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Freeport-McMoRan a Double-Barreled Buy

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In the clamor created by last Friday’s jobs report in the precious metal markets, it easy to focus on the best ways to play gold and silver and overlook base metals like copper. Based on a wide array of global macroeconomic inputs, copper looks well positioned to appreciate into rising demand for the rest of the year. Freeport-McMoRan Copper & Gold (NYSE: FCX) gives investors broad exposure to both copper and precious metals, making it particularly attractive under current conditions. With a solid valuation and a strong dividend yield, the company is a buy for your core portfolio.

Barrel One: Gold & Silver

The combined impact of the weak U.S. jobs report and the announcement by the ECB of its intention to begin its own bond-buying program to stimulate the European economy is bullish for precious metals. Aggressive actions by the world’s most influential central banks tend to be a strong sign of global economic weakness. As capital flows into the safe haven that precious metals represent, prices rise. While a solid uptrend in gold and silver prices has likely already begun, the expected announcement by the Fed of the next round of quantitative easing should serve as a further catalyst. Industry insiders expect the announcement to occur at the regularly scheduled Federal Open Market Committee (FOMC) meeting in late September.

Barrel Two: Copper

While copper prices have risen in four of the last five weeks, global macroeconomic factors are expected to help this trend continue. The move by the ECB should loosen credit and make borrowing easier. The stimulative effect on the European economy will include a positive push in construction spending, one of the largest demand drivers for copper.

Additionally, there is hope amongst traders that Chinese demand will strengthen in the near-term. The Chinese government recently approved 60 vital infrastructure projects that have the potential to stoke demand. China is the world’s largest consumer of copper, accounting for roughly 40% of global consumption. Weakness in the Chinese economy was largely blamed for the rut the base metal had been in, but times are looking more favorable ahead.

Choose Your Weapon

As of December 31, 2011, Freeport has reserves of nearly 120 billion pounds of copper, nearly 34 million ounces of gold and 330 million ounces of silver. Furthermore, the company expects production at its various mines to increase by as much as 25% over the next three years. Finally, the company is well cashed up and in a great position to perform moving forward.

Turning to the stock itself, Freeport has a very attractive valuation relative to most of its peers, trading at a trailing twelve-month multiple of 11.8. On the copper side, Southern Copper (NYSE: SCCO) trades at a 12 multiple. On the gold side, only Barrick Gold (NYSE: ABX) looks cheaper at a P/E of 9.8. Newmont Mining (NYSE: NEM) which is the best comparison based on the company’s heavy exposure to both gold and copper, carries a P/E of 111.4 as of this writing.

As an income play, Freeport is also the most attractive. The company offers a dividend yield of 3.4% relative to 2% for Barrick, 2.9% for Southern Copper and 2.8% for Newmont. While each of these companies’ dividends is solid, the additional yield on Freeport helps to give it an edge over its peers.

Overview

With the double-barreled threat available from Freeport at a time when both precious metals and copper look attractive, this stock is a great addition to one’s core portfolio. While precious metals have been highly in focus of late, the diversification of solid copper exposure mitigates some of the risk on a pure gold or silver play. When the strong income element is added to the analysis, Freeport is hard to beat.


Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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