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What's in Store for Freeport (FCX) This Earnings Season?

Zacks Equity Research

Freeport-McMoRan Inc. FCX is set to release fourth-quarter 2018 results on Jan 24, before the opening bell.

In the last reported quarter, the mining giant delivered a positive earnings surprise of 6.1%. The company posted adjusted earnings of 35 cents per share, which beat the Zacks Consensus Estimate of 33 cents.

Revenues went up around 13.9% year over year to $4,908 million, surpassing the Zacks Consensus Estimate of $4,379.7 million.

Notably, Freeport beat the Zacks Consensus Estimate in three of the trailing four quarters while missing once, delivering an average negative surprise of 0.8%.

The stock has lost 37.2% in the past year compared with the industry’s 37.9% decline.



Will the company surprise investors again or is it heading for a possible pullback? Let’s see how things are shaping up for this announcement.

Factors at Play in Q4

During third-quarter 2018 earnings call, Freeport stated that it anticipates consolidated sales volumes for 2018 to be roughly 3.8 billion pounds of copper, 2.45 million ounces of gold and 95 million pounds of molybdenum. The projections include 790 million pounds of copper, 330,000 ounces of gold and 25 million pounds of molybdenum in fourth-quarter 2018.

Moreover, the company expects operating cash flows to be roughly $4.2 billion for 2018. Capital expenditures are expected to be around $2 billion, which includes $1.2 billion for major mining projects mainly related to underground development in the Grasberg and the Lone Star oxide project.

The Zacks Consensus Estimate for consolidated revenues for the fourth quarter for Freeport is currently pegged at $3,849 million, reflecting an expected year-over-year decline of around 23.6%.  

Consolidated sales volume for Freeport’s North American operations inched up roughly 0.9% in the third quarter while production fell 6.9%. Also, production delivery costs in North America are   increasing due to lower ore grades. Volumes in North America are expected to be under pressure. The company expects North American copper sales to be roughly 1.4 billion pounds for 2018 (down from prior projection of 1.45 billion pounds) compared with 1.5 billion pounds in 2017.

The company’s rising unit net cash costs for copper in North American operation is also a concern. Freeport expects average unit net cash costs of copper for North America to be roughly $1.78 per pound for 2018 based on its current sales volume expectations. Notably, unit net cash costs for the region rose 14.5% year over year to $1.82 per pound in third-quarter 2018 partly due to higher mining and milling costs. Also, the unit net costs for South American mines also increased year over year to $1.81 per pound of copper in the third quarter from $1.64.

The weakness in copper prices is another concern for Freeport, which may affect its margins in the to-be-reported quarter. The company witnessed average realized price for copper decline 4.5% year over year in the third quarter.  Copper prices slumped to their lowest level in more than a year in December amid concerns over demand for the metal due to trade tensions between the United States and China and a weakening Chinese economy. Tepid economic data from China – the world’s biggest consumer of copper – has raised concerns of potential weaker demand for the commodity. As such, weak copper prices pose a headwind for Freeport.

Meanwhile, in December 2018, Freeport completed the transaction with the Indonesian government regarding PT Freeport Indonesia’s (PT-FI) long-term mining rights and ownership.

PT Indonesia Asahan Aluminium (Persero) (PT Inalum), fully owned by the government of Indonesia, wrapped up the earlier announced $3.5-billion cash acquisition of all of Rio Tinto's interests related to its joint venture (JV) with PT-FI. It also completed the $350-million cash acquisition of full interests of Freeport in PT Indonesia Papua Metal dan Mineral (earlier known as PT Indocopper Investama), which owns 9.36% of PT-FI.

Regarding the transaction, the interests of the JV are being merged into PT-FI in exchange for a 40% share of ownership in PT-FI. As such, PT Inalum and the provincial or the regional government’s ownership share of PT-FI is roughly 51.2% and Freeport's ownership is around 48.8%.

The deal enables Freeport and the PT-FI shareholders (before the transaction) to maintain their economics of the revenue and cost sharing arrangements under the JV. As such, Freeport’s economic interest in PT-FI is likely to be roughly 81.28% through 2022. Moreover, Freeport will continue to manage the operations of PT-FI.

Freeport-McMoRan Inc. Price and EPS Surprise

 

Freeport-McMoRan Inc. Price and EPS Surprise | Freeport-McMoRan Inc. Quote

 

Earnings Whispers

Our proven model does not show that Freeport is likely to beat estimates this quarter. That is because a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below:

Earnings ESP: Earnings ESP for Freeport is -30.56%. This is because the Most Accurate Estimate and the Zacks Consensus Estimate are currently pegged at 15 cents and 22 cents, respectively. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Freeport currently carries a Zacks Rank #5 (Strong Sell). Note that we caution against stocks with a Zacks Rank #4 (Sell) or #5 going into the earnings announcement, especially when the company is seeing negative estimate revisions. You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Stocks Poised to Beat Estimates

Here are some companies in the basic materials space you may want to consider as our model shows they have the right combination of elements required for an earnings beat this quarter:

Teck Resources Limited TECK has an Earnings ESP of +8.41% and carries a Zacks Rank #2.
 
New Gold Inc. NGD has an Earnings ESP of +166.67% and carries a Zacks Rank #2.  

Franco-Nevada Corporation FNV has an Earnings ESP of +3.05% and carries a Zacks Rank #3.

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