FCX Freeport McMoRan Inc

Freeport-McMoRan Copper & Gold (FCX) reported strong second quarter results on Thursday, surprising Wall Street expectations with net income of $1.37 billion, or non-GAAP EPS of $1.49 which bested the consensus of $1.34 by 15 cents. This was not only more than double the profit from the year-ago quarter, it was the fourth consecutive positive earnings surprise from the miner with the average beat for the past year running at 16% now.

Revenues in the quarter surged 50% to $5.81 billion, surpassing the consensus estimate of $5.63 billion. Consolidated sales from mines totaled 1.0 billion pounds of copper, 356,000 ounces of gold and 21 million pounds of molybdenum compared with 914 million pounds of copper, 298,000 ounces of gold and 16 million pounds of molybdenum in the second quarter of 2010.

Molybdenum is an element with an extremely high melting point and is thus valued in the production of high-strength steel alloys because it readily forms hard, stable carbides. Freeport is able to extract molybdenum from mineral deposits in an oxidized state before processing it.

The Doctor Orders Profits

In mid June I was highlighting the extreme buying opportunity I saw in Freeport below $50. My article "Copper Stocks: Low-Risk Plays for Long-Term Trend" had three interconnected themes:

1) Copper demand from China and other Emerging Markets was still trending strong

2) Copper was under priced near $4 per pound

3) Freeport and other miners like Southern Copper (SCCO) were a bargain trading below 10 times forward estimates

Here's what I wrote then...

"Copper, the industrial metal with a PhD in economics, may be a buy around $4 just from the looks of the chart alone. And when you consider that China and other emerging markets are not slowing down their rapid and massive urban development much, the demand picture looks like it should be consistently solid for years to come."

And here's a current chart of the good Doctor...

You can clearly see that the rebound in risk appetite in late June that lifted equities also boosted commodities like copper. Also note how strong support was at $4 in June. Coincident with the good Doctor's rise, we saw a $9+ (20%), rally in FCX before their earnings report yesterday.

A Billion Pounds, and $1,500 Gold, Give Good Guidance

Freeport-McMoRan's consolidated unit net cash costs (net of by-product credits) are estimated to average $1.01 per pound of copper for 2011, sub $500 per ounce for gold, and $15 per pound for molybdenum for the second half of 2011. This is what company CFO Kathleen Quirk had to say about this quarter's sales and profit picture:

"Our results in the second quarter included positive pricing of all of our key commodities: copper, gold and molybdenum. Our realized price for copper of $4.22 per pound was over $1 higher than the previous year's period. For gold, our price of $1,509 per ounce in the second quarter of 2011 was higher than last year's $1,234 per ounce realization, and our price of molybdenum of $18 per pound approximated the year-ago period."

A company like Freeport which does little forward hedging of gold, gets to reap the full benefits of the strong trend in the barbarous relic. And compared to most gold producers, they have one of the strongest balance sheets in the mining sector.

If they sell another 350,000 ounces of gold in Q3 at an average price of $1,500 -- the company expects to sell 1.6 million ounces for the year -- that's over half a billion dollars in revenues. And assuming average prices of $4.25 per pound of copper and another billion pounds sold in Q3 and Q4 each, the company's consolidated operating cash flows are estimated to exceed $8 billion for the year 2011.

While EPS estimates have been trimmed back a bit since June to $5.98 for this year and $6.21 for 2012, this still represents a single digit forward P/E multiple. Clearly, the fortunes of both Dr. Copper and Freeport are tied to the pace of emerging markets growth. I'll address the warning shot fired by Caterpillar (CAT) about the global recovery at the end of this piece.

Southern Profits On Deck

The other copper stock I talked about buying last month near $30 -- especially for its 7% dividend -- has also done well in the past month. Southern Copper followed its Doctor's orders and looked strongly "up and to the left" with a nearly $6 surge. Another 20% winner on my copper call.

In that article (linked above) I showed a Zacks Price & Consensus chart which is a great way to see how stock price tends to trend over time with changes in analyst estimates. I noted the steep pullback in SCCO from $50 to $30 on the leveling-off of earnings expectations. Here's what I said then...

"Southern Copper is another one ripe for upward earnings estimate revisions. If the mood about global growth picks up, you'll see the estimates for SCCO likely tick up too, which could move the name from a Zacks #3 Rank (hold) to a #2 Rank (buy)."

We haven't seen any upward revisions to earnings estimates yet. But the strong move back above $35 and Freeport's strength today in a quiet market bodes well for SCCO headed into its quarterly results next Friday July 29. Here's a snapshot of the Zacks data for Southern's earnings growth...

When the CAT Speaks on Global Growth...

Explaining its earnings miss today, even on record sales and revenues, Caterpillar executives spoke about the slower-than-expected pace of recovery in the second quarter, particularly due to the impacts of the Japan quake devastation.

But, the company also raised guidance for the second half of the year, noting that excluding the impact of the Bucyrus acquisition, they expect revenues in a range of $54 to $56 billion and earnings per share of $6.75 to $7.25, compared with the prior guidance of $52 to $54 billion of sales and revenues and earnings per share of $6.25 to $6.75.

CAT anticipates Bucyrus will have a negative impact of $0.50 per share on profit during the year. Thus is the price of becoming the largest maker of mining equipment in North America and if analysts were caught surprised by this, it will quickly sink in and be looked past.

Keep in mind that both the company and Wall Street analysts have an incentive to be conservative in their guidance and estimates, respectively. And the 6% profit-taking in CAT today is probably presenting buying opportunities for many who still believe in the global growth story as I do.

This optimism also bodes well for our copper stocks. Throughout the early quarters of the recovery in 2009, CAT CEO Jim Owens and his successor Doug Oberhelman were important "prophets of profit" as they described the strong global demand for construction and mining equipment coming from emerging markets. I recommended and bought many industrial, materials, and energy stocks in 2009 and 2010 based on their analysis of the global economy -- and CAT's rising earnings because of it.

In this way, Caterpillar was as much a solid forecasting economist as Dr. Copper. Thankfully, both are still looking up now.

Kevin Cook is a Senior Stock Strategist for Zacks.com
 
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