Freeport-McMoRan Inc. (FCX) is set to release its third-quarter 2014 results ahead of the bell on Oct 28. Last quarter, the mining company delivered an 18.37% positive surprise.
Freeport has beaten the Zacks Consensus Estimate in all of the trailing 4 quarters with an average positive surprise of 19.92%. The Zacks Consensus Estimate for Freeport for the third quarter has declined around 1.6% to 63 cents per share over the last 7 days.
Let’s see how things are shaping up for this announcement.
Factors to Watch For
Freeport is currently expanding mining and milling capacity at Morenci to process additional sulfide ores identified through positive exploratory drilling. This project would increase milling rates from the current level of 50,000 metric tons of ore per day to roughly 115,000 metric tons of ore per day with a targeted incremental annual copper production of around 225 million pounds in 2014 (up roughly 40% from 2013). Commissioning and start-up of the project began in the third quarter with a ramp-up to full rates expected by the end of 2014.
Freeport continues to progress with its expansion initiatives in Latin America. Based on promising exploration results, the company is evaluating a potential large-scale milling operation at El Abra mine in Chile to process additional sulfide material and attain higher recoveries.
At Cerro Verde, Peru, a large-scale concentrator expansion continues to advance. The roughly $4.4 billion project would expand the concentrator facilities from 120,000 metric tons of ore per day to 360,000 metric tons of ore per day and provide incremental annual production of around 600 million pounds of copper and 15 million pounds of molybdenum beginning in 2016. The company has completed most of the enginnering works and constrcution is currently underway.
On Jul 25, 2014, PT Freeport Indonesia (PT-FI) and the Indonesian government entered into a Memorandum of Understanding (MOU) under which PT-FI and the government agreed to negotiate an amended Contract of Work (COW) to address provisions related to the size of PT-FI’s concession area, royalties and taxes, domestic processing and refining, divestment, local content, and continuation of operations post-2021. Execution of the MOU enabled the resumption of concentrate exports, which began in Aug 2014.
The revisions to the COW are expected to result in additional costs for the company’s Indonesian operations. The company cannot predict whether it will be successful in reaching a satisfactory agreement on the terms of its long-term mining rights. If the company is unable to reach an agreement with the government on its long-term rights, it might need to reduce or defer investments in its underground development projects, which would negatively impact future production and reserves.
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.
The company completed the sale of the Eagle Ford asset and the acquisition of the deepwater Gulf of Mexico interest that enhanced its position for the focus area of its growth in oil and gas business for the future.
Earnings Whispers
Our proven model does not conclusively show that Freeport will beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) and a Zacks Ranks #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Negative Zacks ESP: The Earnings ESP for Freeport is -4.76% — the difference between the Most Accurate estimate of 60 cents and the Zacks Consensus Estimate of 63 cents.
Zacks Rank #5 (Strong Sell): Freeport currently holds a Zacks Rank #5. We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revisions.
Stocks That Warrant a Look
Here are some other mining companies you may want to consider, as our model shows they have the right combination of elements to post an earnings beat this quarter:
U.S. Silica Holdings, Inc. (SLCA) has an earnings ESP of +4.41% and a Zacks Rank #2 (Buy).
Newmont Mining Corp. (NEM) has an earnings ESP of +11.11% and a Zacks Rank #3 (Hold).
Cameco Corp. (CCJ) has an earnings ESP of +40% with a Zacks Rank #3 (Hold).
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