I’m adding copper exposure to my Jubak’s Picks Portfolio by moving Freeport McMoRan Copper & Gold from my 50 Stocks Portfolio

By this time I think you get the message: I like the trend in copper prices and copper stocks over the next five years. I’ve added copper producers South Copper (SCCO) to my long-term 50 Stocks Portfolio and First Quantum Minerals (FQVLF) to my volatility portfolio. Today I’m moving Freeport McMoRan Copper & Gold (FCX) to my 12-18 month Jubak Picks Portfolio from the 50 Stocks Portfolio. That gives the Jubak Picks Portfolio exposure to what I think will be a very profitable trend in copper prices. And puts Freeport McMoRan in a more appropriate context and holding period.

Not to repeat everything I’ve written on copper, but here’s the crux of my copper argument:  When, way back on August 17, I started recommending going long copper on the increasing adoption of electric cars, I noted that the big uncertainty in this play was how fast demand for electric vehicles and charging stations would grow. Electric cars use more copper than conventional vehicles. “Estimates for how much more copper depend on assumptions about the size of the batteries in the cars and the power of charging stations. The estimates of copper demand per electric vehicle range from 183 pounds from technology-watcher IDTechEx to 304 pounds per vehicle plus 44 pounds per charging station from Glencore, one of the world’s biggest copper producers,” I wrote.

“The faster the growth rate of those electric car sales, the more likely it is that the copper market is going to find itself short of supply. That would send copper prices skyrocketing. Some commodity analysts see the market for electric cars growing so quickly that the global mined copper supply will need to double over the next 20 years from the current 20 million metric tons. That’s an aggressive view. The consensus seems to be that somewhere between 1.7 million metric tons and 5 million metric tons of extra supply will be needed to meet demand by 2025. That’s not going to be easy considering that many of the world’s largest copper mines are mature and are coping with falling ore grades and that new discoveries seem to show up in politically unstable countries with dismaying regularity.”

Getting that level of extra production is going to require a big increase in copper prices. Paul Gait of Bernstein Research told the Financial Times that he sees prices and supply working the way: “It took $10,000 a metric ton copper and super-normal margins to lift production from 15 million to 20 million metric tons during the commodities super cycle [between 2003 and 2013]. At the very least, that is going to be required again,” he said.

Freeport’s huge Grasberg mine in Indonesia with its high concentrations of copper and gold is the reason to own Freeport. And it’s also a major source of risk in the stock and the reason I’m moving it to this portfolio with a shorter holding period.

Production at Grasberg that plunged in 2016 and 2017 on labor, mine construction, and political problems started to bounce back in 2017 (with the mine resuming full production in the second half of the year) and looks like it will continue the come back in 2018. Standard & Poor’s sees earnings per share climbing to $1.74 in 2018 from $1.10 in 2017. And from a loss of $2.96 a share in 2016.

In August the company announced that it had reached an agreement with the Indonesian government under a new mining law that will give the company operating rights in Grasberg until 2041. In exchange Freeport McMoRan will divest an additional 42% of ownership in Grassberg to local investors (a key provision of the country’s new mining law) and to expand processing of copper ore in country. The agreement gives Freeport better terms than most other foreign copper miners in the country but it still leaves several major unanswered questions, including the ultimate price that Freeport will receive for the assets that it is selling. And it’s by no means certain that this is the last revision to Indonesia’s mining law.

The uncertainty in the political outlook in Indonesia is why I am putting this stock in a portfolio with a 12-18 month time horizon rather than in one with a five-year or longer holding period.

The shares are up 27.85% in the last twelve months and the stock now trades at a trailing 12-month PE or 26.90 but a forward PE on projected earnings of just 11.76. The company has cut its debt load by 50% in the last two years and I’m starting to hear talk (very premature, I think, but still important for the share price) that the company may reinstate the dividend that it eliminated in 2015.

The shares closed a $19.88 on January 11. My target price is $24 a share.