Why Freeport-McMoRan Earnings Won't Help Its Stock

Freeport-McMoRan Copper & Gold (NYSE: FCX  ) will release its quarterly report next Tuesday, and everything you need to know about how the stock has done lately is in the company's name. With gold having plunged and copper seeing similar challenges, Freeport-McMoRan earnings will be way down this quarter. But the company is hoping to see a rebound in the near future as its major new acquisitions add energy exposure to Freeport's overall mix.

Freeport is a massive player in the copper market, which has helped the company do extremely well during the emerging-market-led run-up in commodity prices over the past several years. But more recently, slowdowns in those same emerging markets have led to a big deceleration in growth, and that has sent prices of copper and other industrial metals into the basement. Let's take an early look at what's been happening with Freeport-McMoRan over the past quarter and what we're likely to see in its quarterly report.

Stats on Freeport-McMoRan

Analyst EPS Estimate

$0.43

Change From Year-Ago EPS

(47%)

Revenue Estimate

$4.36 billion

Change From Year-Ago Revenue

(2.6%)

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Why investors are scared of Freeport-McMoRan earnings
Analysts have slashed their views on Freeport-McMoRan earnings in recent months, cutting their June-quarter estimates by more than half and reducing the full-year 2013 earnings calls by more than $1 per share. After a big plunge for the shares earlier this year, though, the stock has stabilized, rising about 2% since mid-April.

Part of the reason Freeport stock hit bottom was that its first-quarter earnings turned out better than many had expected. Better-than-expected copper sales offset big price declines at least in part, and although revenue dropped very slightly, the company was able to limit its earnings declines and do better than investors had feared.

Freeport also got more good news last month from the Indonesian government, as the company was allowed to reopen its key Grasberg gold and copper mine despite open investigations about accidents in May in which dozens of workers died. Grasberg probably won't get back to full operation until August, but the mine is an essential part of Freeport's future, and so the company needs to make sure its long-term viability remains sustainable.

However, gold's plunge during the quarter clearly raises concerns. The SPDR Gold ETF (NYSEMKT: GLD  ) has not only lost 20% since the beginning of April but also has seen outflows of bullion from its coffers as investors liquidate shares. Moreover, copper prices have continued to be weak despite supply pressure coming from Rio Tinto's (NYSE: RIO  ) having to stop production at its Utah-based Bingham Canyon mine, although its faster-than-expected recovery has led it to issue a more optimistic forecast of its impact on Rio's overall production for the year.

But the big question going forward for Freeport is whether its acquisitions of Plains Exploration and McMoRan Exploration will pay off. Some of McMoRan's assets are quite speculative, involving extremely deep reserves under the Gulf of Mexico that could give the company access to the equivalent of tens of trillions of cubic feet of natural gas reserves if it can successfully retrieve it. But Freeport now has new assets not only in the Gulf but also along the Gulf Coast, in California, and in the Rockies, as well as holding land assets in the lucrative Eagle Ford and Haynesville areas.

In the Freeport-McMoRan earnings report, look closely to see how the company plans to move forward with its newly integrated operations. With fellow mining giant BHP Billiton (NYSE: BHP  ) having integrated both energy and mineral resources into a single company operation, Freeport has the ability to enjoy similar success if it can do the job well. For now, though, weak earnings aren't likely to help the stock much in the near-term.

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  • Report this Comment On July 20, 2013, at 3:21 PM, cajun1958 wrote:

    How big a factor will oil really play at FCX? In Q1 they sold 285 million lbs of copper at $3.48/lb and 21,000 ozs. of gold at $1617/oz. That is almost a billion in copper and $340 million in gold. They basically used the high price of gold and copper to acquire oil assets.

    The big headache would seem to be getting PXP and McMoran exploration integrated into what is essentially a mining outfit BHP has been in oil/gas, coal mining and iron ore (which makes gold prices seem buoyant) for years. I don't think the comparison is valid. The real test for FCX is can they do oil exploration well at a time when price is high. If not, they are basically a straight commodity copper/gold company. THX

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