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Nibbling at the Metals

10/16/2008 11:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Hedge Fund Trader and High Income Alert, says some commodities stocks are going for fire-sale prices.

Curiously, gold shares are taking a drubbing even as the price of the metal itself keeps rising.

This doesn't make sense and underscores the panic that exists in the markets right now. Central banks are pumping up the money supply to avert a financial crisis. But the long-term effect is inflationary.

Gold stocks, of course, are an excellent inflation hedge. And Barrick Gold (NYSE: ABX) is the cream of the crop.  The company has proven and probable reserves of 124.6 million ounces of gold, 6.2 billion pounds of copper, and more than a billion ounces of silver. Operating margins are 31%. Quarterly revenue is growing at 20%, and earnings are compounding at 22.5%. Yet the stock is near its 52-week low (trading above $27)—even as the barbarous relic itself moves higher.

Gold and gold stocks do not always move together, especially if the higher gold price is viewed as a temporary phenomenon. Second, margin calls are forcing investors to dump even blue chip stocks like Barrick. 

Blue chip mining shares are cheap and unloved right now. I don't expect that to last as this crisis unfolds. And Barrick is big enough that institutional investors are likely to turn to it first. I'm inclined to keep our position in Barrick Gold for now, maintaining our stop at $25.

Freeport-McMoRan Copper & Gold (NYSE: FCX), with the acquisition of Phelps Dodge in 2006, is now the world's largest copper, gold, and molybdenum mining company. It has proven reserves of 90 billion pounds of copper, 85 million pounds of molybdenum, and 1/8 million ounces of gold. It produces 78% copper, 12% molybdenum, and 10% gold.

The New Orleans-based company was trading for $127 a share less than five months ago, and is now down to under $36 a share—a precipitous drop of 70%! What caused this catastrophic fall? Revenues declined 4% to $5.4 billion, and earnings fell 15% to $947 million!  In short, investors overreacted.

Meanwhile, Freeport continues to pay higher dividends, and it just announced an all-time high dividend of 50 cents a share. That's nearly a 5% yield at today's price, one of the highest yields paid on a commodity stock. 

At today's price, Freeport could be one of the best buying opportunities in the past ten years for a commodity play. The Wall Street firm Friedman Billings Ramsey just upgraded the stock to "outperform" with a price target of $85 a share.

Granted, copper prices have fallen from $4 to $2.50 a pound due to the global slowdown in the economy, and the financial crisis. But the Federal Reserve and other central banks are pumping new funny money into the global economy like never before, and that could mean sharply higher prices for gold and copper soon. 

Commodity stocks like Freeport are on sale. (It closed Wednesday above $33, near its all-time low but below Skousen's recommended protective stop of $34 a share—Editor.)

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