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Freeport-McMoRan Copper & Gold (FCX) – Cheap on the Split based on Options Play

The stock of Freeport-McMoRan Copper & Gold (NYSE:FCX), the largest copper and gold miner in North America, rises mainly with the price of copper, not gold, since copper provides a large chunk of their revenue, about 70%.  Taking advantage of the commodities boom, the company plans to spend additional capital to increase output from its mines.  This should boost its earnings, as copper prices stay high.  Global diversification, strong earnings, and bullish technicals should cause prices to head higher.  Plus, a stock split makes options cheaper.

 

Map of Operations:

Click to enlarge

 

-  The Grasberg project (Papua New Guinea) contains the largest recoverable reserves of copper and the largest single gold reserve in the world.  It also mines silver.  FCX owns 90.64% of the project.

-  Tenke Fungurume (Democratic Republic of the Congo) mines copper and cobalt and is expected to produce 250 million pounds of copper and 18 million pounds of cobalt per year.  At today’s price of copper at $4.53/ounce ($72.48/lb) and cobalt at $20.25/pound, that is $18.12 billion of copper and $364.5 million of cobalt a year.  FCX owns 56% of the project.

 

As of December 31, 2009, its recoverable proven and probable reserves totaled 104.2 billion pounds of copper, 37.2 million ounces of gold, 2.59 billion pounds of molybdenum, 270.4 million ounces of silver, and 0.78 billion pounds of cobalt.

 

Breakdown of reserves and sales as of December 31, 2009:

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As of their 4th quarter report on January 20, 2011, consolidated sales for the quarter totaled 941 million pounds of copper, 590 thousand ounces of gold and 17 million pounds of molybdenum, compared to 989 million pounds of copper, 551 thousand ounces of gold and 16 million pounds of molybdenum for 4th quarter 2009.  Thus, sales of copper declined by 48 million pounds, while sales of gold increased by 39 million ounces.  Sales of molybdenum increased by 1 million pounds.

 

Consolidated sales for the year 2010 totaled 3.9 billion pounds of copper, 1.9 million ounces of gold and 67 million pounds of molybdenum, compared to 4.1 billion pounds of copper, 2.6 million ounces of gold and 58 million pounds of molybdenum for the year 2009.  Thus, sales of copper declined by 1.1 billion pounds, and sales of gold declined by 700,000 ounces.  Sales of molybdenum increased by 9 million pounds.

 

The company forecasts consolidated sales for the year 2011 to be approximately 3.85 billion pounds of copper, 1.4 million ounces of gold and 70 million pounds of molybdenum.   

 

For 1st quarter 2011, they expect sales to be approximately 840 million pounds of copper, 325 thousand ounces of gold and 17 million pounds of molybdenum.  At today’s price of copper ($72.48/lb), gold ($1360/ounce), and molybdenum ($17.96), that is sales of $60.88 billion for copper, $442 million for gold, and $305.32 million for molybdenum, and a total sales of $61.63 billion.

 

The chart below shows their earnings history.  Earnings per share are non-GAAP.

Revenue – Quarterly Results (in $Billions)

Earnings Per Share – Quarterly Results

 

2010

2009

2008

 

2010

2009

2008

1st Qrt

4.363

2.602

5.672

1st Qrt

$1.03

$0.05

$1.46

2nd Qrt

3.864

3.684

5.441

2nd Qrt

$0.75

$0.71

$1.23

3rd Qrt

5.152

4.144

4.616

3rd Qrt

   $1.25

$1.11

$0.68

4th Qrt

   5.603

4.610

2.067

4th Qrt

$1.63

$1.13

-$18.38

Click to enlarge

 

As long as copper, gold, and molybdenum prices don’t plunge, the company seems on track to meet earnings and revenue estimates of $1.23 and $5.38 billion when it reports on April 21st.

 

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The MFI (Money Flow Index) is below 50, meaning it is neither overbought (MFI of 80) nor oversold (MFI of 20), giving it room to go up.  Money flowing into a stock (positive money flow) and money flowing out of the stock (negative money flow) has not changed much in the past month.  This, a rising RSI (Relative Strength Index) which is bouncing off the oversold border (RSI of 30), and a downward price movement means that the downtrend may be weak, there is more volume associated with price advance than with the price decline, and thus is a bullish buy signal.

 

Click to enlarge

 

The stochastic %K and %D graphs gave a bullish signal on February 1st when the %K crossed above the %D in oversold territory (reading below 20).  Since then, both have risen above 20 but have recently reversed course and may test the oversold territory again.

 

In the graphs, three previous examples are given to show how these technicals correlate with price.  The first example (orange line) in late April shows a bearish cross of the %K crossing below the %D in overbought territory, which is defined as reading above 80.  This correlated with an overbought W%R and thus a fall in the price.  The second and third examples (purple lines) around September 10th and February 1st shows a bullish cross as noted above, and oversold RSI, and an oversold W%R (reading above 20), and thus corresponded with a rise in price.  And the W%R appears heading back to oversold territory, coinciding with the other indicators, which seem to be flashing the same buy signals.

 

Using the slope of 33 cents/day from its last fall, it is possible it will rise by $10 to a share price of $65 in 30 days.  But to be on the safe side, especially since 1st quarter production is lower than 4th quarter production, use the 16 cents/day slope from the last uptrend to give a 60 day time frame.  Thus, buy 60-day call for $65.  You can always sell the call before the expiration date.  Plus, since the stock recently split, the calls will be “cheaper.”  Or you can buy both the calls and puts, since there is no guarantee that it will not fall, although it is fairly unlikely.


Disclaimer:  Writen for momentumoptionstrading.com/ .

I do not own FCX.