Freeport Beats, Profit Plummets

Freeport-McMoRan Copper & Gold Inc.’s (FCX - Analyst Report) adjusted earnings of 80 cents per share for the second quarter of 2012 dropped 45.6% from $1.47 per share earned in the year-ago quarter. The results, however, surpassed the Zacks Consensus Estimate of 79 cents.

Performance was affected due to less production than the normal rate after a strike at its Grasberg mine in Indonesia. A surge in sales from North America and Africa offered some respite.

Including environmental obligations and related litigation reserves of $53 million or 6 cents per share, reported net income in the quarter stood at $710 million or 74 cents per share. This was almost half the prior-year quarter’s net income of $1.4 billion or $1.43 per share.

Revenues slid roughly 23% year over year to $4.48 billion, but were ahead of the Zacks Consensus Estimate of $4.45 billion. Consolidated sales from mines declined to 927 million pounds of copper and 266,000 ounces of gold from 1 billion pounds and 356,000 ounces, respectively, in the prior-year quarter.

Operational Update

Sales of molybdenum also dropped to 20 million pounds in the reported quarter from 21 million pounds in the second quarter of 2011. This was greater than Freeport-McMoRan’s guidance issued in April, which estimated copper sales at 895 million pounds and gold sales at 235,000 ounces.

Consolidated average unit net cash costs (net of by-product credits) increased to $1.49 per pound of copper from 93 cents per pound in the second quarter of 2011, mainly attributed to reduced copper volumes in Indonesia, increased mining costs in North America and lower by-product credits. Operating income slumped 52.4% to $1.31 billion from $2.76 billion in the year-ago quarter.

Financial Position and Dividend

Freeport-McMoRan had cash and cash equivalents of $4.5 billion as of June 30, 2012 compared with $4.8 billion as of December 31, 2011. However, net of non-controlling interests' share, taxes and other costs, cash available totaled $3.4 billion. Freeport-McMoRan had long-term debt of $3.5 billion as of June 30, 2012, almost flat with debt as of December 31, 2011.

Freeport-McMoRan’s operating cash flows were $1.2 billion in the second quarter of 2012 compared with $1.7 billion in second-quarter 2011. Capital expenditures totaled $840 million in the reported quarter compared with $527 million in the year-ago quarter.

Freeport-McMoRan’s Board of Directors authorized a 25% hike in the annual dividend to $1.25 per share from $1.00 per share in February, and accordingly, the company paid its quarterly dividend of 31.25 cents per share in May 2012.

Guidance

For 2012, Freeport-McMoRan expects consolidated sales from mines of 3.6 billion pounds of copper, 1.1 million ounces of gold and 81 million pounds of molybdenum. For the third quarter, consolidated sales are estimated at 885 million pounds of copper, 225,000 ounces of gold and 20 million pounds of molybdenum.

Based on current 2012 sales volume and cost estimates and average price assumption of $1,600 per ounce for gold and $13 per pound for molybdenum for the balance of 2012, consolidated average unit net cash costs (net of by-product credits) are expected to be $1.47 per pound of copper in 2012.

In addition to the above-mentioned assumptions, assuming average prices of $3.50 per pound for copper, operating cash flows are estimated to approximate $4.7 billion for 2012. Operating cash flows are expected to be roughly $4 billion, net of $1.2 billion for working capital requirements and other tax payments.

The company expects to spend $4 billion as capital expenditure in 2012, which includes $2.5 billion for major projects and $1.5 billion for sustaining capital. Freeport estimates exploration spending of approximately $275 million in 2012 compared with $221 million in 2011.

Our Take

The company is conducting explorations close to its existing mines with a goal to boost reserves which will facilitate the development of additional future production capacity across the large minerals districts where it operates.

As per the company’s exploration data, there are opportunities for meaningful future reserve additions in North and South America as well as in the Tenke Fungurume minerals district in Congo’s Katanga province. We are increasingly optimistic on Freeport’s African operations considering the potential at Tenke as well as increased sulfide production in North America.

However, higher production cost is a concern for Freeport. Unit costs are expected to rise across the company’s copper-producing segments, reflecting higher input costs. Its Indonesian operations are most likely to witness a material year-over-year cost hike on a per unit basis due to the drop in volumes that will reduce the ability to absorb the operation’s high fixed costs.

Freeport-McMoRan, which competes with Newmont Mining Corp. (NEM - Analyst Report) and Southern Copper Corp. (SCCO - Snapshot Report), retains a short-term Zacks #3 Rank (Hold). We have a long-term Neutral recommendation on the stock.