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Freeport-McMorRan Copper & Gold has strengths

The mining firm's vigor comes from its geographic diversification and the longevity and quality of its assets. Also, Vanguard Energy has significant risks and should be only a small part of anyone's holdings.

April 24, 2011|By Andrew Leckey

Question: Freeport-McMoRan Copper & Gold Inc. has been a very good stock for me, but I wonder about the general outlook for commodities. What is your take?

Answer: Freeport-McMoRan is the largest publicly traded producer of copper, and the mining company's fortunes are tied directly to the price of the industrial metal, which can be volatile.

Global demand for copper will probably continue to come largely from China. Although Beijing has lately been raising interest rates to stem inflation by slowing the economy, the country is nonetheless expected to need large quantities of copper for the foreseeable future.

Geographic diversification and quality assets of long duration are Freeport-McMoRan's strengths. Its Grasberg mining complex in Indonesia is the world's largest copper and gold mine in terms of recoverable reserves. The company has operations in North America and South America, and it is developing a massive copper and cobalt deposit in the Democratic Republic of Congo.

The company is also a significant gold producer and the world leader in the production of molybdenum, used to toughen alloy wheels.

Last year the company earned $4.3 billion, up 58% from the year before, as its revenue climbed 19% to $20 billion.

In the first quarter of this year, the firm's earnings jumped 59% from a year earlier as revenue rose 31%. Its stock price has declined 8.7% this year after gaining 50% in 2010 and tripling in 2009.

Question: What's your expectation for Vanguard Energy?

Answer: Like any investment that specializes in one segment of the economy, this $15-billion mutual fund carries significant risks and should represent at most a small part of an individual's overall holdings.

The portfolio took a big hit a year ago when the Gulf of Mexico oil spill caused a dive in the value of its holdings in BP and other firms linked to the accident. But the fund has recovered — and then some — because of the recent surge in oil prices.

The fund is up 25% in the last 12 months, ranking it near the lower one-third of energy funds. Its three-year annualized decline of 1.8% ranks in the top one-fifth of its peers, while its 6.5% five-year annualized gain is better than two-thirds of rivals in the sector.

Top holdings in the portfolio recently included Exxon Mobil Corp., Occidental Petroleum Corp. and Royal Dutch Shell.

Because it mostly buys shares of big oil producers, which are less vulnerable to swings in commodity prices than smaller firms are, Vanguard Energy's volatility of returns is below average for the category, said Morningstar Inc. analyst Rob Wherry.

The fund requires a $25,000 initial investment but imposes no sales charge on purchases of its shares and has a 0.38% annual expense ratio.

"This is an inexpensive fund to own," Wherry said. "If you're looking to do a sector bet in energy, this is one of the smart ways to play it."

Andrew Leckey answers questions only through the column. Write to him at yourmoney@tribune.com.

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