Freeport McMoran Is Now Attractive with Emerging Value

About six months ago, I wrote a post arguing that copper giant Freeport McMoran (FCX) was overvalued (“Freeport Valuation Bloated Here,” Top Gun FP, April 23, 2008).  At the time, Freeport was trading at $118 a share and my call generated nothing but criticism.

On Tuesday, Freeport was down almost 65% to $42 a share, and I think there is value here. 

As I predicted six months ago, copper prices are now down from $4 a pound in early July and yesterday, were around $2.50 a pound.  That is really going to hurt its margins and cash flow.  I’m not sure of the extent but it could be so bad that they are only a breakeven company with copper at these levels.  We’ll find out more when the company reports 3Q earnings in a couple weeks.

But it doesn’t really matter.  With 41 million ounces of proven and probable gold reserves, 93 billion pounds of proven and probable copper reserves and a market cap of $19 billion, you get the copper for $0.20 a pound and the gold for free!  That’s an absolute steal.

This is just one example of a great company that has become a bargain during the recent selloff.  I could do the same analysis for several others.

Disclosure: Top Gun is long shares of Freeport McMoran.

 

Comments

[livesinhiscar:]

>>you get the copper for $0.20 a pound

What is FCX's cost of production on a pound of copper?....that would seem to be a key metric here.

2008 Oct 08 03:26 PM

[Pessimistic...:]

I like FCX here but this 10% pop just does not seem like it will keep the fire burning. yes, I know their balance sheets are strong, lots of cash and gold and ...stuff.. using stuff here as a metaphore for doing all the right things. I believe China will need to step up to the plate and industry there will have to pick up. This is where we will see a bottom and capitulation will take place. I also feel they have been reducing the surplus of commodities and will soon need to ramp up imports. I have read in different articles that CH has been holding out to get pricing down to unheard of levels for their benefit.. anybody else hear this?

2008 Oct 08 08:02 PM

[Daryan:]

You miss the fact that almost HALF or over of their associated production costs are tied to the cost of energy. With energy down signifigantly, this should alleviate somewhat the hit to earnings on the copper side. Secondly, the realized price of gold should be signifigantly higher than last quarter as well.

2008 Oct 09 09:31 AM

[andy_miner:]

Is it really the gold free? I think gold has converted to equivalent copper.

2008 Oct 10 01:42 PM