Freeport McMoRan Copper (NYSE:FCX), the world’s largest copper miner, is set to release its first quarter earnings on Thursday. The quarter has been marked by volatility and uncertainty in commodity prices amidst decelerating growth in the Chinese economy and encouraging reports about the U.S. economy. We expect lower production and sales of copper and gold, triggered by labor disruptions at the company’s Indonesia mine. Higher input costs and expenses could impact margins to some extent even as copper prices have recovered in the first quarter. Freeport is a global miner with mines in the U.S., South America, Indonesia and Africa and has a product portfolio spanning basic metals like copper, gold and molybdenum. It competes with other mining companies like Vale (NYSE:VALE), Newmont Mining (NYSE:NEM) and Barrick Gold (NYSE:ABX).
Our current price estimate for Freeport McMoran stands at $45, implying a premium of about 20% to the current market price.
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Labor disruptions to hurt sales volume
The company has been grappling with a host of issues at its Grasberg mine in Indonesia. After witnessing 13% and 26% respective declines in copper and gold volumes in 2011 as a result of the three month labor strike last October, the company was once again forced to lower its production outlook for this quarter as fighting among disgruntled workers caused a two week suspension in February. The company reduced its Q1 copper sales volume outlook to 795 million pounds, and its gold sales volume outlook was reduced by to 300,000 ounces.
Copper Rises, Gold Loses Steam
We expect Freeport to record higher average realized prices for copper as base metal prices were up 11% at the London Metal Exchange in the first quarter. Higher realized prices should offset some of the company’s production losses.
Gold, however, has lost some of its luster this year though the precious metal has managed to recover some of its early losses. Gold struggled to cross $1,800 per ounce in the first quarter and fell back to about $1,650 per ounce in March.
Long Term Outlook Bright
Overall, we expect Freeport to maintain positive momentum as copper demand from China will likely remain strong in the long-term despite some near-term shocks from the country’s reduction of its target GDP growth rate. We believe importers will start re-stocking copper in the second half of the year, which will allow for strong copper prices going forward.
Should there be no further labor disruptions, the company could achieve its full year target through stepping up production capacity in Q2, which will allow it to make up for lost volumes. Further, the Fed’s decision to keep interest rates at near-zero levels should help gold continue its run. Freeport’s investment in the expansion of its mining operations should also prove beneficial to the company in the long run.