Expected copper demand keeps Freeport in play

Freeport-McMoRan Copper and Gold (NYSE: FCX), the world’s largest publicly traded copper producer, took a 96 percent earnings hit in its March quarter over last year. Nevertheless, improving copper prices are leading to higher share values.

For the quarter, copper sales reached 1 billion pounds, up from 911 million pounds a year ago. And sales of 545,000 ounces of gold far outstripped the 280,000 ounces sold in the first quarter of 2008. But economic conditions chopped Freeport’s molybdenum volume in half, to 10 million pounds, as the average realized molybdenum price plummeted to $11.52 a pound, from above $30.

Freeport CEO Richard Adkerson has expressed confidence that demand for copper from China is “clearly sustainable,” noting that China is building a new infrastructure, including transportation and power facilities and housing, all of which need copper.

Freeport’s share price has fluctuated dramatically during the past year, from about $125 in May 2008 to below $20 in December, and recently near $40. But with its geographic diversity and strong asset base, Freeport is a solid company, which should benefit from commodities demand from developing nations and an eventual global economic recovery. It deserves continued monitoring by those with a yen for metals and mining.

Ask the Fool

Q: What do the terms “bull” and “bear” mean? – T.R., Escondido, Calif.

A: You’re a bull, or “bullish,” on a particular stock or the market if you expect it to go up. A “bear” is pessimistic, expecting a drop in the near future. No one really knows for sure what the market will do in the short term. But in the long run it has tended to go up, so we’re long-term bulls. Over many decades, the stock market has averaged about 10 percent per year – and that’s despite market crashes, world wars and the Great Depression.

Q: Does a company get our money when we buy stocks through a brokerage? – H.W., Erie, Pa.

A: Not really. Stocks are a little like trading cards. When a company like Topps sells a pack of gum with cards in it, Topps gets its money from the buyer. But after that, the cards may be traded between many owners, going up and down in value, with Topps never getting a penny more.

When a company first issues shares of its stock, in an initial public offering (IPO), it collects its money for them, based on their estimated value at the time. After that, the shares are typically traded on major exchanges. The buyers and sellers exchange money, and middlemen such as brokerages take a cut, but money doesn’t flow to the company. In fact, if the company pays a dividend, it will be paying out part of its income to shareholders each year.

Companies do occasionally execute “secondary” offerings of stock, collecting money when those new shares are released into the market. But after that, the shares once more are simply traded between investors.

My dumbest investment

Back in the early 1990s, when I was in my 20s and trying speculative market ventures, a co-worker was receiving calls from a futures broker in Chicago. He said I should try it out. So I sent in $3,000. My money was put into cattle futures, and I saw my investment go to about $6,000! Within a few months, though, I suddenly had lost everything and then some – I owed them another $2,000. The happy ending here is that ultimately, I managed to lose only everything I invested. – S. Smith, Pittsburgh

The Fool responds: Investing in commodities can be very risky. One danger with them is that you can get sunk by leverage, investing with a lot of borrowed money. If things go your way, you might make great returns. But if they don’t, you can end up owing much more than you invested. This is how many people have been wiped out by commodities. Know that many investors do very well without ever investing in commodities – you don’t need to resort to pork bellies and soybeans. Learn more at www.sec.gov/answers/ cftc.htm and www.cftc.gov/ customerprotection.