Copper in warehouses monitored by the Shanghai Futures Exchange is being drawn down, it said. The bank estimated bonded stockpiles at 510,000 tons from 715,000 tons in early March and noted that futures in Shanghai are in backwardation.
Backwardation is a market condition which means that the price of a futures contract is trading below thespot price at maturity. This situation usually arises when a commodity faces a positive demand or negative supply shock.
Freeport is able to produce copper for about $1 per pound. So even if future prices remain relatively stable at current rates, the company will have no trouble turning a profit.
Recent Acquisitions
The other factor possibly weighing on Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)’s share price is investor concern over a pair of large acquisitions.
Freeport finalized the purchase of oil and gas producer Plains Exploration on May 31 for $16.3 billion. Just a few days later, on June 3, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) announced shareholder approval to buy Gulf of Mexico gas and oil explorer McMoRan for $2.2 billion.
In order to complete these purchases, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) issued 91 million additional shares of common stock.
Stockholders are never too happy when the value of their shares is diluted by additional issuances. But in this case, the future benefits for Freeport could far exceed any short-term pain.
The Plains acquisition gives Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) access to an impressive portfolio of oil production facilities in California and the Gulf of Mexico, as well as large stakes in both the Eagle Ford and the Haynesville Shale plays.
The McMoRan acquisition gives the company a leading position in the emerging shallow-water, ultra-deep gas trend on the shelf of the Gulf of Mexico and onshore in south Louisiana.
StreetAuthority analyst and natural resources expert Nathan Slaughter has been covering these emerging energy plays for years…
He recommended McMoRan Exploration to subscribers of his Junior Resource Advisor newsletter last October, eight months before the merger with Freeport took place. So far, his subscribers are up almost 50% on the recommendation.
Whether these acquisitions were smart or not remains to be seen. But the recent $31 million share purchase by Freeport’s CEO could be a sign that at least one well-positioned insider is willing to bet big on its future.
Risks to Consider: Nineteen billion dollars in acquisitions is a lot for a $28 billion market cap company like Freeport to digest. Future success will depend not only on volatile commodity prices, but how well management incorporates the new acquisitions with the existing business.
On May 14, the company had a serious mining accident during safety training at one of its top mines in Indonesia. Twenty-eight workers were killed. Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) has announced that halted production at the mine has so far resulted in a production loss of 80 million tons of copper and 80,000 ounces of gold.
Fortunately, this looks like an isolated event, not part of a larger pattern or deficiency on the part of Freeport. It’s the first such incident of this magnitude in the company’s 40-year history.
Action to Take–> Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is now one of the premier U.S.-based natural resource companies. Shares offer a 4% yield with a manageable payout ratio of 40% over the past 12 months. Consider buying Freeport at today’s prices with a goal of $43 a share over the next 12 to 18 months.
This article was originally written by Chad Tracy and posted on StreetAuthority.
