Freeport McMoRan Copper (
), the world's largest copper miner, is set to release its Q4
earnings on January 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 fourth quarter were weaker
year-over-year, especially as far as China is concerned. Therefore,
copper prices on the London Metal Exchange in the fourth quarter
were much lower year-over-year. Freeport is likely to report lower
year-over-year copper revenues due to much lower prices in Q4 2013
as compared to Q4 2012.
However, production of copper in Q4 is expected to be higher
year-over-year as production from Grasberg in Indonesia will be
higher due to better ore grades. Also, reported revenues will be
much higher year-over-year as the company has an oil and gas
division this year which wasn't there in 2012.
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 basis.
The lower prices in the fourth quarter this year are in line
with the Chinese GDP growth rate of 7.7% for the quarter. The Q4
2012 GDP growth rate was 7.9%.
Effect Of The New Rules In Indonesia
Fears were being expressed that Indonesia's proposed ore export
ban effective January 12 would cripple Freeport McMoran's copper
operations in the country. It was expected that its copper
production would come down by 60% since it processes only 40% of
its produce before exporting it. Potential revenue losses to the
company were pegged at $5 billion or more. However, a last-minute
intervention by the Indonesian government saved the company
temporarily from the ban. It has been granted time till 2017 to
arrange for its copper to be processed within Indonesia before
exporting it. ((
Here Are the Winners of Indonesia's Ore Ban
, Daily Finance))
However, while granting Freeport an exemption from the ban, the
government simultaneously slapped a new export tax of 25% on the
copper concentrate it will export. While the export tax already
existed and was previously charged at 20%, Freeport had been exempt
from it owing to the terms and conditions laid out in its contract
which does not provide for payment of an export tax. The government
has now effectively violated the contract by slapping a new hefty
tax on Freeport. Indeed, the company said that legal arbitration is
a possibility if the tax is not rolled back.
Meanwhile, Freeport's copper shipments from Indonesia have been
on hold since December 15 in absence of clarity over the new rules.
This means that the company won't be able to record revenues it
could potentially have generated in the latter half of December,
and the impact will be visible in its fourth quarter results. Going
forward, if the government doesn't roll back the proposed tax,
first quarter results for 2014 are certain to be affected.
What We Will Be Watching In The Earnings
In the earnings conference call, we would like to hear Freeport
management's view on copper prices in 2014. The Chinese economy is
in a phase of transformation and moving towards a consumption-led
growth model from an investment-led growth one. The economy is
expected to cool further in 2014 which will have adverse
implications for industrial metals like copper of which China
consumes 40% of the total world production. Indeed, the Chinese GDP
data for the fourth quarter immediately caused the price of copper
We would also like to have a glimpse of Freeport's strategy to
deal with the situation in Indonesia. Specifically, we would like
to know whether the company will continue to keep exports on hold
even if it decides to go for arbitration and the process takes
time. Freeport's decision in this respect will have a material
impact on its revenues and cash flows for the first quarter of 2014
and possibly beyond it.
We have a
Trefis price estimate for Freeport McMoran Copper of
, which represents 18% downside to the market price.
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