11/25/2005 12:00 am EST
Dow Theory Forecasts is well known for its focus on high quality, blue chips stocks. Thus, it's no surprise that editor Charles Carlson calls his latest recommendation—an Indonesian copper and gold play—"an atypical addition to our buy list."
"Freeport-McMoRan Copper & Gold (FCX NYSE) is a new addition to our buy list. The company mines copper, gold, and silver in Indonesia. It also runs a smelting and refining operation in Spain. The primary Grasberg mine is the second-largest copper reserve and the largest gold reserve in the world. High copper grades at Grasberg mean Freeport needs to process less ore to extract the copper, keeping production costs low.
"The copper in the mine is mixed with significant amounts of gold and silver, creating additional revenue. Strong demand from China, supply disruptions, and falling inventories have spurred a two-year bull market in copper prices, which hit an all-time high in October. In the September quarter, copper prices improved 29% compared to the year-earlier period, while gold prices increased 12%. Freeport's copper production grew 34%, and gold production jumped 40%. Revenue climbed 64% to $983 million.
"At 12 times expected 2005 per-share earnings of $4.10 and 17 times expected 2006 per-share earnings of $2.90, the stock seems reasonably valued. Estimates for 2006 should continue to rise if copper and gold prices stabilize near current levels, as the company appears likely to sustain healthy volume growth.
"Metal prices are volatile, as is the political and economic environment in Indonesia, making Freeport an atypical addition to our Buy List. The stock is somewhat aggressive, given the nature of the mining industry and the company's concentration in a volatile region. But Freeport brings some diversity and inflation protection to our Buy List, and the stock holds superior 12-month potential."