Freeport-McMoRan Q1 2018 Earnings Review: Earnings Miss And Reduced Guidance Weighs On Share Price

by Trefis Team
Freeport-McMoRan Inc.
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Freeport-McMoRan (NYSE: FCX) reported its first-quarter results on April 24. The company reported an earnings miss in Q1 and downgraded its 2018 guidance which resulted in the market penalizing the company’s stock. The company reported a 3% decline in sequential revenue and EPS (Non-GAAP) also declined by 10% sequentially.

Freeport-McMoRan reported 2% sequential decline in copper sales volume, reflecting its weak quarter performance. Although year-on-year (y-o-y) copper sales increased by 23%, this was primarily because the company reported significantly lower sales volume in Q1 2017 as its operations in Indonesia were disrupted due to regulatory restrictions. However, Freeport’s gold sales volume were up by 3% sequentially in Q1 2018, which reflects the company’s substantial advantage from Grasberg’s underground mining developments, providing the company with an increased access to higher grade ores.  Additionally, higher sequential gold prices helped offset the impact of lower sequential copper prices in Q1. Gold prices have been gaining strength due to the increased global uncertainty with the ongoing trade tension between the U.S. and China and the geopolitical tension in the Middle East and a weaker dollar providing an additional buying opportunity.Apart from missing market estimates, the market’s negative reaction to the company’s earnings was largely due to its reduced guidance for 2018. The company reduced its copper sales guidance by 1 million pounds due to an increased uncertainty with respect to its operations in Grasberg. The company has also confirmed that it intends to ”reduce or defer investments significantly” on its underground development projects at Grasberg if PT-FI doesn’t reach a “definitive agreement with the Indonesian government on its long-term mining rights.” As a consequence of the lower sales outlook, the company has also guided towards a lower operating cash flow of $5.6 billion in comparison to $5.8 billion anticipated previously. The company has, on the other hand, increased its guidance for Molybdenum sales by 4 million pounds. However, this increase would not be sufficient to compensate for the company’s fall in copper sales volume.

On the brighter side, the company has reported a stronger balance sheet position despite its weak results. During its first quarter, Freeport repaid $1.5 billion of its borrowings and $454 million of debt in April. Additionally, the company reinstated its cash dividend and declared a quarterly cash dividend of $0.05 per share. The company reiterated its plan to continue to de-lever the firm and increase its shareholder return. We have updated our base case estimates for the company’s 2018 results based on the company’s latest numbers. You can modify our assumptions using our interactive dashboard and arrive at your own fair price estimate for the company.


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