An Ideal Way to Play the Fed's Loose Money Policies

Freeport-McMoRan Copper & Gold (NYSE: FCX) has endured a choppy stock market ride since May. And not surprisingly, its performance tracks price volatility of the red and yellow metals, its primary products.

The good news for the past cou­ple months: The direction of both producer and metals has been mostly up. With the Federal Reserve extend­ing its loose money policy indefinite­ly with a third round of quantitative easing or “QE3,” more upside likely lies ahead.

There’s not much if any evidence now of rising wages, such as spurred the inflationary spiral of the 1970s. Nonetheless, QE3 is at its heart a “weak dollar” policy – and in the past, that’s been a sure-fire catalyst for higher US dollar prices of natural re­sources from oil to copper and gold. Meanwhile, the company continues to adhere to its bullish strategy for growth, with five “super mines” in de­velopment around the world.

Mining stocks are the ideal way to play the trend, because their earnings are leveraged to the prices of the met­als they produce. A move in copper from $3.00 to $3.50 a pound means a 16.7% return for the owner of the raw commodity, but it doubles the profits of a miner producing the red metal for $2.50 in total costs. As a result, mining stocks tend to outper­form metals in bull markets and un­derperform in bear markets.

For the better part of 2012, Free­port shares badly lagged the mostly retreating prices of copper and gold. Since late August, however, the roles have reversed, and we’re now in the black on the position.

Freeport’s rising production pro­file is another key catalyst for high­er future earnings and share price. In an age where miners are forced to go ever deeper, ever further and into ever more danger to keep up with demand, the company’s projects in the Amer­icas alone are on track to produce roughly by 2016 what it produces globally now.

That adds up to an overall boost of as much as 50% in four years, even as the company continues its high-margin business of mining gold and molybdenum, the latter used to make high-performance steel.

Freeport has a history of pouring rising production and profits into divi­dend increases. The May 2012 pay­out was raised 25% from the previous level, for a 317% to­tal increase in two years. And there’s almost surely more where that came from.

Roger Conrad is editor of Utility Forecaster and Roger Conrad's Canadian Edge as well asassociate editor of Personal Finance and co-editor of MLP Profits, Big Yield Hunting, and Australian Edge.