Can Copper Stay On Top?

Top copper producer Freeport-McMoran (NYSE:FCX) recently reported a blow-out third quarter that saw its earnings sail past even the most optimistic of analysts' expectations. The reported earnings per share of $2.07 for the period handily beat the $1.34 consensus number that Wall Street had been looking for, despite a 10% drop in revenues. Higher price realizations for the copper, gold and molybdenum produced by the company, and improvements in its cost structure were behind the earnings gains.

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Dividend Resumed and Possible Increase
An additional positive came in the form of a decision by the Board to reinstate the annual cash dividend at a quarterly rate of 15 cents, with the first payment expected next February 1. Commenting on the payout in an interview with CNBC, CEO Richard Adkerson even hinted at the possibility that a significant increase in the dividend was possible provided that Chinese demand for copper continues to hold up. To partly back up that view, the company slightly raised its estimate of copper sales for this year to 4 billion pounds from 3.9 billion. But the fact that the company has yet to make a decision on restoring idled production at some of its U.S. mines, or has so far failed to disclose any new capital spending plans for next year, appears to undercut, to a degree, the optimistic rhetoric emanating from the executive suite.

China: Key To World Copper Demand
Strong Chinese demand for this key industrial metal has been the primary force behind its more than doubling in price so far this year to its current level of about $3 a pound. But the recent gains appear to have been prompted more by speculative activity on the part of traders than strong fundamental demand from Asia.

Copper inventories at the world's leading metals exchange, the London Metal Exchange (LME) reached their highest level since the middle of May and are up more than 50% since mid-July, suggesting that Chinese demand may be taking a bit of a breather at the moment. And fresh data showing that the Chinese economy roared ahead at an 8.9% annual rate actually prompted some selling of copper as traders now appear to be embracing the view that China's stimulus-fueled growth may well have crested.

Future Growth
Still, that hasn't dimmed the bullish views on the part of mining executives. Commenting on Asian demand recently, BHP Billiton (NYSE:BHP) Chairman Don Argus stated that copper miners now "stand at the threshold of an era of unprecedented growth" due to the prospect of continue growth in demand from China and India. No doubt that's a view that holds considerable currency in the boardrooms of other big copper producers like Southern Copper (NYSE:PCU), Teck Resources (NYSE:TCK) and Rio Tinto (NYSE:RTP).

The Bottom Line
Freeport shares have easily outperformed their copper-producing peers, up more than four-fold since the March bottom. Anyone considering buying the stock at these levels has to ask whether the news flow from this point onward can get any better than what has been announced. My sense is that the latest bout of positive news is going to be a tough act to follow in coming quarters. (For related reading, take a look at Commodities That Move The Markets.)



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