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Mining for Profits in Metals

11/12/2007 12:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Turnaround Trader, finds a mining stock that would benefit from higher commodities prices in the wake of the Fed’s rate cuts and inflation fears.

As was widely expected, the Federal Reserve cut rates by a quarter point [on Halloween]. Wall Street [initially] celebrated on the news, but suffered a hangover [afterward because] the Fed's bailout of the mortgage markets has reignited fears of inflation and of a slow-motion meltdown of the dollar.

With the Fed easing interest rates and inflation worries growing, commodities have advanced again. As the dollar hits new lows practically every day, and China threatens to diversify into the euro and other currencies, gold has surpassed $800 an ounce and hit a 27-year high. It could move higher.

That makes now a good time to own mining stocks, particularly Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX).

Freeport made a very smart move in March when it bought Phelps Dodge for $26 billion. The purchase made Freeport the world's largest publicly traded copper company.

It now has a huge, long-lived, geographically diverse portfolio of mining assets. And the acquisition of Phelps is producing tens of millions of dollars in unexpected savings.

For example, rather than Freeport spending tons of money exploring for copper, it now boasts 14 new operating mines in North America, South America, and Africa. The buy will result in an immediate 30% spike in Freeport's annual sales.

The company reported recently that its third-quarter profit more than doubled, while quarterly revenue tripled to $5.07 billion from $1.64 billion.

Copper prices are down a bit with the slowdown in US housing construction. But there's strong demand for copper from China and other emerging markets. Worldwide copper consumption actually is up 6% so far this year. At the same time, there have been supply disruptions due to labor strikes and natural disasters such as floods and earthquakes.

With Freeport opening a new copper mine in Arizona ahead of schedule this year—one that will produce at least 240 million pounds of copper per annum—and the new company enjoying huge new economies of scale, expect this stock to continue its rapid run in the weeks just ahead.

Mining stocks [have fallen sharply lately]. That situation gives us an opportunity to buy at a discounted price. Let's add Freeport-McMoRan to our portfolio. Place a sell stop at $95 for protection. (The stock closed below $110 Friday—Editor.) Speculators may want to take a look at the February $135 calls (FCXBZ.X).

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