Freeport-McMoRan Q3 Earnings Preview: Weak Copper And Oil Prices To Take Their Toll On Results

Freeport-McMoRan Inc. (NYSE:FCX) will report its third quarter results and conduct a conference call with analysts on Thursday, October 22. ^[1] We expect the prevailing weakness in copper and oil prices to negatively impact the company’s profitability in Q3. Since Freeport has divested some of its copper mining and oil and gas assets over the course of the last year or so, the company’s production figures for both copper and oil and gas are expected to be lower in Q3 this year. Lower production and pricing will negatively impact the company’s top line as well. Given the weak prevailing market conditions for both major commodities sold by Freeport, the company is reviewing its operations and considering several options as the best response to the prevailing business environment. We hope to hear more pertaining to these latest developments in the earnings conference call.

Copper Prices

Copper prices have declined significantly over the course of the last twelve months, as illustrated by the chart below. London Metal Exchange (LME) copper prices averaged roughly $5,200 per ton in Q3 2015, as compared to around $7,000 per ton in the corresponding period last year. ^[2]

Declining Copper Prices, Source: LME

Copper has diverse applications in industry and copper consumption has a strong correlation with macroeconomic growth. The decline in copper prices over the last twelve months has primarily been due to fears over weakening demand from China, which accounts for around 40% of the global demand for copper, and is the world’s largest consumer of the metal. ^[3] Chinese GDP growth is expected to slow from 7.4% in 2014 to 6.8% and 6.3% in 2015 and 2016, respectively, negatively impacting copper prices. ^[4] The fall in copper prices will weigh on Freeport’s Q3 results.

Oil Prices

A global supply glut has resulted in a decline in oil prices over the past twelve months, as illustrated by the chart shown below.

Brent Crude Oil Prices, Source: Y Charts

Rising oil and gas output from the U.S. over the course of the last few years, where hydraulic fracturing techniques have helped increase production, has sharply boosted global oil supply. Though U.S. oil and gas production has declined in response to falling prices, it still remains at fairly high levels. Further, major oil producing nations 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. Moreover, 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 a Chinese economic slowdown and economic weakness in Europe, oil prices are unlikely to rise significantly in the near term. The weakness in oil prices will negatively impact Freeport’s quarterly results.

Strategic Review

Freeport recently announced a strategic review of its oil and gas operations, in order to respond to the prevailing weakness in oil prices. The company is considering various options with the stated objective of improving its financial position and enhancing long-term shareholder value, including a potential public offering of a minority stake in the oil and gas business, a potential spinoff of the oil and gas business, joint venture arrangements, and further spending reductions. ^[5] Freeport also recently reshuffled its board of directors, including a reduction in the size of the board. This could have been an outcome of discussions between the company management and noted investor Carl Icahn, who recently acquired an 8.5% stake in the company and was in favor of altering the size and composition of Freeport’s board of directors. ((Schedule 13D Filing, SEC)) We would like to hear more from the company management in the earnings conference call on the latest developments in its battle against the twin threat of low copper and oil prices. This would shed some light on the road ahead for Freeport-McMoRan.

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1. Company Presentations, Freeport-McMoRan Website [↩]
2. LME Copper Prices, LME [↩]
3. Copper and Aluminum Sag to Six-Year Lows on China Demand Concern, Bloomberg [↩]
4. World Economic Outlook, IMF [↩]
5. Freeport-McMoRan Announces New Board Structure & Review of Strategic Alternatives for Its Oil & Gas Business, Freeport-McMoRan News Release [↩]