Buy Sell or Hold: Now is the Time to Buy Freeport-McMoRan

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Historically, when investors wanted to gain some exposure to copper in their portfolios, the stock to buy was always Freeport-McMoRan Copper and Gold Inc. (NYSE: FCX).

That's still true today, but with one major difference: When you buy Freeport-McMoRan you're also buying a stake in oil and gas exploration and production.

The company recently acquired McMoRan Exploration Co. (NYSE: MMR) and Plains Exploration & Production Company (NYSE: PXP) – both of which are aggressively producing oil and natural gas through on-shore and off-shore properties in the Gulf of Mexico, California and throughout North America.

This merger is expected to shift Freeport-McMoRan's operations from being a 100% mining outfit to a company with a 75% mining segment and a 25% oil-and-gas segment. This potentially gives the mining giant top-line diversification in the event copper prices begin to weaken.

And while news of these acquisitions did cause the stock to fall 16% in a day, the company has regained some of its mojo – gaining 10.6% since Dec. 6th.

The stock rallied yesterday when the company reported Q4 2012 earnings of $0.78 EPS, which beat consensus analyst estimates of $0.72 EPS. That gain represented a 7.46% increase over the same period a year ago when the company reported $0.67 EPS.

So does that make Freeport-McMoRan a solid buy candidate for 2013?…

Let's take a look, starting with its mainstay: copper demand.

Chinese Demand Drives the Market

Global copper demand is currently driven mainly by one very influential force – China – which is responsible for roughly 40% of the world's copper use.

Recently, HSBC projected that China is expected to make its biggest-ever contribution to global growth in 2014, and that China's economy will grow by 8.6% in 2013, which is up from 7.8% in 2012.

In fact, on January 18, 2013, the National Bureau of Statistics reported China's Q4/2012 GDP increased to 7.9%, which was up from the 7.4% growth recorded in Q3/2012 – and above the consensus forecast 7.8% growth.

Along with China's other trading partners, Freeport-McMoRan is now perfectly positioned to capitalize on China's improving economy.

Not only will Freeport-McMoRan's copper exports grow with China's announcements of infrastructure spending, but its exports of oil and natural gas could also grow as China's economy improves.

Now I do know that there are several Western economists who still question Chinese economic numbers – and they have good reason to.

However, one of the best ways to judge the actual strength of the Chinese economy is by tracking exports to China (by its major trading partners such as Brazil and Australia) and by U.S.-listed multi-national companies that generate substantial revenue inside of China like Apple (Nasdaq: AAPL), General Motors (NYSE: GM) , McDonalds (NYSE: MCD), Yum Brands (NYSE: YUM) – and Freeport-McMoran.

But to really understand the relationship between the performance of FCX and China, you need to take a look at the following 5-year chart that compares Freeport-McMoran (FCX) to iShares FTSE China 25 Index (NYSE: FXI).

Chart: YahooFinance.

As you can see, FCX tracks, with much greater leverage, investor sentiment in China (as represented by FXI).

So how are investors feeling about China right now? Judging from the chart, pretty darn good.

Over the last seven months, FXI has quietly gained 30.91% off its June 25, 2013 lows, compared to a 12.66% gain in the S&P 500 over the same period.

That bodes well for FCX, especially when you consider Chinese demand for natural gas is estimated to grow 13% per year, doubling by the end of 2017, according to the International Energy Association (IEA).

In fact, by 2013 China will become the world's third-largest purchaser of natural gas. The U.S., with its huge supply of natural gas reserves, is expected to become a net exporter of natural gas over the next five years.

When Freeport-McMoRan's mergers are completed they will be well positioned to take advantage of China's thirst for natural gas.

The downside revolves around the global pressures that are beginning to heat up.

Freeport-McMoRan owns the Grasberg mine in Indonesia, which has the world's largest copper and gold reserves. Prior to the merger, the mine accounted for 19% of the company's revenues.

Investors would be wise to keep an eye on the Grasberg operations, since it is facing a declining grade of copper ore, a simultaneous increase in cost, and a potential increase of royalty payments to the Indonesian government.

Freeport-McMoRan is facing similar increased royalty payments in its North African operations – but the company plans to increase production by 25% over the next three years to offset increasing royalty payments at its mining properties throughout Africa, Indonesia and the Americas.

Buy Freeport-McMoRan (NYSE: FCX)

With that in mind, I would buy Freeport-McMoRan today in the wake of yesterday's strong earnings report.

But I wouldn't get caught up in any of the short-term price action as traders work through the earnings report.

Instead, I would focus on the technical picture from a much wider long-term perspective.

Above is the FCX weekly chart, which goes back to September 2009. It demonstrates a multi-year low of $29.27. The current share price of roughly $35.00 is approximately 20% above those lows.

And on this more recent daily chart, what you see is that the share price quickly traded down to $30.81 after the merger announcement in early December. From there, the stock held its ground and rebounded to the upside. I like that because it indicates the stock has found support above the recent $29.27 lows referenced above.

Now usually I would wait until the dust settles and let everyone crunch the earnings numbers before initiating a position. However, I don't believe the numbers are where investors should be focused right now, and I'd hate to miss out on what may be the makings of a good investment.

As a result, I would buy half of a position in Freeport-McMoran (FCX) now and purchase the other half at $36.50, which is above current resistance at the $36 level where the 50- and 200-day moving averages converge.

And don't be surprised if there is a bit of a sideways consolidation around $36.00 before the stock moves higher. That's fine with me because in the meantime investors get the chance to collect a juicy 3.6% yield on the first half of the position.

Of course, once you've initiated a position, make sure you maintain a 25% trailing stop, which is in accordance with the strategy advocated by Money Morning Chief Investment Strategist Keith Fitz-Gerald.

About the Author: David Mamos brings nearly 15 years of analytical experience to the table with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation and execution of trading strategies for aggressive investors.

Join the conversation. Click here to jump to comments…

  1. Barbara R | January 23, 2013

    I am reminded of the cronyism at Chesapeake Energy when I read about the recent energy buys that Freeport McMoran just made. Who will be the watchdog over the 3 buddies who now run Freeport? They changed from a materials focused company to a energy and materials company. I know they have had previous experience in the energy field but why this recent shift WITHOUT paving the way for their shareholders (i.e. warning them this deal was imminent and not hitting them out of left field with it) and WITHOUT shareholder input – no voting on this. Morningstar questioned the price they paid as well. I don't like companies that don't take their shareholders into account and for those of us who were overweighted in energy to get MORE energy when we thought we had a materials company needs to be considered as well.

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