Should Freeport-McMoRan Copper & Gold Inc. Investors Be Prepared for the Worst?

Freeport-McMoRan reports first quarter earnings on Apr. 24.

Apr 22, 2014 at 12:00AM

Copper Mine Az

Photo credit: Flickr/benketaro 

Freeport-McMoRan (NYSE:FCX) is expected to report first quarter earnings on April 24 before markets open. On average, analysts estimated the company will earn $0.49 per share on revenue of $5.18 billion. For the past four quarters, however, analysts have been surprised each time as the company reported higher earnings per share than estimates. This time, however, the company could instead surprise to the downside. 

Copper's tarnish
While Freeport-McMoRan has diversified its revenue into oil and gas, the company's cash flow is still anchored by copper. This year the company is banking on copper prices sticking around $3.25 per pound in order to deliver its expected $9 billion in operating cash flow. The issue is that every $0.10 per pound change in the price of copper will impact cash flow by $370 million. As the copper price chart to the right shows, prices plunged toward the end of the quarter, which could have a noticeable impact on Freeport-McMoRan's earnings in this quarter and on its future guidance.


Source: Metal

If there is some good news for Freeport-McMoRan investors it's the fact that the prices of its other key commodities were strong in the quarter. Gold prices, for example, surged as much as 14% on the quarter to $1,379 per ounce. While prices weakened toward the end of the quarter, gold prices still remained well above Freeport-McMoRan's guidance. In fact, its operating cash flow is based on $1,200 gold so there is some upside to its earnings thanks to rising gold prices. 

Rising gold prices have provided a nice boost to gold miners this year. Goldcorp (NYSE:GG), for example, is up more than 11% so far this year while the market is roughly flat. Goldcorp has also crushed the return of Freeport-McMoRan, which is down more than 12% this year. That underperformance could have been much worse if it wasn't for Freeport's diversification away from copper and into other commodities like gold. 

Will oil and gas save the quarter?
Freeport-McMoRan's is also focused on growing oil and gas production to help it offset copper volatility in the future. This year 27% of its EBITDA is expected to come from oil and gas, however, that's expected to grow over time. In fact, over the next five years the company expects double energy production, with its next boost coming from first production from the Anadarko Petroleum (NYSE:APC) led Lucius development that is expected to deliver first oil in the second half of this year. Freeport-McMoRan owns 23.33% of Lucius while Anadarko owns 27.8% and a whole host of other operators own smaller stakes. Lucius is expected to produce about 80,000 barrels of oil per day along with 450 million cubic feet of natural gas per day. It's an important project for Freeport-McMoRan as it will provide a nice boost to its Gulf of Mexico production which averaged 60,000 barrels of oil equivalent per day last quarter.

Anadarko Red Hawk

Photo credit: Anadarko Petroleum 

Lucius of course won't help Feeport-McMoRan this quarter. It's also unlikely that the company will see as much upside from its other areas like the Eagle Ford shale, which helped fuel gains in past quarters. This is because Freeport is specifically managing its Eagle Ford shale assets for cash flow as opposed to growth. The problem with that is that shale production declines rapidly, making it tough to keep profits flowing. That's why I'm not sure oil and gas will be able to save Freeport this quarter, though it will still help provide a cushion from copper's fall. 

Investor takeaway
Slumping copper prices will certainly have a negative impact on Freeport-McMoRan's first quarter results as well as its guidance for the rest of the year. That being said its product diversification in gold and energy should help take away some of the sting of falling copper prices. So, while investors don't need to prepare for the worst, I wouldn't expect this to be a great quarter for the company.

OPEC is absolutely terrified of this game-changer
Freeport-McMoRan is interested in oil production for more reasons that just diversification. The company knows it can make a lot of money drilling for oil. That said, if you want to make money in oil Freeport-McMoRan isn't the company you want to buy. Instead, you should check out the company that has OPEC terrified. In an exclusive, brand-new Motley Fool report we reveal the company we're calling OPEC's Worst Nightmare.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers