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Freeport (FCX) Provides Operational Update, Revises Q2 View

Zacks Equity Research

Freeport-McMoRan Inc. FCX announced an update on operations and guidance at PT Freeport Indonesia (PT-FI). Moreover, the company provided revised estimates for the second quarter of 2019 as well as reaffirmed earlier announced 2019 guidance for consolidated copper and gold sales volumes.

In second-quarter 2019, PT-FI achieved significant milestones related to its newly commissioned underground mining operations in Grasberg. The company stated that the undercutting in the Grasberg Block Cave surpassed 20,000 sq. meters, more than 20% from prior forecast.

Moreover, extraction of ore ramped up from an average of 5,000 metric tons per day during the first quarter to roughly 9,000 metric tons per day in June 2019. The company expects ore extraction to reach 15,000 metric tons per day by the end of 2019.

The company expects to produce 8 billion pounds of copper and 8 million ounces of gold from the Deep Mill Level Zone (DMLZ) underground mine over its life. In June, undercutting in the DMLZ underground mine initiated on the second production block for mine extraction. Production at the mine rose to an average of around 9,000 metric tons of ore per day in June from an average of 6,800 metric tons of ore per day during the first quarter. The company expects production from the mine to reach 11,000 metric tons of ore per day by the end of 2019.

Regarding the Grasberg open pit, PT-FI continues to mine the final stages. In second-quarter 2019, PT-FI opened an additional mining area, which will extend pit life options into third-quarter 2019 and beyond. Access to high-grade material were delayed due to mine sequencing changes in the open pit during the second quarter. This led to lower gold and copper production from the open pit than the initial estimates provided by the company in April 2019.  

For second-quarter 2019, Freeport projects consolidated copper sales volumes to approximate the April 2019 estimates of 800 million pounds. Higher copper sales from the Americas are expected to offset lower copper sales from Indonesia. Gold sales are expected to be roughly 190,000 ounces, lower than the previous expectation of 265,000 ounces. The decline can be attributed to mine sequencing changes in the Grasberg open pit that delayed the company’s access to high-grade material.

Moreover, Freeport expects copper sales to be recorded at an average price of roughly $2.73 per pound. In March, the company provisionally priced copper sales at its copper mining operations totaling 364 million pounds at average price of $2.94 per pound. However, the company anticipates that mark-to-market impact of lower copper prices in the second quarter to lower revenues by roughly $85 million.

Notably, unit net cash costs from the Americas for the second quarter are expected to be in line with prior estimates. The company currently estimates consolidated unit net cash costs to be roughly 15% higher from the prior guidance of $1.67 per pound of copper given in April 2019.

Based on the projected realized prices and updated gold sales and cost outlook for the second quarter, the company projects adjusted EBITDA to be roughly $430 million. It also expects to record a loss of roughly 5 cents per share to net income before any non-recurring items.

The company projects consolidated sales for 2019 to be in line with the estimates provided in April. Consolidated gold sales are forecast to be 0.8 million ounces and consolidated copper sales are estimated to be 3.3 billion pounds.

Freeport’s shares have lost 32.9% in the past year compared with the industry’s 13.6% decline.

Zacks Rank & Key Picks

Freeport currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the basic materials space are Materion Corporation MTRN, Flexible Solutions International Inc. FSI and Fortescue Metals Group Ltd. FSUGY. These stocks currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Materion has an expected earnings growth rate of 27.3% for 2019. The company’s shares have gained 21.5% in the past year.

Flexible Solutions has projected earnings growth rate of 342.9% for the current year. The company’s shares have surged 159.3% in a year’s time.

Fortescue Metals has an estimated earnings growth rate of 230.4% for the current year. Its shares have rallied 101.3% in the past year.

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