Copper Kings

I was fascinated by the obituary for Huguette Clark that appeared in the New York Times a few weeks ago.

Huguette Clark’s eccentricities in themselves make for good copy — empty mansions, elaborate doll collections, predatory lawyers and accountants vying for control of a vast fortune. More remarkable, however was the fact that, at age 104, she was likely the last living link to the United States’ Gilded Age. Clark’s father was one of the three “Copper Kings” of Butte Montana, who monopolized the fabulous turn-of-the century copper mines, setting the stage for the creation of the appropriately named Anaconda Copper Mining Company.

Coincidently, right at about the time that Huguette Clark died, I received a query from a friend who recently inherited a block of Copper-Mol-Gold giant FCX‘s shares (via an original family holding of Phelps-Dodge, later acquired by Freeport-McMoran). The question, of course, is, given the rather precipitous slide that the primary copper and molybdenum producers have taken over the past few months, should one hold on or sell out?

Molybdos staff analyst Dr. Nutzmann had a look at FCX’s balance sheet, and offered a personal opinion (noting, as always, that this doesn’t constitute a recommendation of any kind. Consult your own financial advisor, etc. etc.)

FCX is trading at 4X book value, so the balance sheet won’t save the stock should copper demand entirely fall off a cliff. Current earnings level makes FCX still reasonably attractive, but not a sure thing.

Some reasons to worry:

http://ftalphaville.ft.com/blog/2011/03/10/510676/chinas-copper-as-collateral-addiction/
(and the links in the article)

I think if China continues to grow smoothly, copper is a good bet. If you are worried about a real estate bubble in China causing weakness in their economy, then copper might have some rough times.

The easiest recommendation is that an investor should not have more than 5% of his or her portfolio in FCX, and should sell some if that is the case. Below that level, I think it is good to have something like FCX in your portfolio.

Cool-headed valuations for your 401(k) are one thing, but there’s a certain undeniable intangible satisfaction to owning a big block of FCX. The boss may be a jerk, unable to neutralize life’s cheap shots within himself and therefore takes it out on you, with unreasonable demands. Yet even as you boil in your cubicle, the giant FCX Tonka trucks keep hauling the gold, the mol and the copper out of the gigantic pit. Dividend checks! As you buckle down under the unfairness, there’s a certain vicarious satisfication in the fact that as a Freeport shareholder, you’re naturally entitled to emulate the “copper crowd” of the Gilded Age:

…Broadway howls when the copper crowd whirl down in their automobiles. Every one in the party enjoys himself carte blanche at the Mr Heinze’s expense on these tours, and the commotion the Western visitors created last May during the annual Heinze tour furnished the newspaper with columns of good stories.