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Freeport-McMoRan Copper & Gold Inc.’s (FCX - Analyst Report) adjusted earnings (excluding one-time gains) of 68 cents per share for the third quarter of 2012 missed the Zacks Consensus Estimate of 74 cents.
Including net credits for adjustments to Cerro Verde's deferred income taxes and environmental obligations and related legal reserves of $168 million or 18 cents per share, net income in the quarter stood at $824 million or 86 cents per share. This was down roughly 22% from the prior-year quarter’s net income of around $1.1 billion or $1.10 per share.
The results were affected due to lesser gold production than the normal rate after a strike at the company’s Grasberg mine in Indonesia. A surge in sales from North America and Africa offered some solace.
Revenues slid roughly 15% year over year to $4.42 billion and missed the Zacks Consensus Estimate of $4.44 billion. Consolidated sales from mines declined to 922 million pounds of copper and 202,000 ounces of gold from 947 million pounds and 409,000 ounces, respectively, in the prior-year quarter.
Sales of molybdenum increased to 21 million pounds in the reported quarter from 19 million pounds in the third quarter of 2011.
Consolidated average unit net cash costs (net of by-product credits) increased to $1.62 per pound of copper in the third quarter from 80 cents per pound a year ago, mainly attributed to reduced copper volumes in Indonesia, increased mining costs and lower by-product credits. Operating income slumped 34.4% to $1.41 billion from $2.15 billion in the year-ago quarter.
North America Copper Mines: Copper sales at the mine increased to 331 million pounds, up 7.8% from the year ago quarter due to increased production at the Chino mine. Production jumped 4.6% to 337 million pounds in the reported quarter.
South America Mining: Both Copper sales and production dropped 4.3% from the year ago quarter to 308 million pounds and 311 million pounds, respectively.
Indonesia Mining: Copper sales of 195 million pounds and gold sales of 178,000 ounces were lower than third-quarter 2011 copper sales of 253 million pounds and gold sales of 384,000 ounces owing to anticipated lower ore grades. Production of copper dropped 14.6% to 199 million pounds while that of gold fell by 49%.
Africa Mining: Copper sales of 88 million pounds represents a year over year increase of 35.4%, reflecting higher mining and milling rates principally related to the ramp up of the second phase expansion. Production increased by 28x.2% to 91 million pounds in the quarter.
Molybdenum: Consolidated molybdenum sales of 21 million pounds in third-quarter 2012 were higher than third-quarter 2011 sales of 19 million pounds.
Freeport had cash and cash equivalents of $3.7 billion as of September 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 $2.7 billion. Freeport had long-term debt of $3.52 billion as of September 30, 2012, compared with debt of $3.53 billion as of December 31, 2011.
Freeport’s operating cash flows were $526 million in the third quarter of 2012 compared with $1.8 billion in the prior year quarter. Capital expenditures totaled $971 million in the reported quarter compared with $717 million in the year-ago quarter.
For 2012, Freeport expects consolidated sales from mines of 3.6 billion pounds of copper, 1 million ounces of gold and 82 million pounds of molybdenum. For the fourth quarter, consolidated sales are estimated at 930 million pounds of copper, 255,000 ounces of gold and 20 million pounds of molybdenum.
Based on current 2012 sales volume and cost estimates and average price assumption of $1,700 per ounce for gold and $11 per pound for molybdenum for the balance of 2012, consolidated average unit net cash costs (net of by-product credits) are expected to be $1.50 per pound of copper in 2012.
The company expects to spend $3.6 billion as capital expenditure in 2012, which includes $2.2 billion for major projects and $1.4 billion for sustaining capital. Freeport estimates exploration spending of approximately $255 million in 2012 compared with $221 million in 2011.
Freeport 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.
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 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.
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