Lower Copper And Oil Prices Weigh On Freeport’s Q3 Results

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Freeport McMoran Inc. (NYSE:FCX) released its third quarter results and conducted a conference call with analysts on Tuesday, October 28. The company reported revenues of $5.70 billion in Q3 2014, as compared to $6.17 billion in the corresponding period a year ago. Operating income for the third quarter, excluding the impact of a $308 million impairment charge on the company’s oil and gas assets, stood at $1.44 billion, as compared to $1.71 billion in the corresponding period a year ago. [1] As expected, the company reported higher copper production and shipments on a year-over-year basis, driven by higher volumes from the company’s Morenci mine in Arizona. However lower year-over-year copper and oil prices negatively impacted the company’s results. In addition, the sale of the company’s Eagle Ford shale assets lowered the company’s revenues form its Oil and Gas division.

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Mining Operations

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Freeport’s mining revenues fell from $4.99 billion in Q3 2013 to $4.71 billion in Q3 2014. Operating income for mining operations fell from $1.5 billion in Q3 2013 to $1.34 billion in Q3 2014. [1] This was primarily due to a fall in average realized copper prices offsetting the impact of hugher shipments.

The company’s copper shipments rose roughly 3.5% from 1.04 billion pounds in Q3 2013 to 1.08 billion pounds in Q3 2014. [1] This was primarily due to higher volumes from the Morenci mine in Arizona due to the ramp up of milling rates at the expanded Morenci mill. As a result, shipments from Freeport’s North American copper mining operations rose to 436 million pounds in Q3 2014 from 363 million pounds in Q3 2013. [1] However, the higher shipments from North America were partially offset by lower shipments from the company’s South American copper mining operations, where shipments fell from 323 million pounds in Q3 2013 to 271 million pounds in Q3 2014, due to mining of lower grades at the Candelaria and Cerro Verde mines. [1]

Freeport’s average realized copper price for Q3 2013 stood at $3.12 per pound, as compared to $3.28 per pound in the corresponding period last year. [1] Copper has diverse applications in industry, particularly in the manufacturing, power and infrastructure sectors. The decline in copper prices was mainly due to concerns over copper demand from China, due to recent signs of economic sluggishness. China is the world’s largest consumer of copper, accounting for nearly 40% of the world’s demand of copper. ((Copper Ends at 5-Month Low on China Worries, Wall Street Journal)) The weak Chinese economic prospects are captured by the Manufacturing Purchasing Managers’ Index (PMI). The Manufacturing Purchasing Managers Index (PMI) measures business conditions in the manufacturing sector of the concerned economy. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction. Chinese Manufacturing PMI, reported by China’s National Bureau of Statistics, stood at 51.1 for September, and has ranged between 50.2 and 51.7 for the whole year. [2] The weak PMI numbers are indicative of sluggishness in the Chinese economy. China’s GDP growth is expected to slow to 7.3% and 7.1% in 2014 and 2015 respectively, from 7.7% in 2013. [3] Further, a proposed structural transformation of the economy from investment and export-led growth to consumption-driven growth may lower Chinese demand for copper in the long run. ((China Premier Warns On Economic Slowdown As Data Fans Stimulus Talk, Reuters)

The company’s operating margins were boosted by a reduction in unit costs. Consolidated average unit cash costs for Freeport’s copper mines stood at $1.34 per pound of copper in Q3 2014, as comapred to $1.46 per pound in Q3 2013, primarily because of higher by-product credits. [1]

Oil and Gas Operations

Freeport’s oil and gas revenues fell from $1.18 billion in Q3 2013 to $0.99 billion in Q3 2014. [1]  This was mainly due to a fall in shipment volumes due to the sale of the company’s Eagle Ford shale assets in Q2. Shipment volumes for the oil and gas division stood at 12.5 million barrels of oil equivalent (MMBOE) in the third quarter this year, including 8.6 million barrels (MMBbls) of crude oil, 20.2 billion cubic feet (Bcf) of natural gas and 0.6 MMBbls of natural gas liquids (NGLs). Shipment volumes stood at 16.5 MMBOE in Q3 2013. [1] Operating income for the oil and gas division, excluding impairment charges, fell from $274 million in Q3 2013 to $158 million in Q3 2014. [1] This was primarily due to a fall in average realized prices for the Oil and Gas divison. In addition, the sale of the low cost Eagle Ford shale assets has resulted in an increase in the Oil and Gas division’s cash production costs from $16.80 per BOE in Q3 2013 to $20.93 per BOE in Q3 2014. [1]

The Oil and Gas division’s average realized price for crude oil fell from $104.33 per barrel in Q3 2013 to $88.58 per barrel in Q3 2014. Oil prices have declined recently due to an oversupply situation. [1] 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. [4] 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. [5].

Outlook

Freeport has revised its shipment figures for 2014, taking into account the resumption of its exports from Indonesia in August and the sale of its Eagle Ford Shale assets. The company now expects consolidated sales for 2014 of approximately 3.9 billion pounds of copper, 1.2 million ounces of gold, 95 million pounds of molybdenum and 56.2 MMBOE of oil and gas sales. The previous forecast at the end July, was for 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 [6]

Capital expenditures for 2014 are expected to be approximately $7.5 billion. This consists of $4.5 billion for the company’s mining operations and $3 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 $2 billion to be incurred at the Deepwater Gulf of Mexico operations and $0.7 billion for the Inboard Lower Tertiary/Cretaceous natural gas trend. [1]

The company management reiterated its commitment to debt reduction. It 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, with $658 in cash and cash equivalents. [1] The company’s strategy to reach this target include asset sales and disciplined capital allocation in order to boost cash flows. ((Freeport McMoran’s Q3 2014 Earnings Call Transcript, Seeking Alpha))

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Notes:
  1. Freeport McMoran’s Q3 2014 Earnings Release, SEC [] [] [] [] [] [] [] [] [] [] [] [] [] []
  2. China Manufacturing PMI, Trading Economics []
  3. Goldman Sachs cuts China growth forecast sharply, Market Watch []
  4. Global Oil Glut Sends Prices Plunging, Wall Street Journal []
  5. Goldman Sachs cuts China growth forecast sharply, Market Watch []
  6. Freeport McMoran’s Q3 2014 Earnings Presentation, Freeport Website []