Freeport’s (FCX) Q2 Earnings, Revs Top Ests

Freeport-McMoRan Copper & Gold Inc. (FCX) reported earnings of 46 cents per share for second-quarter 2014, reflecting a decline of roughly 6 % from the year ago earnings of 49 cents. Profit remained flat year over year at $482 million.

The results include charges of $130 million or 12 cents per share related to environmental obligations and related litigation charges, deferred taxes recorded in connection with the allocation of goodwill to the sale of Eagle Ford and net non-cash mark-to-market losses on oil and gas derivative contracts. Barring that impact, earnings were 58 cents a share in the second quarter, topping the Zacks Consensus Estimate of 49 cents.

Revenues rose 28.8% year over year to around $5.52 billion in the second quarter, and surpassed the Zacks Consensus Estimate of $5.33 billion.

Consolidated sales from mines increased to 968 million pounds of copper in the second quarter from 951 million pounds in the year-ago quarter. Sales of gold declined to 159,000 ounces in the reported quarter from 173,000 ounces a year-ago.

Lower copper and gold sales volumes were due to lower volumes from PT Freeport Indonesia (PT-FI) because of the post-January 12, 2014, restrictions on concentrate exports from Indonesia, which resulted in a deferral of roughly 150 million pounds of copper and 240,000 ounces of gold in the reported quarter.

Sales of molybdenum increased to 25 million pounds in the reported quarter from 23 million pounds in the second quarter of 2013.

Operational Update

Consolidated average unit net cash costs (net of by-product credits) decreased to $1.72 per pound of copper in the quarter from $1.85 per pound a year ago.

Average realized price per ounce for gold fell to $1,302 per ounce from $1,317 per ounce a year ago while average realized price per pound for copper increased to $3.17 per pound of copper from $3.13 per pound of copper in the prior-year quarter.

Mining Update

North America Copper Mines: Copper sales at the mine increased 13.7% year over year to 423 million pounds and production rose 13.2% to 395 million pounds in the reported quarter. Sales increased on the back of higher milling rates and ore grades at several operating sites. Freeport expects copper production to be 1.7 billion pounds in 2014, up from 1.4 billion in 2013 resulting from higher production from Morenci mill expansion project.

South America Mining: Copper sales of 310 million pounds declined slightly by 1.6% from the year ago quarter mainly due to shipment timings. Gold sales went down 4.8% to 20,000 ounces. Copper production inched up 0.3% to 300 million pounds in the reported quarter and gold production increased 10.5% to 21,000 ounces in the quarter. South America mining is expected to report sales of 1.2 billion pounds of copper in 2014.

Indonesia Mining: Copper sales of 117 million pounds declined 25.9% from the year ago quarter while production decreased 12.2% to 122 million pounds. Gold sales decreased 10.6% to 135,000 ounces but production increased 8.4% year over year to 142,000 ounces in the reported quarter. Both gold and copper sales declined in the quarter due to lower milling rates as a result of continued restrictions on concentrate exports from Indonesia.

In Jan 2014, the Indonesian government published regulations providing that holders of contracts of work with existing processing facilities in Indonesia could continue to export product through Jan 12, 2017, but established new requirements for the continued export of copper concentrates, including the imposition of a progressive export duty on copper concentrates in the amount of 25% in 2014, rising to 60% by mid-2016.

Africa Mining: Copper sales of 118 million pounds represent a year over year increase of 11.3%, reflecting timing of shipments. Production decreased 6.6% to 114 million pounds in the quarter. The sales at the mine are expected to be about 440 million pounds of copper and 30 million pounds of cobalt in 2014.

Molybdenum: Molybdenum production of 14 million pounds in the second quarter was higher than second-quarter 2013 production of 13 million pounds due to improved demand in the metallurgical sector. Freeport will make requisite adjustments to its primary molybdenum production after reviewing the market conditions.

Financial Position

Freeport had cash and cash equivalents of $1,458 million as of Jun 30, 2014, down 56% from $3,294 million as of Jun 30, 2013. Freeport had long-term debt of $17.5 billion as of Jun 30, 2014, down 17% from $21.1 billion as of Jun 30, 2013.

Freeport’s operating cash flows were $1.4 billion in the second quarter compared with $1 billion in the year ago quarter. Capital expenditures totaled $2 billion in the reported quarter including $0.7 billion for major projects at mining operations and $0.9 billion for oil and gas operations.

As of May 30, 2014, Freeport amended its revolving credit facility, extending the maturity date by one year, to May 31, 2019, and increased the aggregate principal amount available from $3 billion to $4 billion.

Oil and Gas Operations (FMO&G)

In May and early June of 2013, Freeport completed the acquisitions of Plains and McMoRan Exploration and formed a premier U.S. based natural resource company collectively called FM O&G, and added a high quality portfolio of U.S.-based oil and gas assets to its global mining business.

In the second quarter, realized revenues for oil and gas operations were $1.2 billion ($77.53 per barrels of oil equivalents/BOE). Cash production costs totaled $314 million ($19.57 per BOE) in the quarter. Sales volume was 16 million barrels of oil equivalent (MMBOE) in the quarter.

Acquisitions

In Jun 2014, FM O&G completed the sale of the Eagle Ford shale assets for cash consideration of $3.1 billion. FM O&G's Eagle Ford interests included about 45,500 net acres with estimated net proved reserves of 59 MMBOE and estimated net proved and probable reserves of 69 MMBOE at the end of 2013. FM O&G's second-quarter 2014 results included 4 MMBOE of sales volumes from the Eagle Ford field through June 19, 2014.

FM O&G also completed the acquisition of interests in the Deepwater Gulf of Mexico (GOM), including interests in the Lucius and Heidelberg oil production development projects and several exploration leases, for $0.9 billion on Jun 30, 2014.

Guidance

For 2014, Freeport expects consolidated sales from mines of 4.1 billion pounds of copper, 1.3 million ounces of gold, 98 million pounds of molybdenum and 58.4 MMBOE. The estimates assume resumption of exports from PT-FI beginning in Aug 2014. Till the time PT-FI is unable to resume exports in Aug 2014, this would result in a deferral of roughly 50 million pounds of copper and 80,000 thousand ounces of gold per month.

For the third quarter, the company expects 1.1 billion pounds of copper, 445,000 ounces of gold, 23 million pounds of molybdenum and 12.2 MMBOE. Consolidated unit net cash costs (net of by-product credits) for copper mines are expected to average $1.44 per pound of copper in the third quarter and $1.50 per pound of copper for 2014.

The impact of price changes for the remainder of 2014 on consolidated unit net cash costs would be roughly $0.013 per pound for each $50 per ounce change in the average price of gold and a penny per pound for each $2 per pound change in the average price of molybdenum.

Cash production costs per BOE are expected to be around $22 per BOE for the second half of 2014.

For 2014, capital expenditures are expected to be roughly $7.6 billion, including $3.2 billion for major projects at mining operations and $3.4 billion for oil and gas operations.

Freeport aims at reducing debt by the end of 2016 using cash flows generated above capital expenditures and other cash requirements. The company will seek opportunities to accelerate its deleveraging plans through potential asset sales, as well as evaluate its portfolio for potential future monetizations and will take additional steps to reduce or defer capital spending and other costs in response to market conditions.

Freeport currently retains a Zacks Rank #3 (Hold).

Other mining companies with favorable Zacks Rank include Atlatsa Resources Corp. (ATL), Kazakhmys PLC (KZMYY) and Alcoa Inc. (AA). All of them hold a Zacks Rank #2 (Buy).