Despite Gold Prices Rallying, Why Is Freeport-McMoRan Set To Lose >60% Of Its Gold Revenue?

by Trefis Team
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Freeport-McMoRan Inc.
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Though global gold prices have witnessed a healthy increase from about $1,200 per ounce in the beginning of 2019 to over $1,500/ounce in October 2019, Freeport-McMoRan (NYSE: FCX) is expected to see its revenue from gold sales decrease by more than 60% in 2019, primarily driven by a 67% decline in gold shipments.

You can view the Trefis interactive dashboard – How Much Gold Revenue Could Freeport-McMoRan Lose In 2019? – to understand the movement in gold revenues. You can alter the key assumptions to arrive at your own estimates for the company’s shipments, prices, and gold revenue.

Division Overview

What is on Offer?

  • Freeport-McMoRan is engaged in gold mining, which contributed about 15% of company’s total revenue in 2018.
  • Freeport’s gold operations are almost wholly concentrated at the Grasberg mine in Indonesia.
  • The company also produces gold as a by-product in its North and South American copper operations.

End Use?

  • Gold is used in jewelry and certain sensitive electronics industries. It is also used for investment purposes.

Competition?

The company faces intense competition in its gold division from other major miners such as: Barrick Gold, Newmont Mining, and Anglo Ashanti.

Gold Revenue Trend

  • Freeport is likely to be the only major gold mining company which would not be able to take advantage of higher gold prices this year.
  • Freeport’s gold revenues are expected to decrease from $2.86 billion in 2018 to $1.02 billion in 2019, marking a drop of 64% in a year.

Are the company’s copper and molybdenum segments also seeing a sharp drop in revenues? To understand how the other operating divisions of the company are performing, refer to the following Trefis analysis- Freeport-McMoRan Revenues: How Does Freeport-McMoRan Make Money?

Shipments

  • The Grasberg mine in Indonesia, which is the world’s largest gold mine, contributes almost all of Freeport’s gold production.
  • With the ongoing 2-year transition process (which began in December 2018), under which Grasberg is being transitioned from an open pit mine to an underground one, gold production attributable to the company is going to be negligible until the end of 2020.
  • Furthermore, most of this negligible output would be a by-product from the American copper mines.
  • Shipments for the first nine months of 2019 were 0.67 million ounces.
  • For the full year, gold shipments are projected to be close to 0.8 million ounces in 2019, reflecting a decline of 67% from 2.4 million ounces recorded in 2018.

Price Realization

  • Gold price realization decreased in 2018 due to rising interest rates during the year.
  • However, 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.
  • Price per ounce has increased by almost $300, from $1,200/ounce in December 2018 to over $1,500 in October 2019.
  • With three interest rate cuts in 2019 and with expectations of possibly more to follow, global gold prices have remained elevated.
  • The company’s price realization per ounce of gold is set to increase in 2019.

Refer to the following Trefis analysis to understand the gold price movement over the last 50 years- Gold Prices: 50-Year Price Performance And Production-Demand Analysis

Conclusion

Higher gold price is expected to be more than offset by a whopping 67% decline in shipments for 2019. Thus, a sharp drop in production and volume sales due to the Grasberg transition is set to make a dent of over $1.8 billion in Freeport’s gold revenue base in 2019, marking a revenue decline of 64% in a year.

As per Freeport-McMoRan’s Valuation by Trefis, we have a price estimate of $13 per share for FCX’s stock.

 

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