Freeport's Q1 Earnings Top, Profit Falls - Analyst Blog

Freeport-McMoRan Copper & Gold Inc. FCX reported earnings of 49 cents per share for first-quarter 2014, a decline of roughly 27.9% from the year ago earnings of 68 cents. Profit fell 21.3% year over year to $510 million, hurt by lower copper and gold pricing.
 
The results include net non-cash mark-to-market gains of a penny per share associated with crude oil and natural gas derivative contracts. Barring that impact, earnings were 48 cents a share in the first quarter, topping the Zacks Consensus Estimate of  42 cents.
 
Revenues rose roughly 8.8% year over year to around $4.99 billion in the first quarter, but missed the Zacks Consensus Estimate of $5.12 billion.
 
Consolidated sales from mines decreased to 871 million pounds of copper in the first quarter from 954 million pounds in the year ago quarter. Sales of gold declined to 187,000 ounces in the reported quarter from 214,000 ounces a year-ago.

Lower copper and gold sales volumes were due to lower volumes from PT Freeport Indonesia (PT-FI) because of the post-January 12, 2014, restrictions on concentrate exports from Indonesia, which resulted in a deferral of roughly 125 million pounds of copper and 140,000 ounces of gold in the reported quarter.
 
Sales of molybdenum increased to 27 million pounds in the reported quarter from 25 million pounds in the first quarter of 2013.
 
Operational Update
 
Consolidated average unit net cash costs (net of by-product credits) decreased to $1.54 per pound of copper in the quarter from $1.57 per pound a year ago.  
 
Average realized price per ounce for gold fell to $1,300 per ounce from $1,606 per ounce a year ago while average realized price per pound for copper declined to $3.14 per pound of copper from $3.51 per pound of copper in the prior-year quarter.
 
Mining Update
 
North America Copper Mines: Copper sales at the mine increased 5.1% year over year to 371 million pounds and production rose 12.2% to 385 million pounds in the reported quarter. Sales increased due to higher production at most mines primarily because of higher ore grades. Freeport expects copper production to be 1.7 billion pounds in 2014, up from 1.4 billion in 2013 resulting from higher production from Morenci following the completion of the mill expansion project.  
 
South America Mining: Copper sales of 307 million pounds rose 7.7% from the year ago quarter mainly due to higher mining rates and timing of shipments. Gold sales went up 9.5% to 23,000 ounces. Copper production rose 5.4% to 314 million pounds in the reported quarter and gold production remained at par year over year at 21,000 ounces in the quarter. South America mining is expected to report sales of 1.2 billion pounds of copper in 2014.
 
Indonesia Mining: Copper sales of 109 million pounds declined 44.9% from the year ago quarter while production decreased 36.1% to 140 million pounds. Gold sales decreased 15.2% to 162,000 ounces and production declined 1.9% year over year to 208,000 ounces in the reported quarter. Both gold and copper sales declined in the quarter due to lower milling rates as a result of the restrictions on concentrate exports from Indonesia.

In Jan 2014, the Indonesian government published regulations providing that holders of contracts of work with existing processing facilities in Indonesia could continue to export product through Jan 12, 2017, but established new requirements for the continued export of copper concentrates, including the imposition of a progressive export duty on copper concentrates in the amount of 25% in 2014, rising to 60% by mid-2016.
 
Africa Mining: Copper sales of 84 million pounds represent a year over year decline of 28.9%, reflecting timing of shipments and lower grade ore. Production decreased 9.2% to 109 million pounds in the quarter. The sales at the mine are expected to be about 440 million pounds of copper and 30 million pounds of cobalt in 2014.

Molybdenum: Molybdenum production of 13 million pounds in the first quarter was higher than first-quarter 2013 production of 12 million pounds. Weak demand in the metallurgical sector is affecting the business. Freeport will make requisite adjustments to its primary molybdenum production after reviewing the market conditions.
 
Financial Position
 
Freeport had cash and cash equivalents of $1,378 million as of Mar 31, 2014, compared with $9,595 million as of Mar 31, 2013. Freeport had long-term debt of $19.8 billion as of Mar 31, 2014, compared with $10.1 billion as of Mar 31, 2013.
 
Freeport's operating cash flows were $1.2 billion in the first quarter compared with $831 million in the year ago quarter. Capital expenditures totaled $1.6 billion in the reported quarter including $0.7 billion for major projects at mining operations and $0.6 billion for oil and gas operations.  
 
Oil and Gas Operations (FMO&G)
 
In May and early June of 2013, Freeport completed the acquisitions of Plains and McMoRan Exploration and formed a premier U.S. based natural resource company collectively called FM O&G, and added a high quality portfolio of U.S.-based oil and gas assets to its global mining business.
 
In the first quarter, realized revenues for oil and gas operations were $1.2 billion ($77.22 per barrels of oil equivalents/BOE). Cash production costs totaled $298 million ($18.51 per BOE) in first-quarter 2014. Sales volume was 16.1 million barrels of oil equivalent (MMBOE) in the quarter, ahead of the company's forecast of 15.3 MMBOE.
 
Guidance
 
For 2014, Freeport expects consolidated sales from mines of 4.3 billion pounds of copper, 1.6 million ounces of gold, 97 million pounds of molybdenum and 64.2 MMBOE. The estimates assume resumption of exports from PT-FI beginning in May 2014. Till the time PT-FI is unable to resume exports in May 2014, this would result in a deferral of roughly 50 million pounds of copper and 80 thousand ounces of gold per month.
 
For the second quarter, the company expects 1.1 billion pounds of copper, 320,000 ounces of gold, 24 million pounds of molybdenum and 15.2 MMBOE. Consolidated unit net cash costs (net of by-product credits) for copper mines are expected to average $1.58 per pound of copper in second-quarter 2014 and $1.41 per pound of copper for 2014.

The impact of price changes for the remainder of 2014 on consolidated unit net cash costs would be roughly $0.017 per pound for each $50 per ounce change in the average price of gold and $0.015 per pound for each $2 per pound change in the average price of molybdenum.

Cash production costs per BOE are expected to be around $19 per BOE for 2014.
 
For 2014, capital expenditures are expected to be roughly $7 billion, including $3 billion for major projects at mining operations and $3 billion for oil and gas operations.

Freeport aims at reducing debt by the end of 2016 using cash flows generated above capital expenditures and other cash requirements. The company will seek opportunities to accelerate its deleveraging plans through potential asset sales, joint venture transactions or other monetizations and is engaged in discussions with a number of third parties to achieve this objective.
 
Freeport currently retains a Zacks Rank #3 (Hold).
 
Other mining companies with favorable Zacks Rank include General Moly, Inc. GMO, North American Palladium Ltd. PAL and Alcoa Inc. AA. While both General Moly and North American Palladium hold a Zacks Rank #1 (Strong Buy), Alcoa carries a Zacks Rank #2 (Buy).