Higher North American Copper Shipments Offset Impact of Stalled Indonesian Exports on Freeport’s Q2 Results

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Freeport McMoran Copper and Gold (NYSE:FCX) released its Q2 2014 results on Wednesday, July 23. The company reported revenues of $5.52 billion in Q2 2014, as compared to $4.29 billion in the corresponding period a year ago. However, the company’s overall revenues are not comparable with the year ago period, as it started reporting revenues from its oil and gas division only from June 2013 onwards. Freeport’s revenues from its mining operations rose to $4.29 billion in Q2 2014 from $3.95 billion in the corresponding period a year ago. [1] Higher copper shipments from its North American and African copper mining operations offset the impact of lower lower shipments from the company’s Indonesian operations, where the company’s exports have been suspended.

The company management revised its outlook on shipments for 2014, in view of its stalled exports in Indonesia. It also gave an update on its negotiations with the Indonesian government and is hopeful of a swift resumption of exports from the country.

See our complete analysis for Freeport McMoran


Quarterly Performance

The company reported a net income of $660 million in the second quarter this year, as compared to $610 million in Q2 2013. As the last year’s figure only incorporates the contribution of the oil and gas division for one month, the two figures are not really comparable. A comparison at the divisional operating income level is more appropriate. Freeport reported operating income from mining operations of $986 million in the second quarter, which was higher than the figure of $710 million reported for the corresponding period last year. Freeport derives the majority of its mining revenues from copper. With average realized copper prices for the second quarter standing at $3.16 per pound, virtually flat as compared to $3.17 per pound in the corresponding period last year, higher shipments and lower costs have resulted in higher operating income from mining operations. ((Freeport McMoran’s Q2 2014 Earnings Release, SEC))

Consolidated copper sales for the second quarter stood at 968 million pounds, as compared to 951 million pounds in the corresponding period a year ago. However, this was lower than the company’s April estimate of 1.1 billion pounds of copper shipments, which assumed a resumption in exports from Indonesia in May. Copper shipments from the company’s North American operations stood at 423 million pounds in the second quarter this year, as compared to 372 million pounds in the corresponding period last year. This reflected the mining of higher ore grades and higher milling rates at several sites, including the start-up of activities at the expanded mill at the Morenci mining site. Shipments at the company’s African operations were higher at 118 million pounds in the second quarter this year, as compared to 106 million pounds in the corresponding period last year, mainly due to the favorable timing of shipments. Higher shipments from the North American and African operations offset lower shipments from the company’s Indonesian operations. Restrictions on the company’s exports from Indonesia resulted in a fall in copper shipments from 158 million pounds in Q2 2013 to 117 million pounds  in Q2 2014. The export restrictions resulted in the deferral of 150 million pounds of copper shipments in the second quarter. ((Freeport McMoran’s Q2 2014 Earnings Release, SEC))

Consolidated gold shipments in the second quarter this year stood at 159,000 ounces, which is lower  than the corresponding Q2 2013 figure of 173,000 ounces and the the company’s April estimate of 320,000 ounces, which assumed a resumption in exports from Indonesia in May. Export restrictions in Indonesia led to the deferral of 240,000 ounces of gold shipments in the second quarter. ((Freeport McMoran’s Q2 2014 Earnings Release, SEC))

Operating income for the mining division was also boosted by a reduction in unit costs. Consolidated average unit cash costs, net of by-product credits, for the company’s copper mining operations stood at $1.72 per pound of copper in the second quarter this year, as compared to $1.85 per pound in the corresponding period a year ago. This was primarily because of higher North American shipment volumes. However, Q2 2014 consolidated average unit net cash costs excluded $0.06 per pound of copper for fixed costs charged directly to cost of sales as a result of the impact of export restrictions on operating rates at the company’s Indonesian operations. ((Freeport McMoran’s Q2 2014 Earnings Release, SEC))

