Weak Copper Prices And Grasberg Shutdown Will Impact Freeport’s Revenues

Freeport McMoRan Copper (NYSE:FCX), the world’s largest copper miner, is set to release its Q3 earnings on Tuesday, October 22. The majority of the company’s revenues are derived from copper sales, which is extremely sensitive to cyclical industries such as construction and industrial machinery manufacturing. These industries in turn are heavily influenced by the macroeconomic sentiment and outlook. Macroeconomic factors in the third quarter have shown some improvement, especially as far as China is concerned. Therefore, copper prices on the London Metal Exchange increased gradually throughout the third quarter. Still, Freeport is likely to report lower year-over-year copper revenues due to much lower prices in Q3 2013 as compared to Q3 2012. ^[1]

However, supply disruptions this year are now expected be much below historical levels. This will lead to a higher supply surplus than earlier expected. A higher surplus, in turn, will lead to lower copper prices going forward, thus having a negative impact on Freeport’s revenues.

We have a Trefis price estimate for Freeport McMoran Copper of $31, which represents 11% downside to the market price.

See our full analysis for Freeport McMoran here

Effect Of Macroeconomic Factors On Copper Prices

Copper is often called “Dr. Copper” for being a bellwether of the world economy due to its close correlation with economic growth. It is used by many industries and prices typically rise when the world economy is growing. Hence, macroeconomic factors are important for copper and Freeport.

Going by the copper price data on the London Metal Exchange (LME), the average realized price of copper for Freeport is likely to be lower this quarter on a year-over-year and sequential basis. While copper prices on the LME inched upwards continuously in the third quarter after bottoming out at the end of June, the average price level was lower than in the previous quarter.

The upward price trend in the third quarter is in line with the Chinese GDP growth rate of 7.8% for the quarter. The third quarter growth rate was higher than the growth rates of 7.7% and 7.5% observed in the first two quarters respectively. ^[2]

Impact Of Grasberg Shutdown

Volumes sold are not likely to be higher year-over-year, especially with the Grasberg open-pit mine still functioning at 85% of its production capacity and the underground mine remaining closed. Operations at Grasberg had remained halted for many weeks in the second quarter, following two accidents which resulted in worker fatalities. Since the underground mine at Grasberg accounts for nearly 36% of Freeport’s total production of 220,000 tonnes of copper, the negative impact on revenues in the third quarter could be substantial. ^[3]

Pay Negotiations Nearly Complete

Pay negotiations between Freeport and workers in Indonesia for 2013-15 are nearly done and the company has stated that a tentative agreement has been reached. Freeport has faced considerable labor problems at its Grasberg operations in the past, with workers resorting to strikes and indulging in violent clashes with the police over compensation issues. The company employs around 24,000 workers in Indonesia and of these, three-quarters are union members. The final agreement will be applicable with retrospective effect from October 1, 2013. ^[4]

Peaceful and non-acrimonious conclusion of pay negotiations will ensure that Freeport’s operations are not disrupted going forward. Negotiations were expected to be quite difficult this year for Freeport because of safety concerns that arose due to recent accidents, which resulted in the deaths of many workers.

In the earnings conference call, we would be interested in Freeport’s take on reports that copper prices are likely to fall going ahead because supply disruptions this year are at their lowest in a decade, thus exacerbating the supply surplus situation. ^[5]

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1. LME Copper Prices, LME [↩]
2. China Q3 growth picks up to 7.8 pct, Reuters [↩]
3. Freeport, unions edge closer to wage and benefits deal, Jakarta Post [↩]
4. Freeport Indonesia, union reach tentative agreement in pay talks, Reuters [↩]
5. Copper disruptions hit decade low, Financial Times [↩]