Freeport-McMoRan Earnings Preview: Lower Copper And Oil Prices To Weigh On Q2 Results

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Freeport-McMoRan Inc. (NYSE:FCX) will report its second quarter results and conduct a conference call with analysts on July 23. [1] We expect the ongoing weakness in copper and oil prices to adversely impact the company’s results in Q2. 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. [2] As a result, both the company’s copper and oil and gas production volumes are likely to be lower in Q2 2015, as compared to the corresponding period of the previous year. However, the decline in copper production from the sale of the Candelaria and Ojos del Salado mines will be at least partially offset by higher production from the company’s other copper mines.

The company’s stock price has declined sharply over the course of the last month, primarily due to the sharp decline in copper prices. We will be revising our price estimate for the company shortly. In this article, we will take a look at what to expect from Freeport’s Q2 results.

Copper Mining Operations

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London Metal Exchange (LME) copper spot prices averaged roughly $6,000 per ton in Q2 2015, as compared to approximately $6,800 per ton in Q2 2014. [3] Copper prices have declined sharply from their levels in the middle of 2014 (as illustrated in the chart shown below), mainly due to concerns over copper demand from China. China is the world’s largest consumer of copper, accounting for nearly 40% of the world’s demand for the metal. [4] Copper has diverse applications in industry, particularly in the manufacturing, power, and infrastructure sectors. A slowdown in Chinese economic growth has negatively impacted Chinese demand for copper. Chinese GDP growth is expected to slow to 6.8% in 2015, from 7.4% in 2014. [5]

LME Copper Prices, Source: London Metal Exchange

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. [2] These mines accounted for around 9% of the company’s consolidated copper production in the first nine months of 2014, and the sale of these assets will negatively impact Freeport’s copper production volumes. [6] However, the decline in production as a result of the sale of the Chilean mines will be at least partially offset by higher production from the company’s other mining operations, particularly from the Morenci mine in Arizona. Freeport’s copper production fell 3.5% year-over-year to 915 million pounds in Q1 2015, with the loss in production from the sale of the Chilean mines partially offset by higher production from other mines. ((Freeport-McMoRan Inc. Q1 2015 Earnings Release, SEC))

Oil and Gas Operations

Oil prices have declined over the course of the last twelve months due to oversupplied global markets. Global oil supply has been boosted by rising oil and gas output from the U.S. over the course of the last few years, where hydraulic fracturing techniques have helped boost output. Though U.S. oil and gas production has declined lately in response to falling prices, it still remains at fairly high levels. Moreover, 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. With the signing of the Iranian nuclear deal, oil and gas production from the region is expected to rise. Given that the demand for oil remains weak in the midst of economic weakness in Europe and slowing Chinese growth, oversupplied global markets are likely to result in the continuation of the subdued oil pricing environment.

Brent Crude Oil Prices, Source: Y Charts

Brent Crude spot prices stood at levels greater than $100 per barrel a year ago, over 40% higher than current spot prices (as illustrated by the chart shown above). Given the prevailing subdued oil pricing environment, price realizations for Freeport’s Oil  and Gas division are expected to fall on a year-over-year basis, which will negatively impact the company’s results. Further, with the sale of the company’s Eagle Ford Shale Assets in June 2014, the company’s oil and gas shipment volumes will decline on a year-over-year basis as well. This was reflected in the company’s Q1 results, with the Oil and Gas division’s shipment volumes declining to 12.5 million barrels of oil equivalent (MMBOE), as compared to 16.1 MMBOE in Q1 2014. [7]

Thus, given the weak market conditions impacting both oil and copper, the company is expected to report weak year-over-year results in Q2 2015.

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Notes:
  1. Upcoming Presentations, Freeport-McMoRan Website []
  2. FCX Completes Sale of Its Interests in Candelaria/Ojos for $1.8 Billion in Cash, Freeport-McMoRan News Release [] []
  3. LME Copper Prices, LME []
  4. Copper Ends at 5-Month Low on China Worries, Wall Street Journal []
  5. World Economic Outlook, IMF []
  6. Freeport-McMoRan’s Q3 2014 10-Q, SEC []
  7. Freeport-McMoRan Inc. Q1 2015 Earnings Release, SEC []