Key Takeaways From Freeport-McMoRan’s Q4 2018 Results

Freeport-McMoRan Inc. (NYSE: FCX) released its Q4 2018 earnings results and conducted a conference call with analysts on January 24, 2019. The company fell short of meeting analysts’ expectations for revenue as well as earnings, due to a decline in copper prices in the latter half of 2018 and significant reduction in gold and copper shipments in Q4.

The major takeaways from the announcement have been illustrated in the graphs using our interactive dashboard – Freeport-McMoRan’s Q4 2018 Financial Performance.

Key factors affecting FCX’s Q4 results

• Decline in gold shipments: Gold shipments witnessed a sequential reduction of a whopping 68.2%, with volumes decreasing by 55.1% year-on-year to 266 million ounces in Q4 2018, from 593 million ounces in Q4 2017. All of the company’s gold volume is produced at its Indonesian mine.  Since Q4, FCX has been mining the final phase of the Grasberg open pit, which has led to a significant drop in gold production.
• Lower copper shipments: Copper shipments declined by 22.8% on a year-on-year basis to 785 million pounds in Q4 2018. Volume was 24.8% lower compared to Q3 2018. The primary factor that led to a decline in shipments is lower production from the Grasberg mine, which completely offset increased shipments from the North and South American facilities. In Indonesia, PT-FI is transitioning the Grasberg open pit mine into an underground mine. The transition would take the next two years to complete, during which the company has projected a further steep decline in the overall copper and gold shipments.
• Decline in copper prices: The latter half of 2018 saw a decline in copper prices, mainly due to trade tensions between the US and China. The average realized price of copper was $2.75 per pound in Q4, down 14.3% from the previous year. Though gold prices witnessed some strengthening in the final quarter, more than an expected decline in gold shipments proved to be a drag on revenues.
• High net cash cost: The company’s operating margins largely disappointed the markets. Consolidated average unit net cash costs for FCX’s copper mines increased by 49.5% to $1.54 per pound of copper in Q4 2018 compared to $1.03 in the year-ago period. Sequentially, net cash costs surged by 65.6%. This was primarily a reflection of lower sales volumes in Indonesia and lower by-product credits during the quarter.

For the full year, FCX’s net revenue increased by 13.6% to $18.6 billion compared to $16.4 billion in 2017, benefiting from a significant jump in gold shipments, which increased by 52.9% year-on-year. This increase in shipments was mainly witnessed during the first three quarters of the year. Additionally, molybdenum prices rose by about 34% due to revival in demand for the product from China, increasing revenue from the segment by 32.6% for the year.

Going forward, in line with the company’s projection, we expect copper and gold production to decrease significantly over the next two years. Copper prices would most likely strengthen further as the sales of, and demand for, electric vehicles continue to remain robust. Gold prices would remain elevated due to high demand for the metal from emerging markets like India and China. Thus, modestly higher prices and a sharp decline in shipments would lead to a decrease in revenue for FCX in 2019. Earnings per share would follow the downward trend due to lower shipments. However, FCX has a strong long-term outlook with 2021 being the inflection year for the company, where it is expected to witness a significant rise in volumes and earnings as the Grasberg transition comes to an end. FCX has improved its financial profile with no large obligation in the near future. It has also reinstated the quarterly dividend pay-out in 2018, which is expected to provide support to the company’s stock price.

We have a $13.00 price estimate for Freeport-McMoRan Inc., which is currently higher than its market price.

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