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Freeport (FCX) Q1 Loss Lower Than Expected, to Slash Jobs

Freeport-McMoRan Inc. FCX reported a loss of $3.35 per share for first-quarter 2016, compared with a loss of $2.38 per share a year ago.

The results include net charges of $4 billion or $3.19 per share mainly related to the reduction of the carrying value of oil and gas properties. Barring that impact, adjusted net loss was 16 cents a share in the first quarter, narrower than the Zacks Consensus Estimate of a loss of 20 cents.

Revenues declined 15.1% year over year to $3,527 million in the reported quarter and missed the Zacks Consensus Estimate of $3,667 million.
Consolidated sales from mines increased to 1,123 million pounds of copper in the first quarter from 960 million pounds in the year-ago quarter aided by higher volumes from Cerro Verde mine in Peru.

Sales of gold declined to 201,000 ounces in the reported quarter from 263,000 ounces a year ago. Gold sales decreased due to lower ore grades and recoveries.

Sales of molybdenum decreased to 17 million pounds in the reported quarter from 23 million pounds a year ago.

Freeport said that it will cut 25% of workforce of its oil and gas operations as a part of its cost reduction initiatives.

 

Operational Update

Consolidated average unit net cash costs (net of by-product credits) declined to $1.38 per pound of copper from $1.64 per pound in the year-ago quarter, mainly due to higher copper sales volumes in South America and the impact of ongoing cost cutting initiatives.

Average realized price per ounce for gold rose to $1,227 in the quarter from $1,186 a year ago, while average realized price per pound for copper declined to $2.17 from $2.72 in the prior-year quarter.

Mining Update

North America Copper Mines: Copper sales increased 6.6% year over year to 503 million pounds due to higher ore grades at Morenci and Safford mines. Production rose 7.2% to 487 million pounds in the reported quarter.
Freeport expects copper sales from North America to be 1.75 billion pounds in 2016, versus 2 billion pounds in 2015.

South America Mining: Copper sales of 323 million pounds rose 61.5% from the year-ago quarter, mainly due to higher mining and milling rates at Cerro Verde.

South America mining is expected to report sales of around 1.37 billion pounds of copper in 2016, compared with sales of 871 million pounds in 2015.

Indonesia Mining: Copper sales of 174 million pounds increased 12.3% from the year-ago quarter due to higher copper ore grades and production rose 7.1% to 165 million pounds. Gold sales declined 25% to 195,000 ounces due to lower ore grades and recoveries and production fell 30.2% year over year to 178,000 ounces in the reported quarter.

Sales from Indonesia mining are expected to be about 1.4 billion pounds of copper and 1.85 million ounces of gold for 2016, with roughly 70% of copper sales and 80% of gold sales expected in the back half of the year.

PT-FI remains in discussion with the Indonesian government regarding its Contract of Work (COW) and long-term operating rights. The Indonesian government provided a letter of assurance to PT-FI in Oct 2015 stating that it will clear the extension of operations beyond 2021, and provide the same rights and the same level of legal and fiscal certainty offered under its existing COW. Freeport expects that PT-FI will reach a satisfactory agreement on the terms of its long-term mining rights.

In connection with its COW negotiations, PT-FI has agreed to build new smelter capacity in Indonesia and to sell an additional 20.64% interest in PT-FI at fair market value.

PT-FI is required to apply for renewal of export permits at six-month interval. On Feb 9, 2016, PT-FI's export permit was renewed through Aug 8, 2016. The government of Indonesia continues to impose a 5% export duty while it reviews PT-FI's smelter plans.

Africa Mining: Copper sales of 123 million pounds were 7.5% lower than the year-ago quarter due to lower copper ore grades. Production decreased 5.2% to 110 million pounds in the quarter. Sales at the mine are expected to be 485 million pounds of copper and 35 million pounds of cobalt for 2016.

Molybdenum: Molybdenum production of 7 million pounds in the first quarter compared with 13 million pounds in the year-ago quarter.

Financial Position

Freeport had cash and cash equivalents of $331 million as of Mar 31, 2016, down 39.7% from $549 million as of Mar 31, 2015. Freeport had long-term debt of $19,638 million as of Mar 31, 2016, down from $19,754 million as of Mar 31, 2015.

Freeport’s operating cash flows were $740 million in the first quarter and capital expenditures totaled $982 million.

Oil and Gas Operations (FMO&G)

In May and early Jun 2013, Freeport completed the acquisitions of Plains and McMoRan Exploration and formed a premier U.S.-based natural resource company collectively called FM O&G, and added a high quality portfolio of U.S.-based oil and gas assets to its global mining business.

Freeport, in Oct 2015, said that its board is undertaking a strategic review of alternatives for FM O&G. The company and its advisors are actively engaged in a process to evaluate opportunities that include a sale of assets and joint venture arrangements that would generate cash proceeds for debt repayment.

Freeport continues to go forward with discussions for the sale of certain interests in its mining and oil and gas assets to speed up its debt reduction initiatives. The company expects to achieve additional progress during second-quarter 2016.  

In April 2016, Freeport declared a new management structure and is instituting roughly 25% reduction in its oil and gas workforce. The newly structured oil and gas management is actively engaged in managing costs. Freeport anticipates a charge of about $40 million to be recorded in second-quarter 2016 related to workforce cuts and other restructuring costs.

In the first quarter, realized revenues for oil and gas operations were $289 million compared with $547 million in the year-ago quarter. Cash production costs totaled $192 in the quarter. Sales volume was 12.1 million barrels of oil equivalent (MMBOE) in the quarter.

Divestments

During first-quarter 2016, Freeport agreed to divest an additional 13% ownership in Morenci and to sell an interest in the Timok exploration project in Serbia for total consideration of $1.3 billion. Further, in April 2016, Freeport agreed to sell certain oil and gas royalty interests for $0.1 billion. These transactions are expected to complete in second-quarter 2016.

Guidance

For 2016, Freeport expects consolidated sales to be around 5 billion pounds of copper, 1.85 million ounces of gold, 71 million pounds of molybdenum and 54.4 MMBOE. For the second quarter of 2016, the company expects 1.15 billion pounds of copper, 195,000 ounces of gold, 19 million pounds of molybdenum and 13.5 MMBOE.

Higher grades from Grasberg in the second half of 2016 are expected to result in about 55% of consolidated copper sales and 80% of consolidated gold sales to take place in the second half.

Consolidated unit net cash costs (net of by-product credits) for copper mines are expected to average $1.05 per pound of copper for 2016.
Cash production costs are expected to be around $15 per BOE for 2016.

For 2016, capital expenditures are expected to be roughly $3.3 billion, including $1.8 billion for mining operations and $1.5 billion for oil and gas operations.

During the quarter, Freeport announced plans to strengthen its balance sheet and speed up its debt reduction initiatives. In addition to lowering costs and capital expenditures to boost cash flows from its global business, Freeport announced plans to divest assets to repay debt. It is also taking further actions to increase its debt reduction plans and enhance shareholder value through asset sales and joint venture transactions.

Freeport currently carries a Zacks Rank #2 (Buy).

Better-ranked companies in the mining space include First Quantum Minerals Ltd. FQVLF, Nevsun Resources Ltd. NSU and Coeur Mining, Inc. CDE. While First Quantum Minerals and Nevsun Resources carry Zacks Rank #1 (Strong Buy), Coeur Mining sports a Zacks Rank #2 (Buy).

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