Freeport McMoran Results Come In Light But Outlook Remains Bright

Freeport McMoRan Copper (NYSE:FCX), the world’s largest copper miner released its Q3 2012 results on Monday, October 22. The company reported a decrease in both revenues and profits year-over-year. Quarterly revenues fell to $4.4 billion from $5.2 billion and profits to $824 million from $1.1 billion, compared to Q3 2011. As we had expected, lower realized prices of copper weighed on earnings. We had expected higher realized gold prices to lend some support to earnings. This expectation was negated a bit due to lower gold production than expected.

The quantity of copper sold stood at 922 million pounds, down marginally from 947 million pounds year-over-year. The company sold 21 million pounds of molybdenum, compared to 19 million pounds in Q3 2011. As anticipated, the quantity of gold sold showed a 50% decline as the company sold 202,000 ounces in Q3 2012, down from 409,000 ounces last year. ^[1]

While the company admitted to challenges from a slowing Chinese market and weak European demand, it said that demand for copper from the automobile and housing sectors has been picking up in the U.S. Lower production this quarter was attributed to a combination of factors such as mine sequencing, lower ore grades at the Grasberg mine, and a slow ramp-up work at the underground DOZ mine. ^[2]

See our full analysis for Freeport McMoran here

In 2012, Freeport McMoran now expects to sell 3.6 billion pounds of copper, 1 million ounces of gold and roughly 82 million pounds of molybdenum. Going forward, in 2013 the target is to sell 4.3 billion pounds of copper, 1.4 million ounces of gold and 90 million pounds of molybdenum.

Prices this quarter followed the trend we had expected. The realized copper price in the third quarter was $3.64 per pound compared to $3.60 per pound in Q3 2011. Its gold price realization averaged $1,728 per ounce in Q3 2012 compared to $1,693 per ounce in the year ago quarter. Molybdenum prices were lower than last year’s levels, averaging $13.62 per pound in Q3 2012 compared to $16.34 in Q3 2011.

Near Term Outlook

With the Chinese government expected to provide a boost to infrastructure spending, the demand for copper concentrates and copper cathodes is expected to increase. The demand from the U.S. automobile and housing sectors is picking up, even though the growth rate of the economy is lower than expected. Global inventories of copper are low. Also, supply challenges abound due to lower production from existing mines and difficulties associated with developing the few high-quality, major mines available. To top it all, companies are opting to reduce capital spending in favor of a more disciplined approach to investing. Taken together, we think that all these factors will cause the price of copper to rise gradually.

Projects On Track

The company is currently working to ramp up production at the Climax molybdenum mine and expects to produce roughly 20 million pounds of Molybdenum in 2013. The eventual aim is to increase capacity to 30 million pounds a year. The Tenke copper project in Africa remains on track and is expected to be completed in 2013. The Cerro Verde project in South America, worth $4 billion, to expand the concentrator facilities is progressing well. The management wants to expand the concentrator’s capacity from 120,000 metric tons to 360,000 metric tons of ore per day. ^[3] By 2014, the company expects to sell more than 5 billion pounds of copper per year, 1.7 million ounces of gold and 90 million pounds of molybdenum. You can examine the impact of sales volumes projected for 2012 and 2014 on the company’s Trefis valuation:

Long Term Outlook Bright

The company may continue to face short-term headwinds if copper prices remain under pressure due to slowing Chinese growth and insufficient commitment from the Chinese government to boost infrastructure spending. 

However, we are bullish on the company’s long-term outlook. 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.

Further, the Fed’s decision to keep interest rates at near-zero levels through the “Unlimited QE” program 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.

We have a Trefis price estimate for Freeport McMoran Copper of $44 which is nearly 10% above its market price. We will shortly revise our forecasts for the company in light of the latest earnings results.

Understand how a company’s products impact its stock price at Trefis

1. Freeport-McMoRan Copper & Gold’s CEO Discusses Q3 2012 Results – Earnings Call Transcript, Seeking Alpha [↩]
2. 3rd Quarter Earnings Conference Call Presentation, Freeport McMoran Website [↩]
3. Freeport-McMoRan: Is It Ready To Break Out?, Seeking Alpha [↩]