From briefing.com - Phelps Dodge Corp : (PD) 105.80 -1.21: Copper eased off recent historical highs Monday, as the dollar made a significant move against the euro. Copper futures have been trading in-line with fluctuations in the currency markets along with rising demand expectations. Futures rose 1.6% last week to $3,292 per ton - the highest level since the contract began trading back in 1985.
It has been a volatile ride in terms of price activity for the commodity and copper producers as the market tries to anticipate demand, particularly from the world's largest consumer...China. Futures soared to a new high last week after China said spending on factories, roads, and other infrastructure increased during the first two months of the year. Fixed asset investment grew 25% to $51 bln, according to the National Bureau of Statistics, surpassing Beijing's forecasts of 16%. Prices are also being supported on expectations of an economic recovery in Japan and Germany.
Global consumption is forecasted to grow 5.3% in 2005 and 4.6% in 2006. Demand this year is believed to exceed supply for the third straight year resulting in a deficit of 259,000 tons, according to the International Copper Study Group. Several producers including the world's largest, Codelco, along with Freeport-McMoRan (FCX) are boosting production, but most likely the additional output will not reach the market until 2006.
One of our suggested holdings in the Briefing.com Active Portfolio is Phelps Dodge (PD), which has returned over 30% during the last year. We remain committed to the name due to its low valuation, strong balance sheet, earnings momentum, and shareholder value. As the second largest producer, PD is highly leveraged to prices, as such analysts have been trying to keep up with the recent elevation. Just last week, Lehman raised its FY05 EPS estimate by 16% to $12.75 and by 27% for FY06 to $14.00. Back in Jan, Phelps beat consensus estimates by $0.23 for the Q4 with revenues up 70% year/year.
Share price volatility is likely to remain demonstrating the continued skepticism over the sustainability of prices. Shares reached a low around $60 back in May of 2004, on concerns that Beijing's attempts to slow growth would result in a significant drop-off in demand. This did not come to pass and almost a year later demand trends remains strong. Looking ahead, we feel with low inventory levels, continued demand trends particularly from China, constraints from scheduled mine depletions, tougher environmental standards, and restrained mine production will result in supply deficits sustaining prices. There has not been a major discovery of copper since the 1980's and with demand rates mentioned above, the market will more than absorb increasing supply and planned restarts of inactive mines. Therefore the risk remains to the upside for PD's shares, which are trading at a 9.5x price to earnings multiple. ----Kimberly DuBord, Briefing.com |
