Right now, you can own one of the greatest assets in the world – a real trophy asset – at a huge discount. Regular readers will recognize the term "trophy asset" – it's how we describe the world's highest quality, most coveted hard assets.
Assets like timberland, oil deposits, gold mines, and unique real estate. We like investing in trophy assets for a couple reasons. First, as investors, we know what we're buying.
These companies have real hard assets; physical property...stuff you can touch. It's far easier to figure out the real value of a huge gold mine or a five-star hotel on the Las Vegas Strip than it is to guess the future market value of, say, a tech startup devising some new Internet service.
Plus, companies that own one-of-a-kind, world-class assets almost never face liquidity problems because they can always get financing.
Buying these trophy assets when you can get them at dirt-cheap prices is a core strategy for building wealth over the long term. Right now, perhaps the single greatest trophy asset on the planet is selling at a 40%-plus discount to its value.
Freeport began mining in the Grasberg minerals district back in 1972. Even after 40 years of production, the mine still holds one of the largest recoverable copper and gold reserves on the planet. In the company's 2012 annual report, it lists Grasberg's "proven and recoverable" reserves at 31 billion pounds of copper, 30.9 million ounces of gold, and 116 million ounces of silver.
With gold trading around $1,400 per ounce, you could value Grasberg's gold at more than $43 billion. That's admittedly a simple, back-of-the-envelope calculation. It doesn't factor in the cost of extracting the ore or any operating expenses but it gives you an idea of the real and tangible value the Grasberg complex brings to Freeport-McMoRan. Compare that with the company's market cap, which is around $32 billion today.
The company's global resource position is far greater. Freeport's worldwide reserves include 116.5 billion pounds of copper, 32.5 million ounces of gold, and 321.4 million ounces of silver. Adding to its metals reserves are 3.42 billion pounds of molybdenum (a chemical element used in metal production) and 0.84 billion pounds of cobalt. Plus, Freeport recently acquired significant energy properties.
The company forecasts that oil and gas sales in the second half of the year will average 163 thousand barrels of oil equivalent per day. All told, the company's tangible assets are worth about $61 billion. With the market cap at $32 billion, you can buy Freeport at a 47% discount. As you can see in the following chart, Freeport rarely trades at such a big discount. (And it's usually at a premium to its asset values – that's when the blue line is above the 100% level.)
As I said, owning these trophy assets is a core strategy for building wealth over the long term. The key, of course, is to buy the companies that own these assets when their shares trade at dirt-cheap prices. That's exactly where Freeport is today.