Freeport McMoran: Higher Production Compensates For Lower Copper And Gold Prices

Freeport McMoRan Copper (NYSE:FCX), the world’s largest publicly traded copper company, released its Q3 2013 results on Tuesday, October 22. As expected, lower prices of gold and copper impacted results negatively but higher production volumes more than compensated for a fall in prices. Although the Grasberg mine in Indonesia reported higher production than last year, the output would have been much higher if not for the shutdown in the previous quarter. The production at Grasberg hasn’t been fully restored yet. Freeport reported revenues of $6.2 billion compared to $4.4 billion in Q3 2012. Net income for the third quarter stood at $821 million, slightly lower than the $824 million recorded a year ago. ((Freeport McMoran Q3 2013 8-K, SEC))

The financial figures for the third quarter this year are inclusive of Freeport’s newly acquired oil and gas business. Revenues from oil and gas constituted $1.18 billion of the total $6.2 billion, implying that the year-over-year revenue increase from the company’s core mining business is not as steep as it seems.

The company sounded upbeat about its long-term prospects in both the copper and oil and gas businesses. It will continue to invest in developing its assets, and the capital expenditure plans outlined in the previous quarter remain unchanged. Freeport maintained its sales forecasts for copper and gold for the year while it raised the forecast for oil and gas slightly. ((Freeport McMoran Q3 2013 Earnings Conference Call, Seeking Alpha))

We have a Trefis price estimate for Freeport McMoran Copper of $29 after the latest results which represents a 15% downside to the current market price.

See our full analysis for Freeport McMoran here

Quarterly Performance

The company reported net income of $821 million compared to $824 million in Q3 2012. The quarterly profits are not really comparable to the previous year’s figure. Freeport didn’t have an oil and gas division last year. A comparison at the operating income level would be fair, given that the breakdown between mining and oil and gas businesses is available for this. Freeport reported operating income of $1,502 million in Q3 2013 as compared to $1,476 million in Q2 2012. The oil and gas business contributed another $274 million to operating income in Q3 2013.

The average realized price of copper stood at $3.28/pound compared to $3.64/pound in Q2 2012. The price of copper is influenced to a great extent by macroeconomic forces. China, which accounts for nearly 40% of the world’s copper consumption, has reported a lower overall economic growth rate this year, as compared to 2012. The country is reorienting its economy away from an investment-led growth model towards higher domestic consumption. Although growth picked up in the third quarter following monetary stimulus by the government, a supply surplus situation will not allow copper prices to rise going ahead. ((China Q3 growth picks up to 7.8 pct, Reuters))

Freeport sold 1,041 million pounds of copper in the quarter, which was higher than the previous year’s comparable figure of 922 million pounds. This was primarily due to higher production from Indonesia as a result of return to higher grade ore. Production rose from 495 million pounds in Q2 2012 to 611 million pounds in Q3 2013. Sales were also higher on a year-over-year basis because of higher production from North and South America as well as Africa.

Gold sales of 305,000 ounces were about 50% higher than 202,000 ounces in Q3 2012 due to higher ore grades in Indonesia. The average realized price for gold stood at $1,329 per ounce, which is lower than the price of $1,728 per ounce in Q3 2012. The price of gold this year has been responding primarily to the U.S. Federal Reserve Bank’s policy announcements about the ongoing quantitative stimulus program.

The oil and gas operations yielded 16.5 million barrels of oil equivalent (BOE) in the third quarter, which is the first full quarter of production for the division after commencement in June. This included 11.5 million barrels of oil, 23.6 billion cubic feet of natural gas and 1 million barrels of natural gas liquids. The company realized a price of $80.93 per BOE sold. ^[1]

Future Growth And Outlook

At Grasberg, over the next 2-3 years, Freeport plans to transition to only underground mining operations from the present mix of open-pit and underground mining. Underground mining costs less, so over time we expect margins to improve significantly at this crucial mine.

Freeport is also concentrating on three major brownfield projects to add about 1 billion pounds of copper by 2016 to its existing production level. The Phase II expansion at Tenke Furugame is complete and the company has so far spent $0.7 billion out of the $0.9 billion budgeted for the site. The mine is expected to produce an extra 150 million pounds of copper as a result of the expansion. At Morenci Mill, Freeport has already spent $0.8 billion out of the budgeted amount of $1.6 billion. The project is expected to start producing an additional 225 million pounds of copper 2014 onwards. At Cerro Verde, production is expected to commence in 2016 and add almost 600 million pounds of copper every year. So far, $1.1 billion of the budgeted $4.6 billion has been spent.

Freeport has maintained the sales outlook for 2013. It is projecting copper sales of 4.1 billion pounds. Sales of gold, molybdenum and oil are expected to stand at 1.1 million ounces, 92 million pounds and 37.5 million BOE, respectively. The forecast for the oil and gas division is a bit higher than the previous quarter’s forecast of 35 million BOE.

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1. Freeport McMoran Q3 2013 Earnings Presentation, Freeport Website [↩]