What to Expect from Freeport (FCX) This Earnings Season?

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Freeport-McMoRan Inc.FCX is set to release third-quarter 2015 results ahead of the bell on Oct 22, 2015.

Last quarter, the mining company delivered a positive earnings surprise of 27.27%. Freeport has beaten the Zacks Consensus Estimate in two of the trailing four quarters while missing in the other two with an average negative surprise of 12.02%.

Let's see how things are shaping up for this announcement.

Factors to Watch For

Freeport posted a huge loss in the second quarter of 2015 as depressed copper and gold prices dented its bottom line. The company also incurred a huge impairment charge related to its oil and gas properties. Adjusted earnings, however, topped the Zacks Consensus Estimate. Revenues fell by double-digits and missed expectations.

For the third quarter, the company expects to produce 1 billion pounds of copper, 315,000 ounces of gold, 24 million pounds of molybdenum and 13.6 million barrels of oil equivalent (MMBOE).

Freeport is conducting exploration activities near its existing mines in order to expand reserves that will support the development of additional future production capacity in the large minerals districts, where it currently operates. Favorable exploration results indicate opportunities for significant future potential reserve additions in North and South America and in the Tenke Fungurume minerals district.

Freeport continues to progress with its expansion initiatives. The company is evaluating a potential large-scale milling operation at El Abra mine in Chile to process additional sulfide material and attain higher recoveries. At Cerro Verde, Peru, a large-scale concentrator expansion continues to advance. The roughly $4.6 billion project would provide incremental annual production of around 600 million pounds of copper and 15 million pounds of molybdenum beginning in 2016.

However, Freeport's copper business remains affected by the sluggish global economy and supply related issues. The difficult market conditions in Europe are still impacting the copper markets. Demand from key end markets, including construction materials and electronics, still remain weak. The slowdown in China (a major market for copper) adds to the concern.

The Grasberg minerals district, the most significant operating asset for Freeport, is still exposed to Indonesian political, economic and social uncertainties. The mine remains susceptible to strikes, which could affect production due to reduced capacity.

Adding to the problem is the slump in oil prices which is hurting Freeport's oil and gas business. The company may also see further impairment charges related to this business, which will affect its profitability in the future reporting periods.

Freeport, however, is taking aggressive actions to manage costs and capital expenditures amid a difficult pricing backdrop in a bid to strengthen its balance sheet.

Earnings Whispers

Our proven model does not conclusively show that Freeport will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Ranks #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Negative Zacks ESP: The Earnings ESP for Freeport is -12.50% as the Most Accurate estimate is currently at a loss of 9 cents while the Zacks Consensus Estimate is at a loss of 8 cents.

Zacks Rank: Freeport currently carries a Zacks Rank #3 (Hold), which when combined with a negative ESP makes surprise prediction difficult.

We caution against stocks with a Zacks #4 or 5 Ranks (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies in the basic materials sector that you may want to consider, as our model shows they have the right combination of elements to post an earnings beat this quarter:

Franco-Nevada Corporation FNV has an earnings ESP of +7.14% and a Zacks Rank #3.

The Chemours Company CC has an Earnings ESP of +6.90% and a Zacks Rank #3.

Commercial Metals Company CMC has an Earnings ESP of +4.65% and a Zacks Rank #3.

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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 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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