Fool's Gold Report: Spot Gold Bounces as Freeport Reports Earnings

Gold prices rose modestly on Thursday on news reports that members of pro-Russian separatist groups in eastern Ukraine had been killed, leading to posturing by Ukrainian and Russian military forces. and raising the chance of further escalation. Yet, even with the supportive geopolitical situation, gains for precious metals were relatively minor, with the exception of palladium and its push back above the $800 level briefly on an intraday basis. Meanwhile, earnings season moved into the gold arena, as Freeport-McMoRan Copper & Gold (FCX 0.52%) reported quarterly results that sent its stock price higher in afternoon trading, but had implications for Newmont Mining (NEM 2.36%), Southern Copper (SCCO -0.37%), and other players in the gold and copper mining industry.

Earnings enter the spotlight
Freeport-McMoRan Copper & Gold jumped more than 1% Thursday as the company reported results that weren't as bad as some investors had feared. Freeport-McMoRan saw revenue grow by 9% and, although net income fell 21%, adjusted earnings per share came in much better than expected. For metals-market investors, though, Freeport-McMoran's news wasn't entirely welcome, as lower copper prices and a fall in output levels from the company's Grasberg copper mine in Indonesia were largely to blame for the drop in earnings.

Image sources: Wikimedia Commons; Creative Commons/Armin Kubelbeck.

It was Freeport-McMoRan's decision to diversify into the oil and gas production industry that helped salvage its overall results, as strength in the Eagle Ford shale play and the Gulf of Mexico helped boost production levels more than 5% above earlier company forecasts. Freeport-McMoRan has worked hard to cut cash costs for its mining operations, with copper production costs following $0.03 per pound. Yet, export restrictions from Indonesia added that cost back and then some, and a drop of almost 11% in average realized copper prices, and 19% in average realized gold prices -- or more than $300 per ounce -- had the expected impact on revenue and net income. Production levels also fell, with copper down more than 3%, and gold falling almost 2%.

It's unclear how much impact Freeport's report had on other copper producers, as Southern Copper rose slightly, even as Newmont Mining fell back by more than 1.5%. Arguably, though, Newmont has more similarities to Freeport, especially since they share exposure to the Indonesian market. As investors grapple with the political considerations of mining in Indonesia, Freeport-McMoRan Copper & Gold's experience will be invaluable in showing whether profitable operations are still possible within that country. Moreover, the example of political challenges will make it clear how much value mines in more-stable areas of the world have.

How metals moved today
June gold futures rose $6 per ounce Thursday, settling at $1,290.60. May silver futures did even better on a percentage basis, picking up $0.25 per ounce to settle at $19.69. Platinum-group metals also joined in the rally, with palladium climbing briefly above $800 before falling back a bit.

Source: Kitco. As of 4:30 p.m. EDT.

Earnings season will continue for the next couple of weeks, and what mining companies say about their production could have an impact on metals prices. For the most part, though, the key will lie in what happens in other financial markets, and whether risk levels on the geopolitical and macroeconomic front start to rise. Without a change in sentiment, it will be hard for gold to make much progress from current levels.