Freeport Earnings Preview: Higher Volumes To Boost Copper Mining Results

Freeport McMoran Inc. (NYSE:FCX) will report its third quarter results and conduct a conference call with analysts on October 28. We expect higher volumes from the company’s Morenci copper mine in Arizona to positively impact the results of its copper mining operations on a year-over-year basis. However, lower oil prices will weigh on the results of the company’s oil and gas division. Freeport announced the resumption of its mineral exports from Indonesia in August, ending a near seven month suspension of its exports from the country. ^[1] The company had been negotiating with the Indonesian government over new regulations governing mineral exports from the country that came into effect in January. The resumption of exports, albeit under new regulations, will positively impact the company’s flagging copper shipment volumes from its Indonesian mining operations.

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Copper Mining Operations

Freeport will report higher copper shipments in the third quarter as compared to the corresponding period a year ago. The company’s copper shipments will be boosted by the ramp up of milling rates at the expanded Morenci Mill, located in Arizona. Higher volumes from Freeport’s North American copper mining operations will more than make up for the loss in volumes from Indonesia as a result of suspended exports in July. The North American copper mining operations are expecetd to report copper shipments of around 900 million tons of copper in the second half of 2014, as compared to around 700 million tons in the corresponding period last year. ^[2] Restrictions on the company’s exports from Indonesia resulted in a fall in copper shipments from its Indonesian operations from 158 million pounds in Q2 2013 to 117 million pounds  in Q2 2014. ^[2] The export restrictions in Indonesia  resulted in the deferral of 150 million pounds of copper and 240,000 ounces of gold shipments in Q2 2014. ^[2] With the resumption of the company’s exports from Indonesia, shipment volumes will rise significantly.

Copper prices in the third quarter this year are at similar levels as in the corresponding period a year ago. London Metal Exchange (LME) spot copper prices averaged roughly $7,000 per ton in Q3 this year, as well as in the corresponding period last year. ^[3] With Freeport expected to report higher copper shipments in the third quarter on a year-over-year basis, we expect the company’s copper mining revenues, which constitute the bulk of its revenues, to rise.

Oil and Gas Operations

Freeport’s Oil and Gas division is expected to report lower year-over-year quarterly revenues and profits, as a result of lower volumes as well as realized prices in the third quarter, as compared to the corresponding period last year. The company sold off its Eagle Ford shale assets in the second quarter. The Eagle Ford shale assets accounted for 4 million barrels of oil equivalents ^[4], or 25% of the company’s second quarter oil and gas sales of 16 MMBOE. ^[2] Price realizations for its Oil  and Gas divsion will fall on a year-over-year basis due to a fall in oil prices. Brent Crude spot prices averaged roughly $110 per barrel in the third quarter of 2013, as compared to around $100 per barrel in the third quarter of this year. ^[5]

Oil prices have declined recently due to an oversupply situation. Oil supply has been boosted by rising oil and gas output from the U.S., where hydraulic fracturing techniques have helped boost output. In addition, major oil producers of the Organization of the Petroleum Exporting Countries (OPEC) have not lowered output in response to falling prices, in order to preserve their market shares. ^[6] Demand for oil remains weak in the midst of economic weakness in Europe and slowing Chinese growth. China, the world’s largest importer of oil, is expected to witness a slowdown in GDP growth to 7.3% and 7.1% in 2014 and 2015 respectively, from 7.7% in 2013. ^[7]. Lower oil prices will negatively impact the procpects of Freeport’s Oil and Gas division.

Other Developments

Earlier on in the month, the company had announced the sale of its Candelaria and Ojos del Salado copper mines in Chile to Lundin Mining Corporation for $1.8 billion and a contingent consideration of up to $0.2 billion. These mines accounted for around 10% of the company’s consolidated copper production of approximately 4.13 billion pounds of copper in 2013. ((Freeport McMoran’s 2013 10-K, SEC)) As on December 31, 2013, the mining complex accounted for 3.4 billion pounds in proven and probable reserves, which translates into roughly 3% of the company’s consolidated proven and probable reserves. ^[8] The company estimates that it would realize after-tax net proceeds of approximately $1.5 billion from the transaction, excluding the contingent consideration. ((Freeport-McMoRan Announces Agreement to Sell Its Interests in Candelaria/Ojos for $1.8 Billion in Cash Plus up to $0.2 Billion in Contingent Consideration, Freeport McMoran News Release)) The focus of this transaction is to use the proceeds to pare down the company’s heavy debt burden. At the end of the second quarter, the company’s total debt stood at $20.3 billion, with around $1.5 billion in cash and cash equivalents. ^[2] The company is targeting a reduction in its total debt to $12 billion by the end of 2016. ^[8] Thus, there is still a long way to go for Freeport in its debt reduction efforts.

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1. Freeport Indonesia says copper exports resumed as tax dispute ends, Reuters [↩]
2. Freeport McMoran’s Q2 2014 10-Q, SEC [↩] [↩] [↩] [↩] [↩]
3. LME Copper Prices, LME [↩]
4. MMBOE [↩]
5. Europe Brent Spot Price FOB, U.S. Energy Information Administration [↩]
6. Global Oil Glut Sends Prices Plunging, Wall Street Journal [↩]
7. Goldman Sachs cuts China growth forecast sharply, Market Watch [↩]
8. Freeport McMoran’s 2013 10-K, SEC [↩] [↩]