It’s no secret that the basic materials sector has seen some rough times lately. However, a bullish spike last year offered hope. Investors cheered the Chinese stimulus package and thought it might contribute to support levels in key commodities. Steel temporarily spiked and copper seemed like it was on the radar for the first time in years. Fast forward 12 months to the present and it’s painfully clear now support for higher prices never materialized.
What’s even more painful is the future of companies that deal in copper, steel, gold, silver, and coal, just to name a few. Macroeconomic fundamentals continue to point down for these commodities due to lackluster demand, oversupply, and rising operating costs. Investors have come to the realization that there is no silver bullet and trickle down government intervention doesn’t create the real demand needed for growth or even profitability in this industry.
Freeport Gets Hurt
One of the largest mining companies is Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) which mines both copper and gold. Copper is often thought of as a proxy for real economic growth. Gold is seen as an inflation hedge or fear barometer depending on whom you ask. Both are subject to market swings depending on the global economic cycle. It’s not often both trade in tandem, but when they do it can mean either good times or disaster for companies like Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX).
Since both gold and copper are openly traded in commodity markets the prices companies are set to receive per quarter and year can be forecast well in advance. This makes stocks of this nature some of the easiest to predict provided operating costs do not surprise.
In the first quarter (Q1) of 2012 the average price realized per pound of copper was $3.82. Compare that to the most recent quarter, Q1 of 2013, where the average price was $3.51. That’s about an 8% drop. Things are not looking any better with copper currently trading at $3.22/pound. Copper makes up over 80% of Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)’s sales. Analysts don’t seem to be seeing any reason for the decline to stop with the most recent data out of China showing very tame demand.
Gold didn’t do much better for Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), decreasing from $1,694/ounce in Q1 of 2012 to $1,606/ounce in Q1 of 2013. Currently gold is trading at $1,386/ounce and appears to be on a solid downtrend. Since gold makes up almost 18% of total sales revenue this drastically reduced price will force the company to revise their $1,400/per ounce sales forecast for 2013.
With these trends firmly in place it easy to see why Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) has declined almost 50% from the beginning of 2011. It’s also easy to understand why this downtrend will continue and why I cannot recommend an investment in this stock.
Knowing that the prices for gold are in decline and will most likely continue to decline can also lead us to make some major conclusions about other players in the gold sector.
Barrick Gold Corporation (USA) (NYSE:ABX) is a leading gold producer that has seen a dramatic decline in stock price of 60% since the beginning of 2011.