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Recently I have been buying more options on gold mining stocks than common stocks, but I bought this common stock on Monday.

Copper is currently at $74.15 (January 2003 futures contract). Last quarter (Q3) FCX realized $.67 a pound for copper. Using FCX's guide for the impact of copper prices on revenue and income, each 1 cent increase in a pound of copper generates $15 million in revenue and $8 million in income. If FCX averaged a 4 cent boost in the average copper price (i.e., $.71), income should increase $8 million this quarter from copper.

Gold closed today at $353.80 bid (up $6.90). FCX's average price for gold in Q3 was $314.19. For every $5 increase in the price of gold, FCX generates an addition $11 million in revenue and $6 million in income. If FCX's average price for gold is $324.19, the Q4 profit impact would be $3 million.

In Q34, FCX earned a healthy $206 million. If my assumptions above are accurate, then earnings will increase $11 million, or 5.3%. Not bad, but not enough to move the earth and moon.

What does capture my interest is that FCX is aggressively paying down debt. Here is a snip from the Q3 report:

At copper and gold prices of $0.65 per pound and $315 per ounce, respectively, for the remainder of the year, our operating cash flow is expected to approximate $500 million for the year, which would allow us to reduce debt and redeemable preferred stock by over $250 million during the year.

Both copper and gold are way above those prices. The two things that cloud FCX's future is its debt and its Indonesian location. Although Indonesia may always be an issue, at least for now, it is a non-issue because the government needs the money/jobs the FCX mine produces. Debt, though, is not that big a problem now that copper and gold prices have risen.

When I first looked at FCX a few years ago, there were large debt payment due that looked like they would be unpayable. Here is what is current due on the roughly $2.58 billion in debt as of Q3 end:

2002: $98.3 million (certainly already paid)
2003: $528.2 million (roughly the cash flow for 2002)
2004: $79.0 million
2005: $513.5 million
2006: $1,036.1 million
Thereafter: $326.1 million

The $528 million for 2003 looks very doable for three reasons. 1) Metals prices look like they will generate another $500 million in cash flow. 2) Cash and cash flow, minus the interest on debt being repaid, should approach the size of debt payment. 3) If FCX wants to use cash for other reasons, commercial paper or borrowing windows should open because of the strong cash flow.

2004 will help generate cash for the 2005 and 2006 payments. The 2006 payment, which I thought was potentially too big to handle and a ticket to bankruptcy, could be covered if gold continues higher and copper gets well above the $.78 price everyone seems to be predicting as the base price going forward. If the 2006 payment is too large (and it probably will be), FCX should be able to refinance it because debt will be greatly reduced by then and the cash flow should be adequate if the payments are spread over two or three years.

There are a number of things that could go right for FCX. They now own more of the output of their mine in Indonesia. If they mine higher grade ore veins, the imapct on earnings can be magnified by both higher copper and/or gold prices and their higher share of output. Gold is going up sharply -- and they may decide to hedge if gold goes over $400 and ounce to protect those large loan payments due in the future. They could hedge copper too if it goes over $85 a pound. And every debt repayment reduces interest payments -- and moves cash to the bottom line.

I bought because I think copper will recover and average $.80 cents a pound in 2003. I also expect gold to average $400 an ounce. At those prices, and only using 2002 output as a earnings guide, earnings would increase by $190 million -- or $1.30 a share.

In my opinion, FCX is cheap. On a day like today, with gold going up strongly and copper flat, it is surprising to see FCX down. When you are producing 2.5 million ounces of gold, sharp price increases should impact your stock price -- at least that is what a Foolish observer might expect. The market must still be thinking that the debt load is too big and the political situation is too unstable. Even if my price objectives are not reached, FCX currently has the cash flow to keep its operations humming and get its debt under control.
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