Freeport-McMoRan Q4 2015 Earnings Preview: Subdued Commodity Pricing Environment To Negatively Impact Results

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Freeport-McMoRan Inc. (NYSE:FCX) will report its fourth quarter results and conduct a conference call with analysts on January 26. [1] We expect the ongoing weakness in copper and oil prices to adversely affect the company’s profitability in Q4 2015. The divestment of some of Freeport’s copper mining and oil and gas assets, over the past year or so, will negatively impact the company’s production figures in Q4 2015. The combination of weakness in pricing and shipments will exert top line pressure on Freeport’s results. Given the unfavorable prevailing market conditions for both major commodities sold by Freeport, the company has been considering the sale of its oil and gas business. [2] We hope to hear more pertaining to a potential sale of the oil and gas assets, and other measures that the management may be contemplating to combat low commodity prices, in the earnings conference call.

Copper Prices

LME Copper Prices, Source: LME

Copper prices have fallen sharply over the past year, as illustrated by the chart shown above. London Metal Exchange (LME) copper prices averaged roughly $4,900 per ton in Q4 2015, as compared to around $6,600 per ton in the corresponding period of 2014. [3]

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Copper is extensively used in industrial applications and consumption of the metal has a strong correlation with macroeconomic growth. Copper prices have declined sharply over the last twelve months primarily due to fears of weakening demand from China, the world’s largest consumer of copper, which accounts for around 40% of the global demand for the metal. [4] Chinese GDP growth is expected to decline to 6.3% in 2016 from 6.8% in 2015, which has negatively impacted copper prices. [5] The fall in copper prices will negatively impact Freeport’s Q4 2015 results.

Oil Prices

Brent Crude Spot Prices, Source: Y Charts

Oil prices have fallen sharply over the past year, as illustrated by the chart shown above. Robust U.S. oil and gas output, enabled by technological improvements that have lowered production costs, and elevated OPEC production levels, have sharply boosted global oil supply. Moreover, with the signing of the Iranian nuclear deal and lifting of sanctions on the country, oil and gas production from the region could rise further. Given that the demand for oil remains weak in the midst of slowing economic growth in China, the world’s largest oil importer, prices of the commodity are unlikely to rise significantly in the near term. The weakness in oil prices will certainly negatively impact Freeport’s Q4 2015 results.

Other Developments

FCX Stock Price, Source: Google Finance

Freeport’s stock price has fallen sharply as a result of the challenging business conditions facing the company. In response to the weakness in commodity prices, Freeport has sharply cut its capital spending and tried to reduce operating costs. The most pressing concerns for Freeport in the ongoing downturn in commodity prices are the preservation of its cash flows and debt reduction. With Carl Icahn acquiring a stake in Freeport in 2015, the pressure on the management to act decisively has mounted. [6] The company is considering the sale of its oil and gas assets, despite unfavorable market conditions for the same. [2] We would like to hear more pertaining to this potential asset sale and other measures that the management might be considering in order to respond to the weak commodity pricing environment. More information on this front will shed some light on the road ahead for Freeport-McMoRan.

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Notes:
  1. FCX 4Q 2015 Conference Call, Freeport-McMoRan Website []
  2. Freeport-McMoRan to launch auction for oil and gas assets-sources, Reuters [] []
  3. LME Copper Prices, LME []
  4. Copper and Aluminum Sag to Six-Year Lows on China Demand Concern, Bloomberg []
  5. World Economic Outlook, IMF []
  6. Schedule 13D Filing, SEC []