Freeport-McMoRan Copper & Gold: Long-Term Rise

Oct.19.12 | About: Freeport-McMoRan Inc. (FCX)

On Monday October 22nd, Freeport McMoRan Copper & Gold (NYSE:FCX), considered to be the world's lowest cost producer of copper and a major producer of gold, is scheduled to report earnings and that earnings report will be watched closely by investors because as a leading producer of copper along with other natural resources, the stock has been hit by concerns over the slowdown in China. On the other hand, what is happening in China right now may not be as bad for copper as some believe and with Central Banks around the world printing money as fast as the printing presses will allow, there is still demand for hard assets like the gold that Freeport McMoRan Copper & Gold also produces. With that said, Freeport McMoRan Copper & Gold is facing some uncertainty over royalties in Indonesia where it's biggest mine is located. So where does all of that leave investors?

The Numbers Wall Street Expects from Freeport McMoRan Copper & Gold

To begin with and according to the latest summary of analyst estimates from Yahoo! Finance, the Wall Street consensus expects Freeport McMoRan Copper & Gold to report a 16.6% fall in revenue to $4.33 billion along with an EPS of $0.71 verses $1.10 for the same period last year. The current EPS consensus estimate of $0.71 is up from the $0.97 consensus number three months ago.

For the year, the Wall Street consensus for Freeport McMoRan Copper & Gold calls for an 11.10% revenue decline to $18.56 billion while EPS is expected to decline from $4.84 to $3.35; and for next year, the Wall Street consensus expects a 19.10% revenue rise to $22.10 billion along with an EPS rise from $3.35 to $4.81. However, investors need to keep in mind that these Freeport McMoRan Copper & Gold estimates for both revenue and earnings could still make big changes in either direction depending upon commodity prices and how things play out in Indonesia.

In addition, investors should keep in mind that other big mining stocks that will report earnings over the next few weeks include Goldcorp (NYSE:GG) also on Monday, October 22nd; Newfield Exploration (NYSE:NFX) and Vale (NYSE:VALE) on Wednesday, October 24th; Agnico-Eagle Mines (NYSE:AEM) and Barrick Gold (NYSE:ABX) on Thursday, October 25th; and Anglogold Ashanti (NYSE:AU) on Thursday, November 8th.

What Freeport McMoRan Copper & Gold Reported Last Earnings Season

The last time Freeport McMoRan Copper & Gold reported earnings, it reported that revenue fell from $5.81 billion to $4.48 billion while net income dropped 48% from $1.37 billion to $710 million (74 cents per share). Freeport McMoRan Copper & Gold was hurt by copper prices, something beyond the company's control but the company also plans to still increase copper production by 25% over the next three years through development of brownfield projects near existing mines. In addition, activity at the company's massive Grasberg mine in Indonesia had largely returned to normal after a crippling strike the previous year and the company expressed confidence its contract to operate in that country would be extended after a review by the Indonesian government.

What You Need to Be Aware of

What investors should be most concerned about is how the troubled global economy and the slowdown in China is impacting Freeport McMoRan Copper & Gold. However, in a recent Bloomberg interview, Chief Executive Officer Richard Adkerson pointed out that investment in infrastructure projects in China is "very positive for copper demand" and he called it "inevitable" that the country will announce more stimulus spending that would increase demand. However, the company's total copper sales did fall from around 1 billion pounds to 927 million pounds in the second quarter - meaning the number for last quarter will be closely watched by analysts.

Another headache or problem for Freeport McMoRan Copper & Gold is potentially developing in Indonesia where the government is seeking higher payments as part of negotiations to extend the mining contracts of both Freeport-McMoRan Copper & Gold and Vale. Specifically, the government of Indonesia formed a team to review mining contracts last January as PT Freeport Indonesia currently pays a 1% royalty for mining gold and a 3.5% royalty for copper while coal mining companies pay 13.5%. That review team would like to raise the royalties paid by Freeport-McMoRan Copper & Gold and Vale to 10% but it has until December 2013 to finish the review.

That's still a long way off and there will no doubt be negotiation and some horse trading going on behind the scenes in the mean time before a final decision is made as its important to remember that while Freeport-McMoRan Copper & Gold gets around 19% of its revenues from the mine, the mine is also a very important source of revenue for Indonesia. Hence, don't expect the government of Indonesia to want to kill or cripple the goose that literally lays golden and copper eggs as the mine is far from the only source of both for China along with the rest of the world (although it is the largest gold mine and the third largest copper mine in the world according to Wikipedia).

I suspect that some kind of deal will be worked out that would be mutually beneficiary for both parties (e.g. no more strikes and problems with the insurgent Free Papua Movement or environmentalists for that matter) plus Freeport McMoRan Copper & Gold has plenty of time to prepare for any added expenses resulting from higher taxes.

A Final Word About the Coming Freeport McMoRan Copper & Gold Earnings Report

As a mining company, there is not much that Freeport McMoRan Copper & Gold can really control because after all, end prices are determined by the market (e.g. the laws of supply and demand) while production and product costs can be greatly impacted by unforeseen events (e.g. a strike in Indonesia) or geopolitical issues (e.g. changes in mining laws). And while higher royalties to the government of Indonesia will inevitably hit the bottom line, it's not like they are unexpected at this point in time as its been talked about for most of the year - meaning it's probably already priced into the stock price. That means what matters is where the global economy is heading and right now that's still a question mark for Freeport McMoRan Copper & Gold and all of us for that matter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.