Freeport McMoRan Copper (
), the world's largest copper miner, is set to release its Q3
earnings on Tuesday, October 22. The majority of the company's
revenues are derived from copper sales, which is extremely
sensitive to cyclical industries such as construction and
industrial machinery manufacturing. These industries in turn are
heavily influenced by the macroeconomic sentiment and outlook.
Macroeconomic factors in the third quarter have shown some
improvement, especially as far as China is concerned. Therefore,
copper prices on the London Metal Exchange increased gradually
throughout the third quarter. Still, Freeport is likely to report
lower year-over-year copper revenues due to much lower prices in Q3
2013 as compared to Q3 2012.
However, supply disruptions this year are now expected be much
below historical levels. This will lead to a higher supply surplus
than earlier expected. A higher surplus, in turn, will lead to
lower copper prices going forward, thus having a negative impact on
We have a
Trefis price estimate for Freeport McMoran Copper of
, which represents 11% downside to the market price.
See our full analysis for Freeport McMoran
Effect Of Macroeconomic Factors On Copper Prices
Copper is often called "Dr. Copper" for being a bellwether
of the world economy due to its close correlation with economic
growth. It is used by many industries and prices typically rise
when the world economy is growing. Hence, macroeconomic factors are
important for copper and Freeport.
Going by the copper price data on the London Metal Exchange
(LME), the average realized price of copper for Freeport is likely
to be lower this quarter on a year-over-year and sequential basis.
While copper prices on the LME inched upwards continuously in the
third quarter after bottoming out at the end of June, the average
price level was lower than in the previous quarter.
The upward price trend in the third quarter is in line with the
Chinese GDP growth rate of 7.8% for the quarter. The third quarter
growth rate was higher than the growth rates of 7.7% and 7.5%
observed in the first two quarters respectively.
Impact Of Grasberg Shutdown
Volumes sold are not likely to be higher year-over-year,
especially with the Grasberg open-pit mine still functioning at 85%
of its production capacity and the underground mine remaining
closed. Operations at Grasberg had remained halted for many weeks
in the second quarter, following two accidents which resulted in
worker fatalities. Since the underground mine at Grasberg accounts
for nearly 36% of Freeport's total production of 220,000 tonnes of
copper, the negative impact on revenues in the third quarter could
Pay Negotiations Nearly Complete
Pay negotiations between Freeport and workers in Indonesia for
2013-15 are nearly done and the company has stated that a tentative
agreement has been reached. Freeport has faced considerable labor
problems at its Grasberg operations in the past, with workers
resorting to strikes and indulging in violent clashes with the
police over compensation issues. The company employs around 24,000
workers in Indonesia and of these, three-quarters are union
members. The final agreement will be applicable with retrospective
effect from October 1, 2013.
Peaceful and non-acrimonious conclusion of pay negotiations will
ensure that Freeport's operations are not disrupted going forward.
Negotiations were expected to be quite difficult this year for
Freeport because of safety concerns that arose due to recent
accidents, which resulted in the deaths of many workers.
In the earnings conference call, we would be interested in
Freeport's take on reports that copper prices are likely to fall
going ahead because supply disruptions this year are at their
lowest in a decade, thus exacerbating the supply surplus
a company's products impact its stock price at Trefis