Freeport-McMoRan beats Q2 expectations on lower costs, strong copper sales

Freeport-McMoRan Inc (NYSE:FCX, ETR:FPMB)[1] delivered strong financial results for the second quarter, driven by lower operating costs and higher-than-expected copper sales volumes. The company posted earnings per share of £0.54, above estimates of £0.45, while revenue of £7.58 billion beat the consensus £7.19 billion. Earnings before interest, taxes, depreciation and amortization (EBITDA) of £3.2 billion were ahead of the Street consensus of £3.02 billion and Jefferies' estimate of £2.92 billion.

The company reported copper sales of 1.016 billion pounds, slightly above its prior guidance, with unit cash costs of £1.13 per pound, significantly lower than the £1.50 per pound forecast. "Cash costs in Indonesia fell to a net credit of £0.99 per pound," the Jefferies analysts highlighted, citing the positive impact of operations at Grasberg. However, Jefferies noted that Freeport raised full-year unit cost guidance from £1.50 per pound to £1.55 due to a downgrade in Grasberg's gold production outlook.

"Gold sales volume guidance has been lowered from 1.6 million ounces to 1.3 million ounces," they wrote, pointing to grade variability at the Grasberg Block Cave (GBC). Despite trimming full-year copper sales guidance from 4 billion pounds to 3.95 billion pounds, Jefferies said stronger prices should more than offset the volume reduction. "On a mark-to-market basis, higher copper prices would much more than offset the expected increase in unit costs for Freeport in H2," analysts wrote.

They believe a significant tailwind for Freeport is the COMEX copper premium, which averaged £4.80 per pound in Q2 and has since surged to £5.82 per pound, or 30% above the LME price. "This is a significant positive for Freeport as the US accounts for about one-third of Freeport's consolidated copper production," Jefferies wrote. The firm acknowledged the risk of demand destruction in the US due to higher copper prices but added: "The impact so far appears to have been limited."

Jefferies noted that Freeport's share repurchases in the first half totaled £107 million at an average price of approximately £37 per share. "We had hoped for a more aggressive buyback in Q2 as the FCX equity valuation materially derated, especially on a mark-to-market basis," the analysts wrote. Net debt stood at £1.5 billion, excluding £3.2 billion of PT-FI-related debt, well below Freeport's £3 billion to £4 billion net debt threshold.

"If the Freeport share price remains near the current level, we would expect an acceleration of share repurchases," Jefferies added. The firm also highlighted Freeport's longer-term growth prospects, supported by declining costs in Indonesia, operational upside at its mines in the US, longer-term organic growth, and continued strength in the gold price. "We would expect some weakness in Freeport today," Jefferies concluded. "Buy on weakness."

The firm maintained its "Buy" rating on Freeport with a £52 price target, implying upside of 14% at the time of writing.

Shares of Freeport did fall about 2.3% following its report, trading hands just shy of £45.

References

1. ^ Freeport-McMoRan Inc (NYSE:FCX, ETR:FPMB) (www.proactiveinvestors.com.au)