The rise in the price of copper, from the November 2001 low of $0.60 a pound to Thursday's $0.83 close, has exceeded most experts' predictions. With many industry executives and Wall Street analysts now looking for $0.85 in 2004, the foundation of companies built on copper mining should be strong.
When considering copper companies, mining giants like BHP Billiton (NYSE: BHP ) and Rio Tinto PLC (NYSE: RTP ) are so large and diversified that a boom in copper could almost go unnoticed in their business. But here are three established mining companies where the price of copper is extremely important:
Phelps Dodge (NYSE: PD ) curtailed mining and eliminated its common stock dividend in 2001 to manage through the period of depressed prices. For the quarter ended June 2003, Phelps earned roughly 5.2 cents per pound of copper (which was computed by subtracting the company-supplied full cost of 0.695 cents from the average Comex price of 0.747 cents). The company produced 318,000 short tons of copper last quarter. Every penny move has a profound impact on profit. One large negative is Phelps' $2 billion debt, however.
Southern Peru Copper (NYSE: PCU ) is 14% owned by Phelps. Operating break-even is reached at 45.6 cents per pound of copper. Debt is $299 million and may remain flat or decline if copper prices continue to firm. The stock's quarterly dividend was just increased 20% and the stock now yields 2.4%. Southern Peru mined 204 million pounds of copper in the latest quarter. For each one cent change in the price of copper, company earnings increase by 6 cents. The company is trading at 27 times earnings, and it also has the drawback of its entire mining operation being in Peru.
The Freeport-MacMoRan (NYSE: FCX ) Grasberg mine is both the largest gold deposit in the world and the second largest copper deposit. Each one cent increase in a pound of copper generates $15 million in revenue and $8 million in income for the company. Trading for 22 times earnings and yielding 2.4%, the stock does not seem to reflect strong copper and gold prices -- and a strong cash flow of $350 million over the last 12 months. However, the stock price does reflect the market concern that the Grasberg mine is in Indonesia and the company carries $2.6 billion in debt (which it is aggressively reducing).
Copper prices peaked at $1.35 a pound in 1995. Since economic growth drives copper demand, expecting $1 per pound prices before 2005 requires rose-color glasses. But, with copper prices firming, these companies are in an excellent position to profit. Phelps Dodge is richly priced. Southern Peru and Freeport are worth considering if you are willing to take political risk into your portfolio.
For those thinking that it is time to start hoarding U.S. pennies for their copper content, Congress is a step ahead of you. The last pure copper penny was legislated out of existence in 1837. In 1982, the penny went from 95% copper and 5% zinc to 97.5% zinc and 3.5% copper (in essence, today's penny is copper plated zinc). Even with the change in composition, the current penny costs 0.81 cents to produce.
W.D. Crotty does not own stock in any of the companies mentioned, but he does have pennies in his pocket. He welcomes your feedback atHawaiiFool@Hawaii.com.