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The Commodity Investor Q&A

By Matt Badiali, editor, S&A Resource Report
Wednesday, December 2, 2009

Q: Thanks for your Freeport-McMoRan suggestion back in March. I just took a fat profit on that trade! Keep it up. – G.P.
 
A: Thanks, G.P. Back in March, I told you if the copper rally held up, Freeport-McMoRan (FCX) looked like a great trade.
 
Here's what I wrote:
 
Freeport's shares traded as high as $125 in May 2008. Today those shares trade around $33. In other words, you can buy Freeport's 102 billion pounds of copper reserves for $0.13 a pound and get its 1.9 billion pounds of molybdenum, 196 million ounces of silver, 37 million ounces of gold, and 300 million pounds of cobalt for free.
 
At the time, we weren't sure if copper would hold up... but it sure has. Freeport ran from $34 per share to its recent high of $87. It's hard to believe a company this size (it's now worth $36 billion) could triple in 10 months, but it did.
 
That's due to the continued rally in copper... with some help from the huge rally in gold. It turns out, Freeport was almost the perfect company to capitalize on the last 10 months. If the trend continues, Freeport will keep heading higher.
 
Q: Hey Matt, I see Rio Tinto is doing an IPO of Cloud Peak (CLD). When will this happen and would you recommend a purchase of this coal company? – C.W.
 
A: Rio Tinto, the giant integrated mining company, spun out its coal assets into a new public company called Cloud Peak Energy (CLD). The interesting thing about the IPO is it wasn't a big success. The company expected $16 to $18 per share. The 30.6 million shares actually sold for $15 each.
 
That's because as soon as the company went public, it took on $600 million in debt. Just days old, it already had more debt than market value.
 
When Cloud Peak went public, it became the third-largest coal producer in the U.S. (based on 2008 production). According to Market Watch, it generated $1.1 billion in sales and $190 million profit in the first nine months of 2009.
 
Based on those numbers, you're paying 1.75 times trailing earnings at $14.50 per share. That's cheap among the coal group. For example, Arch Coal, which owns similar Powder River Basin coal mines, trades for about 29 times its trailing earnings.
 
Judging by those numbers, Cloud Peak looks attractive. And as I said last week, an electric car boom will give the entire coal sector a big boost.
 
Good investing,
 
Matt Badiali 




In The Daily Crux
Market Notes
Brazil's commodity-driven rally continues... EWZ jumps to a fresh high.
 
Gold hits another record... passes $1,200 per ounce and pushes big gold miners Barrick, Newmont, AngloGold Ashanti, and Gold Fields to new highs.
 
Credit-card companies surge... MasterCard, Visa, American Express hit new highs.
 
Earnings today... Aeropostale.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%

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