Freeport-McMoRan Cracks a January Homer
Jan 20th 2012 3:44PM
Updated Jan 20th 2012 4:44PM
All things considered -- following essentially a half year of violent employee insurrections at its biggest mine -- it's difficult to imagine how events at the world's largest publicly held copper producer, Freeport-McMoRan Copper & Gold (NYS: FCX) , could have turned more positive more quickly.
As you likely know, the company is continuing to emerge from its first strike in the four-decade history of its huge Grasberg copper and gold mine in Papua, Indonesia. The strike led to dramatically reduced output at the facility, to a declaration of force majeure by the company, and to substantial damage at its facilities there. It also resulted in a reduction in earnings during the company's fourth quarter of 2011.
However, Freeport now has new labor agreements in place at Grasberg, where production is returning to normal, and its facilities in North and South America and Africa are humming along. But perhaps most importantly in the face of today's plethora of global economic concerns, the world's copper market is strengthening almost beyond belief.
Weak quarter in a strong year
Before continuing, let's take an obligatory look at results for the company's damaged December quarter. Earnings for the period were $640 million, or $0.67 per share, a 59% slide on the net income line from the year earlier total of $1.55 billion, or $1.63 per share. Revenues for the most recent period dipped 26% to $4.16 billion. But despite the myopic tendency of investors to focus excessively on quarterly results, it's surprising to note that Freeport was able to surpass its quarterly tribulations and achieve full-year earnings of $4.6 billion, a healthy bump from its prior record of $4.3 billion, set in 2010.
Freeport follows Pittsburgh's large aluminum producer Alcoa (NYS: AA) as the second big domestic metals producer to provide us with a quarterly report. But while Alcoa recorded a loss, which unfortunately masked room for optimism at the company, Freeport has combined its stellar financial performance for the entirety of 2011 with levitating copper prices and is beginning 2012 amid a spirit of increasing ebullience.
Copper heads higher
Copper, of which the company produced 823 million pounds in the quarter, compared with 1,007 million pounds for the prior year's comparable period, has seldom justified more optimism than is currently the case. March contracts on the Comex division of the New York Mercantile Exchange are hovering around $3.80 a pound, up from just above $3.00 as recently as early in the December period. The reasons behind the considerable leap include an improvement in the euro and more robust jobless numbers in our own country.
But likely of more significance was a recent World Bureau of Metal Statistics report indicating a market deficit of 100,000 tons for the red metal in November. Indeed as Freeport CEO Richard Adkerson noted on Thursday, "We see a tight and encouraging market for copper as we go into 2012." Specifically, it appears that worldwide inventories for the metal have dipped to about a 10-day supply.
Regarding the recovery from the now-concluded "excitement" at Grasberg in the quarter just past, Mr. Adkerson expressed positive feelings about having "reached agreement with the union at the ... mine and with our team (for) completing pipeline repairs." Regarding the bigger picture, he said, "We are continuing to advance our growth projects which are expected to result in meaningful increases to copper and molybdenum production in future periods."
A mixed production picture
It appears from my years of following this solid company that management tends to downplay somewhat expectations for future production. That approach is not all bad, as events of 2011 would confirm. Nevertheless, copper production for 2012 is expected to total about 3.8 billion pounds, versus 3.7 billion pounds in 2011. The higher number is likely to result from increased output at the company's North and South American plants.
Conversely, gold sales are expected to slip about 14% to 1.2 million ounces in 2012, down from 1.4 million ounces last year. The reduction will result from a planned expansion at Grasberg, a process that should be completed in time for a return to full production next year.
This project is one of several being undertaken by Freeport, which operates in an industry where production increases are often difficult to achieve. The company has indicated that it has a number of opportunities to expand production capacity at several its North American copper mines. The same is true of its four-mine South American copper operation.
At its Tenke Fungurume copper and cobalt concession in the politically unstable Democratic Republic of Congo, the company's still-new facility, which was designed to produce 8,000 metric tons of ore, is delivering an average of 11,900 metric tons of ore. And beyond that, the company has initiated work on an $850 million second phase, which will significantly expand ore production at the facility.
A Foolish conclusion
With Freeport-McMoRan having clearly cracked a homer -- if you'll pardon the rendering of a baseball metaphor in January -- it'll be more than mildly interesting to learn of the results at Southern Copper (NYS: SCCO) and Newmont Mining (NYS: NEM) as earnings reports continue to emerge. Furthermore, I'll be watching the likes of steel manufacturer Nucor (NYS: NUE) as an indicator of a broader economic recovery.
I'd urge Fools to track all of the companies named above on your individual versions of My Watchlist. But given Freeport-McMoRan's especially impressive strength, I'd begin by adding the Phoenix-based company to your list by simply clicking here.
At the time this article was published The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Motley Fool newsletter services have recommended buying shares of Nucor. Try any of our Foolish newsletter services free for 30 days.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy.
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