This Stock Is the Best Copper Play

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

Copper is one of the metals that suffered the least this year. Wide industrial implications of copper make it a more price-stable metal than others. Nevertheless, it is down 10% this year, although there are signs that it can recover. Freeport-McMoRan Copper and Gold (NYSE: FCX) is the best copper play available in the marketplace now--here’s why.

Diversifying assets

Freeport-McMoRan has recently secured deals to acquire Plains Exploration & Production and McMoRan Exploration. With the help of these deals, Freeport-McMoRan has diversified its assets into the oil and gas industry. Oil and gas prices have been more stable this year than metals prices. Related project spending was stable too. These deals make Freeport-McMoRan less dependable on metal prices.

The stock was punished by investors right after the deals were announced back in December 2012. The deals have spurred a flurry of lawsuits from shareholders of three companies. The claims were controversial, stating that Freeport-McMoRan both underpaid and overpaid. This fact helped the company secure the deals without major problems. The stock did not recover to the pre-deal prices. It is down 9% year-to-date, while copper prices are down 10%.

No major harm from recent incident

Freeport-McMoRan operates the Grasberg Mine, which is the largest gold mine and the third-largest copper mine in the world. This mine is situated in Indonesia. On May 14, a tunnel collapsed and killed 28 miners underground. The government has started an investigation on this issue, and is estimated to take less than three months. This means that production would be halted until the conclusion from government officials comes. This is bullish for copper prices, because it removes 100,000 to 150,000 metric tons of copper supply from the market.

Who else could benefit from the possible rise of copper prices? Southern Copper (NYSE: SCCO) operates copper mines in Peru, Mexico and Chile. Its stock is down 16% this year. Southern Copper trades at a 13 forward P/E and pays a dividend that yields 2.5%. Analysts have a $40.51 mean target price for this stock, 29% higher than the current price. If copper prices start to rebound, this target is reachable. In fact, Southern Copper has already traded above $40.00 this year.

Brazilian Vale (NYSE: VALE) is also present on the copper market. Copper is one of the numerous resources that Vale mines, but in today’s environment, every positive development is welcome. The stock is down 30% this year. It trades at a 6.1 forward P/E and pays an impressive dividend that yields 5.2%. If you believe in the future of resource companies, Vale is a great dividend play.

BHP Billiton (NYSE: BHP) has several copper mines in its portfolio, including the Escondida mine in Chile, which is the world’s largest single producer of copper. BHP Billiton is down 17% year-to-date. It trades at 18 forward P/E and pays a dividend that yields 3.5%. Besides metals exposure, BHP Billiton is engaged in the oil and gas business. This helps the stock a little, since oil and gas prices are more stable this year.

Rio Tinto (NYSE: RIO) has a 30% interest in the aforementioned Escondida mine, which is operated by BHP Billiton. Apart from that, Rio Tinto mines for gold in numerous countries such as Australia, Indonesia, Mongolia, Peru, South Africa and USA. Copper is a sizable part of Rio Tinto’s business. The stock trades at 6.6 forward P/E. It pays a dividend that yields 4.2%. I would consider this stock as good dividend play.

Good value

Freeport-McMoRan trades at a 7.4 forward P/E and pays a dividend that yields 4.0%. Analysts mean target price for the stock is $37.41, which is 21% higher than the current price. I think that the stock could do even better when the copper and gold prices recover. The company has a diversified asset base with assets located in North America, South America, Africa and Asia.

The recent move has exposed the company to the oil and gas industry, which is in a good shape now. Freeport-McMoRan is the best copper play because it gets a big part of its revenue from copper and, at the meantime, is diversified in a non-mining industry. 

After putting together a blockbuster deal to expand into the oil and natural gas industry, Freeport-McMoRan will have plenty on its plate as it tries to adapt to the new industry, as expanding into oil and gas carries plenty of inherent volatility. FCX had a profitable copper business, and on top of this foray into a new industry it still has to contend with mining industry bellwether BHP Billiton. To help investors determine if Freeport-McMoRan is a buy or a sell, The Motley Fool has compiled a premium research report on the company. Simply click here now to access your copy today.


Vladimir Zernov has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads and 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!

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