Freeport-McMoRan: Earnings Preview

 |  About: Freeport-McMoRan Inc. (FCX)
by: Zacks Investment Research

Metals and mining powerhouse Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) announced that it would release its results for the first quarter of 2011 before the market opens on April 20, 2011.

FCX earned a profit of $3.25 per share in the fourth quarter of 2010, outshining the Zacks Consensus Estimate of $2.87 per share. In the upcoming quarter, the Zacks Consensus Estimate for Freeport is pegged at a profit of $1.25 per share, reflecting an annualized growth of 22.62%. The downside potential of the estimate, essentially a proxy for future earnings surprises, is 2.40%.

With respect to earnings surprises, the company outdid the Zacks Consensus Estimate in the trailing four quarters. This is reflected in the average earnings surprise of 11.05%, with positive surprises in each of the quarters involved.

Fourth Quarter Review

Freeport posted an excellent net income of $1.5 billion or $3.25 per share in the fourth quarter of 2010, beating the Zacks Consensus Estimate of $2.87 per share.

Quarterly revenues of $5.6 million surpassed the Zacks Consensus Estimate of $5.19 billion and were up 21.5% year over year. Higher metal prices drove sales and earnings in the quarter.

Averaged realized metal prices surged and copper prices leaped 23.4% year over year to $4.18 per pound. Gold prices jumped 25.4% year over year to $1,398 per ounce, while molybdenum prices experienced a 23.4% year-over-year rise to $16.60 per pound.

However, copper sales volumes plunged 4.5% year over year in the quarter to 941 million pounds, while gold sales volumes increased 7.1% to 497,000 ounces. Molybdenum sales volumes of 17 million pounds were up by 6.3% year over year.

Net cash cost per unit in the quarter decreased 14.5% to 53 cents per pound versus 62 cents in the fourth quarter of 2009. Operating cash flows of $2.1 billion for fourth-quarter 2010 increased by a robust 42.7% from $2.8 billion as of December 31, 2009. Capital expenditures totaled $535 million for the fourth quarter of 2010.

As of December 31, 2010, total debt was approximately $4.8 billion with $3.7 billion in cash. From January 1, 2010 through December 31, 2010, Freeport repaid $1.6 billion of debt.

Agreement of Estimate Revisions

Three out of the 13 analysts covering the stock for the first quarter of fiscal 2011 have made an upward revision in the last 30 days and among them 1 has made a revision in the last 7 days. Apart from 2 analysts who have made a downward revision in the last 30 days none has made a downward change in the last 7 days.

Magnitude of Estimate Revisions

The first quarter 2011 estimate increased by a penny to $1.26 per share in the last 7 days and remained flat at $1.25 per share in the last 30 days. The Zacks Consensus Estimate for the first quarter is 22.5% higher than the year-ago profit of $1.02 per share.

Our Take

We are optimistic on Freeport’s African Tenke Fungurume copper mining operations, which will optimize costs for Freeport on reaching full production capacity. Rising copper prices, driven by Chinese stockpiling, bode well for the company.

However, unit net cash costs for 2011 are expected to be higher than 2010, due primarily to the impact of higher unit net cash costs at Grasberg. Unit costs are likely to rise in each of Freeport’s copper-producing segments, reflecting higher input costs. Indonesian operations will likely see the most significant year-over-year increase on a per unit basis due to the drop in volumes that will lessen the ability to absorb the operation’s high fixed costs.

Thus, Freeport has a short-term (1 to 3 months) Zacks #3 Rank (Hold) and a long-term Neutral recommendation.

The company faces stiff competition from Newmont Mining Corp. (NYSE:NEM) and Southern Copper Corp. (NYSE:SCCO).