Copper Prices Regain Momentum (JJC, COPX, FCX, CU, GLD)
Yiannis Mostrous: The copper (NYSEArca:JJC) market suffered a volatile 2011 due to supply disruptions and investor concern about a global economic slowdown. Some analysts estimate that worldwide copper production last year was at its lowest level since 2008. Indeed, Freeport McMoRan Copper & Gold (NYSE:FCX) alone lost roughly 235 million tons of copper production from its Indonesian segment following a labor dispute and the temporary suspension of its milling operation.
Total reported inventories of refined copper declined globally by 380,000 tons in 2011, while demand rose 5.1 percent. As the chart below indicates, copper inventories have been in steady decline for some time.
As a result, the supply/demand imbalance in the copper market is expected to persist for at least another year, as current production remains insufficient to cover demand despite slowing global economic growth.
With copper already in tight supply, further disruptions to copper production could mean the metal will be bid higher.
The chart below shows the copper market adjusting prices upward following a protracted downturn.
Additionally, I continue to believe that the Chinese economy will avoid a so-called hard landing. Although Chinese policymakers have dampened the country’s rapid growth and cooled its overheated real estate market, the Middle Kingdom will still deliver gross domestic product (GDP) growth in excess of 8 percent this year. Nevertheless, China’s demand for commodities remains robust. In fact, China’s copper imports surged in December to a record of nearly 407,000 metric tons, an increase of 78 percent from the year-ago period.
Freeport McMoRan, my favored copper play, is the world’s largest publicly traded copper and molybdenum producer. For every USD0.10 change in the price of copper, the miner’s EBITDA (earnings before interest, taxes, depreciation and amortization) rises or falls by approximately USD400 million.
The firm’s major assets are the Grasberg mine in Indonesia, the Cerro Verde, El Abra and Candelaria copper mines in South America, the Tenke Fungurume copper/cobalt mine in the Democratic Republic of Congo, and the Henderson molybdenum mine in Colorado.
During the fourth quarter, Freeport McMoRan generated USD746 million in cash flow from operations, a substantial decline of nearly 64 percent from the year-ago period. At the end of the quarter, the company had USD4.8 billion in cash, USD3.5 billion in long-term debt and USD1.5 billion available on its credit facility. Only USD4 million of its long-term debt is slated to mature through 2016.
The company’s outlook for 2012 assumes an average price of gold (NYSEArca:GLD) of USD1,600 per ounce, USD3.50 per pound for copper, and USD13 per pound for molybdenum. Based on those projections, management expects to generate operating cash flows of around USD4.7 billion this year. Meanwhile, 2012 capital expenditures are expected to total USD4 billion.
You can learn more about commodities investing and the companies poised to take advantage of today’s market trends in my report on top rare metal stocks..
With his experience in international market analysis and venture financing, Yiannis G. Mostrous is more than just a world traveler; he’s also an expert on identifying investment opportunities in emerging and overlooked markets—the places most of us only see on television. As an analyst with Artemel International, Mr. Mostrous worked with developmental institutions to promote business development in the Mediterranean, while as an associate in the venture capital Finance & Investment Associates was involved in analyzing start up companies’ business plans evaluating their potential while bringing together worthy candidates and angel investor groups.
Since joining Investing Daily, Mr. Mostrous has dedicated himself to helping individual investors bolster their returns and give their portfolios an international flavor. In his financial advisory Global Investment Strategist, Mr. Mostrous identifies top Asian stock market opportunities in fast-growth economies including China and India. Mr. Mostrous has an MBA from Marymount University with a major in Finance and a BBA from Radford University focusing on investments in natural resource markets around the globe. More recently, Mr. Mostrous was lead author of The Rise of the State: Profitable Investing and Geoplitics in the 21st Century.