Another wave of red across Freeport’s quarterly results

VANCOUVER — Heavily weighted in the copper and energy business, mining giant Freeport-McMoRan (NYSE: FCX) is enduring the worst of the commodity rout, with big losses announced in its third-quarter fiscal results.  

Revenue for the company plummeted 25% to US$3.7 billion from the previous comparable quarter, with a net loss of US$3.8 billion, or US$3.58 per share — mostly from the US$3.7-billion reduction in the carrying value of its oil and gas assets.

Adjusted net loss for the quarter totalled US$156 million, or 15¢ per share, which is almost double the Zacks Investment Research estimate of an 8¢ loss.

During the quarterly earnings call, management referred to 2015 as a “bridge year” to free cash flow in 2016, and offered reassurances the company would “aggressively pursue” alternatives for its oil and gas assets. 

“We recognize the need to prudently manage ourselves in the short run,” Richard Adkerson, vice-chairman, president and CEO of Freeport, said during the call. 

“We have taken important steps to maintain our liquidity in our assets for what we believe will be a positive market for us in our business as we go forward.”

Over the past 12 months, London Metal Exchange copper prices have fallen to US$5,200 per tonne in the third quarter this year, compared to US$7,000 per tonne in the corresponding period last year, largely driven on fears of weakening metal demand in China.

Since the rout, Freeport’s average realized price for copper sales have dropped 19.3% to US$2.38 per lb. in the third quarter, compared to US$2.95 per lb. in the corresponding period last year.

To curb costs, the Phoenix-based conglomerate edged copper production down 2.3% from the previous comparable quarter to 1 billion lb., by suspending operations at its Miami mine in Arizona, along with a 50% reduction in mining rates at its other North and South American operations, such as the Tyrone, Sierrita and El Abra mines.

Freeport is reviewing copper operations to ensure they’re cash-flow positive at US$2 per lb. copper prices, and strives to cut unit costs by more than 20% next year.

“Everywhere in the industry companies are curtailing high-cost production and limiting capex, and that’s reducing investments in long-term development, which is positive for the market to go forward.” Adkerson said.

He noted Freeport drove down its own capital expenditures by 25% to US$1.5 billion this quarter, compared to last year. 

The reduction partly reflects a US$4.6-billion mill facility upgrade at the company’s Cerro Verde copper-moly mine in Peru. 

The new expansion — described as the world’s largest concentrating facility — started operations in September and will ramp up to full levels by 2016, adding 240,000 tonnes of ore per day. 

“We’re taking aggressive steps towards controlling costs, and we have a very positive outlook on generating free cash flow, particularly in 2016, once we benefit from expansion projects like Cerro Verde,” he said.

Higher production from the expanded facilities at the Morenci mine in Arizona last quarter partly offset losses in production at its other operations.

Meanwhile, the company has been advancing underground development at its Grasberg mine, in Papua, Indonesia, reaching first production from the Deep Mill Level Zone underground mine during the quarter.

For the next three years, Freeport will invest an average US$800 million a year in the projects, anticipating the changeover from the Grasberg open-pit, which the company expects in late 2017.

Operations at the largest gold and third-largest copper mine have been under renegotiations since 2014, when the Indonesian government revised the mines’ long-standing contract of work (CoW).

Adkerson said during the call that Freeport received a letter of assurance from the government during the quarter, which said the operation would extend beyond 2021, in terms that are consistent with the CoW.

“Like we see here in the U.S., there will be a lot of political comments coming out Indonesia, but that’s where we are with our understanding,” he said, assuring that royalty rates are “fixed, and subject to no further changes.”  

Other shortcomings from the quarter came from the company’s oil and gas division, and although the company has brought down its unit cash costs, average realized prices fell at a steeper pace. 

Cash-operating margins for the quarter plummeted to US$333 million, compared to US$604 million in the previous quarter, as average realized prices per barrel of oil plunged 36.9% to US$55.9 between the quarters.

“We’re undertaking a strategic review of alternatives for our oil and gas business, and whatever we do supports our company’s financial condition. If we separate the business, it’ll be in a way of where it’s sustainable on its own and can trade well, but that’s subject to review, and we’re pursuing it aggressively.”

The company expects capital expenses from its energy division will cost US$2.8 billion for the year, compared to US$2.5 billion from its mining sector.

“There’s a degree of urgency to deal with these capital costs,” Adkerson said, noting that six months is a “reasonable” time to expect decisions on how the company will move forward. 

Freeport has traded with a 52-week range of US$7.76 to US$30.04, and closed at US$11.74 at press time. The company has 1.1 billion shares outstanding, for a $12.8-billion market capitalization.