Freeport-McMoRan Inc. FCX reported net loss of 38 cents per share for second-quarter 2016, compared with the year-ago loss of $1.78 per share.
The results include net charges of $452 million or 36 cents per share mainly related to impairment of oil and gas properties and drillship settlements/idle rig costs partially offset by net gains on the sales of assets. Barring that impact, adjusted net loss was 2 cents a share in the second quarter, wider than the Zacks Consensus Estimate of a loss of a penny.
Revenues declined 15.3% year over year to $3,334 million in the reported quarter and missed the Zacks Consensus Estimate of $3,733 million.
Consolidated copper sales from mines (including volumes from Tenke Fungurume which is being reported as a discontinued operation) increased to 1,133 million pounds of copper in the second quarter from 977 million pounds in the year-ago quarter due to higher volumes from Cerro Verde.
Gold sales went down to 156,000 ounces in the reported quarter from 352,000 ounces a year ago. Sales fell due to lower ore grades, reduced mining and milling rates.
Sales of molybdenum decreased to 19 million pounds in the reported quarter from 23 million pounds a year ago mainly owing to market-driven curtailed production volumes from the primary molybdenum mines.
Operational Update
Consolidated average unit net cash costs (net of by-product credits including Tenke) declined to $1.33 per pound of copper from $1.50 per pound in the year-ago quarter. This is mainly attributable to higher copper sales volumes and the impact of ongoing cost-cutting initiatives that were partially offset by lower gold and silver credits.
Average realized price per ounce for gold rose to $1,292 in the quarter from $1,174 a year ago, while average realized price per pound for copper declined to $2.18 from $2.71 in the prior-year quarter.
Mining Update
North America Copper Mines: Copper sales decreased 4.5% year over year to 464 million pounds because of timing of sales in the 2015 period. Production was flat at 469 million pounds in the reported quarter.
Freeport expects copper sales from North America to be 1.8 billion pounds in 2016, versus 2 billion pounds in 2015.
South America Mining: Copper sales of 327 million pounds were up 83.7% from the year-ago quarter due to Cerro Verde's expanded operations and production rose 77.7% to 334 million pounds.
South America mining is anticipated to report sales of around 1.36 billion pounds of copper in 2016, compared with sales of 871 million pounds in 2015.
Indonesia Mining: Copper sales of 196 million pounds were flat compared with the year-ago quarter as higher copper ore grades were countered by lower mining and milling rates. Gold sales plunged 56.4% to 151,000 ounces due to lower ore grades and reduced mining and milling rates. Production dropped 56.1% year over year to 158,000 ounces in the reported quarter.
Sales from Indonesia mining are expected to be about 1.3 billion pounds of copper and 1.7 million ounces of gold for 2016, with roughly 40% of copper sales and 55% of gold sales expected in the fourth quarter.
PT-FI remains in discussion with the Indonesian government regarding its Contract of Work (COW) and long-term operating rights. The Indonesian government provided a letter of assurance to PT-FI in Oct 2015 stating that it will clear the extension of operations beyond 2021, and provide the same rights and the same level of legal and fiscal certainty offered under its existing COW. PT-FI continues to engage in talks with the Indonesian government to achieve extension of its long-term rights available under the COW.
In connection with its COW negotiations, PT-FI has agreed to build new smelter capacity in Indonesia and sell an additional 20.64% interest in PT-FI at fair market value.
PT-FI is required to apply for renewal of export permits at six-month interval. On Feb 9, 2016, PT-FI's export permit was renewed through Aug 8, 2016. The government of Indonesia continues to impose a 5% export duty while it reviews PT-FI's smelter plans.
Africa Mining: Copper sales of 124 million pounds were 19.2% higher than the year-ago quarter due to higher mining rates and timing of sales during the 2015 period. Production went up 6.1% to 122 million pounds in the quarter. Sales at the mines are expected to be 440 million pounds of copper and 35 million pounds of cobalt for 2016.
Molybdenum: Molybdenum production was 7 million pounds in the second quarter compared with 13 million pounds in the year-ago quarter.
