Top Picks 2018: Freeport McMoran (FCX)

01/10/2018 5:00 am EST

Focus: COMMODITIES

Carla Pasternak

Editor, The Income Investor

Copper and gold miner Freeport McMoran (FCX) is expected  to grow earnings per share nearly fivefold this year, another almost 50% in 2018, and more than 70% annually over the next five years, asserts Dr. Carla Pasternak, editor of Dow Theory Letters’ Income Investor.

Earnings are forecast to rise mainly in the wake of higher copper prices, which are currently trading at a three-year high at better than $3 a pound. Prices have been trending higher this year as China's crackdown on its copper smelters to control pollution has increased its reliance on copper imports.

A lack of reserves to meet projected demand for copper in the coming years is also pushing prices higher. As the world's largest publicly traded copper producer, with over 50% of revenue derived from copper, Freeport-McMoran is expected to benefit from higher prices.

Uncertainty about the fate of its Grasberg copper mine in Indonesia has been a large overhang for the shares, but the clouds are clearing. Right now, Freeport owns 91% of Grasberg, the world's second largest copper mine, and the Indonesian government owns the balance.

In an effort to control the country's natural resources, Jakarta is demanding mining companies get new licenses and build smelters for local production. In response, Freeport said it will sell a 51% interest in the mine to the state if it can retain operating control until 2041. At stake is whether the two parties can agree on price for this interest.

Investors are optimistic that the parties are close to closing in on a deal that's a win-win for all sides. The government would get a bigger stake in the open pit mine, but Freeport would have enough of an interest to support an underground expansion project that would generate additional corporate revenues while also funding local government coffers.

Investors are starting to take notice. But they are still trading at a forward PE of only 10 times and a 1-year trailing price to earnings growth rate of just 0.5, which leaves  room for considerable upside. (A PEG of 1.0 or less represents good value.)

For almost the last two years, the shares have been "dead money." In the last several weeks, however, the technical picture has radically changed. In December, the stock broke out above $17 resistance that had restrained it for almost a year.

After a long period of sideways movement, the 10- and 40-week moving averages are now both below the share price and beginning to slope bullishly upward. The 10-week crossed above the 40-week in August 2017, forming a bullish "golden cross." 

The next important resistance I see is in the $23-$24 range, a brief support level in 2013 and recovery peak in 2015. My stop would be $13.79. Since old resistance should be new support, there should be prior buying interest near $17 if there is a retreat.

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