Freeport Tops, Net Income Up 10%

Copper producer Freeport-McMoRan Copper and Gold Inc. (FCX - Analyst Report) posted net income of $649 million or $1.40 per share in the second quarter of 2010, outshining the Zacks Consensus Estimate of $1.38 per share. Results improved by 10% from last year’s net income of $588 million or $1.38 per share. Lower volumes negated pricing gains in the quarter, resulting in a modest 5% increase. Yet, the quarterly revenues of $3.9 million surpassed the Zacks Consensus Estimate of $3.66 billion.

Sales Prices and Volumes

Although averaged realized copper prices fell on a sequential basis, they soared from last year’s levels. Copper prices leaped 38% year over year to $3.02 per pound, though they have fallen 12% sequentially. Gold prices jumped 32% year over year and 11% sequentially to $1,234 per ounce, while Molybdenum prices experienced a robust 80% increase year over year and 20% sequentially to $18.18 per pound.

However, copper sales volumes declined 8.8% year over year in the quarter to 914 million pounds, while gold sales volumes plunged 64% to 298,000 ounces. Molybdenum sales volumes remained flat at 16 million pounds. The decline in sales volume resulted from lower copper and gold ore grades at Grasberg due to planned mine sequencing and lower sales from South America mines.

Financial Review

Net cash cost per unit in the quarter increased 36% to $1.41 per pound versus $1.04 in the second quarter of 2009. Operating cash flows totaled $1.1 billion for second-quarter 2010, down 7.8% from $1.15 billion as of June 30, 2009. Capital expenditures totaled $296 million for second-quarter 2010. As of June 30, 2010, total debt approximated $4.8 billion with $3.8 billion in cash. From January 1 through April 20, 2010, Freeport repaid $2.6 billion of debt.

Guidance

Mining sequencing at Freeport’s Grasberg mine in Indonesia is affecting copper and gold sales. Consolidated sales in 2010 are expected to be around 3.8 billion pounds of copper, 1.8 million ounces of gold and 63 million pounds of molybdenum. For the third quarter of 2010, Freeport expects copper sales to be around 970 million pounds, while gold sales are expected at 410,000 ounces. The company expects Molybdenum sales of 15 million pounds for third quarter 2010.

Freeport expects average copper price to be $3.00 per pound, $1,200 per ounce of gold and $14 per pound of molybdenum for the second half of 2010. Consolidated cash costs are estimated to average around $0.86 per pound in 2010. Operating cash flows are estimated to exceed $5 billion in 2010. The company expects capital outlay of about $1.7 billion for 2010, which includes the underground development expenditures at Grasberg, the sulfide ore project at El Abra and investments in a new sulphur burner facility at Safford.

Zacks Recommendation

Phoenix-based Freeport-McMoRan has been showing signs of recovery. The company’s earnings rose for the first time in the third quarter of 2009 on higher sales to China and other developing countries. The company has a geographically-diverse asset base with significant reserves of copper, gold and molybdenum. Its principal asset, the Grasberg minerals district in Indonesia, constitutes the single largest copper reserve and the largest gold reserve of the world.

We are optimistic on Freeport’s African Tenke Fungurume copper mining operations, which would optimize costs for Freeport upon being fully operational. Rising copper prices, driven by Chinese stockpiling, bodes well for the company. However, of late, copper prices are experiencing a downtrend with a dip in Chinese copper consumption. Freeport generates about one-third of its copper sales from China.

The recent downtrend in the copper business could be a major headwind for copper companies. We believe revenues and margins for copper producers like Freeport McMoRan and Southern Copper Corporation (SCCO - Snapshot Report) could see pressure from the recent fall in copper prices and volumes, primarily driven by the slowing economic activities in China.

Currently, FCX has a long-term (6 months and higher) Neutral recommendation supported by the short-term (1 to 3 months) Zacks #3 Rank (Hold).

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