Freeport-McMoRan Investors Need to Strike a Cautious Note

Freeport-McMoRan’s [stock_market_widget type="inline" template="generic" color="default" assets="FCX" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] latest results turned out to be disastrous. The company’s top and bottom lines plunged as weak copper production and unfavourable prices took a toll on its financial performance.

Let’s take a closer look at how Freeport performed during the quarter and if it can make a comeback in the coming months.

What Happened with Freeport

Freeport witnessed a 14% decline in its copper production during the third quarter of 2019 to 864 million pounds as compared to 1 billion pounds in the year-ago period. On the other hand, gold production also fell by a huge margin of 56% to 333,000 ounces in the third quarter.

This massive drop in Freeport’s output was not surprising. The company’s production was hampered by weak milling rates and declining ore grades thanks to the transition from open-pit mining to underground mining at Grasberg. What’s more, Freeport witnessed a drop in its pricing of copper.

The average realized price of copper for Freeport came in at $2.62 per pound in the third quarter, down nearly 6% from the year-ago quarter. However, the average realized price of gold increased substantially from $1,191 an ounce a year ago to $1,487 an ounce this time.

But the combination of lower prices and weak production levels was enough to knock the wind out of Freeport’s sails during the quarter. Its revenue came in at $3.3 billion during the quarter as compared to $4.9 billion a year ago. Its operating income was down to just $117 million in the third quarter as compared to $1.3 billion in the year-ago period.

More Pain Ahead for Freeport

Analysts expect Freeport’s financial performance to pick up the pace next year. Its revenue is expected to jump 6%, while earnings per share are anticipated to jump from $0.03 this year to $0.49 next year.

The good news for investors is that Freeport’s production is expected to take off impressively once the transition happens. According to the company’s press release:

At average reserve grades of 0.96 percent copper and 0.72 grams per tonne of gold, 130,000 metric tons of ore per day is expected to equate to the production of 850 million pounds of copper and 700,000 ounces of gold per year. Access to higher grades is expected in the early years of production.

What’s more, the DMLZ underground mine is also expected to deliver production of 8 billion pounds of copper and 8 million ounces of gold over its entire life. However, investors need to be aware of the fact that the copper pricing scenario could prove to be a headwind for Freeport’s turnaround.

Thanks to the global economic slowdown, copper prices have taken a hit. The bad news is that the price of copper could continue to head lower, with analysts issuing a negative to neutral forecast for the price of the metal. As such, Freeport investors should wait and watch before taking a call as the company needs to keep progressing as far as the transition is concerned, or any bit of bad news could send the stock lower.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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