Freeport’s Q1 Profit Slumps On Labor Disputes, China Slowdown

As expected, Freeport McMoRan Copper’s (NYSE:FCX) first quarter revenues and operating income fell significantly as a result of lower production. Revenues declined by 19% year-over-year to $4.6 billion while operating income slumped by 40% to $1.7 billion. ^[1]

The quarter has been marked by lower production and sales of copper and gold triggered by labor disruptions at the company’s Indonesia mine. It realized lower average prices for copper amidst a slowdown in Chinese economic growth, offset by an increase in gold prices compared with the same period last year. The company’s increasing capital expenditures, however, should benefit the company in the long run.  Freeport is the world’s largest copper miner with mines in the U.S., South America, Indonesia and Africa. It 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).

See our full analysis for Freeport McMoran Copper

Freeport McMoRan shipped 827 million pounds of copper compared with 926 million pounds of copper in the same period last year. Production slipped due to labor disruptions at Grasberg, the world’s third largest copper mine in Indonesia. Average realized prices for copper fell to $3.82 compared with $4.31 last year, but improved from $3.46 on a sequential basis. ^[2] The company’s copper shipments forecast stands at 895 million pounds in the second quarter and 3.7 billion pounds for the full year.

Due to the aforementioned labor issues, the company’s gold volumes declined from the world’s largest gold mine to 288,000 ounces, compared to 480,000 ounces in the previous year’s first quarter. Average gold prices improved on both a year-over-year and sequential basis to $1,694. The company expects gold volumes to top 1.1 million ounces in 2012, out of which 235,000 ounces should be shipped in the second quarter.

Cautious on Near Term…

In the near term, we will be keeping a close watch on the company’s Indonesian mine, which has recently faced a host of issues including repeated labor disruptions and recent political intervention. Any further labor disruption at the mine will translate into significant production losses for the company. The dim near-term copper price outlook due to China’s reduction of its target GDP growth rate could also intensify the pain.

… But Long Term Outlook Solid

Still, we believe the company’s long term prospects are solid given the strong demand for the base metal from emerging markets. Copper consumption in China is expected to pick back up thanks to growing demand from the renewable energy sector and several other industries.  Further, rising input costs have made mining more expensive, thus discouraging large mining investments. This is causing the demand-supply gap to widen.

Gold should also continue its bull run given the high inflationary expectations.

Freeport’s Spending Plan Intact

The company’s capital expenditures increased to $707 million from $505 million in Q1 2011 as the company continues to expand its copper and gold mining operations, which should help it tap the expected increase in demand. The company expects to spend $4.3 billion in 2012, including $2.7 billion for major projects and $1.6 billion for sustaining capital.

Among the company’s many expansions plans, a major one is to expand the ore processing capacity at its Cerro Verde mine. The project is expected to be completed by 2016 with total capacity from the facility reaching 1 billion pounds of copper annually.  This should significantly boost its copper production from its South American mines.

Our current price estimate for Freeport McMoran stands at $44, implying a premium of about 20% to the current market price.

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1. Freeport-McMoRan Copper & Gold Inc. Reports First-Quarter 2012 Results, FCX News Releases, April 19 2012 [↩]
2. Freeport-McMoRan Copper & Gold Inc. Reports Fourth-Quarter and Year Ended December 31, 2011 Results, FCX News Releases, Jan 19 2012 [↩]