FCX and what is going on in Indonesia.
FCX is a one mine, one country deal. It lives or dies by its large mine in Indonesia.
Look at the price of FCX preferred B or C. These stocks are "worth" 1/10 oz. of gold, with payoff dates only 3-5 years away, and they pay dividends, yet they are discounted better than 25%. If the price of gold stays stable and all goes well, the rate of return is huge. Why would smart investors discount gold by more than 25%?
The answer lies in two things:
1. The price of gold. The mining & refining cost of the metal is about $320 per ounce. So, even at the recently improved price of $309, FCX is losing money. Not enough to threaten survival, but enough to make them possibly consider suspending dividends; and if regular dividends aren't paid then preferred dividends can be suspended too.
2. Politics. The chairman of FCX is closely aligned with the president of Indonesia, the aging patriarch of a very powerful, very hated and very corrupt family. Have you read King Lear or seen the Japanese movie Ran? When he dies, the country could go up in flames. Freeport could easily see its mine nationalized or disabled.
So, the price of the common and the preferred is adrift in a riptide not of its own making. If you want to bet that capitalism rules and that AU will return to a price which reflects its full mining and refining cost, buy FCX, or even better FCX preferred B and C. (I own a little of the preferred, none of the common). But I've kept my investment to just 2% of my non-IRA funds because while the rate of return is scheduled to be very good, lots of risk exists in these securities.
Pete F. |
