Freeport 3Q14 profits frustrate shareholders

Freeport-McMoRan shareholders appeared less than enthusiastic with the company’s third quarter results, as FCX shares closed at US$29.03 on the NYSE on Tuesday, down 4.16% with a volume of 27,699,868 shares traded.

Nevertheless, during a conference call with analysts to discuss third-quarter financials on Tuesday, FCX CEO Richard Adkerson expressed confidence that – although global macroeconomics are contributing to copper demand uncertainty – copper consumption remains strong.Freeport-McMoRan

“The outlook of the current uncertainty is bolstered by more positive outlook going forward,” he noted, adding the copper “surpluses that were projected are not yet being realised and appeared perhaps overstated.”

Cathode inventories and exchange stocks remain low, said Adkerson, “and we see examples of new projects being delayed—and so the supply side picture remains the same and the positive long-term fundamentals for the copper market which drives our business are intact.”

In his presentation, he referred to Freeport’s portfolio of world scale mines including Morenci in Arizona, Cerro Verde and El Abra in Chile, Tenke Fungurume in the Democratic Republic of Congo and Grasberg in Indonesia, all mines with the potential capacity for producing one billion pounds of copper each annually.

“At $2 copper plans, we have over 100 billion pounds (45,359,237 tonnes) of proven and probable reserves reported under SEC standards,” he told analysts. “Beyond that, we have identified mineral resources associated with our existing properties of an incremental contained over 100 billion pounds.”

“Then beyond this big resource base, there is significantly additional potential that’s not included in our mineral resources and much of this has to do with sulfide deposits lying in North America associated with the oxide production that we have,” he added.

Political and labor tension
Meanwhile, Freeport’s Grasberg mine continued to have political, safety and labour issues during the third quarter. While the company entered a memorandum of understanding in July which allowed FCX to resume exports from Indonesia in August, Adkerson observed that a new national government with a new president has been inaugurated as of last week, “and we’re again working in a transition mode from the prior government officials with these new government officials.”

“It’s been a complicated political environment with the elections and we’ve had to work in that environment,” Adkerson admitted. However, he stood firm in his belief that FCX will “maintain a positive long-term partnership with the government of Indonesia. We’re confident we can achieve that because it’s one of these things where it’s [in] everyone’s best interest to do it.”

Nevertheless, Grasberg is now coping with labour issues exacerbated by the deaths of four Grasberg workers on September 27, 2014, who were fatally injured when a haul truck collided with their van.stock

On October 27, 2014, PT Freeport-Indonesia received notice from union leadership indicating its intention to conduct a 30-day strike beginning on November 6.

“It’s been – let me just say – an emotional time in Indonesia with the elections not only nationally, but in the region,” said Adkerson. “As a result of that, that’s led to a current issue with parts of our workforce. Seventy-five percent to 80% of our workforce is in place, but some workers are engaging in protest and demands relating to these recent safety issues where we’re attempting to work with them. Some workers are currently not reporting to work and that’s having some constraints on our mining activities in the [Grasberg] pit. We’ve been continuing to operate our underground operations and our concentrate delivery systems, but it’s having a current impact.”

Freeport is now reaching out to the union leadership to have discussions regarding the safety issues, he added.

Production
For the third quarter, FCX reported 1.027 billion pounds (465,839.4 tonnes) of copper production at unit net cash costs of $1.34 per pound, down from 1.063 billion pounds (482,168.7 tonnes) of copper output at unit net cash costs of $1.46 per pound for the third quarter-2013.

For the first nine months of this year, FCX reported 2.906 billion pounds (1,318,139.4 tonnes) of copper output at unit net cash costs of $1.52 per pound, down from 2.952 billion pounds (1,339,004.7 tonnes) of copper production at unit net cash costs of $1.62 per pound for the same period of last year. The decline in cash costs was attributed to higher by-product credits.

Also during the third quarter of 2014, Freeport reported 449,000 ounces of gold production, up from 327,000 ounces for the third quarter of last year. For the first nine months of 2014, FCX reported gold production of 846,000 ounces, up from 713,000 ounces of gold output for the first nine months of 2013.

The company also reported 24 million pounds (10,886.2 tonnes) of molybdenum production during the third quarter of the year, down from 25 million pounds (11,339.8 tonnes) of moly during the same period of 2013, as well as 73 million pounds (33,112.2 tonnes) of moly output for the first nine months of 2014, up from 71 million pounds (32,205.1 tonnes) for the same period of 2013.

Oil equivalents production for the third quarter was 12.5 million barrels (MMBOE), down from 16.5 MMBOE for the third-quarter of 2013. For the first nine months of this year, FCX reported 44.7 MMBOE, more than double the 21.5 MMBOE reported during the first nine months of 2013.

The 3Q14 oil and gas cash operating margin was $0.6 billion with an average cash margin of $48/BOE.

Financials
FCX has continued to support its 2014 estimated sales outlook of 3.9 billion pounds (1,769,010.2 tonnes) of copper, 1.2 million ounces of gold, 95 million pounds (43,091.3 tonnes) of moly, and oil equivalents of 5.62 MMBOE (~70% oil). Average unit cost is $1.52/lb of copper and $21/BOE.

In response to analysts’ questions on Tuesday, Adkerson stressed “we’re going through all of our business, looking at all of our capital spending seeing, what we can differ, how we can deal with it, how we can generate cash. And we’re going to be committed to reaching the strong balance sheet target.”

“…While we work to keep up production volumes up, execute dealing with our issues in Indonesia, deal with our long-term growth plans to be disciplined about how we spend capital over the long range, we’re going to deal with it,” he added.

Freeport-McMoRan

During the conference call, Bank of America Merrill Lynch analyst Oscar Cabrera remarked, “From my perspective, you already have a strong balance sheet.”

“We’ve got a strong balance sheet,” Adkerson responded. “I mean we’re an investment grade-rated company now. We’ve had very positive discussions with the [ratings] agencies.”

“What we want our shareholders to understand is that we’ve got this commitment to work to strengthen our balance sheet in a rational way,” he stressed. “We’re not going to fire sale assets, we don’t have to. We’re going to find ways; we’re going to look at all of our capital spending, see if things can be deferred with that of where we’re honoring our contracts to spend where we’re doing what we need to do.

“…We can manage our way through this and preserve our long-term growth. We’re not having any discussions about cutting the dividend. We’re just talking about managing our business and we got the assets, the balance sheet and the way to do it,” he declared.

However, Freeport reported a third-quarter net income of $552 million or 53-cents per share, down substantially from third-quarter 2013 net income of $821 million or 79-cents per share.

For the first nine months of this year, net income was $1.5 billion or $1.47 per share, down from net income of $2 billion or $1.96 per share for the first nine months of 2013.

During Tuesday’s conference call, FCX CFO Katherine Quick mentioned several items reduced 3Q14 net income by $115 million or 11 cents per share including a ceiling net income on oil and gas properties, which impacted net income by $192 million, as well as a $47 million charge for an increase in deferred tax accruals associated with recent tax law changes in Chile. These were partly offset by $76 million in mark-to-market gains on oil and gas derivatives and $48 million in gains on assets sales and debt redemption transaction.