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Freeport 4Q EPS Meets, Revs Shy

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Freeport-McMoRan Copper & Gold Inc.’s (FCX - Analyst Report) adjusted earnings (excluding one-time gains) of 74 cents per share for the fourth quarter of 2012 was in line with the Zacks Consensus Estimate.

Including net credits for adjustments to environmental obligations, related legal reserves and a gain for insurance recoveries, net income for the quarter was $743 million or 78 cents per share. This represents a 16.1% rise from the prior-year quarter’s net income of around $640 million or 67 cents per share. The results were aided by higher copper and gold production.

For full-year 2012, Freeport posted net income of $3 billion or $3.19 per share compared with $4.6 billion or $4.78 per share in the year ago period. The results beat the Zacks Consensus Estimate by a penny.

Revenues jumped roughly 8.4% year over year to $4.51 billion in the fourth quarter but missed the Zacks Consensus Estimate of $4.52 billion. Consolidated sales from mines increased to 972 million pounds of copper and 254,000 ounces of gold from 823 million pounds and 133,000 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 fourth quarter of 2011.

For the full year, revenues decreased 13.7% year over year to $18.01 billion, missing the Zacks Consensus Estimate of $18.24 billion.

Operational Update

Consolidated average unit net cash costs (net of by-product credits) decreased to $1.54 per pound of copper in the fourth quarter from $1.57 per pound a year ago, mainly attributed to increased mining costs in North and South America. Operating income surged 4.7% to $1.36 billion from $1.3 billion in the year-ago quarter.

Mining Update

North America Copper Mines: Copper sales at the mine decreased to 321 million pounds, down 3.6% from the year-ago quarter due to timing of shipments. Production jumped 5% to 358 million pounds in the reported quarter.

South America Mining: Copper sales dropped by about 2% from the year ago to 350 million pounds while gold sales dropped 10.3% to 26,000 ounces. Copper production rose 3.6% to 349 million pounds in the reported quarter. Gold production however declined 7.1% to 26,000 ounces for the quarter.

Indonesia Mining: Copper sales of 204 million pounds and gold sales of 224,000 ounces were significantly higher than the year-ago copper sales of 50 million pounds and gold sales of 102,000 ounces. The lower sales in 2011 for both copper and sales were due to labor problems and temporary suspensions of milling activities. Production of copper jumped 194.1% to 200 million pounds while that of gold increased by 48.3% to 224,000 ounces.

Africa Mining: Copper sales of 97 million pounds represents a year over year increase of 16.9%, reflecting higher mining and milling rates mainly related to the ramp up of the second phase expansion. Production increased 27.3% to 98 million pounds in the quarter.

Molybdenum: Consolidated molybdenum sales of 21 million pounds in fourth-quarter 2012 were higher than fourth-quarter 2011 sales of 19 million pounds.

Financial Position

Freeport had cash and cash equivalents of $3.7 billion as of December 31, 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 December 31, 2012, compared with debt of $3.53 billion as of December 31, 2011.

Freeport’s operating cash flows were $1.3 billion in the fourth quarter of 2012 compared with $746 million in the prior-year quarter. Capital expenditures totaled $976 million in the reported quarter compared with $785 million in the year-ago quarter.

Acquisition

The company, in late 2012, forged definitive merger pacts, under which, it will buy Plains Exploration & Production Company and McMoRan Exploration Co. for about $20 billion. Freeport is funding the cash portion of the twin deal with a $9.5 billion financing from JPMorgan Chase Bank, N.A., a unit of JPMorgan Chase & Co. (JPM - Analyst Report). The transactions are expected to close in the second quarter of 2013.

Guidance

For 2013, Freeport expects consolidated sales from mines of 4.3 billion pounds of copper, 1.4 million ounces of gold and 90 million pounds of molybdenum. For the first quarter, consolidated sales are estimated at 940 million pounds of copper, 230,000 ounces of gold and 23 million pounds of molybdenum. The company forecasts that its Grasberg mine will produce higher grade ore in late 2013 that will result in higher copper and gold production volumes.

Based on current sales volume and cost estimates and average price assumption of $1,700 per ounce for gold and $11 per pound for molybdenum, consolidated average unit net cash costs (net of by-product credits) are expected to be $1.67 per pound of copper for first-quarter 2013 and $1.35 per pound for the year 2013.

The company expects to spend $4.6 billion as capital expenditure in 2013, which includes $2.8 billion for major projects and $1.8 billion for sustaining capital. Freeport estimates exploration spending of approximately $235 million in 2013 compared with $251 million in 2012.

The company remains optimistic for the long term and expects that its copper production will rise to over 5 billion pounds annually by 2015. Freeport intends to develop its resources in a cost effective manner thereby ensuring benefits to its shareholders in the long run.

Our Take

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.

The company currently retains a short-term Zacks Rank #3 (Hold).

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