Freeport-McMoRan, the world’s biggest publicly listed copper producer reported quarterly earnings on Thursday of $404 million from $1.4 billion in the year-ago quarter due to lower copper prices. The results beat expectations and FCX gave a bullish demand outlook for copper going forward. FCX has significant reserves of copper, gold, molybdenum, cobalt, oil, and gas. The company is a key player in energy transition. FCX stock price has been largely mirroring copper prices. $FCX has been repaying debt and distributing dividends from the surge in revenues.
Q3 2022 earnings released at 6:15 a.m. ET; conference call at 8:30 a.m ET
- Net income fell to $404 million, or 28 cents per share from $1.4 billion, or 94 cents per share, in the year-ago quarter.
- Beat consensus EPS Estimates of $0.26 according to IBES data from Refinitiv.
- Revenue was reported $5 billion, beating estimates of $4.99bn. In the same quarter a year ago, the company earned $0.89 per share on revenue of $6.1 billion.
- Quarterly copper production rose 7% to 1.06 billion recoverable pounds.
- Average realized price for copper dropped 16.7% to $3.50 per pound at the end of the third quarter, compared with last year.
- Average unit net cash costs of $1.75 per pound of copper were 41% higher than Q3 2021 average of $1.24 per pound on higher energy prices and increased costs for other consumables such as sulfuric acid, explosives, key equipment parts and other supplies and services.
- Copper traded on the LME up 2.2% to $7,549 a metric ton on Thursday, trimming the year-to-date loss to 22%.
“We certainly have no problem selling copper,” Freeport Chief Executive Richard Adkerson told investors on a conference call. “It’s just striking how negative the financial markets are about this industry and yet the physical market is so tight.”
- Produced 448 thousand ounces of gold in Q3 2022, an increase of 20% over Q3 2021 (374 thousand ounces), reflecting increased operating rates at the Grasberg minerals district.
- Molybdenum production was down 17% to 19 million pounds, primarily reflecting lower by-product production from certain copper mines.
- FCX price-to-earnings ratio (P/E) of 8.9.
- FCX price-to-book-value (P/BV) is 2.85.
- FCX stock dividend yield of 2.04%.
- FCX stock traded between $24.80 and $51.99, today closed 29.12+0.76 (+2.68%)
Chairman and CEO Richard C. Adkerson commented, “FCX’s position as a global leader in the copper industry, together with a solid balance sheet, long-lived assets and experienced team, provide strength as we navigate the current global market uncertainties. Our performance in Q3 2022 reflects the global team’s focus on achieving our production plans in a challenging cost and supply chain environment.
“Despite near-term uncertainties, the long-term market fundamentals and value opportunities for our stakeholders remain highly attractive. I am confident that our strategy centered on being Foremost in Copper will be positive for all stakeholders as global conditions improve.”
FCX has mirrored the fall in Copper since the Feb Highs
Freeport’s copper production has been trending higher, over the first six months of 2022, copper output was up 14% versus last year, led by higher volumes from the Grasberg mine in Indonesia, and the company’s South American operations, and this momentum could continue over Q3 as well. However, the pricing environment is likely to be more challenging.
Copper prices have fallen from about $4.40 per lb in September 2021 to about $3.50 per lb as of September 2022. The three-month forward copper price at the end of June stood at $3.75 per pound, compared to the average $4.18 per pound the company realized over the first six months of the year.
Copper futures prices rose at the start of October for seven consecutive trading days. The front-month copper futures contract rose 0.4% to $3.5325. That was the longest winning streak since February 2021. Copper prices have bounced from their lowest level since November 2020 but still off about 30% from 2022 highs. The tight supply from Chile, coupled with lower supply from the ongoing war in Ukraine, has boosted prices. The strength in copper had been boosted by a weaker USD off 25 years plus highs. Since then, the USD has soared higher still.
