Freeport-McMoRan Earnings Preview: Lower Copper And Oil Prices To Weigh On Q1 Results

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Freeport-McMoRan Inc. (NYSE:FCX) will report its first quarter results and conduct a conference call with analysts on April 23. We expect the ongoing weakness in copper and oil prices to adversely impact the company’s results in Q1. Freeport sold off its Candelaria and Ojos del Salado copper mines, in addition to its Eagle Ford Shale assets in 2014, as a part of its efforts to reduce its debt. [1] As a result, both the company’s copper and oil and gas production volumes are likely to be lower in Q1 2015, as compared to the corresponding period of the previous year.

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Copper Mining Operations

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Freeport’s average realized copper price for Q4 2014 stood at $2.95 per pound, as compared to $3.31 per pound in the corresponding period in 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 March and below 50 for the remaining months of the quarter. [4] The weak PMI numbers are indicative of sluggishness in the Chinese economy. China’s GDP growth is expected to slow to 6.8% in 2015, from 7.4% and 7.8% in 2014 and 2013 respectively. [5]

London Metal Exchange (LME) copper prices averaged roughly $5,800 per ton in Q1 2015, as compared to approximately $7,100 per ton in Q1 2014. [6] The weakness in copper prices will adversely affect Freeport’s year-over-year quarterly results.

The company completed the sale of its Candelaria and Ojos del Salado copper mines in Chile to Lundin Mining Corporation for $1.8 billion in November 2014. [7] These mines accounted for around 9% of the company’s consolidated copper production in the first nine months of 2014. [8] This asset sale will negatively impact production volumes for the company on a year-over-year basis.

Oil and Gas Operations

Freeport’s average realized price for crude oil stood at $78.02 per barrel in Q4 2014, as compared to $92.68 per barrel in the corresponding period of 2013. [2] 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. [9] Demand for oil remains weak in the midst of economic weakness in Europe and slowing Chinese growth.

Brent Crude spot prices stood at levels greater than $100 per barrel in the first quarter of 2014, as compared to an average value of around $50 per barrel in the first quarter of 2015. [10] Given the subdued oil pricing environment, price realizations for Freeport’s Oil  and Gas division are expected to fall on a year-over-year basis due to a fall in oil prices, which will negatively impact the company’s results.

Thus, given the weak market conditions impacting both oil and copper, the company is expected to report weak year-over-year results in Q1 2015.

 

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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 Q4 2014 Earnings Release, SEC [] []
  3. Copper Ends at 5-Month Low on China Worries, Wall Street Journal []
  4. China Manufacturing PMI, Trading Economics []
  5. World Economic Outlook, IMF []
  6. LME Copper Prices, LME []
  7. FCX Completes Sale Of Its Interests In Candelaria/Ojos For $1.8 Billion In Cash, Freeport-McMoRan News Release []
  8. Freeport-McMoRan’s Q3 2014 10-Q, SEC []
  9. Global Oil Glut Sends Prices Plunging, Wall Street Journal []
  10. Europe Brent Spot Price FOB, U.S. Energy Information Administration []