Stock of the Day - February 9, 2009 - FCX

Freeport-McMoran Copper & Gold Inc. (FCX)

Freeport-McMoRan Copper & Gold Inc. (FCX) explores, mines, and produces various types of metals including copper, gold and silver. It also smelts copper concentrates to sell refined copper products. Freeport-McMoRan is the world’s largest publicly traded copper company. The company’s stock has taken a huge hit recently, and I’ll discuss why its fall may present us with a great buying opportunity.

FCX traded around $120 for the first half of 2008. With July came the beginning of a gigantic drop in its stock price: by December, it hit its 52-week low of $15.70 and in doing so lost about 87% of its value. To comprehend the drop in stock price, you must understand that FCX is completely reliant on the value of commodities, mainly gold and copper. The second half of 2008 saw the U.S. dollar make a remarkable rally. The value of the dollar increased because demand for U.S. treasuries skyrocketed, and the combination of foreign and domestic support for the U.S. currency led to an uptick in its value.

Because of the inverse relationship between commodities and the dollar, an increase in the value of the dollar equates to a decrease in value of commodities. Copper was trading at an average of $3.61 per pound for the first 9 months of 2008, and by December it was trading at a four-year low of $1.26 per pound. The 65% decrease in value spelled bad news for Freeport-McMoRan, as the company relies heavily on the sale and refinement of copper. Its 4^th quarter earnings report for 2008 was disastrous: the company posted a loss of $14 billion, or $36.78 a share.  In order to compensate for the steep losses, FCX suspended its dividend in December and plans to cut capital expenses.

I hope that I haven’t scared you away from the company at this point, because FCX has a huge amount of upside. The company is sitting on reserves of 3.2 billion pounds of copper and 41 million ounces of gold. This means that FCX holds billions of dollars worth of solid assets (literally). The company still owns gigantic mines on four different continents, and it plans on producing 3.9 billion pounds of copper in 2009 and 3.8 billion pounds in 2010.  FCX has not slowed production of gold either: The company expects to produce 2.2 million ounces of gold for each of the next two years. It should be clear by now that the industry leader (FCX) will maintain through adverse times.

I believe the horrible times for commodities are ending, and this is where the amazing upside for FCX begins. Due to a decrease in demand for U.S. Treasuries and an increase in money printing from the Federal Reserve, the dollar rally is coming to an end. As a result, commodities such as gold and copper are beginning to gain. Additionally, if Obama’s enormous stimulus bill passes we will see a hike in government spending. Increased government spending, increased money printing, and a decrease in demand for U.S. Treasuries will add up to INFLATION. Inflation is a beautiful thing for commodities because a decrease in the value of money equates to an increase in the value of solid assets.

In the end, FCX is a commodity play. If you agree with me and believe that we will see a period of monetary inflation in the times ahead of us, then Freeport-McMoRan will be a great investment. The company is cutting costs while still producing massive amounts of copper and gold. If the value of copper and gold goes up, FCX will be cashing in on major profits. You owe it to yourself to do some research and determine if you want to buy some shares of FCX and profit with the company.

Finding an upside to every downside,

-Matt Schwartz

College Trillionaire