What to expect with Freeport McMoran Earnings

Freeport-McMoRan, the world’s biggest publicly listed copper producer reports quarterly earnings on October 20. FCX has significant reserves of copper, gold, molybdenum, cobalt, oil, and gas. The company is a key player in energy transition. FactSet analyst estimates provide an EPS consensus of $0.30 and a sales consensus of $4.99bn. FCX stock price has been largely mirroring copper prices and has traded between $24.80 and $51.99 and year-to-date the stock price is down over -32.2% at around $28.14. $FCX has been repaying debt and distributing dividends from the surge in revenues.

Freeport McMoRan Copper Mine

Freeport-McMoRan Earnings Preview

Q3 2022 earnings release at 6:15 a.m. ET; conference call at 8:30 a.m ET

  • Consensus EPS Estimates: $0.30
  • Consensus Revenue Estimates: $4.99bn
  • 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 trades at around $28.16

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.

Freeport Copper Projects

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. 

Geopolitical Risk

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.

Grasberg Underground via FCX

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?

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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