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Freeport-McMoRan’s strengths bode well for market improvements

SUNDAY, JULY 11, 2010

The world’s largest publicly held copper producer, Freeport-McMoRan (NYSE: FCX), which also produces gold and molybdenum, has seen its stock slump recently as copper prices have dropped.

That has happened in spite of gold’s rise and the possibility that molybdenum is headed higher. (Energy applications such as deepwater wells, oil sands and nuclear power use molybdenum.) Many expect copper to rebound, too, due to demand from China and Brazil.

Should price improvements occur, Freeport stands to be one of the primary beneficiaries. The company boasts a number of strengths, including the geographic spread of its high-quality, long-lived minerals reserves.

Its Grasberg operation in Papua, Indonesia, is the world’s largest copper and gold mine in terms of reserves. And its still-new Tenke Fungurume operation in the Democratic Republic of Congo began producing copper cathode slightly more than a year ago. That operation is moving toward full-scale production of cobalt and sulfuric acid. Exploration and capacity expansions for molybdenum are occurring at several company facilities.

Freeport-McMoRan came into its own in 2007 when it acquired Phelps Dodge, a copper producer twice its size. With a price-to-earnings (P/E) ratio recently below 10, it’s looking like an attractive investment contender – if you can handle its volatility.

Ask the Fool

Q: What makes interest rates go up and down? – J.S., Columbus, Ind.

A: Interest rates are strongly influenced by inflation and the market for debt (notes, bills, bonds, etc.). With inflation rather low in recent years, we’ve been enjoying low interest rates. (Even if they rise a bit, they will still be really low, historically speaking.)

These days, we’re looking forward to recovering from our recent recession. But as that happens, if the economy appears to be growing too briskly, the Federal Reserve, headed by Ben Bernanke, may hike short-term interest rates via the “federal funds rate” in order to slow growth. (The federal funds rate is the rate a bank can charge another bank for use of its excess money.)

When the economy is sluggish, the Fed often cuts rates, as lower rates give companies and people an incentive to borrow (and spend) money.

The Fed can also change the “discount rate” – the rate paid by a bank to borrow short-term funds from the Fed.

The prime rate and other interest rates are based primarily on these two interest rates, while mortgage rates are linked to Treasury bill rates. The money markets themselves (basic supply and demand for money) also exert great influence over interest rates.

Q: What are a company’s audited financial statements? – B.R., Greenwood, S.C.

A: Publicly traded companies are required to report on their earnings and financial condition each quarter. Once a year they issue comprehensive “10-K” reports, along with their annual report. In the intervening quarters, they issue less substantial “10-Q” reports. 10-K reports include details on the company’s recent performance, risks and more, and their financial statements are audited. 10-Q reports, though, are not required to be audited.

My dumbest investment

Webvan, the online grocery delivery service, was my dumbest investment ever. I bought into it originally because it was one of those perfect-looking stocks during the dot-com era. People were so busy counting their money that they had no time to go to the grocery store – how could it fail? I’d see the delivery trucks running up and down the street and thought, “This thing’s going to catch on!” But it didn’t. I even used the service and found it to be wanting – yet I held on to the stock anyway. – R.J., San Jose, Calif.

The Fool responds: You were right to consider a company familiar to you, but that’s not enough. If you found the service lacking, know that others would, too. Even if you loved it, you would want to make sure that the company had ample cash to fuel its growth, a sound business strategy and competitive advantages. Webvan expanded aggressively, but didn’t attract enough customers and lost lots of money. It filed for Chapter 11 bankruptcy protection just a year and a half after its IPO.


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