It was last October when Freeport-McMoRan Copper & Gold (FCX) had a gold mine in Indonesia called Grasberg that experienced a violent clash between striking employees and police. Long-running strikes and deadly violence at a mining concession is bad news for the company that spooks investors -- and that's just what happened to Freeport-McMoRan. The stock fell, but started up again in January and was on a nice climb until another temporary stop on Feb. 23 caused a hiccup in production again. With fresh fear from a recent three-month strike, investors sold stock until it ended up building a long base at about $36. And now we see the company as a good potential buy.
It is understandable that earnings were about half of what they were last year considering the unexpected strike. But results did beat Wall Street's lowered projections due to the relatively strong copper prices at the time. The company said in a statement about its future success this year:
The achievement of projected 2012 sales volumes is dependent on a number of factors, including returning to normal operations at Grasberg during second-quarter 2012.
Whether Freeport can move up now depends on two things: the continued civil operations of the Grasberg mine and the price of copper through 2012.
Regarding Copper Prices
Credit Suisse analyst Stefan Garber believes that copper prices may reach $9,500 per metric ton over the next 12 months. But that may be hard. Though Freeport had better than expected first-quarter results, copper had strong prices. But since then, copper prices have fallen as a leading Chinese copper smelter stated it would begin to export the metal to ease the global shortage. It then fell to about $8,300 a ton. Like everything else, copper production costs are increasing. So it will squeeze out the profits from Freeport as prices also fall. How long will this go on, we just don't know.
Looks As If Grasberg Is The Key
So it appears that copper as a positive savior of Freeport may be in question, at least in the short term through mid-2012. It looks more and more like getting the Grasberg mine running smoothly is going to be what keeps the company prosperous. The economic worries benefited gold, which is considered a relatively stable asset that investors tend to buy when they're nervous about the economy.
As we look at the stock, signs of a bullish move appear to be on the horizon. The RSI is showing a nice positive divergence against the stock as this defines strengthening of a move upward. Investors should take note.
Since we think gold will go up, we are looking at a bullish play on Freeport options for a short-term strategy, along with looking at a long-term investment.
The Options Play
- Buy an August 2012 call with a '37' strike (priced at $2.51)
- Sell an August 2012 call with a '38' strike (priced at $2.04)
- Net Debit to Start: $0.47
- Maximum Profit: $0.53
Reasoning Behind The Trade
- Gold is the key to Freeport's 2012 success, and we believe it will go up.
- A positive divergence in the RSI could be signaling a future climb in the stock.
- Eroding economic news could contribute to gold's rise and Freeport's success.