Monday, October 27, 2008

Why FCX Is A Screaming, Table-Pounding Buy Right Now At $25....

Someday the deflationary pressures caused by the Great Unwind of 2008 will subside. And then we will confront the next headwind: inflation. And it'll be nasty.

Do you know the U.S. has borrowed an extra $1.4 trillion during the last 12 months, an annualized growth rate of 15.9%. A week ago gross public debt grew was 14.0%. Two months ago gross public debt rate was growing at "just" 7.1%.

Where is all this money going to go? It will chase real assets, the kind FCX owns.

Here's how I look at FCX. It owns 41 million ounces of gold. At $684 an ounce, the pretax in-ground value is $28 billion. Assume for illustrative purposes only that FCX mines all of its gold in one year and mining expenses are 51% of revenue (the average during 2003-2007). Thus, gross profit are $14.4 billion. Deduct $460 million for overhead (actual, 2007) and you have $14 billion of EBIT, $9 billion after-tax. Meanwhile, FCX's market value is $9.6 billion.

So at $25 a share, you buy FCX's gold mine at market value and get 93 billion pounds of copper and another 2 billion pounds of molybdenum for free. FCX will not be stock of the month in November, but it WILL reward patient investors.

Position: Long FCX

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