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Could Gold Add Glitter to Freeport-McMoRan This Year?

Mark O'Hara

A Deeper Dive into May 2016 Copper Industry Indicators

(Continued from Prior Part)

Gold and copper miners

In the previous part of the series, we looked at some factors that are driving copper prices this year. It’s important to note that copper miners also produce gold as a byproduct. Although Freeport-McMoRan (FCX) isn’t a major gold producer, it expects its gold production to rise to 1.8 million ounces this year, a year-over-year increase of 44%. Higher gold production is due to the Grasberg mine. Freeport is in the process of completing open pit mining in the Grasberg mine, so its gold production is expected to increase this year.

Gold has risen in 2016

Higher gold prices (GLD) would help Freeport-McMoRan in 2016. In its 2016 EBITDA (earnings before interest, taxes, depreciation, and amortization) guidance, Freeport assumed gold to be $1,100 per ounce. Currently, gold is trading ~$150 per ounce higher than this guidance. Given the earnings sensitivity provided by FCX, the company’s 2016 EBITDA will likely rise by ~$330 million if gold trades at its current price.

What’s next?

It’s important to note that Freeport has more sensitivity to copper prices than crude oil and gold. Copper prices have to increase from these levels for Freeport’s earnings to improve meaningfully. But some copper miners aren’t very optimistic about copper’s short-term outlook. Antofagasta (ANFGY) sees copper prices staying lower for two years. Rio Tinto (RIO) (TRQ) doesn’t believe commodities have bottomed out.

Freeport has seen a valuation rerating due to asset sales and improved Market sentiments. However, if positive sentiment fades away and copper prices stay lower, the bears (SPXS) will again start fancying their chances.

You can also read Why It’s a Battle Between Freeport-McMoRan Bulls and Bears and explore what could drive Freeport in this volatile year.

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