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

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Freeport McMoRan Copper (NYSE:FCX), the world’s largest publicly traded copper company, released its Q4 2013 results on Wednesday, January 22. As expected, lower prices of gold and copper impacted results negatively but higher production volumes more than compensated for a fall in prices. Freeport reported revenues of $5.89 billion compared to $4.51 billion in Q4 2012. Net income for the fourth quarter stood at $707 million, slightly lower than the $743 million recorded a year ago. Profits fell despite higher revenues as the company was impacted negatively by oil-and-gas derivative contracts and other one-time items.((Freeport McMoran Q4 2013 8-K, SEC))

The financial figures for the fourth quarter this year are inclusive of Freeport’s newly acquired oil and gas business. Revenues from oil and gas constituted $1.1 billion of the total $5.89 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 has raised its capital expenditure target for 2014 to $7.1 billion from $5.3 billion in 2013. It forecasts higher sales volumes for copper, gold, molybdenum as well as oil and gas in the coming year. ((Freeport McMoran Q4 2013 Earnings Conference Call, Seeking Alpha))

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See our full analysis for Freeport McMoran here

Quarterly Performance

The company reported net income of $707 million compared to $743 million in Q4 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 $1,639 million in Q4 2013 as compared to $1,447 million in Q4 2012 for the mining segment. The oil and gas business contributed another $112 million to operating income in Q4 2013.

The average realized price of copper stood at $3.31/pound compared to $3.6/pound in Q4 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. An expected supply surplus situation will not allow copper prices to rise going ahead. ((METALS-London copper drifts lower as China GDP growth cools, CNBC))

Freeport sold 1.14 billion pounds of copper in the quarter, which was higher than the previous year’s comparable figure of 972 million pounds. This was primarily due to higher production from Indonesia as a result of return to higher grade ore. Production rose from 200 million pounds in Q4 2012 to 317 million pounds in Q4 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 512,000 ounces were higher than the 254,000 ounces reported in Q4 2012 due to higher ore grades in Indonesia. The average realized price for gold stood at $1,220 per ounce, which is lower than the price of $1,681 per ounce in Q4 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 16.6 million barrels of oil equivalent (MMBOE) in the third quarter, which is the second full quarter of production for the division after commencement in June. This included 11.7 million barrels of oil, 22.9 billion cubic feet of natural gas and 1.1 million barrels of natural gas liquids. The company realized a price of $92.68 per BOE sold. [1]

Future Growth And Outlook

Freeport forecasts sales of 4.4 billion pounds of copper, 1.7 million ounces of gold, 95 million pounds of molybdenum and 60.7 MMBOE of oil and gas in 2014. These forecasts assume that there will be no impact on shipments from the ongoing dispute with the Indonesian government over a new export duty. The government has levied a new export duty of 25% for 2014 which will increase to 60% in 2016. While detailed regulations are still being prepared, Freeport is assuming that the duty will be levied on revenues and not profits which will render export economically unviable. Furthermore, this new duty violates the contract signed by the company with the Indonesian government which clearly states that no additional taxes, duties or fees will be imposed on the company apart from those mentioned in the contract.

Freeport says that it is working with the government and waiting for detailed regulations to be declared. It has also not received approvals for exports in 2014 and will provide updates to investors when available. In the mean time, the company expressed confidence in the conference call that it would be able to eventually resolve the issue so is going ahead with its capital expenditure plans in Indonesia. [2]

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 $1 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, $1.5 billion of the budgeted $4.6 billion has been spent.

We have a Trefis price estimate for Freeport McMoran Copper of $29, which represents 13% downside to the market price. This will be updated shortly in view of the latest earnings results.

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Notes:
  1. Freeport McMoran Q4 2013 Earnings Presentation, Freeport Website []
  2. Freeport Defers Indonesian Exports Amid Permit Delays, Bloomberg []