Will Freeport Be Able to Take Advantage of Elevated Copper Prices in Q4?

-13.32%
Downside
47.08
Market
40.81
Trefis
FCX: Freeport logo
FCX
Freeport

Freeport’s (NYSE:FCX) mining operations in Indonesia have been disrupted since the beginning of the year due to the restrictions imposed by the local government on export of unprocessed minerals from the country. Although Freeport had received a temporary export permit to continue its export from Indonesia, which was further extended in October, a concrete agreement is unlikely to take shape between the parties until Feb 2018. This would most likely keep the company’s shipment volume dampened in the last quarter of 2017 as well.
In contrast to Freeport’s shipment volume, copper prices have remained elevated this year due to greater demand outlook for the non-ferrous metal and the structural changes initiated in China (world’s largest copper consumer) in order to control its alarming level of pollution. However, even in an environment of favorable copper prices, Freeport has not been able to take advantage of the elevated copper prices as its shipment volume remained weak throughout the year.
As per the latest quarter results, the company expects to sell a total of 1010 million pounds of copper in 2017. In order for this estimate to be realized, the company will have to show a Q-o-Q (Quarter-on-Quarter) growth of 47% in its shipment volume in Q4. However, given the uncertainty still prevalent in Indonesia along with the continued separatist violence disrupting the mine’s ongoing operations, this estimate seems unlikely to be realized.

In our base case for Freeport, we have assumed shipments for Freeport to be approximately 380 million pounds of copper (as per the company’s estimate of 1010 pounds of copper shipment for 2017), which should provide an estimated revenue of $1.16 billion from Indonesia itself. However, as per the aforementioned arguments, we expect shipments to be 20% less than the company’s expected volumes which should result in a fall in revenue realization by a similar level. We have created the above scenario using our interactive platform. You can gain access to our base case for Freeport be clicking here and create different scenarios by using our interactive platform.
We expect Freeport to resume normal production by Q2 2018, once a final agreement has been entered into by all concerned parties.
We have $13.54 price estimate for Freeport, which is 10% below the market price.
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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Freeport
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