Hey There Income Hunters,,
Macro risks in Peru have held mining company Freeport-McMoRan’s (Ticker: FCX) price down as inventories remain low and global reopening progresses faster than anticipated.
Copper prices have also been hit hard because of the shutdown of more than two dozen coal mines in China. That led to a drop in smelting and fewer copper purchases.
Well, the mines will be back online soon and as inventories have dropped 40% in the last four months, copper is poised to sustain a meaningful breakout into the end of 201
FCX is an awesome shape to capitalize on the increased demand. Its valuation is low and the balance sheet is strong.
Today I’ll run them through the Power Income Valuation Model and give you a low risk/high reward strategy …
Copper Supply Trending Down
All the talk recently has been about hydrocarbons: oil, natural gas and coal …
Meanwhile we are on the verge of a global pickup in growth and the industrial metals are undervalued.
The graph below shows the trend in China’s copper supply …
Get ready to see a resurgence in China in 2022 sparked by the Winter Olympics and recent injections of liquidity into the economy …
FCX Valuation
FCX has $2.5 billion in operating cash flow and could return up to 50% to shareholders.
They have also drastically reduced the net debt on their books from $8.4 billion in 2020 to $3.4 billion in Q2 2021
Yet with all the positives, they are still trading at a 9% discount. See the fair value price based on their value, growth and dividend metrics below:
Technical Setup
This is an ideal low risk/high reward setup.
FCX has recently rallied from below $32 on high volume and then broke above the 50- and 200-day moving average.
FCX Strategy
In order to get the move into the year-end, the Dec. 17 expiry is ideal.
My play:
-
BTO $FCX Dec. 17 38/39 call spread for $.35
As you can see in the lower left hand corner below, the max net profit if risking the whole debit of $.35 is 185% …
However, there is no need to risk that much.
FCX should hold the low from the nice rally on Oct. 7 when the buy volume was almost double the average.
So, you would be risking 35% of the debit or $.125 — or $12.5 per contract — to make $65 (the $100 difference in strikes minus your $.35 cost) …
That would be a 5.25-to-1 return.
Bring It Home
Call spreads allow you to optimize trade management
You don’t want to always assume you are risking your total cost. Know what the trade gives you at what price you think the bullish structure is negated.
A disciplined, systematic approach allows you to be wrong more than right while still capturing outsized returns.
Live and Trade With Passion,
Griff