Freeport-McMoRan Shares — 3 Pros, 3 Cons

tdp2664
InvestorPlace
Recently, the surge in copper prices hit some resistance.  But now the metal is making a rebound.  That’s certainly good news for Freeport-McMoRan (NYSE: FCX ), which is the largest publicly traded copper producer in the U.S.  The stock is up 31.2% over the past year, and its average annual return for the past 10 years is a stunning 23.85%. There really seems to be no end to the success.  Just this week, Freeport announced a special 50-cent dividend, as cash flows continue to grow. Yet will Freeport be able to produce nice returns for shareholders in the future?  Here is a look at the pros and cons: Pros Diverse footprint.   Because of its acquisition of Phelps Dodge in 2007, Freeport has become a global powerhouse.  It now operates mines in North America, South America, Indonesia and Africa.  Freeport also has exposure to gold, silver, cobalt hydroxide and molybdenum. Emerging markets.   As growth continues to be strong in Brazil, China and India, there will be continued demand for copper — it’s a critical part of industrialization.  It’s also getting tougher to mine copper – in terms of finding new deposits of scale. Interestingly enough, there also is upward pressure on prices because of the emergence of copper exchange-traded funds.  The result is that — as these funds get larger — more copper is taken off the market. Strong financials. In the latest quarter, Freeport's revenue increased 30% to $5.7 billion.  Net income grew to $1.5 billion from $897 million a year ago.  Freeport is also making strides in paying down its debt, which is now at $3.7 billion.  Cons Costs. Freeport is a heavy user of energy, such as electricity, diesel, coal and natural gas.  To deal with this, the company often uses long-term contracts.  However, as energy prices continue to rise, there will certainly be an adverse impact profits. A dangerous business.   As production of commodities rise across the world, there have been some horrible mining accidents.  For example, this week Freeport had to halt its subsurface activity at its Grasberg operation in Indonesia.  There was one reported death and another person missing.   Political risks.   Freeport has mines in various areas that have unstable environments.  One is in Congo.  With the continued increase in profits, there is likely to be more pressure for the government to exact better terms.  And yes, the worst-case scenario is a possible nationalization of the operation. Verdict True, inflation has become a big problem in China (as it has with many other emerging economies) and the result is higher interest rates.  Yet the country continues to grow at a substantial rate. And taking a look at the long haul, this should continue for some time, which will continue to drive copper demand and prices. For those investors looking for a play on commodities, Freeport is a good pick — with the pros outweighing the cons on the stock.  Tom Taulli's latest book is "All About Short Selling" and his Twitter account is @ttaulli.  He does not own a position in any of the stocks named here.