Buy Freeport-McMoRan as a Real Estate Rebound Play
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With the homebuilders and home improvement stocks already racking up impressive gains over the last year, investors are now looking for derivative plays to benefit from the coming rebound in the domestic real estate market. One of the most appealing stocks might just be copper producer Freeport-McMoRan Copper & Gold (NYSE: FCX).
The company is one of the world’s largest miners of copper, gold, and molybdenum in terms of reserves and production. It recently announced a blockbuster deal to purchase McMoRan Exploration (NYSE: MMR) and Plains Exploration & Production (NYSE: PXP) that focuses on exploration of oil and natural gas offshore in the Gulf of Mexico. McMoRan owns one of the largest acreage positions in the swallow waters of these areas and focuses on ultra-deep drilling at depths of greater than 25,000 feet.
Primarily focused on producing copper, Freeport was seen as the best investment for copper exposure. These deals shifted that dynamic as the main markets that establish the global pricing of copper are rebounding. The question for investors now encompasses whether the stock will trade based on global copper prices or on the pending merger. Copper has remained one of the more stable metals, having retained the majority of the price gains from the last decade.
Domestic housing rebound
The copper market has remained a conundrum to most traders as the prices remained relatively steady in 2012 even as China slowed down considerably and the domestic homebuilding industry scraped along the bottom of a roughly 5-year decline. Considering both countries combine to account for over 60% of global demand, most thought copper would see sub $3/lb numbers by now instead of the strong $3.60/lb close last Friday.
It could be that investors in China see the metal as an investment with the whole world attempting to debase currencies. Regardless, the domestic homebuilding sector is finally showing some life and maybe investors know that the metal will have a future value much higher than current prices as demand picks up.
According to Viking Minerals, the average single-family home is around 2,100 sq. ft. and uses 439 pounds of copper. That total consists of 195 pounds for building wire, 175 pounds for plumbing, 47 pounds for built-in appliances, and 22 pounds for other hardware and wires.
Considering construction accounts for over 46% of annual domestic copper consumption, the growth in construction in the US and especially the rebound in residential construction could have a major impact on global copper demand.
By now most investors know that China accounts for the majority of copper consumption in the world. Per the graph below from Dove Communications, China consumption will continue growing to further fuel global demand:
After a weak 2012, growth is expected to pick up in the worlds second largest economy. With the economies for the worlds two largest consumers of copper expanding for the first time in 5 or 6 years, copper prices might be set for record levels.
In the current yield-starved environment, Freeport offers one of the better and more reliable dividends in the mining industry. The stock currently offers a surprisingly high 3.8% yield. The merger isn’t expected to impact the dividend either.
The company only pays $1.25 in annual dividends, so that amount is easily covered by earnings of $3.25 in 2012 and expected numbers of $4.62 in 2013. Outside of cash spent on the merger, the company ultimately could easily increase the yield if so desired.
The recent slump from the McMoRan and Plains Exploration deals provide investors with an excellent entry point near the lows of the year. Considering the stock traded around the $50 range most of 2011, buying the stock around $33 today appears a bargain.
Some investors might be steered towards Southern Copper (NYSE: SCCO) for a copper pure play, but the stock trades at double the multiple of Freeport. No reason exists to buy the second best copper stock until the value is more compelling.
Investors are getting an opportunity to buy a world-class mining company at a very attractive valuation. Not to mention, the stock now pays investors a very solid dividend to wait. The vast growth opportunities of the oil and natural gas deals provide for significant upside potential in the stock. Investing with world-class management teams don’t come along very often at these prices. Investors should heed the chance to make a long-term investment in an industry leader.
Mark Holder and Stone Fox Capital Advisors, LLC own shares in Freeport-McMoRan Copper & Gold. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!