Freeport-McMoRan Copper & Gold (FCX) just reported 2012 first quarter results, and the company exceeded the consensus estimate by posting an adjusted net income of 96 cents per share, compared to the consensus of 86 cents. Actual earnings were 80 cents including a 16 cent per share loss booked with the payoff of $3 billion in long-term debt in the quarter. Year-ago earnings were $1.57 per share.
The decline in earnings was primarily the result of a three-month strike at the company's large Grasberg mine in Indonesia. The strike ended in December, but in the first quarter, operations were in the early ramp-up stage at the mine. Also affecting the quarter's results were a lower sales price per pound of copper and higher net cash cost per pound.
Freeport-McMoRan puts out an informative quarterly earnings conference call, and several items stand out from the first quarter discussion. The company is changing from a stay-the-course production level which has been in effect since at least 2008 to a plan to spend money on mine and mill expansions, aimed at increased production. I took a look at the 2009 first quarter presentation slides, and at that time, the company was projecting a decline from 4.1 million pounds of copper production per year in 2008 and 2009 down to 3.8 million pounds in 2010 and 2011. Actual 2011 production was 3.7 million pounds.
On this latest earning report the company outlined capital spending plans to significantly increase copper production over the next two-year. One part is getting the Indonesian operations up to full speed and another part is an expansion of mining and milling operations in the U.S. The projected copper production for 2013 is 4.3 million pounds and then 4.5 million pounds in 2014. Longer term, the company is shooting for 5 million pounds per year.
In the shorter term, prices for all three of the major metals produced by Freeport-McMoRan have been relatively stable. Copper has been in the $3.50 to $3.90 range, gold around $1,650 per ounce and molybdenum around $14. Earnings estimates for the next few quarters are based on these prices and any improvement will result in getter earnings results and declining prices lower earnings. Freeport management has a very strong belief in a positive demand-supply relationship for copper, which will keep prices at or above current levels.
With a positive earnings surprise in the first quarter, Freeport-McMoRan is poised to beat the full year consensus unless there is a serious disruption in the price of copper. With the share price trading at just 9 times the consensus 2012 earnings estimate and a 3.0% dividend yield, the stock looks like a very attractive value compared to where it could be in the next couple of years. Investors should get ahead of the projected production increases and the market realization that those increases are coming fairly soon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.