Freeport-McMoRan: An Overlooked Copper Play With The Potential To Double

Jul. 4.12 | About: Freeport-McMoRan Inc. (FCX)

Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is a resource company exploring for copper, gold, silver, cobalt, molybdenum and other minerals. Like the majority of other stocks, FCX found its bottom in 2009 and has since moved up from under $10 a share to $35 now.

For investors who had the courage to invest in 2009, the stock hit $60 at the start of 2011. Since then, a little over a year ago, the stock price has dropped 50%. Like other resource companies such as BP (NYSE:BP), Potash (NYSE:POT), Vale (NYSE:VALE) and ConocoPhilips (NYSE:COP), companies operating in the resource field have been hit by fears relating to economic growth. Since corporations cut back on purchases first, these companies have been hit hardest by renewed fears of a recession.

I do not believe those fears are warranted. A lot of the decline in the FCX share price can be attributed to worries about the underlying weakness in the copper price, on which FCX clearly is dependent. Margins and the bottom line are highly correlated with the development of the copper price.

Copper is and remains a core input for the construction and technology industry and can not be substituted by other commodities. This alone makes copper very attractive. More than that: The supply of copper is limited. The long-term outlook for copper demand should be very attractive as emerging markets grow dynamically and strongly. I assume, that the bulk of commodity demand can be traced back to population growth and household formation in the long run. There is no alternative to copper so far.

FCX is a great play on copper for investors who believe copper prices will recover long term. FCX offers investors not only great upside in terms of capital gains, but also sports a 3.6% dividend yield, that is higher than the yields for Alcoa (NYSE:AA) or BHP (NYSE:BHP). The company has a current earnings yield of over 14%, which makes the stock hugely undervalued. I can clearly see FCX come back to hit its 52-week high of $57. Even then, I believe, growth prospects are not adequate priced in the stock. I consider the risk/reward trade-off for long-term investors very favorable.

In addition, FCX just has bounced back from its lower trend canal at around $31, given the stock support on the downside. Given the growth prospects of the company, its high profitability, and its cash flow backed high dividend, I rate FCX a strong buy.

Disclosure: I am long FCX.