We maintain our Neutral recommendation on Freeport-McMoRan Copper & Gold Inc. (FCX - Analyst Report), which is engaged in mineral exploration and development; mining and milling of copper, gold, molybdenum and silver; as well as the smelting and refining of copper concentrates.
Freeport completed ramp up of Morenci's mining rates to 635,000 metric tons of ore per day and milling rates to approximately 50,000 metric tons of ore per day, resulting in increased copper production of around 125 million pounds of copper per year. Freeport expects to ramp up production at Miami to approximately 100 million pounds of copper per year by 2012.
Freeportalso restarted mining and milling activities at the Chino mine. Incremental annual copper production is expected to be 100 million pounds in 2012 and 2013 and 200 million pounds in 2014. The company also completed construction of the $150 million sulphur burner project at the Safford mine, which is providing a more cost-effective source of sulphuric acid used in SX/EW operations and lower transportation costs.
In July 2011, Freeport reported a profit of $1.37 billion or $1.43 per share in the second quarter of 2011, more than double from $649 million or $0.70 per share in the same quarter of 2010. The profit exceeded the Zacks Consensus Estimate by $0.09 per share. Revenues surged 50% to $5.81 billion, surpassing the Zacks Consensus Estimate of $5.63 billion.
For fiscal 2011, the company’s capital expenditures are expected to reach $2.6 billion, including $1.4 billion for major projects and $1.2 billion for sustaining capital. Major projects for 2011 primarily include underground development activities at Grasberg, construction activities at the Climax molybdenum mine and completion of the initial phase of the sulfide ore project at El Abra.
Freeport has a strong balance sheet. As of June 30, 2011, the company had $4.4 billion in consolidated cash and cash equivalents and $3.5 billion in total debt. During second-quarter 2011, Freeport repaid $1.2 billion in debt, including April 2011 redemption of $1.1 billion of outstanding 8.25% Senior Notes. The company has no significant debt maturities in the near term; however, it may consider additional opportunities to prepay debt in advance of scheduled maturities.
However, the Grasberg minerals district, the most significant operating asset for Freeport, is exposed to Indonesian political, economic and social uncertainties. The company faces regular protests from local residents and has been targeted with arson, roadside bombs and blockades ever since it began production in the 1970s. During July 2011, PT Freeport Indonesia union workers commenced an eight-day labor strike, which led to a temporary suspension of mining, milling and concentrate shipments. On July 11, 2011, PT Freeport Indonesia reached an agreement with the union to end the strike and resume operations. PT Freeport Indonesia estimates the aggregate impact of the strike on 2011 production to be approximately 35 million pounds of copper and 60 thousand ounces of gold.
The company conducts its operations primarily through its principal operating subsidiaries, PT Freeport Indonesia, Freeport-McMoRan Corporation (formerly Phelps Dodge) and Atlantic Copper. Its major competitors include Newmont Mining Corp. (NEM - Analyst Report) and Southern Copper Corp. (SCCO - Snapshot Report). It currently retains Zacks #3 Rank on its stock, which translates to short-term rating of “Hold”.