3 Questions Investors Want Answered When Freeport-McMoRan Reports

Freeport-McMoRan Copper & Gold  (NYSE: FCX  ) is expected to report its second-quarter results on July 23. What's different this time around is that it will be reporting more than copper and gold earnings because the company's transition into oil and gas is now complete. Let's take a look at three burning questions investors want answered when the newly combined company reports.

How is the oil and gas integration going?
On June 3, Freeport became more than just a mining company when it completed the final step of its $19 billion transformation into a global resource company. With that out of the way, the key for investors is to watch to see how the integration went during the first month. Because this was such a large deal, any hint that there will be integration issues will really weigh down shares.

One area to watch is production. Last quarter, the two companies it had acquired produced 137,000 barrels of oil per day and 303 million cubic feet of natural gas per day. Investors will want to see growth in both of those numbers. Overall, Freeport has said it expects to double its production over the next five years, while tripling its cash margin by 2020. Investors need to see how the company is progressing on those aggressive goals.

What was Grasberg's effect?
Freeport's massive copper and gold mine in Indonesia had its production suspended after a tragic accident occurred near the mine on May 14. The mine didn't resume operations until June 21, which had a big effect on production. Overall, Freeport estimated that 115 million pounds of copper and 115,000 ounces of gold production was affected. Further, about 1 million pounds of copper and 1,000 ounces of gold production per day remain suspended, for the mine isn't back at full production. This undoubtedly had an influence on the quarter's performance. 

Grasberg mine. Source: Alfindra Primaldhi (Wikimedia Commons).

What investors will want to see is how much the production curtailment affected its quarterly earnings as well as what the future effect might be. There will be costs associated with the incident, as well as costs to ensure something like this will never happen again. Investors will need to see what effect, if any, there will be on Freeport's long-term profitability at Grasberg or at its other mines.

What's the outlook for gold?
We already know last quarter was the worst quarter for gold since the start of modern gold trading. The 23% free fall in the price of gold hit gold mining stocks hard: for example, Yamana Gold  (NYSE: AUY  ) plunged 38%. Because of that, analysts have already been reducing expectations of gold miners by ratcheting down earnings estimates. Analysts have already slashed 28% off Yamana's consensus bottom line, which might not be enough because the company had missed estimates in four of the past five quarters. This is where Freeport's more diversified portfolio should really shine. This quarter alone, that diversification has helped to insulate it from the free fall in gold mining stocks -- Freeport's stock was down just over 16%. 

The added diversification into oil and gas has made gold less critical to its business. That makes me wonder if the company will see the recent weakness in gold mining stocks as an opportunity to go on the offensive and add to its gold production by picking up a gold miner on the cheap. While a move deeper into gold might not be its next step, the company is always on the prowl for its next deal and any hint where its looking could provide a lift to other mining stocks. 

Final Foolish thoughts
I wouldn't expect a terrific quarter from Freeport. However, it is quite possible that the company can beat Wall Street estimates that call for revenue of $4.43 billion and earnings of $0.46 per share. The company's diversification should have been enough to overcome the pessimism of analysts, which are projecting a really poor quarter for the company. What's more important here is that the company has very visible growth now thanks to the addition of oil and gas, giving Freeport the potential to reward investors over the long term.

It really is critical for investors to have a long-term outlook. Many investors have been crushed by gold lately, even though gold has outshined the stock market with strong returns since 2000. If you have a long-term outlook for the shiny metal, you'll find great value in The Motley Fool's new free report, "The Best Way to Play Gold Right Now," which dissects the recent volatility and provides a guide for gold investing. Click here to read the full report today!


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  • Report this Comment On July 22, 2013, at 7:23 PM, johnlad wrote:

    what will be grasberg effect on rio tinto.....rarely do folks consider lowered production and rio/fcx partnership

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