Freeport: Grasberg Ops Normalizing; 3Q Earnings Dip After Metals Prices Fall

Tuesday October 22, 2013 8:55 AM

(Updating earlier story with additional details throughout and comments from company officials during earnings Webcast)

(Kitco News) - Copper and gold production returned to more normal levels in the third quarter at the giant Grasberg mine in Indonesia run by Freeport-McMoRan Copper & Gold Inc. ( FCX ), officials said Tuesday.

Output ramped up after a second-quarter shutdown and the company sequenced into higher ore grades. Further, Freeport officials reported that they just reached a new labor agreement at the mine to avert a strike such as the one that disrupted output two years ago.

Company-wide copper and gold production rose in the July-September period, officials said in a Webcast in conjunction with their third-quarter earnings report. Nevertheless, earnings in the second quarter dropped, with metals prices lower than a year ago.

Net income for the third quarter was $821 million, or 79 cents a share, down from $824 million, or 86 cents a share, in the third quarter of 2012. Freeport reported net income of $2 billion, or $1.96 per share, for the first nine months of the year, compared to $2.3 billion, or $2.41 per share, for the same period a year ago.

Results included net charges for unrealized losses on oil and gas derivative contracts totaling $98 million, or 9 cents a share, for the third quarter and $120 million, or 12 cents per share, for the year to date.

"Our results benefited from a return to normal operations at Grasberg, and we had significant contribution from a full quarter of results at the recently acquired oil and gas business," said Kathleen Quirk, chief financial officer.

Freeport was historically thought of as the world's largest publicly traded copper company. However, the company now describes itself as a leading natural-resources company, since it is also a significant gold producer, the world's leading molybdenum producer and has now entered the oil and gas business. Freeport completed its acquisitions of Plains Exploration & Production Co. and McMoRan Exploration Co. during the second quarter.

Third-quarter copper sales of 1.04 billion pounds were 13% higher than 922 million in the same quarter a year ago, although slightly lower than the company's July estimate of 1.06 billion. Gold sales of 305,000 ounces were 51% higher than year-ago sales of 202,000, reflecting higher ore grades in Indonesia. However, gold sales were lower than the July estimate of 330,000, which Freeport said reflected the timing of shipments in Indonesia and lower South American production.

Freeport's third-quarter copper output was higher than a year ago in North America, South America, Indonesia and Africa.

"Particularly important was the improvement at Grasberg and its operations," said Richard C. Adkerson, vice chairman, president and chief executive officer. "It is now returning to more-normal grade access because of our mining sequencing and improved operating performance at that important asset."

Mining operations at PT Freeport Indonesia ramped up following a 38-day suspension in the second quarter, caused when a rock structure above an underground ceiling for a training facility collapsed unexpectedly.

Third-quarter copper sales in Indonesia were 237 million pounds, with gold sales of 278,000. This compares to 195 million and 178,000, respectively, in the year-ago period.

Indonesian mill rates averaged 198,000 metric tons of ore per day, up from 157,000 in the first half of the year. Copper grades were 0.74%, up from 0.69% in the first half, while the gold grade rose to 0.65 gram per metric ton from 0.53 in the first half. The unit net cash cost per pound of copper fell to 99 cents from $1.95 in the first half, benefitting from higher volumes.

Meanwhile, Adkerson said that the company early Tuesday signed a two-year labor agreement in Indonesia.

"The good news with that is we avoided any kind of work stoppage," he said. "The strike two years ago was a major negative for all of the stakeholders involved there."

Average Metals Prices Down From Year Ago

Average realized prices for the third quarter included $3.28 per pound for copper, compared with $3.64 per pound in the same period of 2012; $1,329 per ounce for gold, compared with $1,728 a year ago; and $11.21 per pound for molybdenum, compared to $13.62. The company received $104.33 per barrel for oil, excluding the impacts of unrealized losses on derivative contracts.

Consolidated average unit net cash costs (net of by-product credits) for FCX's copper mines were $1.46 per pound of copper in third quarter, lower than $1.62 per pound in the year-ago period, primarily reflecting higher copper and gold volumes in Indonesia and ongoing cost control efforts, the company said.

Assuming average prices of $1,300 per ounce of gold and $9.50 per pound of molybdenum for the fourth quarter and achievement of current sales volume and cost estimates, consolidated unit net cash costs for FCX's copper mines are expected to average approximately $1.58 per pound of copper for the year 2013.

Meanwhile, third-quarter molybdenum sales of 23 million pounds were higher than third-quarter 2012 sales of 21 million pounds and the July estimate of 22 million pounds.

Third-quarter sales from oil and gas operations were 16.5 million barrels of oil equivalents (MMBOE), including 11.5 million barrels of crude oil, 23.6 billion cubic feet of natural gas and 1.0 million barrels of natural gas liquids. This was around 10% higher than the July estimate of 15 MMBOE.

For full-year 2013, sales are expected to be approximately 4.1 billion pounds of copper, 1.1 million ounces of gold, 92 million pounds of molybdenum and 37.5 MMBOE. For the fourth quarter, the company looks for 1.1 billion pounds of copper, 390,000 ounces of gold, 21 million pounds of molybdenum and 16 MMBOE.

Operating cash flow in the third quarter was $1.9 billion. As of Sept. 30, consolidated cash was $2.2 billion and consolidated debt was $21.1 billion. Adkerson said officials aim to reduce the debt load to around $12 billion over the next three years while continuing dividends. During the third quarter, FCX paid $1.4 billion in common stock dividends, which included $1 billion for a supplemental dividend of $1 per share paid on July 1.

Capital expenditures were $1.6 billion. This is expected to be around $5.5 billion for the full year, including $2.4 billion for major projects at mining operations and $1.5 billion for oil and gas operations for the period from June 1 to Dec. 31.

Still, Freeport said it is taking steps to achieve reductions and deferrals of capital expenditures, operating, exploration and other costs following its July announcement of $1.9 billion in targeted reductions for 2013 and 2014. FCX also said it is reviewing its portfolio of assets for potential asset sales, joint venture transactions or further adjustments to capital spending plans.

Adkerson said expansions in the company's mining business are progressing. A Morenci expansion in Arizona is on track for completion in the first half of 2014. Also, 70% of engineering is completed on an expansion of Cerro Verde in Peru, with construction in progress, Adkerson said.

Read the latest news in gold and precious metals markets at Kitco News.

By Allen Sykora of Kitco News asykora@kitco.com

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

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

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