Soaring Metals Mean More Gold for Freeport

Could Freeport-McMoRan Copper & Gold(FCX) still have some more to give?

The stock has more than doubled since the beginning of the year on the back of a buoyant cocktail: Soaring metal prices in each of the miner's main products -- copper, molybdenum and gold -- and the benefit of geographical diversification following its acquisition of Phelps Dodge in March.

Maybe the easy money is gone, and some bears would make the case that the commodities bull market that also has pushed miners BHP Billiton(BHP), Rio Tinto(RTP) and Southern Copper(PCU) to 52-week highs could be near its end -- either of which could stall growth for Freeport. But there's still reason to believe the company's stock could go higher.

The reason: The tendency among analysts to underestimate the magnitude of swings in commodity prices.

"It's typical for all mining analysts to use trailing prices," says John Doody, editor of the Gold Stock Analyst newsletter in Fort Lauderdale Fla. "And that means they are always behind the price curve."

Or more simply, analysts underestimate how high metals prices will go on the way up, and how far they'll fall on the way down. Right now, we're still on the way up.

A look at recent research on Freeport from Citigroup should be instructive in this case, and shows how the stock could be gearing up for a major rally.

John Hill, a Citi analyst in San Francisco, estimates the stock is worth $122, 3.9% above the $117.40 52-week high it achieved Wednesday. It's based on an amalgam of valuation techniques: Cash flow multiple, price/earnings ratio, value of the ore bodies and a discounted cash flow analysis, each weighted 25%.