How to Value Freeport-McMoran
Freeport-McMoRan is the largest U.S.-based, and among the world’s five largest copper mining companies in terms of 2020 production. The last few years has been a dramatic change in fortunes for the company as copper prices hit a new high.
When valuing $FCX as an investment, or a short for that matter means understanding what they went through since 2011 and what they have done to dig out of that hole. There is of course the all-important stock market and commodity specific risk to consider also. Freeport’s earnings in the past were hammered by write-offs, in 2016 the company reported a loss of $4.1 billion, or $3.16 per share. What saved them was they still had $3.7 billion of operating cash flow. The effect of asset sales. While copper prices soared in early 2022 unfortunately for FCX they were not able to benefit from the copper prices as much as they would like in Q217 as copper sales declined to under 3.9 billion pounds from 4.65 billion pounds in 2016. This has much to with asset sales, quality assets sold off to pay down debt.
Freeport-McMoRan debt load and why
FCX today has a relatively strong balance sheet (net debt of just about $1.6 billion) which should make it more resilient to an economic downturn. Why, well it’s important to understand just how dire it got at the company.
$FCX company had a massive hole of unproductive debt, yes it has been cut down but is still huge and good assets have gone as we saw with copper sales. Net debt was down from $20 billion to $11.8 billion over 2017. The forecast is for its leverage ratio to average around 1.5 times that year, high in a cyclical bear commodity market.
Looking back then to today is a judgement on where does it go from here given the massive debt and losses back then. Has management improved to offset any future cyclical moves?
What hangs over Freeport-McMoRan is they did two massive deals in 2012 when oil was over $100 a barrel and natural gas was at $4.50 per million Btu. The deals were for over $20 billion. Copper was $3.50 per pound and gold $1,500 per ounce at the time. Of course as history showed us that was around the peak and the commodity rout took hold. The deals were closed mid-2013 and the massive overpay has wreaked havoc.
To pay down debt in 2014 it sold its Eagle Ford Shale assets to Encana $ECA for $3.1 billion. While they used half to buy Gulf of Mexico assets from Apache $APA. Earlier this year $FCX sold its California onshore oil and gas properties to a private buyer for $720 million.
Freeport-McMoRan has raised only $4.4 billion from those oil and gas assets from 2012. There are some oil properties left. Thats a huge chunk gone. $FCX also had equity raisings yet the debt level was still $15.4 Billion of debt at the end of 2Q17 with $4.7 Billion in cash.
Global commodity companies have another risk, geopolitical. Freeport-McMoRan over the years has had a number of disputes at its Grasberg Mine in Indonesia. In January 2017 $FCX suspended copper exports due to a contract dispute with the government. It took until over two years later for exports to flow again. This happened because the Indonesian government agreed to allow the company to continue shipping for six months while it negotiated a new operating license with FCX. Hence the issue remains a risk and unresolved.
Then as soon as exports were back on in May more than over 5,000 workers at the mine went on strike. An added risk to the mine and therefore the firm’s cash flow.
The issues have been largely resolved and FCX was able to reap the benefit of 202/22 of high Copper and Gold prices and pay down debt. Of course, the flipside is should Freeport-McMoRan resolve these issues, earnings keep improving and debt paid down they do appear cheap relative to their major competitors like the Australian mining giants $BHP and Rio Tinto $RIO on several measures.
There is the added risk of will they replicate the same type of errors again? Are they good commodity managers?
FCX is a leading international mining company with headquarters in Phoenix, Arizona. FCX operates large, long-lived, geographically diverse assets with significant proven and probable reserves of copper, gold and molybdenum.
FCX is one of the world’s largest publicly traded copper producers. FCX’s portfolio of assets includes the Grasberg minerals district in Indonesia, one of the world’s largest copper and gold deposits; and significant mining operations in North America and South America, including the large-scale Morenci minerals district in Arizona and the Cerro Verde operation in Peru.
From the Traders Community News Desk