Freeport-McMoran Earnings Preview: Lower Copper And Oil Prices To Weigh On Results

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Freeport-McMoran Inc. (NYSE:FCX) will report its fourth quarter results and conduct a conference call with analysts on January 27. We expect the ongoing weakness in copper and oil prices to adversely impact the company’s results in Q4. Freeport sold off its interest in two of its Chilean copper mines — Candelaria and Ojos del Salado — in November. [1] As a result, the company’s production volumes are likely to be lower in Q4 2014, as compared to the corresponding period the previous year.

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Freeport’s average realized price for copper stood at $3.14 per pound in the first nine months of 2014, as compared to $3.31 per pound in the corresponding period of 2013. [2] Copper has diverse applications in industry, particularly in the manufacturing, power, and infrastructure sectors. The decline in copper prices this year 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 for copper. [3] 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 50.1 in November, and has ranged between 50.1 and 51.7 for the whole year. [4] The weak PMI numbers are indicative of sluggishness in the Chinese economy. China’s GDP growth is expected to slow to 7.1% in 2015, from 7.3% and 7.7% in 2014 and 2013 respectively. [5]

London Metal Exchange (LME) copper prices averaged roughly $6,600 per ton in Q4 2014, as compared to approximately $7,200 per ton in Q4 2013. [6] The weakness in copper prices will adversely affect Freeport’s year-over-year quarterly results.

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 fourth quarter, as compared to the corresponding period in 2013. The company sold off its Eagle Ford shale assets in Q2 2014. The Eagle Ford shale assets accounted for 4 million barrels of oil equivalents [7], or 25% of the company’s second quarter oil and gas sales of 16 MMBOE. [8] Price realizations for its Oil  and Gas division will fall on a year-over-year basis due to a fall in oil prices. Brent Crude spot prices averaged roughly $109 per barrel in the fourth quarter of 2013, as compared to around $76 per barrel in the fourth quarter of 2014. [9]

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. [10] Demand for oil remains weak in the midst of economic weakness in Europe and slowing Chinese growth. Lower oil prices will negatively impact the results of Freeport’s Oil and Gas division.

Other Developments

The company completed 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. [11] As of 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. [11] The company realized after-tax net proceeds of approximately $1.5 billion from the transaction, excluding the contingent consideration. [12] The focus of this transaction is to use the proceeds to pare down the company’s heavy debt burden. At the end of the third quarter, Freeport’s total debt stood at $19.7 billion, with $658 in cash and cash equivalents. [13] The company is targeting a reduction in its total debt to $12 billion by the end of 2016. [11] Thus, there is still a long way to go for Freeport in its debt reduction efforts.

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Notes:
  1. FCX Completes Sale Of Its Interests In Candelaria/Ojos For $1.8 billion In Cash, Freeport-McMoran News Release []
  2. Freeport-McMoran’s Q3 2014 10-Q, SEC []
  3. Copper Ends at 5-Month Low on China Worries, Wall Street Journal []
  4. China Manufacturing PMI, Trading Economics []
  5. Goldman Sachs cuts China growth forecast sharply, Market Watch []
  6. LME Copper Prices, LME []
  7. MMBOE []
  8. Freeport-McMoran’s Q2 2014 10-Q, SEC []
  9. Europe Brent Spot Price FOB, U.S. Energy Information Administration []
  10. Global Oil Glut Sends Prices Plunging, Wall Street Journal []
  11. Freeport-McMoran’s 2013 10-K, SEC [] [] []
  12. 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 []
  13. Freeport-McMoran’s Q3 2014 Earnings Release, SEC []