Cheap Copper Stocks With Golden Opportunities

NEW YORK (TheStreet) -- The uses for copper are many and the demand is as strong as ever. It's a key component in home building, from the wiring in houses to ornamental exterior functions like rainspouts and roofing.

Because copper can absorb a great deal of heat, it is used for piping hot water, as infrastructure for refrigerators and as a vital component for air conditioners. It is used in electrical switches and magnetrons for microwave ovens.

Looking at the other uses for copper, one can see many applications that aren't well known but are essential to a wide range of products and services.

Most copper is mined near the surface of the earth in open pits. These surface-style mines are being depleted while the worldwide demand for copper keeps increasing.

In an article on June 12, in the Wall Street Journal, "Meet at the Center of the Earth," copper miners like Rio Tinto ( RIO), a copper producer that has mainly relied on surface mining, is in the process of drilling quite deep to discover more copper.

RIO, according to the article, is investing $165 million in just one area alone to unlock a potential $5 billion copper cache buried 4,000 feet below the surface, in Bingham Canyon, Utah.

There are a lot of risks to drilling for copper and other minerals at deep levels. It's also very expensive. Miners have to create complex underground tunnels and invest in robotic digging equipment because digging deeper puts the human miners at increased levels of danger.

The point of all this is that copper is so valuable and so important to many industries that the big producers are literally "going out of their way" to get more of it out of the ground.

This strongly indicates the copper prices are at, or near (if you'll excuse the pun), the bottom. The price has been incredibly volatile over the last 13 years. Copper prices have quintupled from the 60-year low of 60 cents/lb ($1.32/kg) in June 1999, to $3.75 per pound ($8.27/kg), in May 2006. As of June 12, 2012, it closed at $3.35, or around 11% below its May 2006 high.

Economic incentives, population growth, labor unrest and monetary stimulus programs from wealthy nations suggest that the price of copper is most likely to go higher in the months and years ahead.

One of the most cost-effective ways for an investor to benefit from a rising copper price is to invest in the companies that are most successful in mining and distributing it.

Besides RIO, there's Southern Copper ( SCCO) and Brazil's Vale ( VALE), which is not just a copper mining company and is still selling at an incredibly cheap 5 times present and future earnings.

But before you consider SCCO, RIO or VALE, let me suggest you look closely at what I call the "King Kong of Copper Miners," Freeport-McMoRan Copper and Gold ( FCX).

As FCX rightly describes itself, it is the "world's largest publicly traded copper company." It mines "geographically diverse, long-lived reserves of copper, gold and molybdenum."

The company's portfolio of assets includes the Grasberg mining complex in Indonesia, which happens to be the world's largest copper and gold mine, in terms of recoverable reserves.

They also own significant mining operations in the Americas, including the large scale Morenci and Safford minerals districts in North America and the Cerro Verde and El Abra operations in South America.

FCX is also bullish on their mines in the highly promising Tenke Fungurume minerals district in the Democratic Republic of Congo, DRC. The main drawback in the DRC is the political risks and an ongoing civil war that flares up from time to time.

Its 2011 annual report is a must-read for all serious investors, and it spells out in details not only the past growth of this exciting company but how FCX plans on having exponential growth in 2012 and beyond.

According to a recent Bloomberg News article , analysts are more bullish on the price of copper than they've been since March.

"Copper traders are the most bullish in three months as China, the biggest buyer, reduced interest rates to bolster growth, increasing expectations that prices will rebound from the longest slump in two years."

Now I could wow you with the key financial statistics of FCX, which are generally impressive, but the real "scoop" here is that FCX stock is so cheap that it's most likely a takeover candidate.

In fact, it was Bloomberg that cranked up the rumor mill on this topic in late April of this year. In the April 17 article, Bloomberg said words that are as true today as they were then:

" As of April 16, 2012, FCX was valued at 3.3 times its earnings before interest, taxes, depreciation and amortization in 2013, according to analysts' estimates compiled by Bloomberg.

"That was cheaper than any other base metals producer with more than $10 billion in market value and about a third less than the median." As of June 12, Freeport's market cap was less than $23 billion at a closing price of $33.56. It is now valued around 3.48 times its EBIDTA. Still cheap indeed!

The 52-week low of $28.85 was set last October. Looking at a one-year chart above, you can see from a technical basis the 100-day moving average recently crossed above the 200-day MA, often a positive indicator of higher prices ahead.

In the Bloomberg article, there was this thought-provoking quote: "Freeport has probably the most attractive assets in the world with its copper mine in Indonesia," Jean-Francois Comte, co-founder of Lutetia Capital, a Paris-based hedge fund that bets on mergers and acquisitions, said in a telephone interview. "Anybody who believes that would probably look at it."

There are some big conglomerates in the world that can't increase their copper and gold production any other way but through strategically chosen acquisitions. So the possibility is more than real.

An acquirer would experience some political hurdles and would most likely have to pay a nice premium to the current share price.

But as the article points out, "... Adrian Day of Adrian Day Asset says the prospect of owning Freeport may still be worth the risk for potential buyers such as Rio Tinto, BHP and Anglo American AAUKF .

"This would be the way of picking up 10 percent of the world's copper production in one fell swoop, including some of the world's major copper mines," he said. "If someone were to buy Freeport, they'd get a jewel at a great price."

At the same time, the People's Bank of China has been cutting interest rates. One of the big reasons is that inflation has dropped so much in China that one observer declared inflation "tamed."

With the enormous, multi-national fiscal crisis in Europe, the Central Banks there and in the United Kingdom are bound to do all they can to keep the continent from collapsing into a deflationary economic depression.

Come June 20, the whole world will be waiting for the Federal Reserve Board Chairman Ben Bernanke's press conference after the next Open Market Committee meeting. Anyone who has studied Bernanke's economic agenda knows that he'd rather have too much inflation than deflation.

All this should eventually lead to the unveiling of what many of us have realized is a global, carefully orchestrated monetary easing and stimulation program that should be good for the price of copper and other important metals like silver and gold.

It should also be good for the share price of big copper miners like FCX.

As of the date of publication Marc Courtenay is long FCX and VALE.
As of the date of publication Marc Courtenay is long FCX and VALE.