Shares of copper and gold miner Freeport McMoran (NYSE: FCX) are trading off of their early highs, but still up a respectable +4%, thanks to surprisingly strong second-quarter profits.

Quarterly results for this mining giant are based on two simple factors. How much it can produce, and what price it can garner. In this quarter, production was the key: FCX sold 289 million pounds of copper in North America, 30% above analysts’ forecasts. (Sales of copper outside of North America, which still account for 70% of output, were slightly below plan).

#-ad_banner-#For a long time, shares of FCX were seen as a proxy for copper prices. Those prices soared toward the $4 per pound mark in early 2008, pushing the company’s stock north of $100. But as copper prices fell below $1.50 in late 2008 on the heels of a quickly-slowing global economy, FCX shares lost more than -80% of their value. Investors grew spooked by the fact that FCX spends at least $1.50 per pound just to mine and transport copper, so that weak price was a profit-killer.

Copper prices have since bounced back, and now trade just north of $3. The company would love to see copper prices breach those 2008 highs, but that won’t happen any time soon. The world is awash in nearly 150 million tons of copper, and that surplus would need to be worked off to boost prices. The industry would need to throttle back output sharply to work off that glut. But as noted, the company intends to make up in volume what it can’t achieve in price. For example, after selling 914 million pounds of copper in the second quarter, it expects to boost that figure to 970 million in the current quarter.

Freeport’s copper output accounts for about 70% of revenue. The company also mines about one million ounces of gold every year, and has clearly benefited from a price spike for the yellow metal.

Freeport is likely to post sharply improved profits this year, simply because 2009 contained an absolutely dismal first quarter when it earned just $0.11 a share. (Other than that, earnings per share (EPS) have remained fairly above $1.40 in every other quarter of 2009 and thus far in 2010). Looking into 2011, expansions at key mines should boost output nicely, pushing EPS up almost +20% to $7.15 (assuming copper stays above $3 a pound). And that should translate into earnings before interest, tax, depreciation and amortization (EBITDA) exceeding $9 billion.

Action to Take –> By those measures, this is a cheap stock. Shares have historically traded at 11 times mid-cycle EPS, implying upside to near $90. Similarly, shares are also undervalued at less than four times projected 2011 EBITDA, on an enterprise value basis. Applying a multiple of five times also gets you to a $90 price target. Shares, at a recent $66, have more than +30% upside toward that target.

Of course, investors should remember that this is a very economically sensitive play, and the projections cited above assume that the global economy will stay in this slow-growth mode. Another economic downturn would hammer copper prices — and the company’s profits. Copper prices have already fallen -20% in the past three months on concerns of weakening demand from China. Prices have started to firm in recent sessions, indicating that those concerns may have been overblown.