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Freeport-McMoRan Copper & Gold Inc Thriving Despite Indonesia

Considering the lingering issues in Indonesia, the best investors can say about the first-quarter earnings report is that Freeport-McMoRan Copper & Gold (NYSE: FCX  ) is thriving despite the troubles in that country.

The company is facing export bans on about 50% of production at the giant Grasberg mine in Indonesia, but it didn't stop the copper and gold producer from achieving solid income and operating cash flow. Ironically, the company benefits from the reduced copper supply on the markets with mines in North America, South America, and Africa. Even more encouraging and important is that China demand remains robust, and European demand is finally rebounding.

Any deferrals of copper concentrates will help stabilize copper prices and provide benefits for other copper miners like Southern Copper (NYSE: SCCO  ) .

Solid numbers
In the first quarter, the company was hit with lower earnings compared to the prior year from reduced copper and gold sales in Indonesia. Still, Freeport-McMoRan generated earnings of $510 million and $0.49 compared to estimates of around $0.43. Even more important, operating cash flows net of working capital used jumped to $1.2 billion. In the prior year, the company only generated operating cash flow of $831 million.

The copper miner forecasts operating cash flows hitting $7.7 billion this year with copper prices at only $3.00 per pound. These estimates provide for upside of $275 million for each $0.10 increase in the copper price. The numbers are very solid, though, based on some possibly overly positive expectations on the resolution of the Indonesia issues mentioned below.

Similarly, Newmont Mining (NYSE: NEM  ) generated solid earnings despite the interruptions in Indonesia. The company obtains the majority of gold production from North America and Australia operations, but the secondary copper product is affected by the export bans.

Indonesia impact
Back in January, the Indonesian government published regulations placing punitive tariffs on the export of unrefined commodities including copper concentrates. Considering Freeport-McMoRan already processes roughly half of the mined copper at a jointly owned smelter, the impact is limited to roughly 50% of previous production.

During the first quarter, the company estimated that 125 million lbs of copper and 140,000 ounces of gold were deferred due to the ban. At the same time, the company undertook the commitment to keep the facility at full employment in order to prevent long-term disruptions to a minimum. The impact, though, is reduced revenues while still absorbing the same employee costs. If the ban remains going forward, the monthly impact is 50 million lbs of copper and 80,000 ounces of gold.

Freeport-McMoRan continues working with the government in expectation of clearing up the matter with limited long-term impact. After all, the company accounts for nearly 90% of the economy in the region and up to 40% in the province. The government will no doubt eventually start feeling the impact of lower activity.

Newmont Mining saw around 2,000 attributable ounces of gold and 2,500 attributable tons of copper affected during the quarter. Clearly, the impact to Newmont was relatively immaterial with production of 1.2 million ounces of gold for the period.

Bottom line
As with most hard commodities, any short-term issues that defer sales are not necessarily negative. The reduced supply to the market can increase prices while the asset isn't losing value in the ground or inventory. In that manner, the recent issues in Indonesia are only temporary delays that Freeport-McMoRan is still forecasting to have limited impacts on 2014 financials. If the government were to make any decisions that affected the long-term fundamentals of the mining operation in Indonesia that could have an impact on Freeport-McMoRan.

Southern Copper could be a beneficiary if copper exports remain cut for an extended period.

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Mark Holder

Mark has been writing for TMF since Dec. 2012 with a primary focus on taking advantage of opportunities provided by the market in the energy and tech sectors.

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9/1/2015 2:08 PM
FCX $9.97 Down -0.67 -6.30%
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NEM $17.09 Up +0.02 +0.12%
Newmont Mining Cor… CAPS Rating: ***
SCCO $25.78 Down -0.88 -3.30%
Southern Copper Co… CAPS Rating: ***