Freeport-McMoRan Inc. FCX reported a loss of $3.58 per share for third-quarter 2015 as against earnings of 53 cents per share in third-quarter 2014.
The results include net charges of $3.7 billion or $3.43 per share mainly related to the reduction of the carrying value of oil and gas properties. Barring that impact, adjusted net loss was 15 cents a share in the third quarter, wider than the Zacks Consensus Estimate of loss of 8 cents.
Revenues declined 35.4% year over year to around $3,681 million in the third quarter and missed the Zacks Consensus Estimate of $4,085 million.
Consolidated sales from mines decreased to 1 billion pounds of copper in the third quarter from 1.1 billion pounds in the year-ago quarter. Lower volumes from South America due to the sale of Candelaria/Ojos in fourth-quarter 2014 and lower volumes at PT Freeport Indonesia (PT-FI) related to lower ore grades and the impact of El Nino weather conditions led to the reduction in sales. This however, was partly offset by increased volumes from North America.
Sales of gold decreased to 294,000 ounces in the reported quarter from 525,000 ounces a year ago. Gold sales decreased due to lower volumes at PT-FI resulting from lower ore grades and the impacts of El Nino.
Sales of molybdenum increased to 23 million pounds in the reported quarter from 22 million pounds a year ago.
Operational Update
Consolidated average unit net cash costs (net of by-product credits) increased to $1.52 per pound of copper from $1.34 per pound in the year-ago quarter, mainly due to lower by-product credits, in part, offset by lower site production and delivery costs mostly related to increased volumes in North America.
Average realized price per ounce for gold fell to $1,117 from $1,220 a year ago, while average realized price per pound for copper declined to $2.38 from $3.12 in the prior-year quarter.
Mining Update
North America Copper Mines: Copper sales increased 10.8% year over year to 483 million pounds due to higher milling rates and ore grades across Morenci and Chino mines and higher ore grades at Safford. Production rose 18% to 499 million pounds in the reported quarter.
Freeport expects copper sales from North America to be 1.95 billion pounds in 2015, compared with 1.66 billion pounds in 2014.
South America Mining: Copper sales of 207 million pounds declined 23.6% from the year-ago quarter, mainly due to the sale of the Candelaria and Ojos del Salado mines.
South America mining is expected to report sales of around 885 million pounds of copper in 2015, compared with sales of 1.14 billion pounds in 2014 that included copper sales volumes of 268 million pounds from the Candelaria and Ojos del Salado mines.
Indonesia Mining: Copper sales of 198 million pounds decreased 23.3% from the year-ago quarter while production decreased 5.4% to 192 million pounds. Gold sales declined 43.6% to 285,000 ounces and production fell 36.2% year over year to 272,000 ounces in the reported quarter. Both gold and copper sales decreased in the quarter due to lower ore grades and El Nino impacts, as well as timing of shipments in third-quarter 2014 associated with the lifting of export restrictions in late Jul 2014.
Freeport has adjusted its estimates to anticipate around 15% reduction in fourth-quarter 2015 mill rates from the previous plan. This will result in a deferral of 70 million pounds of copper and 70,000 ounces of gold from fourth-quarter 2015 to future periods. Further, lower-than-expected mining rates in the second half of 2015 are expected to lead to a deferral of high-grade ore to future periods.
PT-FI expects ore grades to improve considerably in 2016 and 2017 with access to higher grade sections of the Grasberg open pit, leading to increased production and lower unit net cash costs.
In Jul 2014, Freeport signed a Memorandum of Understanding (MOU) with the government of Indonesia. The parties entered into a MOU related to an amended Contract of Work (COW), which was extended until Jul 25, 2015.
PT-FI has made progress in negotiations with the Indonesian government regarding its 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 is advancing plans for building new smelter capacity in parallel with completing negotiations on its COW and long-term operating rights. On completion of its amended COW, Freeport and PT-FI have agreed to a divestment to the Indonesian government and/or Indonesian nationals of up to a 30% stake (an additional 20.64%) in PT-FI at fair market value.
Africa Mining: Copper sales of 113 million pounds were 0.9% lower than the year-ago quarter. Production decreased by 7.7% to 108 million pounds in the quarter. Sales at the mine are expected to be 465 million pounds of copper and 35 million pounds of cobalt for 2015.
Molybdenum: Molybdenum production of 13 million pounds in the third quarter was at par with the year-ago quarter.
Financial Position
Freeport had cash and cash equivalents of $338 million as of Sep 30, 2015, down 48.6% from $658 million as of Sep 30, 2014. Freeport had long-term debt of about $19,792 million as of Sep 30, 2015, up from $17,975 million as of Sep 30, 2014.
Freeport’s operating cash flows were $822 million in the third quarter and capital expenditures totaled $1.5 billion.
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, and added a high quality portfolio of U.S.-based oil and gas assets to its global mining business.
Freeport’s board is undertaking a strategic review of its oil and gas business to assess alternatives designed to increase value to Freeport’s shareholders and attain self financing of the oil and gas business from its cash flows and resources. The earlier announced potential initial public offering (IPO) of a minority interest in the oil and gas business remains an alternative for future consideration. Other alternatives include a spin off of the business to Freeport shareholders, joint venture arrangements and further spending cuts.
In the third quarter, realized revenues for oil and gas operations were $593 million compared with $867 million in the year-ago quarter. Cash production costs totaled $260 million ($18.85 per BOE) in the quarter. Sales volume was 13.8 million barrels of oil equivalent (MMBOE) in the quarter.
Guidance
For 2015, Freeport expects consolidated sales to be around 4.1 billion pounds of copper, 1.2 million ounces of gold, 90 million pounds of molybdenum and 52.7 MMBOE. For the fourth quarter of 2015, the company expects 1.1 billion pounds of copper, 310,000 ounces of gold, 21 million pounds of molybdenum and 13.3 MMBOE.
Freeport expects sales volumes to be about 5.2 billion pounds of copper for 2016 factoring in the completion of the Cerro Verde expansion project and access to higher grade ore at Grasberg next year.
Consolidated unit net cash costs (net of by-product credits) for copper mines are expected to average $1.52 per pound of copper for 2015. Unit net cash costs are expected to fall considerably in 2016, mainly reflecting higher anticipated copper and gold volumes. Consolidated unit net cash costs are expected to average $1.15 per pound of copper for 2016.
Cash production costs are expected to be around $19 per BOE for 2015.
For 2015, capital expenditures are expected to be roughly $6.3 billion, including $2.5 billion for major projects at mining operations and $2.8 billion for oil and gas operations. Capital expenditures are expected to be about $4 billion for 2016.
During the quarter, Freeport took aggressive steps to boost the outlook for free cash flow generation at low commodity prices, including further reductions in capital spending, production cuts across specific mining operations and actions to trim operating, exploration and administrative costs. These include a 29% percent reduction in estimated 2016 capital expenditures from $5.6 billion to $4 billion, production cuts at certain North and South America copper mines and reductions in mining operating costs
Freeport currently carries a Zacks Rank #3 (Hold).
Better-ranked mining companies include Solitario Exploration & Royalty Corp. XPL, Coeur Mining, Inc. CDE and South32 Limited SOUHY. While Solitario Exploration holds a Zacks Rank #1 (Strong Buy), Coeur and South32 carry a Zacks Rank #2 (Buy).
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