Freeport’s Q3 Profit Down, But Future Prospects Still Bright

Freeport McMoran Copper’s (NYSE:FCX) profit for third quarter of 2011 was down by 11% y-o-y triggered by higher costs and expenses as well as lower production and sales of copper and gold. ^[1] However, it managed to maintain a higher average realized price of copper at $3.60 per pound despite decelerating Chinese economy and fears of a global debt crisis. Management has, however, lowered its copper production guidance by 0.1 billion pounds to 3.8 billion pounds for 2011 citing uncertain macro-economic environment and declining copper prices from past several weeks.  Freeport competes with miners like Southern Copper (NYSE:PCU), Codelco and Newmont Mining (NYSE:NEM).

We believe the company’s near-to-mid term prospects are good given the strong demand for the under-supplied metal from emerging markets, and Freeport’s increasing capital expenditure and capacity expansion for its copper and gold mining operations.

See our full analysis for Freeport McMoran Copper

Freeport’s Higher Spending Plan for 2012

The company announced last week that it expects to increase its capital expenditure from $2.7 billion in 2011 to $3.7 billion in 2012, as three of its expansion of mining operations globally are due for approval. ^[2] This additional spending will go toward its Morenci mine in the U.S., its Cerro Verde mine in Peru and the Tenke Fungurume operations in Congo.

Freeport plans to expand the ore processing capacity at its Cerro Verde mine, and the project is expected to complete by 2016 with the total capacity from the facility adding up to 1 billion pounds of copper annually. (Read: Freeport’s Cerro Verde Mine Set to Raise Output by 45%) This is going to boost its copper production from its South American mines and may also take its average realized price higher from this region with growing global demand for copper.

Demand from China Still Strong

Around 40% of the world copper consumption is from China, and the recent news of the Chinese economy decelerating may have, in part, been responsible for declining copper prices from past few weeks. In addition, in the first half of 2011, China was destocking its copper inventory and reducing its imports, which led to a decline in copper spot prices.

However, China will look to replenish its inventory by late 2011 and an expected supply shortage will push copper price above $4 for entire 2012. (Read: Copper Prices Set to Recover Lifting Freeport, Others) This will greatly benefit Freeport and peers who are focusing on capacity expansion and incurring higher capex. For the longer term, we expect copper prices to decline due to increasing production which may result in oversupply.

While we estimate Freeport’s average realized copper price per pound from its South American mines will decrease from $4.60 in 2012 to $2.70 by the end of our forecast period, Trefis members expect a smaller decrease from $4.70 to $3.50 during the same period. The member estimates imply an upside of 5% to the Trefis price estimate for Freeport McMoran Copper’s stock.

We currently have a Trefis price estimate of $41.52 for Freeport McMoran Copper’s stock, about 19% above the current market price.

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1. Freeport-McMoRan Copper & Gold Q3 Profit Drops 11%, RTTnews, Oct 19, 2011 [↩]
2. UPDATE: Freeport CEO: 2012 Capex To Rise To $3.7 Billion,  Fox Business, Oct 19, 2011 [↩]