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Freeport Beats, Net Income Plummets

Zacks Equity Research

Freeport-McMoRan Copper & Gold Inc. (FCX) reported a profit of $913 million or 96 cents per share in the first quarter of 2012, a 39% drop from the $1.5 billion or $1.57 per share earned in the year-ago quarter. The per share figure, however, surpassed the Zacks Consensus Estimate of 85 cents per share.

Performance was affected by work interruption at its Grasberg mine in Indonesia. A surge in sales from North America offered some respite.

Including losses on early extinguishment of debt of $149 million or 16 cents per share, reported net income in the quarter stood at $764 million or 80 cents per share. This was almost half the prior year quarter’s net income of $1.5 billion or $1.57 per share.

Operational Update

Revenues in the quarter were $4.6 billion, a 19% drop from $5.7 billion in the prior-year quarter, but ahead of the Zacks Consensus Estimate of $3.8 billion. Consolidated sales from mines declined to 827 million pounds of copper and 288,000 ounces of gold from 926 million pounds and 480,000 ounces, respectively, in the prior-year quarter.

Sales of molybdenum improved to 21 million pounds in the reported quarter from 20 million pounds in the first quarter of 2011. This compared with Freeport-McMoRan’s trimmed guidance put forward in March, which estimated copper sales at795 million pounds of copper and gold sales at 300,000 ounces.

Consolidated average unit net cash costs (net of by-product credits) increased to $1.26 per pound of copper from 79 cents per pound in the first quarter of 2011 mainly attributed to reduced copper volumes in Indonesia, increased mining and input costs in North and South America and lower by-product credits. Operating income slumped 41% to $1.7 billion from $2.9 billion in the year-ago quarter.

Financial Position

Freeport-McMoRan had cash and cash equivalents of $4.5 billion as of March 31, 2012 compared with $4.8 billion as of December 31, 2011. However, net of non-controlling interests' share, taxes and other costs, cash available totaled $3.4 billion.

Freeport-McMoRan had long-term debt of $3.5 billion as of March 31, 2012, flat with debt as of December 31, 2011.  During the quarter, Freeport sold $3 billion of senior notes in three tranches with a weighted average interest rate of 3% and utilized the proceeds to redeem the balance $3.0 billion of its 8.375% Senior Notes.

Freeport-McMoRan’s operating cash flows were $801 million in the first quarter of 2012 compared with $2.4 billion in first-quarter 2011. Capital expenditures totaled $707 million in the reported quarter compared with $505 million in the year ago quarter.

Freeport-McMoRan’s Board of Directors authorized a 25% hike in the annual dividend to $1.25 per share from $1.00 per share. The first quarterly dividend will be paid on May 1, 2012 to shareholders of record on April 13, 2012.


For 2012, Freeport-McMoRan expects consolidated sales from mines of 3.7 billion pounds of copper, 1.1 million ounces of gold and 81 million pounds of molybdenum. In the second quarter, consolidated sales are estimated at 895 million pounds of copper, 235,000 ounces of gold and 20 million pounds of molybdenum.

Based on current 2012 sales volume and cost estimates and average price assumption of $1,600 per ounce for gold and $14 per pound for molybdenum for the balance of 2012, consolidated average unit net cash costs (net of by-product credits) are expected to be $1.43 per pound of copper in 2012.

In addition to the abovementioned assumptions, assuming average prices of $3.50 per pound for copper, operating cash flows are estimated to approximate $4.7 billion for the year 2012. Operating cash flows are expected to approximate $4.2 billion, net of $1.1 billion for working capital requirements.

The company expects to expend $4.3 billion as capital expenditure in 2012, which includes $2.7 billion for major projects and $1.6 billion for sustaining capital. Freeport estimates exploration spending of approximately $275 million in 2012 compared with $221 million in 2011.

Our Take

The company is conducting explorations close to its existing mines with a goal to boost reserves which will facilitate the development of additional future production capacity across the large minerals districts where it operates.

As per the company’s exploration data there are opportunities for meaningful future reserve additions in North and South America as well as in the Tenke Fungurume minerals district in Congo’s Katanga province. We are increasingly optimistic on Freeport’s African operations considering the potential at Tenke as well as increased sulfide production in North America.

However, higher production cost is a concern for Freeport. Unit costs are expected to rise across the company’s copper-producing segments, reflecting higher input costs. Its Indonesian operations are most likely to witness a material year-over-year cost hike on a per unit basis due to the drop in volumes that will reduce the ability to absorb the operation’s high fixed costs.

Headquartered in Phoenix, Arizona, Freeport-McMoRan Copper & Gold Inc. is engaged in mineral exploration and development; mining and milling of copper, gold, molybdenum and silver, as well as smelting and refining of copper concentrates.

The company conducts its operations primarily through its principal operating subsidiaries, PT Freeport Indonesia, Freeport-McMoRan Corporation (formerly Phelps Dodge) and Atlantic Copper. Its major competitors include Newmont Mining Corp. (NEM) and Southern Copper Corp. (SCCO). The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

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