Today one of the companies embroiled in the act of precious metals extraction reported better-than-expected profits for the second quarter.
Freeport-McMoRan Copper & Gold (FCX) reported second quarter revenue and profit that fell sharply from a year ago, yet the numbers still beat Wall Street’s consensus estimates by a substantial margin.
The Phoenix, Arizona-based miner attributed the strong results to cost-cutting and wider profit margins. In Q2, Freeport posted earnings of $588 million, or $1.38 per share, down from the year-ago period’s $947 million, or $2.25 per share. Analysts were expecting earnings of just 69 cents per share, so investors got a nice earnings surprise.
But like so many earnings reports we’ve seen this season, Freeport’s top line revenue fell substantially; down 31% to $3.7 billion in the quarter. That’s a big decline over last year’s $5.4 billion Q2 revenues.
Unfortunately, the Freeport numbers send mining stock investors a mixed message. Yes, the company was able to make money, but they did so largely by cost-cutting and not via increased revenue. The Street reacted favorably to the Freeport numbers at Tuesday’s open, but as the trading day continued the initial gain seen in FCX shares evaporated.
Striking Shareholder Gold
As investors, the question now becomes how best to play — if at all — mining stocks like Freeport.
I think a good case can be made on the bullish side for the precious metals’ miners based on two factors. The first is a decline in the U.S. dollar versus rival foreign currencies.
After a protracted surge in the greenback during the first quarter of 2009, the last few months have brought about a substantive pullback. In the chart below of the U.S. Dollar Index, a measure of the value of the dollar versus a basket of world currencies, we can see the severity of the recent decline that’s been in effect since mid-April.
In most cases, when the value of the dollar is in decline, the value of precious metals soar. This causes more investors to race to hold hard assets like gold and silver as a hedge against the inflation caused by the declining value of the greenback.
The second component of the bullish case for mining stocks is…
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The second component of the bullish case for mining stocks is increased global demand, particularly for industrial metals such as copper, from emerging markets like China. There’s no recession in China, and the country is committed to maintaining the immense infrastructure build-out that’s transforming the economic landscape from predominantly rural to industrial giant.
To be certain, last year the recession put a damper on worldwide demand for gold, copper and other precious metals. But that demand isn’t slowing in China, and as the world’s economy gets healthier and healthier, expect to see increased demand for precious metals.
How Will Other Mining Stocks Fare This Earnings Season?
Increased price of precious metals due to a falling dollar, along with growing demand for precious metals equals better earnings for mining companies like Freeport, Agnico Eagle Mines (AEM), Barrick Gold (ABX), Goldcorp (GG), Newmont Mining (NEM) and a host of others.
On Thursday before the opening bell we’ll find out how Newmont Mining did in Q2, and that will likely give us a clearer picture of the health of the mining stock sector.
How Will Other Mining Stocks Fare This Earnings Season?
But I don’t advocate going into gold stocks with a single stock focus. Instead, take a look at the Market Vectors Gold Miners (GDX).
This ETF investment seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the AMEX Gold Miners index. The fund generally normally invests at least 80% of its total assets in common stocks and American depositary receipts of companies involved in the gold mining industry.
The chart here of GDX shows the fund trading well above its long-term, 200-day moving average (red line), clearly a bullish sign from a technical perspective. Perhaps more importantly — at least in the short run — is the breaking of the 50-day moving average (blue line) over the past couple of trading days.
The penetration of both the 50-day, and the 200-day moving averages, combined with the aforementioned bullish case for miners, mean you too can tap the vein of mining stock profits for your portfolio.
Buy GDX.
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