Freeport-McMoRan Earnings Review: Weak Copper And Oil Prices Negatively Impact Q2 Results

Freeport-McMoRan Inc. (NYSE:FCX) released its second quarter results and conducted a conference call with analysts on July 23. ^[1] As expected, the company’s results were negatively impacted by weak copper and oil prices. The company reported an adjusted net income of $143 million (which excludes the impact of one-time charges such as impairment on earnings) in Q2 2015, as compared to a net income of $482 million in the corresponding period last year. ^[2] Freeport reported revenues of $4.25 billion in Q2 2015, as compared to $5.52 billion in the corresponding period a year ago, with lower oil and gas production contributing to the decline in revenues, in addition to weak copper and oil prices. ^[2] In this article, we will take a closer look at Freeport’s second quarter results.

See our complete analysis for Freeport-McMoRan

Mining Operations

The negative impact of the sharp fall in copper prices on the company’s operations over the last twelve months is evident in the results of Freeport’s mining operations. The company’s mining revenues fell sharply from $4.29 billion in Q2 2014 to $3.68 billion in Q2 2015. ^[2] Operating income for mining operations over the same period fell from $986 million to $625 million. ^[2]

Freeport’s average realized copper price for Q2 2015 stood at $2.71 per pound, around 14% lower as compared to the average realized price in the corresponding period of 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]

Copper Prices, Source: LME

The company’s copper production rose to 977 million pounds in Q2 2015, as compared to 931 million pounds in the corresponding period last year. ^[2] Production rose despite the sale of the Candelaria and Ojos del Salado mines by the company in Q4 2014, due to higher production from the Batu Hijau mine in Indonesia and the Morenci mine in Arizona. The ramp-up of milling activities to full rates from the expanded mill at the Morenci mine drove a 19% year-over-year increase in output from Freeport’s North American mines to 469 million pounds in Q1 2015. ^[2] In addition, production at the Batu Hijau mine rose 68% to 205 million pounds, due to the mining of higher grade ores.

The company’s unit costs of production fell year-over-year, reflecting higher production volumes and the mining of higher grade ores at the Batu Hijau mines. Consolidated average unit cash costs for Freeport’s copper mines fell to $1.50 per pound of copper in Q2 2015, as compared to $1.72 per pound in Q2 2014. ^[6]

Oil and Gas Operations

Freeport’s oil and gas revenues fell from $1.24 billion in Q2 2014 to $569 million in Q2 2015. ^[2] This was due to a combination of lower realized prices and shipment volumes. Shipment volumes for the oil and gas division stood at 13.1 million barrels of oil equivalent (MMBOE) in Q2 2015, as compared to 16 MMBOE in Q2 2014, primarily due to the sale of the company’s Eagle Ford shale assets in Q2 2014. ^[2] The oil and gas division’s unit cash production costs declined from $19.57 per BOE in Q2 2014 to $19.04 per BOE in Q2 2015, as a result of lower repairs and maintenance costs. ^[2]

The realized revenues for Freeport’s oil and gas division’s fell from $77.53 per barrel of oil equivalent (BOE) in Q2 2014 to $50.04 per BOE in Q1 2015. ^[2] 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.

As a result of a decline in realized prices , the division’s cash operating margin fell from $57.96 per BOE in Q2 2014 to $31 per BOE in Q2 2015. ^[2]

Other Developments

Given the subdued oil pricing environment, the company management is considering ways to raise additional capital to fund the oil and gas division’s capital expenditures without increasing the company’s debt burden. 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] Though the exact details, including the quantum of the potential minority stake sale have not been finalized, this step fits in well with Freeport’s efforts to reduce it’s debt. Earlier steps taken for the same purpose include the divestment of Freeport’s Eagle Ford Shale assets in Q2 2014. Stake sales are one of the options for Freeport to raise capital 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.

1. Upcoming Presentations, Freeport-McMoRan Website [↩]
2. Freeport-McMoRan Inc. Q2 2015 Earnings Release, SEC [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
3. Freeport-McMoRan Inc. Q2 2015 Earnings Release, SEC [↩]
4. Copper Ends at 5-Month Low on China Worries, Wall Street Journal [↩]
5. World Economic Outlook, IMF [↩]
6. Freeport-McMoRan Inc. Q2 2015 Earnings Presentation, SEC [↩]
7. Freeport- McMoRan’s Q2 2015 Earnings Call Transcript, Seeking Alpha [↩]