Freeport-McMoRan Copper & Gold Inc. (FCX) reported earnings of 49 cents per share for second-quarter 2013, a decline of 33.8% from the year ago earnings of 74 cents. But it beat the Zacks Consensus Estimate of 41 cents. Profit slid 32% year over year to $482 million, hurt by lower price.
The results include net income of 27 cents per share related to the acquisition of Plains Exploration & Production Company and McMoRan Exploration Co. which were completed during the second quarter.
Revenues fell roughly 4.2% year over year to $4.29 billion in the second quarter, missing the Zacks Consensus Estimate of $4.45 billion.
Consolidated sales from mines increased to 951 million pounds of copper from 927 million pounds in the year ago quarter due to higher sales from America and Africa. Sales from gold decreased to 173,000 ounces of gold from 266,000 ounces in the prior-year quarter led by lower production in Indonesia due to temporary closure of operations following a tragic accident.
Sales of molybdenum increased to 23 million pounds in the reported quarter from 20 million pounds in the second quarter of 2012 driven by stronger sales in the metallurgical and chemical sectors.
Operational Update
Consolidated average unit net cash costs (net of by-product credits) increased to $1.85 per pound of copper in the quarter from $1.49 per pound a year ago, mainly attributed to lower copper and gold volumes in Indonesia, anticipated higher mining rates in North America and the impact of lower gold prices in net by-product credits.
Average realized price per ounce for gold fell to $1,322 from $1,588 a year ago while average realized price per pound for copper declined to $3.17 from $3.53 in the prior-year quarter.
Mining Update
North America Copper Mines: Copper sales at the mine increased 3% year over year to 372 million pounds, due to increased production at the Chino mine. Production jumped 5.4% to 349 million pounds in the reported quarter.
South America Mining: Copper sales of 315 million pounds rose 4.7% from the year ago quarter mainly due to the timing of shipments. Gold sales surged 10.5% to 21,000 ounces. Copper production declined 1.6% to 299 million pounds in the reported quarter and gold production jumped 5.6% to 19,000 ounces in the quarter.
Indonesia Mining: Copper sales of 158 million pounds dropped 13.7% from the year ago quarter while production declined 19.7%. Gold sales fell 38.9% and production tumbled 43%. The decline was due to an accident that occurred at PT Freeport Indonesia and resulted in about 28 fatalities and 10 injuries.
That resulted in a temporary suspension of operations at the mine. The work, when resumed, negatively affected production of about 125 million pounds of copper and 125 thousand ounces of gold in the second quarter of 2013.
Africa Mining: Copper sales of 106 million pounds represents a year over year increase of 29.3%, reflecting higher mining and milling rates mainly related to the ramp up of the expansion project and higher ore grades. Production increased 54.4% to 122 million pounds in the quarter.
Molybdenum: Molybdenum production of 13 million pounds in second-quarter 2013 was higher than second-quarter 2012 production of 9 million pounds.
Financial Position
Freeport had cash and cash equivalents of $3.3 billion as of Jun 30, 2013, compared with $3.7 billion as of Dec 31, 2012.
Freeport had long-term debt of $21.2 billion (includes $10.5 billion of acquisition related debt, $7.5 billion assumed debt of Plains and McMoRan Exploration and $3.6 billion of its existing debt) as of Jun 30, 2013, compared with debt of $3.53 billion as of Dec 31, 2012.
Freeport’s operating cash flows were $1 billion in the second quarter of 2013. Capital expenditures totaled $1.2 billion in the reported quarter which also includes $190 million for oil and gas operations for the period beginning Jun 1, 2013.
Acquisition of PXP and MMR
During the second quarter, Freeport completed the acquisition of Plains and McMoRan Exploration and formed a premier U.S. based natural resource company, and added a high quality portfolio of U.S.-based oil and gas assets to its global mining business. Freeport’s second-quarter 2013 financial results include Plains’ operations beginning Jun 1, 2013, and McMoRan Exploration’s operations beginning Jun 4, 2013.
Freeport’s sales from the recently acquired oil and gas operations (FM O&G) totaled 5 million barrels of oil equivalents (MMBOE) for the period from June 1, 2013, through June 30, 2013, including 3.4 million barrels (MMBbls) of crude oil, 7.7 billion cubic feet (Bcf) ofnatural gas and 0.3 MMBbls of natural gas liquids (NGLs).
Cash production costs for oil and gas operations were $16.58 per barrels of oil equivalents (BOE) in Jun 2013. Capital expenditures for FM O&G totaled $190 million during Jun 2013.
Guidance
For 2013, Freeport expects consolidated sales from mines of 4.1 billion pounds of copper, 1.1 million ounces of gold, 92 million pounds of molybdenum and 35 MMBOE. For the third quarter, consolidated sales are estimated at 1.1 billion pounds of copper, 330,000 ounces of gold, 22 million pounds of molybdenum and 15 MMBOE.
Consolidated unit net cash costs (net of by-product credits) for Freeport’s copper mining operations are forecast to be roughly $1.58 per pound of copper for the year 2013. Unit net cash costs are expected to decline during the second half of 2013 and in 2014 as Freeport will gain access to higher grade ore in Indonesia. Cash production costs per BOE are expected to be roughly $19 per BOE in the second half of 2013.
Based on current sales volume and cost estimates Freeport’s consolidated operating cash flows are estimated to approximate $5.8 billion for 2013. Capital expenditures are anticipated to be about $5.5 billion for the year 2013, including $2.3 billion for major projects at mining operations and $1.5 billion for oil and gas operations (for the period beginning June 1, 2013).
Our Take
Freeport’s strategy is to reduce debt and maintain a strong balance sheet, while investing in financially attractive projects and providing cash returns to shareholders. The company is working in sync with its plans and is also conducting explorations close to its existing mines with a goal to boost reserves which will facilitate the development of additional future production capacity across the large minerals districts where it operates.
Moreover, the acquisitions of Plains and McMoRan Exploration will usher in new opportunities. However, higher production cost is a concern for Freeport.
Freeport, which is among the prominent players in the mining industry along with Newmont Mining Corporation (NEM), Barrick Gold Corporation (ABX) and Kinross Gold Corporation (KGC), currently retains a short-term Zacks Rank #3 (Hold).
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