How Much Is The Grasberg Transition Expected To Weigh On Freeport-McMoRan’s Q1 2019 Results?

by Trefis Team
Freeport-McMoRan Inc.
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Freeport-McMoRan Inc (NYSE: FCX) is set to release its Q1 2019 results on April 25, 2019, followed by a conference call with analysts. We expect the company to report revenue of $3.8 billion in Q1 2019, which marks a significant decrease of 21.5% over the previous year period. Lower revenue is expected to be driven by lower volume and price realization of copper and gold in Q1. The Grasberg mine in Indonesia, which is the largest gold mine and second largest copper mine in the world, is currently transitioning from an open pit mine to an underground mine, which would likely lead to a sharp drop in production of copper and gold in 2019. Price realization is expected to be lower due to the decline in copper and gold prices on the back of US-China trade tensions throughout 2018 and rising interest rates in the US. However, in spite of lower volume, revenue of $3.8 billion would mark a sequential growth of 3.7% over Q4 2018, due to an increase in global price levels in the last three months, though they are still lower when compared on a year-on-year basis. Markets expect FCX to report earnings of $0.07 per share in Q1 2019, 85% lower compared to Q1 2018. Lower earnings are likely to be a reflection of lower volume, a decrease in revenues, and higher net cash costs per pound.

We have summarized our key expectations from the announcement in our interactive dashboard – How is Freeport-McMoRan expected to fare in Q1 2019 and what is the outlook for the full year? In addition, here is more Materials data.

Key Factors Affecting Earnings

Copper volume and prices

  • We expect copper shipments to decrease by close to 30% in Q1 to 700 million pounds, with most of the volume being contributed by FCX’s copper mines in North and South America.
  • With the world’s second largest copper mine – Grasberg – currently undergoing a transition from being open pit to underground, production at the site is expected to be negligible, leading to a sharp drop in shipments in Q1.
  • Copper prices have been declining throughout 2018 due to the US-China trade tensions, which led to expectations of a slowdown and thus lower copper demand projections. However, with trade talks progressing and a possible truce in sight, prices have increased since the beginning of 2019, though they are still lower compared to levels achieved in Q1 2018.

Gold volume and prices

  • Since Grasberg is the world’s largest gold mine and contributes all of FCX’s gold production, the current transition of the mine is expected to lead to a decline of over 67% in gold volume in Q1.
  • Price realization of the yellow metal is projected to be lower on a y-o-y basis due to a decline in global gold prices with four interest rate hikes in 2018.
  • With increased retail and institutional investment in gold since Dec 2018, in the face of rising global economic uncertainty and the projection of no further interest rate hikes in 2019, gold prices have been on an upswing since the beginning of 2019. However, price expected to be realized in Q1 is still likely to be lower than in the previous year period.

Lower operating margin

  • We expect operating margins to decline sharply from 30% in Q1 2018 to about 8% in Q1 2019, mainly due to an increase of 68.4% in net cash cost per pound of copper to $1.65/pound for the quarter.
  • Higher cost per pound would primarily be a reflection of lower sales volumes in Indonesia and lower by-product credits during the quarter.

Full year picture

  • For the full year, we expect revenue to decrease by 14.1% to $16 billion in 2019, primarily due to the decline in volume and lower price realization in the company’s copper and gold segments, partially offset by higher molybdenum revenue, with an increase in molybdenum prices due to a revival in the demand for the product from China.
  • Net income margin is projected to decrease from 14% to 11.2%, mainly due to higher cost per unit (as shipments would decrease) and absence of any gain on asset sales, unlike in 2018.

Trefis has a price estimate of $14 per share for FCX’s stock. With the gold industry seeing consolidation over the last few months (Newmont-Goldcorp deal and Barrick-Randgold merger), the stock price increased on reports of the company looking for a good deal. However, we believe that FCX’s strong long-term outlook, improved financial profile with no large obligation in the near future, and reinstatement of the quarterly dividend pay-out in 2018, would provide support to the company’s stock price.


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