Freeport's Earnings Beat, Profit Slides - Analyst Blog

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Freeport-McMoRan Copper & Gold Inc. 's ( FCX ) adjusted earnings (excluding one-time charges) of 73 cents per share for first-quarter 2013 beat the Zacks Consensus Estimate by a penny but exceeded the year ago earnings of 96 cents.

Including debt extinguishment costs for the termination of the acquisition bridge loan facilities and acquisition costs, net income for the quarter was $648 million, 68 cents per share. This represents roughly 15% fall from the prior-year quarter's net income of around $764 million or 80 cents per share. The results were affected by higher costs and lower copper prices.

Revenues fell roughly 0.5% year over year to $4.58 billion in the first quarter, missing the Zacks Consensus Estimate of $4.81 billion.

Consolidated sales from mines increased to 954 million pounds of copper from 827 million pounds in the year ago quarter due to higher production from Indonesia and Africa. Sales from gold decreased to 214,000 ounces of gold from 288,000 ounces in the prior-year quarter led by lower ore grades in Indonesia.

Sales of molybdenum increased to 25 million pounds in the reported quarter from 21 million pounds in the first quarter of 2012 driven by stronger sales in the metallurgical and chemical sectors.

Operational Update

Consolidated average unit net cash costs (net of by-product credits) increased to $1.57 per pound of copper in the quarter from $1.26 per pound a year ago, mainly attributed to lower by-product credits. Operating income declined 21.9% to $1.36 billion from $1.73 billion in the year-ago quarter.

Mining Update

North America Copper Mines: Copper sales at the mine increased 4.4% year over year to 353 million pounds, due to increased production at the Chino mine. Production inched up 1.8% to 343 million pounds in the reported quarter.

South America Mining: Copper sales of 285 million pounds were almost at par with the sales reported in the year ago quarter as higher grade ore at Candelaria offset lower grade ore at Cerro Verde. Gold sales surged 10.5% to 21,000 ounces. Copper production rose 1.7% to 298 million pounds in the reported quarter and gold production jumped 10.5% to 21,000 ounces in the quarter.

Indonesia Mining: Copper sales of 198 million pounds were significantly higher than the year-ago copper sales of 134 million pounds. The lower sales in 2012 were due to labor problems. Gold sales in the reported quarter declined 28.2% year over year due to lower ore grades from mine sequencing.

Production of copper jumped 78% to 219 million pounds while that of gold decreased by 7.4% 212,000 ounces.

Africa Mining: Copper sales of 118 million pounds represents a year over year increase of 71%, reflecting higher mining and milling rates mainly related to the ramp up of the expansion project and higher ore grades. Production increased 50% to 120 million pounds in the quarter.

Molybdenum: Consolidated molybdenum sales of 25 million pounds in first-quarter 2013 were higher than first-quarter 2012 sales of 21 million pounds.

Freeport Cobalt: In March 2013, Freeport acquired a large-scale cobalt chemical refinery located in Kokkola, Finland, and the related sales and marketing business through the newly formed and wholly consolidated Freeport Cobalt joint venture. Freeport has a 56% ownership interest and is the operator of the joint venture. The acquisition increases Freeport's cobalt marketing presence, and provides direct end-market access for the cobalt hydroxide production from the Tenke Fungurume mine.

Financial Position

Freeport had cash and cash equivalents of $9.60 billion as of Mar 31, 2013, compared with $3.7 billion as of Dec 31, 2012. Cash and cash equivalents as of Mar 31, 2013, also include net proceeds from the Mar 2013 sale of $6.5 billion of senior notes that will be used to fund a portion of the pending acquisitions of Plains Exploration & Production Company ( PXP ) and McMoRan Exploration Co. ( MMR ).

Freeport had long-term debt of $10.1 billion as of Mar 31, 2013, including the Mar 2013 issuance of $6.5 billion of senior notes compared with debt of $3.53 billion as of Dec 31, 2012.

Freeport's operating cash flows were $831 million in the first quarter of 2013 compared with $801 million in the prior-year quarter. Capital expenditures totaled $805 million in the reported quarter compared with $707 million in the year-ago quarter.

Acquisition

The company, in late 2012, forged definitive merger pacts, under which, it will buy Plains Exploration & Production Company and McMoRan Exploration Co. for about $20 billion. During the quarter Freeport completed $10.5 billion in debt financings related to the acquisitions. The acquisitions are expected to close in the second quarter of 2013.

Guidance

For 2013, Freeport expects consolidated sales from mines of 4.3 billion pounds of copper, 1.4 million ounces of gold and 92 million pounds of molybdenum. For the second quarter, consolidated sales are estimated at 1 billion pounds of copper, 295,000 ounces of gold and 23 million pounds of molybdenum.

The company forecasts that its Indonesia mine will produce higher grade ore in the second half of 2013 that will result in higher copper and gold production volumes. About 54% of 2013 consolidated copper sales volumes and 63% of consolidated gold sales volumes are expected in the second half of 2013. As a result of this, quarterly unit net cash costs are expected to decline during the second half of the year.

Based on current sales volume and cost estimates and average price assumption of $1,400 per ounce for gold and $11 per pound for molybdenum, consolidated average unit net cash costs (net of by-product credits) are expected to be $1.45 per pound of copper for 2013.

The company expects to spend $4.4 billion as capital expenditure in 2013, which includes $2.6 billion for major projects and $1.8 billion for sustaining capital. Freeport estimates exploration spending of roughly $235 million in 2013 compared with $251 million in 2012.

The company remains optimistic and intends to develop its resources in a cost effective manner thereby ensuring benefits to its shareholders in the long run.

Our Take

Freeport is conducting explorations close to its existing mines with a goal to boost reserves which will facilitate the development of additional future production capacity across the large minerals districts where it operates.

As per the company's exploration data, there are opportunities for meaningful future reserve additions in North and South America as well as in the Tenke Fungurume minerals district in Congo's Katanga province. We are increasingly optimistic on Freeport's African operations considering the potential at Tenke.

Moreover, the acquisitions of Plains and McMoRan Exploration will usher in new opportunities. However, higher production cost is a concern for Freeport.

Freeport currently retains a short-term Zacks Rank #3 (Hold).
Atlatsa Resources Corporation ( ATL ), which also belongs to the mining industry, holds a Zacks Rank #1 (Strong Buy).



ATLATSA RESRCS (ATL): Free Stock Analysis Report

FREEPT MC COP-B (FCX): Free Stock Analysis Report

MCMORAN EXPLOR (MMR): Free Stock Analysis Report

PLAINS EXPL&PRD (PXP): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: ATL , FCX , MMR , PXP

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