Freeport-McMoRan Stock Is One to Avoid, for Now

Freeport-McMoRan stock has plunged after a solid start to the year thanks to the production issues that the company has faced. Freeport was unable to hit its sales targets in the first quarter of the year, and the trend continued in the second quarter.

Let’s see what went wrong with Freeport in the second quarter and what investors can expect from the company in the coming months.

Freeport-McMoRan Is Not in the Best Shape

Freeport-McMoRan witnessed a 31% annual revenue decline in the second quarter to $3.55 billion. This was in line with estimates, but it doesn’t paint a good picture of the company’s health.

The massive decline in Freeport’s revenue was a result of an 18% decline in consolidated copper sales and a massive 72% drop in gold sales. More specifically, Freeport sold 807 million pounds of copper during the quarter as compared to 989 million ounces in the year-ago period. Also, the company’s average realized price of copper fell from $3.08 per pound in the prior-year period to $2.75 per pound this time.

Unit cash costs also increased, with Freeport reporting unit net cash costs of $1.92 per pound as compared to the year-ago period’s figure of $0.96 per pound.

Meanwhile, gold sales were absolutely decimated year over year. The company reported just 189,000 ounces of gold sales during the quarter as compared to 676,000 ounces in the year-ago period. This huge drop in gold sales meant that the company was unable to take advantage of the nice increase in the average realized price of gold, which came in at $1,351 an ounce as compared to $1,274 an ounce in the year-ago period.

What’s the Problem?

The huge drops in Freeport-McMoRan’s sales can be attributed to the bottlenecks faced by the company in Indonesia. It is transitioning to an underground mining operation at the Grasberg mine in Indonesia, and that’s taking a toll on production.

As a result of this transition, Freeport’s access to higher grade material is being blocked and its costs are rising through the roof. According to the company’s press release:

During second-quarter 2019, PT-FI opened an additional area to extend mining in the Grasberg open pit into third-quarter 2019 and potentially longer. The mine sequencing changes in the open pit delayed access to the high-grade material previously expected to be produced during second-quarter 2019.Scott Skinner, General Manager at 48North's Good Farm

However, Freeport CEO Richard Adkerson is confident that the short-term problems will pave the way for long-term gains. As reported by Reuters:

Richard Adkerson, Freeport’s chief executive, said the Grasberg expansion was “advancing according to plan. Copper production from Grasberg is expected to rebound to 200 million pounds per year by 2020 and 900 million pounds per year by 2021.Scott Skinner, General Manager at 48North's Good Farm

As such, expecting a quick turnaround at Freeport-McMoRan doesn’t seem to be a good idea considering that the company’s transition is going to take some time to deliver its full potential. This is why it would be a good idea to remain away from Freeport as copper prices are currently under pressure thanks to the ongoing U.S.-China trade war, adding to the uncertainty delivered by the company’s transition.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
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.

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