Freeport: Lower Copper And Gold Prices And Lower Copper Shipments Affect Q1 Results

Freeport McMoran Copper released its Q1 2014 results on Thursday, 24 April. As expected, lower realized copper and gold prices as well as reduced shipments of copper and gold from its Indonesian operations negatively impacted results. The company acquired oil and gas assets in Q2 2013. Thus, an apples to apples comparison between quarterly results with the year ago period is not possible. Freeport reported revenues of $4.96 billion this quarter as compared to $4.58 billion in Q1 2013. Net income stood at $510 million this quarter as compared to $648 million in Q1 2013. ^[1]

Revenues from the oil and gas business stood at $1.25 billion in the first quarter. Revenues from mining operations stood at $3.72 billion this quarter as against $4.58 billion last quarter.

Freeport gave lower sales forecasts for 2014 for copper and gold as compared to its previous guidance in view of the unresolved Indonesian situation. It sounded optimistic on the possibility of a resumption on exports from the country in May. The company gave marginally higher sales forecasts for molybdenum and oil and gas for 2014 as compared to the previous guidance. The company maintained its capital expenditure target for the year.

You can check out our complete analysis for Freeport here:

Quarterly Performance

The company reported $510 million in net income this quarter as compared to $648 million in Q1 2013. As net income this year includes contribution from the oil and gas business, it is not comparable to the Q1 2013 figure. However, the company provides a breakdown between the mining and the oil and gas division at the operating income level. A comparison at this level is more suitable. Freeport reported operating income from mining operations of $878 million as against $1.43 billion in Q1 2013. The oil and gas business contributed $233 million to operating income.

The average realized price of copper stood at $3.14 per pound as against $3.51 per pound in the corresponding period last year. Copper prices are largely determined by macroeconomic factors. China is the largest consumer of copper in the world, accounting for nearly 40% of the total world consumption of copper. The prices of the metal are to a large extent influenced by Chinese demand for it. Slower economic growth in China has led to a moderation in copper prices. According to data from China’s National Bureau of Statistics growth in investment, factory output and retail sales has slowed to multi-year lows in the first two months of the year. The Chinese leadership has proposed structural reforms of the economy, shifting the emphasis from an investment and export driven growth to services and consumption led growth. Such a transformation of the Chinese economy may negatively impact Chinese demand for copper in the long run.  Lower demand for copper has resulted in an oversupply situation which is likely to keep prices depressed.

Average realized gold prices stood at $1,300 per ounce as against $1,606 in Q1 2013. Gold prices have fallen sharply over the course of the last year, reacting to cues from the Federal Reserve regarding QE tapering.

First quarter consolidated copper sales stood at 871 million pounds. This was lower than sales of 954 million pounds in the corresponding period last year and the January estimate of 1 billion pounds. This is primarily as a result of 125 million pounds in deferred exports from Indonesia.

First quarter consolidated gold sales stood at 187,000 ounces. This was lower than sales of 214,000 ounces in the corresponding period last year and the January estimate of 325,000 ounces. This is primarily as a result of 140,000 in deferred exports from Indonesia.

Oil and gas sales volumes were 16.1 million barrels of oil equivalent (MMBOE). These were higher than January forecast values of 15.2 MMBOE due to higher production volumes from the company’s Eagle Ford assets, continuing strong performance in the Gulf of Mexico and stable production from California. Average realized prices in the first quarter were $93.76 per barrel for oil, net of $4.86 per barrel associated with payments on derivative contracts. ^[2]

The Indonesian Situation

A law enacted in Indonesia in 2009 banned exports of unprocessed minerals from the country with effect from January 12, 2014. The intent behind this law was to provide a boost to development of the Indonesian mineral processing industry and simultaneously increase the value of the country’s commodity exports. Though last minute changes to the export ban permitted Freeport’s copper concentrate exports, the government also imposed an export duty of 25% which will rise to 60% by 2016. Freeport contends that this violates its agreement with the Indonesian government. The company halted its exports from Indonesia in January pending negotiations with the government over these regulatory changes. Though the Indonesian government has recently displayed some leniency in its stance on the tax issue, it has still not been resolved. Freeport is yet to resume its exports of copper concentrate. Indonesia accounted for over 20% of Freeport’s consolidated copper production in 2013. ^[3]

As a result of the delay in obtaining approvals for resumption of exports from Indonesia, Freeport implemented changes to its operations. During Q1 2014, the milling rate at Freeport’s Indonesian operations averaged 118,000 metric tons of ore per day, which is approximately half of normal rates.

If Freeport is unable to conduct normal operations for an extended period, it intends to implement plans to reduce operating costs, defer capital expenditures and implement workforce reductions.

Outlook

Freeport expects consolidated sales for 2014 of approximately 4.3 billion pounds of copper, 1.6 million ounces of gold, 97 million pounds of molybdenum and 64.2 MMBOE oil and gas sales. The previous forecast was for 4.43 billion pounds of copper, 1.75 million ounces of gold, 95 million pounds of molybdenum and 60.7 MMBOE oil and gas sales. The revised shipment figures assume that Freeport will be able to resume normal operations in Indonesia by May 2014. If this does not happen it would result in a deferral of approximately 50 million pounds of copper and 80 thousand ounces of gold shipments per month. However, the company management appears optimistic about resumption of normal operations in Indonesia by May.

Capital expenditures for 2014 are expected to be approximately $7 billion. This consists of $3 billion for major projects at mining operations and $3 billion for oil and gas operations. Major projects in mining operations for the year 2014 primarily include the expansions at Cerro Verde in Peru and Morenci in New Mexico, and underground development activities at Grasberg in Indonesia. Capital expenditures for oil and gas operations will majorly be incurred at the Deepwater Gulf of Mexico and Eagle Ford operations.

We have a $29.33 price estimate for Freeport McMoran Copper, which represents a 13.5% discount to market prices. This will be revised shortly.

1. Freeport McMoran Q1 2014 Earnings Conference Call, Seeking Alpha [↩]
2. Freeport McMoran Copper 8-K, SEC [↩]
3. Indonesian Government Relaxes Its Stance in Tax Dispute with Freeport and Newmont, Forbes [↩]