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Freeport Cuts First Quarter View

Zacks Equity Research

Freeport-McMoRan Copper & Gold Inc. (FCX) has trimmed its copper and gold sales outlook for the first quarter of 2012 following a strike at its Grasberg mine in Indonesia. Though operations at the mine have already started, the mine is slated to reach its full production by the second quarter of 2012.

The mine’s production was impacted as the strike lasted for three months last year and again started on February 23, 2012. Freeport also anticipates that the strike will reduce total production and sales by around 80 million pounds of copper and 125,000 ounces of gold. This will bring down the guidance to 795 million pounds of copper and 300,000 ounces of gold from its previous expectation of 875 million pounds of copper and 425,000 ounces of gold, including 210 million pounds of copper and 400,000 ounces of gold from Grasberg.

Freeport’s fourth-quarter 2011 consolidated sales volume were 823 million pounds of copper and 133 thousand ounces of gold. The sales volumes in the quarter were affected due to labor disruptions and the temporary suspension of milling operations at Grasberg, resulting from the damage of the concentrate and fuel pipelines.

The company reported a profit of $640 million or 67 cents per share in the fourth quarter of 2011 versus $1.5 billion or $1.63 per share in the same quarter of 2010. Revenues in the quarter were $4.2 billion versus $5.6 billion in the prior-year quarter, surpassing the Zacks Consensus Estimate of $3.8 billion.

Freeportis also conducting exploration activities near its existing mines with a focus on opportunities to expand reserves that will support the development of additional future production capacity in the large minerals districts, where it currently operates. Favorable exploration results indicate opportunities for significant future potential reserve additions in North and South America and in the Tenke Fungurume minerals district.

Freeportis the world's largest producer of molybdenum. The company has a strong balance sheet. As of December 31, 2011, Freeport had $4.8 billion in consolidated cash and cash equivalents and $3.5 billion in total debt.

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

Freeportcompetes with Newmont Mining Corp. (NEM) and Southern Copper Corp. (SCCO). We are currently Neutral on Freeport, which is in tandem with a short-term Zacks#3 Rank (Hold).

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