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 Prices.com

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.

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