David Sterman

There's an old saying on Wall Street that investors should look to the income statement for upside and the balance sheet for downside protection. But for mining and energy stocks, this axiom has been spun on its head. Income-statement metrics are forcing many of these stocks down, but their balance sheets point to the way to vigorous upside (while that downside protection also remains in place).

You can find no greater example of this than copper and gold miner Freeport McMoran (NYSE: FCX). Copper prices have fallen from around $4.50 a pound in early 2011 to a recent $3.60, dampening the company's profit prospects. Adding insult, the company is temporarily seeing reduced output at a key Indonesian mine on the heels of work stoppages. Lastly, concerns continue to fester that China's insatiable appetite for copper is set to slow down. Add it up, and you have a pretty dismal stock chart...

To be sure, this stock may look attractive at less than eight times trailing profits and less than four times trailing EBITDA, but Freeport McMoran's earnings per share (EPS) is expected to slump about 15% this year to about $4.15 a share. And investors simply shun stocks that are posting falling profits.

But such an environment is precisely where you find value. Freeport McMoran is becoming a deep-value stock if you measure the company's stock against the unlocked value in its various copper and gold mines.  Let me explain...

David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He is currently an analyst for StreetAuthority.com

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