Freeport McMoran Triples Profit With Record Copper Prices

Freeport-McMoRan, the world’s biggest publicly listed copper producer more than tripled its profit in Q3. Higher copper prices and an increase in demand for the metal at a time when copper inventories are plunging. $FCX has been repaying debt and distributing dividends from the surge in revenues.

Freeport McMoRan Copper Mine

FCX released its Q3 numbers on Oct. 21 with adjusted net income was $1.3 billion, or 89 cents per share, compared with $430 million, or 29 cents per share, a year earlier. The mining company posted revenue of $6.08 billion in the period, falling short of Street forecasts. Analysts were calling for quarterly EPS of 81 cents and revenue of $6.2 billion.

Last quarter, the company reported 77 cents in EPS, beating consensus estimates by 1.3%. Analysts expect that the stock’s momentum will continue. Among 18 analysts covering the company, the stock has an average price target of $43. Shares closed at $38.64 on Oct. 15.

The company’s average realized price for a pound of copper rose about 40%, while production of the metal increased about 17% to 987 million recoverable pounds.

“There’s going to be a time when the world is going to be very short of copper,” Freeport CEO Richard Adkerson told investors after the company posted better-than-expected quarterly results. “Supply is a real issue for this industry.”

Last quarter, Freeport-McMoRan’s revenue jumped 88% year over year sending cash from operations up almost fivefold which enabled FCX to repay debt and reaffirm its intention to return more capital to shareholders. With copper just hitting a record high of $4.78 per pound, or near $10,518 per metric ton on COMEX it is expected Freeport-McMoRan will deliver bumper profits for its third quarter and distribute larger dividends over its base annual dividend of $0.30 a share.

Freeport Copper Projects

Copper In 2021

The price of copper started to rally alongside other metals, hiting a record high of $4.78 per pound, or roughly $10,518 per metric ton on COMEX. Post the Covid-19 pandemic the tight global supply saw copper inventories at the London Metal Exchange (LME) tumbling to levels last seen in 1974.

Copper W 10 15 2021

The LME had only around 14,150 metric tons of copper not marked for delivery. For perspective, nearly 25 million metric tons of copper are consumed globally every year. Copper was already in demand pre the pandemic with demand from electrical equipment, industrial machinery and construction, specifically roofing and plumbing. From there copper is used in electric vehicles and renewable energy industries like wind, fueling demand even further. Then in 2021 the power crisis in China and Europe’s power crisis has seen supplies shortern further.

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 18 momths 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 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 affect of asset sales While copper prices are soaring today 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. 

Feeport-McMoRan debt load and why

$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. 

Geopolitical Risk

Global commodity companies have another risk, geopolitical. Freeport-McMoRan this year had a number of disputes at its Grasberg Mine in Indonesia (image above). In January 2017 $FCX suspended copper exports due to a contract dispute with the government. It took until  April for exports to flow again. 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.

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 measure.

There is the added risk of will they replicate the same type of errors again? Are they good commodity managers?

About Freeport

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.

Source: FCX

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