Freeport (FCX) Beats Earnings, Revenue Estimates in Q3

Freeport-McMoRan Inc. (FCX) reported earnings of 53 cents per share for third-quarter 2014, reflecting a decline of 32.9% from the year-ago earnings of 79 cents. Profit declined 32.8% year over year to $552 million, hurt by lower pricing of copper and gold.

The results include net charges of $115 million or 11 cents per share. Barring that impact, earnings were 64 cents a share in the third quarter, topping the Zacks Consensus Estimate of 62 cents.

Revenues declined 7.6% year over year to around $5,696 million in the third quarter, but surpassed the Zacks Consensus Estimate of $5,596 million.

Consolidated sales from mines increased to 1.08 billion pounds of copper in the third quarter from 1.04 billion pounds in the year-ago quarter. Sales of gold also jumped to 525,000 ounces in the reported quarter from 305,000 ounces a year-ago. Gold sales increased due to higher ore grades.

Sales of molybdenum decreased moderately to 22 million pounds in the reported quarter from 23 million pounds in the third quarter of 2013.

Freeport-Mcmoran Copper & Gold Inc - Earnings Surprise | FindTheBest

Operational Update

Consolidated average unit net cash costs (net of by-product credits) decreased to $1.34 per pound of copper in the quarter from $1.46 per pound a year ago.

Average realized price per ounce for gold fell to $1,220 per ounce from $1,329 per ounce a year ago while average realized price per pound for copper declined to $3.12 per pound of copper from $3.28 per pound of copper in the prior-year quarter.

Mining Update

North America Copper Mines: Copper sales at the mine increased 20% year over year to 436 million pounds due to higher mining and milling rates at Morenci and higher ore grades at Chino. Production rose 19.5% to 423 million pounds in the reported quarter.

Freeport expects copper sales to be 1.7 billion pounds in 2014, up from 1.4 billion in 2013. For 2015, Freeport expects copper production to increase due to higher mining and milling rates at Morenci and higher ore grades at Chino.

South America Mining: Copper sales of 271 million pounds declined by 16.1% from the year ago quarter mainly due to lower ore grades at Candelaria and Cerro Verde. Gold sales went down 38.5% to 16,000 ounces. Copper production went down 18.7% to 284 million pounds in the reported quarter and gold production decreased 33.3% to 20,000 ounces in the quarter.

In October 2014, Freeport entered into deal to sell its 80% ownership interest in the Candelaria and Ojos del Salado copper mining operations and supporting infrastructure to Lundin Mining Corporation (Lundin) for $1.8 billion in cash and contingent consideration of up to $0.2 billion. Excluding contingent consideration, Freeport estimates after-tax net proceeds from the transaction will be around $1.5 billion. The transaction is expected to close by end- 2014.

South America mining is expected to report sales of 1.1 billion pounds of copper in 2014. The guidance excludes production from the Candelaria and Ojos del Salado mines (expected to be around 80 million pounds of copper) because of the pending sale transaction.

Indonesia Mining: Copper sales of 258 million pounds declined 8.9% from the year ago quarter while production decreased 19.8% to 203 million pounds. Gold sales increased 81.7% to 505,000 ounces and production rose 43.4% year over year to 426,000 ounces in the reported quarter. Both gold and copper sales increased in the quarter due to higher ore grades. Freeport expects sales from Indonesia mining to be around 0.7 billion pounds of copper and 1.15 million ounces of gold for 2014.

In Jul 2014, Freeport signed a Memorandum of Understanding (:MOU) with the government of Indonesia under which PT Freeport Indonesia (PT-FI) and the government agreed to negotiate an amended Contract of Work (COW). According to the MOU, Freeport was granted the approval to resume operations at PT-FI. With its export permit, Freeport resumed concentrate shipments from the Grasberg mine in Papua, which had been suspended since January 2014.

During the quarter, the miners at Grasberg met with a fatal accident due to which operations were temporarily suspended. However, Indonesian authorities approved the resumption of operations after issuing recommendations on traffic control procedures which have been implemented by PT-FI. But, PT-FI received notice from union leadership indicating its intention to conduct a 30-day strike beginning on Nov 6, 2014.

Africa Mining: Copper sales of 112 million pounds represent a year over year decrease of 5.1%, reflecting timing of shipments. Production increased 7.3% to 117 million pounds in the quarter. The sales at the mine are expected to be about 445 million pounds of copper and 30 million pounds of cobalt in 2014.

Molybdenum: Molybdenum production of 13 million pounds in the third quarter was higher than 12 million pounds produced a year ago.

Financial Position

Freeport had cash and cash equivalents of $658 million as of Sep 30, 2014, down 70.3% from $2,219 million as of Sep 30, 2013. Freeport had long-term debt of about $18 billion as of Sep 30, 2014, down from $21.1 billion as of Sep 30, 2013.

Freeport’s operating cash flows were $1.9 billion in the third quarter, flat compared with the year ago quarter. Capital expenditures totaled $1.9 billion in the reported quarter.

Oil and Gas Operations (FMO&G)

In May and early June of 2013, Freeport completed the acquisitions of Plains and McMoRan Exploration and formed a premier U.S. based natural resource company collectively called FM O&G, and added a high quality portfolio of U.S.-based oil and gas assets to its global mining business.

In the third quarter, realized revenues for oil and gas operations were $867 million ($69.08 per barrels of oil equivalents/BOE) compared with $1,333 million ($80.93 per barrels of oil equivalents/BOE) in the year ago quarter due to lower oil prices and higher realized cash losses on derivative contracts. Cash production costs totaled $263 million ($20.93 per BOE) in the quarter. Sales volume was 8.6 million barrels of oil equivalent (:MMBOE) in the quarter.

Guidance

For 2014, Freeport expects consolidated sales from mines of 3.9 billion pounds of copper, 1.2 million ounces of gold, 95 million pounds of molybdenum and 56.2 MMBOE. These estimates exclude estimated fourth-quarter 2014 production from the Candelaria and Ojos del Salado mines (totaling around 80 million pounds of copper and 25,000 ounces of gold) due to the pending sale transaction.

For the fourth quarter, the company expects 1 billion pounds of copper, 350,000 ounces of gold, 21 million pounds of molybdenum and 11.5 MMBOE. Consolidated unit net cash costs (net of by-product credits) for copper mines are expected to average $1.52 per pound of copper in for 2014.

The impact of price changes for the fourth quarter on consolidated unit net cash costs would be roughly a penny per pound for each $50 per ounce change in the average price of gold and $0.005 per pound for each $2 per pound change in the average price of molybdenum.

Cash production costs per BOE are expected to be around $24 per BOE for the fourth quarter 2014 and $21 per BOE for the year 2014.

For 2014, capital expenditures are expected to be roughly $7.5 billion, including $3 billion for major projects at mining operations and $3.4 billion for oil and gas operations.

Freeport aims at reducing debt by the end of 2016 using cash flows generated above capital expenditures and other cash requirements. The company has taken steps to accelerate its deleveraging plans through potential asset sales, as well as will continue to evaluate its portfolio for potential future monetizations and will take additional steps to reduce or defer capital spending and other costs in response to market conditions.

Freeport currently retains a Zacks Rank #5 (Strong Sell).

Other mining companies with favorable Zacks Rank include Energy Fuels Inc. (UUUU), Thompson Creek Metals Company Inc. (TC) and Alcoa Inc. (AA). All of them hold a Zacks Rank #2 (Buy).

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