Tuesday, February 5, 2013

Freeport (FCX) Could Soar on Copper Demand

Some analysts have questioned the sustainability of copper prices based upon the existing 82 mines that are scheduled to come online by 2020.

The problem with those assumptions is there are already significant delays of a number of those mines, and over a couple of decades there are sure to be many more. So even though there are in fact plans for 82 mines to be operating by 2020, there is no guarantee it'll come close to those numbers.

And of course that leaves 7 years of uncertainty and no guarantees as to how much copper will be available to the markets.

What also needs to be taken into consideration concerning copper supply is Escondida, the current largest producer of copper, has had production over the last five years plunge by 25 percent.

Together this produces a weak production outlook for copper in the near term, measured by a time period up to seven years, based upon projected copper mines coming online.

We must be careful not to make investment decisions based upon projections as to mine openings, which are very unstable and unreliable, rather we must look at probabilities and realities, which at this time favor growing demand and falling supply for several years.

How that plays in Freeport's favor is in recent history, 2009 - 2010, when copper prices took off, it soared from under $10 a share to almost $60 a share in that short period of time. It's likely to happen again, assuming the copper scenario plays out as expected; meaning supply is more constrained than believed by some analysts.

Another positive factor for Freeport is it is currently trading at only 7.5 times 2014 earnings. There is also the nice 3.5 percent dividend to consider.

There are those that could be rightly concerned over the recent acquisitions of Plain Exploration (PXP) and McMoRan Exploration (MMR), as the move towards diversification could water down the effect of copper prices on Freeport's bottom line. Over the long term that could be true (although the benefits of the assets coming with those acquisition are a positive for the company over time), in the short term it's unlikely to have any significant impact on the share price of Freeport, which should move in unison with the price of copper.

If the underlying assumptions are correct, that should be good news for Freeport investors.

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