For the oil and gas division, shipments stood at 16.0 million barrels of oil equivalent (MMBOE) in the second quarter this year, including 11.7 million barrels (MMBbls) of crude oil, 20.3 billion cubic feet (Bcf) of natural gas and 1.0 MMBbls of natural gas liquids (NGLs). This is higher than the company’s April estimate of 15.2 MMBOE, primarily because of higher production from the Eagle Ford and Deepwater Gulf of Mexico (GOM) assets. ((Freeport McMoran’s Q2 2014 Earnings Release, SEC))

The oil and gas division’s cash operating margins were stable at $57.96 per BOE in the second quarter this year as compared to $57.79 per  BOE in the corresponding period last year. Realized revenues were higher in the second quarter this year, standing at $77.53 per BOE, as compared to $74.37 in the corresponding period last year. However, the effect of higher realized prices was offset by higher cash production costs. Cash production costs for the oil and gas operations stood at $19.57 per BOE in Q2 2014, which were higher than cash production costs of $16.58 per BOE in June 2013, primarily because of higher operating costs in California.((Freeport McMoran’s Q2 2014 Earnings Release, SEC))

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 the development of the Indonesian mineral processing industry and simultaneously increase the value of the country’s commodity exports. However, last minute changes to the law deferred the ban on exports to 2017. Exports of copper concentrate were permitted, but under new rules. The government introduced new regulations in order to get an export permit and also imposed an export duty of 25%, which will rise progressively to 60% by 2016. Freeport contends that the export tax violates the terms of its investment agreement, or contract of work, with the Indonesian government. The company halted its exports from Indonesia in January pending negotiations with the government over these regulatory changes. [2]

The company management gave an update on its negotiations with the Indonesian government in its earnings conference call. Freeport has recently reached an agreement with the government over a memorandum of understanding (MoU). The company expects the MoU to be signed soon and exports to resume after that. Under the terms of the MoU, the company is to provide a $115 million assurance bond for the construction of new smelting capacity. Freeport will have to pay an export duty until 2016, but at lower rates than those imposed in January and which would decline as smelter construction progresses. The company will also have to pay a royalty of 4% for copper sales, up from 3.5% currently, and 3.75% for gold sales, up from 1% currently.  ((Freeport’s Q2 2014 Earnings Conference Call Transcript, Seeking Alpha))

Outlook

Freeport has revised its shipment figures for 2014, in view of its stalled exports from Indonesia. The company now expects consolidated sales for 2014 of approximately 4.1 billion pounds of copper, 1.3 million ounces of gold, 98 million pounds of molybdenum and 58.4 MMBOE of oil and gas sales. The previous forecast at the end of April, was for 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. [3] The revised shipment figures assume that Freeport will be able to resume normal operations in Indonesia by August 2014. If this does not happen it would result in a deferral of approximately 50 million pounds of copper and 80,000 ounces of gold shipments per month. Lower expected oil and gas shipment figures for 2014 reflect the sale of the company’s Eagle Ford shale assets in the second quarter.

Capital expenditures for 2014 are expected to be approximately $7.6 billion. This consists of $4.2 billion for the company’s mining operations and $3.4 billion for its oil and gas operations. Major projects in mining operations for 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 for 2014 will include $1.8 billion to be incurred at the Deepwater Gulf of Mexico operations and $0.7 billion for the Inboard Lower Tertiary/Cretaceous natural gas trend. ((Freeport McMoran’s Q2 2014 Earnings Release, SEC))

The company is targeting a reduction in its debt figure to $12 billion by 2016. Freeport’s total debt stood at $19.7 billion at the end of Q2 2014. The company’s strategy to reach this target include asset sales and disciplined capital allocation in order to boost cash flows. ((Freeport’s Q2 2014 Earnings Presentation, Freeport Website))

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Notes:
  1. Freeport McMoran’s Q2 2014 Earnings Release, SEC []
  2. Indonesian Government Relaxes Its Stance in Tax Dispute with Freeport and Newmont, Forbes []
  3. Freeport’s Q2 2014 Earnings Presentation, Freeport Website []
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