Copper's a Gold Mine

And analysts say Freeport may be poised to take off.
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Shares of mining giant

Freeport-McMoRan Copper & Gold

(FCX) - Get Report

appear set to get a big boost this spring on the back of continued strength in industrial metal prices and a more benign risk profile, according to analysts.

Freeport, which completed its takeover of copper and molybdenum producer

Phelps Dodge

earlier this month, has already seen a stock price surge of 25% since the beginning of the year to about $66 recently. If observers are proved right, that advance could be dwarfed by a coming rally.

The key, it seems, is the buoyant outlook for copper prices, a metal that made up 78% of the new Freeport's pro forma 2006 revenue, according to company data.

"Now everything is bullish for copper," says Andy Cole, a base metals analyst at Metal Bulletin Research in London.

Cole sees strong demand coming from China, which should grow up to 10% this year because of increased government stockpiling and industrial consumption. That, he says, will be enough to help maintain the momentum that has seen prices claw their way back from a low of around $2.40 a pound in February to about $3.14 of late.

"We should see a sustained rally continuing into the second quarter, that's traditionally a strong period," he says. Prices could possibly spike to $3.36, he believes.

The weakness in the U.S. housing market, traditionally a key factor driving copper prices, should be more than offset by the strength in China and Europe, says Catherine Virga, a base metals analyst at New York-based specialty consultancy CPM Group.

She also notes that even if homes aren't selling, owners often continue to remodel in areas of high metal use, such as the bathroom or the kitchen.

"If you buy the strong copper story, the major way is to buy Freeport," says Doug Groh, senior research analyst at Tocqueville Asset Management in New York.

With a conservative price estimate of $2.80 a pound for copper, Groh estimates Phoenix-based Freeport's full-year income could reach about $11.50 a share, which translates to a target price of $92, assuming a multiple of eight times earnings.

If prices average $3.10 a pound, and Freeport's earnings hit $13.10, the stock should trade over $100, Groh says.

In contrast, the current consensus estimate is calling for $8.26 a share in earnings for 2007.

But the underlying mineral economics are only part of the situation. Freeport represents an entirely different risk profile than it did before it took over Phelps Dodge.

"Freeport's price suffered in the past because it was a one-mine company, and was perceived to be in a politically risky situation," says Tom Winmill, portfolio manager of the

(MIDSX) - Get Report

Midas Fund in New York, referring to the premerger situation when the company owned and operated a single mine in Indonesia, the Grasberg pit.

Winmill says the political risk story for Freeport may have been overdone a bit. Instead, he believes in the "political inertia theory," whereby the longer things operate uninterrupted, the more likely they are to stay so.

The combined Freeport-Phelps entity would have collected 38% of last year's revenue from Indonesia, 35% from North America, 22% from Chile and 5% from Peru, according to company data. Such diversification makes it very unlikely that all operations could be shut down by adverse political changes.

Another risk-mitigating factor for Freeport is the continued legacy of precious metals production.

The small gold component of revenue -- 10% on a pro forma basis -- could help lessen the chance that a dramatic slowdown in the world economy will dampen copper prices, explains Brian Hicks, co-manager of the

(PSPFX) - Get Report

Global Resources Fund at U.S. Global Investors in San Antonio, Tex. Gold prices tend not to get impacted by industrial demand factors.

Still, despite the sunny outlook for Freeport, the share price hasn't revisited the highs above $72 reached a little less than a year ago, regardless of a value proposition appearing a lot better now than it did then.