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

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Freeport-McMoRan Inc. (NYSE:FCX) released its first quarter results and conducted a conference call with analysts on Thursday, April 23. As expected, the company’s results were negatively impacted by weak copper and oil prices. Excluding the impact of one-time charges, the company reported an adjusted net loss of $60 million in Q1 2015, as compared to a net income of $510 million in the corresponding period last year. [1] Freeport reported revenues of $4.15 billion in Q1 2015, as compared to $4.99 billion in the corresponding period a year ago, with lower oil and gas production contributing to the decline in revenues, apart from weak pricing. [1] In addition, given the subdued pricing environment for oil, the company management talked about the potential sale of a minority interest in Freeport-McMoRan Oil & Gas through an IPO, in order to partially fund capital expenditure for the oil and gas business.

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Mining Operations

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Freeport’s mining revenues fell marginally from $3.72 billion in Q1 2014 to $3.65 billion in Q1 2015. [1] Higher shipment volumes partially offset the impact of a fall in copper prices upon the company’s mining revenues. Operating income for mining operations fell from $878 million in Q1 2014, to $574 million in Q1 2015, primarily due to a fall in realized prices. [1]

The company’s copper production fell from 948 million pounds in Q1 2014 to 915 million pounds in Q1 2015. [1] This was primarily due to the sale of the Candelaria and Ojos del Salado mines by the company in Q4 2014, offset by higher production at the company’s other operations, particularly at the company’s North American mining operations. The ramp-up of milling activities to full rates from the expanded mill at the Morenci mine drove a 17% year-over-year increase in output from North American mines to 452 million pounds in Q1 2015. [1] In addition, copper production at the Indonesian operations rose 10% year-over-year to 154 million pounds, as operations returned to normal after the resolution of the standoff between the company and the Indonesian government over a tax dispute. [1] Production rose 6% year-over-year to 116 million pounds in Q1 2015 at the African mines due to the mining of higher grade ores. Despite the fall in production, the company’s copper shipments rose 10% year-over-year to 960 million pounds in Q1 2015, due to the favorable timing of shipments of stockpiled ore.

Freeport’s average realized copper price for Q1 2015 stood at $2.72 per pound, as compared to $3.14 per pound in the corresponding period in 2014. [1] 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. [2] 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. [3] 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. [4]

The company’s unit costs of production rose year-over-year, mainly reflecting higher costs and lower sales volumes at the company’s South American mining operations. Consolidated average unit cash costs for Freeport’s copper mines rose to $1.64 per pound of copper in Q1 2015, as compared to $1.54 per pound in Q1 2014. [1]

Oil and Gas Operations

Freeport’s oil and gas revenues fell from $1.26 billion in Q1 2014 to $500 million in Q1 2015. [1] This was due to a combination of lower realized prices and shipment volumes. Shipment volumes for the oil and gas division stood at 12.5 million barrels of oil equivalent (MMBOE) in Q1 2015, as compared to 16.1 MMBOE in Q1 2014, primarily due to the sale of the company’s Eagle Ford shale assets in Q2 2014. [1] In addition, the sale of the low-cost Eagle Ford shale assets resulted in an increase in the oil and gas division’s unit cash production costs from $18.51 per BOE in Q1 2014 to $20.86 per BOE in Q1 2015. [1]

The realized revenues for Freeport’s oil and gas division’s fell from $77.22 per barrel of oil equivalent (BOE) in Q1 2014 to $43.71 per BOE in Q1 2015. [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.

As a result of a decline in realized prices and a rise in cash production costs, the division’s cash operating margin fell from $58.71 per BOE in Q1 2014 to $23.45 per BOE in Q1 2015. [5]

Given the subdued oil pricing environment, the company management is considering ways to raise additional capital in order to fund the oil and gas division’s capital expenditures. The company management currently favors the sale of a minority interest in Freeport-McMoRan Oil & Gas through a separate IPO for the oil and gas division. [7] Freeport would retain management control after the IPO. Though the exact details, including the quantum of the potential minority stake sale have not been finalized, this step fits in well with the company’s efforts to reduce it’s debt. Earlier steps taken for the same purpose included the divestment of Freeport’s Eagle Ford Shale assets in Q2 2014. Given the subdued market conditions for both copper and oil, stake sales are one of the options for Freeport to expand its operations without taking on additional debt. However, given the prevailing subdued market conditions in the oil and gas space, it remains to be seen whether the company is able to get favorable valuations for its oil and gas division.

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Notes:
  1. Freeport-McMoRan Inc. Q1 2015 Earnings Release, SEC [] [] [] [] [] [] [] [] [] [] [] []
  2. Copper Ends at 5-Month Low on China Worries, Wall Street Journal []
  3. China Manufacturing PMI, Trading Economics []
  4. World Economic Outlook, IMF []
  5. Freeport-McMoRan Inc. Q1 2015 Earnings Presentation, SEC [] []
  6. Global Oil Glut Sends Prices Plunging, Wall Street Journal []
  7. Freeport McMoRan’s Q1 2015 Earnings Call Transcript, Seeking Alpha []