The next time you hear the familiar catchphrase "And they're off," it'll likely be late in the afternoon on Saturday, May 7, and you'll either be at Churchill Downs in Louisville or ensconced in your living room preparing to watch the year's running of the Kentucky Derby.
But that same phrase could just as easily be said next Monday -- April 11th -- when, as has become traditional, aluminum and alumina kingpin Alcoa
Wild ride on the red metal
To my way of thinking, however, throughout this year and beyond, copper prices may induce squeamishness in even the most brazen rollercoaster jockey. Now that the first quarter is in the books, it appears that copper prices slid 1.8%, their most severe opening quarter drop in a decade. That downward direction was attributable to several factors, with a drop in demand from China and the tragic events in Japan being salient.
At the same time, the chaos in the Middle East and North Africa did little to goose demand for the red metal.
Nevertheless, with China typically consuming in the vicinity of 40% of the world's copper, any sort of decline in the big country's appetite affects global pricing.
But that's likely not where the story will end. Copper is being affected by a longer-term phenomenon; for the past six years, global supplies haven't kept pace with demand. In fact, the annual output "miss" versus demand has been in the vicinity of 5% annually on a worldwide basis. For instance, Freeport's production fell short last year by an amount equal to the global percentage. However, with China's economy expected to experience high single-digit growth this year, along with other economies on the upswing, aggregate production shortfalls could reach 400,000 tons, potentially leading to price hikes in the mid- to high-teens compared with current levels by year's end.
Still pitching low
It appears that this year won't reverse that trend for Freeport. Indeed, one of the culprits has been a slide in the ore grades at its massive Grasberg mine in Indonesia. So the problem is both quantitative and qualitative. As a result, BHP Billiton
Further, Freeport's Grasberg facility will consume about $600 million in new capital during the next five years. Also, Freeport has a 57.75% interest in the still new Tenke Fungurume copper and cobalt concessions in the Democratic Republic of Congo. As the operator of the project, the company believes it can add 100 million to 200 million pounds of copper production during the next two or three years.
Given the current supply-demand imbalance in copper, however, I find myself gravitating to Freeport-McMoRan as a company that Fools would be well advised to research and watch closely as time goes on. Perhaps my sentiments stem from my having walked the Sierrita mine south of Tucson while in the employ of Pennzoil Company, whose mining subsidiary owned the Sierrita mine, which ultimately came to Freeport with its acquisition of Phelps Dodge.
A string of strengths
But more realistically, I'm impressed by the quality of the company's assets, their expected long lives, and the strength of Freeport's management team. From an operating perspective, the team oversaw the addition of more than 20 billion pounds of copper reserves during the past year. As I've mentioned before, the company's asset base includes 120.5 billion pounds of copper, 35.5 million ounces of gold, and 3.39 billion pounds of molybdenum.
Beyond that, management's financial stewardship of the company has been equally impressive. When it acquired Phelps Dodge -- a rival twice its size -- in 2007, Freeport's total debt reached $17.6 billion. By December 31, 2010, that figure had been winnowed to $4.8 billion and has cash of $3.7 billion. And last week the company redeemed $1.1 billion of 8.25% senior notes, further reducing its obligations.
So, I'll continue to place Freeport on my watchlist and to suggest that Fools do the same. That, by the way, is not to ignore Alcoa, which has seen its share price increase by nearly 80% from its 52-week low and is benefiting from aluminum replacing copper in some applications. Nevertheless, I still believe that as copper prices rise, Freeport enjoys a somewhat more promising upside.