Earnings Preview: Freeport-McMoRan

Copper major Freeport-McMoRan Copper & Gold Inc. (FCX) is scheduled to report third quarter 2010 results on October 21, 2010. The Zacks Consensus Estimate for the current quarter and full year 2010 is pegged at $1.93 and $7.80. Shares of the company have surged higher and are trading near the 52-week high of $96.57 since its better-than-expected second quarter 2010 results.

Although Freeport did not come up with any earnings guidance, it expects copper sales to be around 970 million pounds, while gold sales are expected at 410,000 ounces for the third quarter. The company expects molybdenum sales of 15 million pounds. Freeport expects consolidated sales in 2010 of around 3.8 billion pounds of copper, 1.8 million ounces of gold and 63 million pounds of molybdenum.

In the second half, average copper price are expected to be around $3.00 per pound. Gold prices are forecasted at $1,200 per ounce and molybdenum at $14 per pound in the second half of 2010. Consolidated cash costs are estimated to average around 86 cents per pound in 2010.

Operating cash flows are estimated to exceed $5 billion in 2010. Freeport expects a capital outlay of about $1.7 billion for 2010, which includes the underground development expenditure at Grasberg, the sulfide ore project at El Abra and investments in a new sulfur burner facility at Safford.

Second Quarter 2010 Highlights

Freeport-McMoRan posted a net income of $649 million or $1.40 per share in the second quarter of 2010, outshining the Zacks Consensus Estimate of $1.38 per share. Results improved 10% from last year’s net income of $588 million or $1.38 per share. Lower volumes negated pricing gains in the quarter, resulting in a modest 5% increase. Yet, the quarterly revenues of $3.9 million surpassed the Zacks Consensus Estimate of $3.66 billion.

Sales Prices and Volumes

Although averaged realized copper prices fell on a sequential basis, they soared from the last-year levels. Copper prices leaped 38% year over year to $3.02 per pound, though they have fallen 12% sequentially. Gold prices jumped 32% year over year and 11% sequentially to $1,234 per ounce, while molybdenum prices experienced a robust 80% increase year over year and 20% sequentially to $18.18 per pound.

However, copper sales volumes declined 8.8% year over year in the quarter to 914 million pounds, while gold sales volumes plunged 64% to 298,000 ounces. Molybdenum sales volumes remained flat at 16 million pounds. The decline in sales volume resulted from lower copper and gold ore grades at Grasberg due to planned mine sequencing and lower sales from South American mines.

Zacks Consensus Estimates

Analysts and investors have remained bullish on Freeport-McMoRan over the last month, anticipating stronger copper prices. We notice 6 of the 14 analysts covering the stock have upped their earnings estimate for the upcoming quarter while 1 analyst has made a positive revision to the estimate in the last week. Consequently, in the last week, the Zacks Consensus Estimate has shot up to $1.93 for the current quarter from $1.87. Over the last month, the consensus estimate has climbed 12 cents from $1.75.

For the full year 2010, out of the 9 analysts covering the stock have 3 and 2 have revised their earnings estimate positively over the last 30 days and 7 days, respectively. We note 1 negative revision for the full year estimate while there are no negative revisions for the third quarter over the last month.

During the period, the Zacks Consensus Estimate spiked 13 cents to $7.61 from $7.48. The consensus estimate jumped 19 cents and settled at $7.80 over the last week.

For 2011, we see a similar trend. Out of the 17 analysts covering the stock, 4 and 1 have upgraded their earnings estimate over the last 30 days and 7 days, respectively. We see only 1 downward revision in the estimates in the last month.

We see the Zacks Consensus Estimate mounting at $8.83, up 5 cents over the last week. During the last month, the consensus jumped 23 cents to $8.78 from $8.55.

With respect to earnings surprises, Freeport has outperformed the Zacks Consensus Estimate in all of the trailing four quarters. This is reflected in the average surprise of 32.47%. The current full year and third quarter estimates have an upside potential of 10.36% and 5.51%, respectively.

Zacks Recommendation

Freeport-McMoRan Copper & Gold has a geographically-diverse asset base with significant reserves of copper, gold and molybdenum. Its principal asset, the Grasberg minerals district in Indonesia, contains the single largest copper reserve and the largest gold reserve in the world.

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, bodes well for the company.

However, mine sequencing at Freeport’s Grasberg mine in Indonesia is affecting copper and gold sales. The company also expects higher input costs. Higher production costs, which increased 23% year over year in the most recent quarter, are another concern for Freeport. The company is witnessing higher costs across its South American operations and at the Indonesian mines.

Freeport expects cash cost per unit to vary significantly with variations in metal sales volumes and prices for the rest of 2010. The company expects average unit costs for its South America mining operations to be about $1.20 per pound of copper for 2010. In Indonesia, Freeport expects unit costs of 25 cents per pound of copper for 2010. Such costs would change by about $0.05 per pound for each $50 per ounce change in the average price of gold for the rest of 2010.

Currently, Freeport has a short-term (1 to 3 months) Zacks #3 Rank and a longer term (6+ months) Neutral recommendation.

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