What Effect Did The Ongoing Grasberg Mine Transition Have On Freeport-McMoRan’s Q1 2019 Results?

by Trefis Team
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Freeport-McMoRan Inc. (NYSE: FCX) released its Q1 2019 financial results on April 25, 2019, followed by a conference call with analysts. The company reported revenue of $3.79 billion in Q1 2019, marking a decline of 22.1% from $4.87 billion of revenue in Q1 2018. Lower revenue was driven by a decrease in volume and lower 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 led to a sharp drop in production of copper and gold in Q1 2019. Price realization was 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, on a sequential basis, revenue of $3.79 billion was 2.9% higher than in Q4 2018, due to increase in global price levels in the last three months, though they are much lower when compared on a year-on-year basis. Adjusted earnings came in at $0.05 per share, significantly lower than $0.46 per share in the year-ago period. Lower earnings were a reflection of lower volume, a decrease in revenues, and higher net cash cost per unit.

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

Key Takeaways

Copper shipment and price

  • Copper shipments declined by 21% (y-o-y) to 784 million pounds in Q1 2019, reflecting impact from weather events at El Abra and unscheduled maintenance in North America.
  • Most importantly, shipment from Indonesia were negligible due to the ongoing transition at the Grasberg mine, with most of the volume being contributed by copper mines in North and South America.
  • 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 price realization was still 6.8% lower compared to Q1 2018.

Gold shipment and price

  • Since Grasberg is the world’s largest gold mine and contributes all of FCX’s gold production, the current transition of the mine has led to a decline of over 60% in gold volume.
  • Additionally, price realization of the yellow metal was 1.6% lower on a y-o-y basis due to the decline in global gold prices with four interest rate hikes in 2018.
  • With increased retail and institutional investment in gold since December 2018, in the face of rising global economic uncertainty, gold prices have been on an upswing since the beginning of 2019. However, price realization per ounce sold in Q1 2019 was still lower than the previous year period.

Lower profitability

  • Operating margins declined sharply from 30% in Q1 2018 to about 8.5% in Q1 2019, mainly due to a y-o-y increase of 81.6% in net cash cost per pound of copper to $1.78/pound for the quarter.
  • Higher cost per pound was primarily a reflection of lower sales volumes in Indonesia and lower by-product credits during the quarter.

Outlook for FY 2019

  • For the full year, we expect revenue to decrease by almost 19% to $15.1 billion in 2019, primarily due to a 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 revival in the demand for the product from China.
  • Net income margin is projected to decrease from 14% to 12%, 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. 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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