Vale SA (ADR) (VALE), Freeport-McMoRan Copper & Gold Inc. (FCX): Proven Profits in Tough Times, Explosive Gains to Come

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The epitome of an industrial metal from a trophy property

When investors are given the opportunity to acquire one of the most productive mining properties in the world for a bargain basement price it is always wise to act quickly as those conditions tend to rectify themselves quickly. The current market valuation of Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) provides those willing to act soon with such a proposition.

Many people believe that copper prices can predict economic activity. As the global economy grows, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is a mining business positioned to prosper, as it produces copper and gold from what many believe to be the world’s most valuable copper mine: the Grasberg Mine located in Indonesia. While it has a plethora of other producing properties, Grasberg is the true trophy in the Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) portfolio. With a valuation of only 5.8 times free cash flow, interest coverage for its debt of 29.8 times, and a dividend yield of 4.04%, this business includes one of the world’s most productive mines yet trades as if it were a speculative investment.

Rising standards of living in the emerging economies will drive demand for raw copper and rising demand for any commodity results in rising prices. Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) will be one of the primary beneficiaries of those rising prices and they have a proven track record of rewarding shareholders as represented by the 5-year dividend growth rate of 12.7%.

Better than just gold

One of the criticisms I hear about gold on a regular basis is that it doesn’t produce any income. Those who like to throw around that comment loosely have obviously never taken a close look at Newmont Mining Corp (NYSE:NEM); a $16.8 billion market capitalization gold miner with a 4.1% dividend yield that has grown at a torrid 28.47% rate for the last 5 years.

Sitting on an asset base of 99.2 million ounces of attributable and probable gold reserves with a production cost in 2012 of $677/ounce, Newmont Mining Corp (NYSE:NEM) is maintaining attractive levels of profitability even after the recent pullback in gold prices, but its share price has been decimated, falling from a 52-week high of $57.93 to a recent low of $30.30. It has since rebounded to $34.11, at which price it is just plain cheap for a gold mining stock, at 9.08 times 2014 consensus earnings. Furthermore, based on the current outstanding shares, each share of Newmont Mining Corp (NYSE:NEM) represents 0.2 ounces of gold reserves, a value of $124.60/share based on a $1,300/ounce gold price and the 2012 production cost of $677/ounce.

Final thoughts and actions

All three of these businesses currently offer investors exceptionally favorable valuations with proven ability to remain profitable under adverse conditions and track records of rewarding their shareholders through high yielding dividends. As demand for their products grows and profits rise, the share prices of these businesses will follow and reward the owners with substantial capital gains to go along with the rich dividends they will receive while waiting. Investors who make equal investments in each of these three businesses will acquire a reasonably diverse selection of commodities stocks that should all benefit from improving economic conditions and rising standards of living as the latest economic uptrend continues to develop.

After putting together a blockbuster deal to expand into the oil and natural gas industry, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) will have plenty on its plate as it tries to adapt to the new industry, as expanding into oil and gas carries plenty of inherent volatility. FCX had a profitable copper business, and on top of this foray into a new industry it still has to contend with mining industry bellwether BHP Billiton.

The article Proven Profits in Tough Times, Explosive Gains to Come originally appeared on

Ken McGaha has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads and Freeport-McMoRan Copper & Gold. Ken is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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