' fears regarding the prospects for the worldwide economy.

The prognosis for copper, which accounted for 78.5% of Freeport's sales in 2010, is positive for 2012 as demand should increase and supply should fall according to S&P's outlook for the diversified metals and mining sub-industry as outlined in its stock report on Freeport. Supporting the thesis that the metal will be in short supply this year is the fact that global copper stockpiles are at their lowest level in nearly two years and have fallen 22% since last March according to Bloomberg.

Freeport itself generally agrees that demand for copper should remain strong and supply should remain constrained in 2012. In it's most recent quarterly report, the company notes that "the long-term outlook [is positive], supported by limitations on supplies for copper and by the requirements for copper in the world economy."

The company also notes that "future copper prices ... are likely to be influenced by demand from China [and] economic activity in the U.S.," which is positive given that S&P expects U.S. demand for copper to be strong as housing starts post a projected 12% increase in 2012 versus an increase of around 3.5% in 2011 (copper is used throughout homes).

Goldman Sachs predicts copper prices will increase 26% by the end of 2012 on stable consumption from China and increased demand from Europe, as the region begins to emerge from the debt crisis in the second or third quarter. Goldman projects copper prices will rise nearly $2,000 per metric ton from $7,600 at the close of 2011 to $9,500 by the end of this year, according to BusinessWeek. It should be noted that this is a particularly optimistic projection. Other analysts see the metal trading substantially lower than $9,500 per metric ton on average in 2012.

If you believe the recent run-up in copper prices is a sign of things to come in 2012, Freeport McMoran is one good way to place a bet. According to S&P's stock report, over the last nine years the company has increased revenues, EPS, and free cash flow by a compound annual growth rate of 29.6%, 37.2%, and 33.8%, respectively. The company's margins are high, and its forward price to earnings ratio is low at 8.8 times analysts' consensus estimate of $4.81 for 2012.

The company has beat analysts' earnings expectations for at least seven consecutive quarters. Of the firms who cover the company, 84% rate it a buy/hold or better, and no firm recommends selling the shares. As of September 30, 2011, Freeport had $5.1 billion in cash and only $3.5 billion in total debt. The shares yield around 2.4%.

S&P's 12-month price target is $48, a 12.5% gain from current levels. However, if the global economic recovery picks up some steam, boosting demand for copper, the shares could have even more upside potential. Clearly this is one to be cautious, with as copper prices can fluctuate significantly, but shares of Freeport seem to be a bargain regardless of the direction copper takes in 2012, as long as demand and price don't collapse completely. I would begin averaging in soon in case copper prices continue to run up and eat away at the stock's upside potential.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FCX over the next 72 hours.