Freeport-McMoRan’s Revenue And Earnings Likely To See A Sharp Drop In Q2 2019

by Trefis Team
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Freeport-McMoRan Inc.
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Freeport-McMoRan Inc. (NYSE: FCX) is set to release its Q2 2019 financial results on July 24, 2019, followed by a conference call with analysts. The company’s revenue has seen a year-on-year (y-o-y) decline over the last two quarters due to lower volume and price realization for copper and gold. The market expects this trend to continue, with Freeport-McMoRan’s revenues likely to decline by over 30% in Q2 2019 compared to the previous year period, primarily driven by a sharp drop in copper and gold production due to the ongoing mine transition at Grasberg in Indonesia, and lower copper prices due to re-escalation of US-China trade tensions in Q2, partially offset by higher gold prices. FCX is also expected to report a net loss of $0.02 per share in Q2 2019, compared to earnings of $0.58/share in the year-ago period. Such a sharp fall in earnings is likely to be driven by a significant drop in copper and gold production volume leading to higher net cash cost per unit, and decrease in revenue.

You can view our key expectations from the announcement in our interactive dashboard – Freeport-McMoRan Earnings: Performance and 2019 Forecast – and alter the assumptions to arrive at your own revenue, earnings, and stock price estimates for the company. In addition, here is more Materials data.

A] Key Revenue Drivers

Copper

  • Copper shipments have decreased significantly over the last two quarters, from a high of over 1 billion pounds to about 0.8 billion pounds.
  • The Grasberg mine in Indonesia, which is the second largest copper mine in the world, is currently transitioning from an open pit mine to an underground mine, which is driving a sharp drop in the production of copper.
  • We expect this trend to continue with shipments likely to drop by over 20% (y-o-y) in Q2 2019, as the mine transition will be completed by the end of 2020.
  • With US-China trade talks progressing and a possible truce in sight, prices increased since the beginning of 2019. However, re-escalation of tensions with the imposing of additional tariffs has led to drop in global copper prices since April 2019.
  • Thus, lower shipments and price realization is expected to lead to a significant y-o-y drop in copper revenue in Q2 2019.

Gold

  • Since Grasberg is the world’s largest gold mine and contributes almost all of FCX’s gold production (with some gold being contributed as a by-product from the American mines), the current transition at Grasberg has led to gold shipments decreasing significantly from a high of 837 million ounces to 242 million ounces in Q1 2019.
  • We expect negligible gold production to drive a sharp y-o-y decrease in gold shipments for Q2 2019 as well.
  • With increased retail and institutional investment in gold since Dec. 2018, in the face of rising global economic uncertainty, gold prices have been on an upswing since the beginning of 2019.
  • With rising investment in the yellow metal by major central banks, gold price realization is expected to further improve in Q2 2019.
  • However, higher prices would be more than offset by lower shipments, leading to a sharp drop in gold revenue during the quarter.

B] Expenses and Profitability

Total expenses are expected to increase with higher effective tax rate and higher fixed cost translating into increase in cost per unit.

  • Copper- net cash cost: Net cash cost per pound of copper has increased over the last three quarters. We expect cost per pound to increase further in Q2 2019, driven by a significant drop in sales volumes in Indonesia and lower by-product credits.
  • Effective Tax Rate: The effective tax rate (ETR) has remained above 33% in most of the recent quarters (except Q4 2018). FCX does not pay any tax in the US and is subject to higher foreign tax rates. We expect the ETR to remain high in Q2 2019 as has been the case historically during phases of a lower copper price environment.

Net income margin has continuously declined over the last four quarters and is expected to drop further in Q2 2019 on the back of a significant drop in revenue and higher expense levels.

Full Year Outlook

  • For the full year, we expect revenue to decrease by about 21% to $14.7 billion in 2019 from $18.6 billion in 2018, primarily due to a decline in volume and lower price realization in the company’s copper segment, partially offset by higher gold prices and molybdenum revenue, with an increase in molybdenum prices due to a revival in the demand for the product from China.
  • Revenue is expected to increase to $15.5 billion in 2020, mainly due to a positive price outlook for copper and gold, along with a slight pick-up in volume compared to 2019, and strong molybdenum demand.
  • Net income margin is projected to witness a significant decline from 14% in 2018 to 3% in 2019, mainly due to higher cost per unit (as shipments would decrease) and absence of any gain on asset sales, unlike in 2018. Margins could see a slight revival by reaching about 7.5% in 2020, due to a pick up in volume sold and higher revenue.

According to Freeport-McMoRan’s Valuation by Trefis, we have 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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