Financial Position
Freeport had cash and cash equivalents of $352 million as of Jun 30, 2016, down 10.7% from $318 million as of Jun 30, 2015. Freeport had long-term debt of $19,319 million as of Jun 30, 2016, down from $20,902 million as of Jun 30, 2015.
The company’s operating cash flows were $874 million in the second quarter and capital expenditures totaled $833 million.
Through Jul 25, 2016, Freeport exchanged $369 million in senior notes for about 28 million shares of its common stock in a series of privately negotiated transactions, including $268 million exchanged during second-quarter 2016.
Oil and Gas Operations (FMO&G)
In May and early Jun 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. It added a high-quality portfolio of U.S.-based oil and gas assets to its global mining business.
In Oct 2015, Freeport announced that its board is undertaking a strategic review of alternatives for FM O&G. The company and its advisors are actively engaged in a process to evaluate opportunities that include a sale of assets and joint-venture arrangements which would generate cash proceeds for debt repayment.
During the reported quarter, FM O&G completed the sale of certain oil and gas royalty interests for cash consideration of $102 million. In Jul 2016, it completed the sale of its Haynesville shale assets in North Louisiana for $87 million in cash.
During the quarter, Freeport entered into agreements to end FM O&G's three drilling rig contracts for a total of $755 million and potential contingent consideration depending on future oil prices. The settlements resulted in total savings of roughly $350 million, compared to the earlier-contracted commitments.
In the second quarter, realized revenues for oil and gas operations were $405 million compared with $656 million in the year-ago quarter. Cash production costs totaled $186 in the quarter. Sales volume was 8.7 million barrels of oil equivalent (MMBOE) in the quarter.
Divestments
During the reported quarter, Freeport completed earlier-announced asset sales for total cash consideration of $1.3 billion, including the $1 billion sale of an additional 13% undivided interest in Morenci.
Freeport also entered into a definitive agreement to sell its interest in TF Holdings Limited for $2.65 billion in cash and contingent consideration of up to $120 million.
Guidance
For 2016, Freeport expects consolidated sales to be around 5 billion pounds of copper (including 440 million pounds for Tenke through the anticipated closing date), 1.7 million ounces of gold, 76 million pounds of molybdenum and 47.4 MMBOE. For third-quarter 2016, the company expects 1.3 billion pounds of copper (including 115 million pounds for Tenke), 410,000 ounces of gold, 20 million pounds of molybdenum and 11.4 MMBOE.
Consolidated unit net cash costs (net of by-product credits) for copper mines are expected to average $1.06 per pound of copper for 2016.
Cash production costs are expected to be around $15.50 per BOE for 2016.
For 2016, capital expenditures are expected to be roughly $3.1 billion, including $1.7 billion for mining operations and $1.4 billion for oil and gas operations.
As previously announced, Freeport plans to strengthen its balance sheet and speed up its debt-reduction initiatives. The company announced over $4 billion in transactions and has received total cash consideration of $1.4 billion, including $87 million in Jul 2016. The $2.65 billion Tenke Fungurume transaction is also expected to complete in fourth-quarter 2016. During the reported quarter, Freeport restructured its oil and gas business to curb costs and align capital allocation for the business with the company’s debt-reduction actions.
Freeport expects to generate substantial cash flows over the next 18 months for debt reduction, with the successful completion of the Cerro Verde expansion and access to higher grade ore from the Grasberg mine in future quarters.
As part of its initiative to reduce outstanding indebtedness, the company plans to commence a registered at-the-market offering of up to $1.5 billion of common stock and use the proceeds to retire outstanding debt.
FREEPT MC COP-B Price, Consensus and EPS Surprise
FREEPT MC COP-B Price, Consensus and EPS Surprise | FREEPT MC COP-B Quote
Freeport currently carries a Zacks Rank #3 (Hold).
Better-ranked companies in the mining space include Coeur Mining, Inc. CDE, Agnico Eagle Mines Ltd. AEM and Amerigo Resources Ltd. ARREF. While Coeur Mining sports Zacks Rank #1 (Strong Buy), Agnico Eagle and Amerigo Resources sport a Zacks Rank #2 (Buy).
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