Freeport (FCX) and BHP Billiton (BHP)

By Glenn Rogers, contributing editor to Gordon Pape's Internet Wealth Builder

We recommend Freeport-McMoRan (NYSE: FCX), which bills itself as "the world's largest publicly-traded copper company". However, it also owns large deposits of gold and molybdenum.

We also recommend BHP Billiton Ltd. (NYSE: BHP), an Australian-based mining giant that has diversified into other areas such as crude oil, natural gas, and, most recently, potash in Saskatchewan. Its mineral assets include aluminum, silver, uranium, nickel, iron, diamonds, lead, and more.

The complex contains the largest known recoverable reserves of both minerals. F-M began open-pit mining of the Grasberg ore body in 1990 and that is expected to continue until mid-2015, at which time underground mining operations are scheduled to begin.

Current reserves are listed as 35.6 billion pounds of copper and 38.5 million ounces of gold. F-M believes there are a lot more valuable minerals to be found in the Grasberg district and is actively conducting ongoing exploration there.

The company operates four copper mines in South America: three in Chile and one in Peru. In the U.S., there are five operating copper mines in the western part of the country plus one molybdenum mine in Colorado.

Currently, Freeport-McMoRan is playing a lead role in the development of a large mine in the Congo, in partnership with a Canadian company, Lundin Mining, and the Congolese government. Current reserves are listed as 5.9 billion pounds of copper and 0.7 billion pounds of cobalt.

Advertisement

The company recently announced fourth-quarter and year-end results for fiscal 2009. Net income attributable to common stock for the quarter was $971 million ($2.15 per share, figures in U.S. dollars). That compared with a net loss of $13.9 billion ($36.78 per share) for the same period in 2008.

For the full year, net income attributable to common stock was $2.5 billion ($5.86 per share) compared with a net loss of $11.3 billion ($29.72 per share) for fiscal 2008.

Consolidated sales for 2009 totalled 4.1 billion pounds of copper, 2.6 million ounces of gold, and 58 million pounds of molybdenum. F-M said that the numbers for 2010 are expected to come in lower for copper and gold with sales of approximately 3.8 billion pounds of copper and 1.8 million ounces of gold.

A slight increase, to 60 million pounds, was forecast for molybdenum sales. The expected year-over-year drop is attributed to several factors including lower grade ore from one of the South American mines, the impact of reduced 2009 mining activities on 2010 leaching operations at U.S. mines, and lower grade copper and gold ore in Indonesia.

This news hit the stock hard. At one point in mid-January, the shares traded over $90. After the results came out, they dropped to as low as $66.03 in intra-day trading.

That's when I started buying and I intend to continue adding to my position until the price moves back to the $80 range.

BHP Billiton Ltd. operates in virtually every corner of the world, including Canada, and is perfectly positioned to take advantage of both emerging market growth and future inflationary pressures which will drive up the cost of commodities worldwide.  

The company recently reported financial results for the second quarter of fiscal 2010 (to Dec. 31). BHP said that for the six-month period, profit attributable to common shares, excluding exception items, was $5.7 billion ($1.025 per share, figures in U.S. dollars). That compared to $6.1 billion ($1.101 per share) in the same period of the previous year.

The company said it recorded record sales volumes in three key commodities: iron ore, metallurgical coal, and manganese. "However, lower commodity prices and a weak U.S. dollar adversely impacted earnings compared to the prior period," a statement said.

Looking ahead, the company expressed cautious optimism. "Physical demand for bulk commodities continues to be very strong in most regions following the aggressive destocking during the economic downturn," the statement said. "However, real end demand for metals still appears sporadic.

Commodity markets will continue to be largely dependent on Chinese and Indian demand. In the short term, it is critical to monitor the pace of monetary tightening and the rate of loan growth for commodity intensive sectors in China.

We do not expect China to stop lending however reduced credit liquidity in key segments of the commodity market may have a flow-on impact on prices. Real commodity demand in the developed economies remains restrained and the impact of the gradual withdrawal of government stimulus will be a key driver.

In the long term we continue to expect strong growth in demand for our commodities. Any effects on commodity demand due to potential weakness in developed countries are likely to be offset over time by continuing growth as China and India urbanise and industrialise.

However, with reduced capital investment in new mining capacity since 2007, supply may struggle to keep pace with demand in the medium and longer term."

BHP has the scale and the financing to ride out long periods of tepid demand and the muscle to negotiate strong pricing when demand is high. And, as mentioned, it's domiciled in Australia which came through the global downturn extraordinarily well and has already begun raising interest rates to cool down a burgeoning economy.

This is one of my largest holdings and I consider it to be a strong buy at current levels. The latest quarterly dividend was 42c a share ($1.68 annualized). The stock closed in New York on Friday at $72.13. It trades on the NYSE as an American Depository Receipt (ADR).

Learn more about this financial newsletter at The Internet Wealth Builder.