Why Freeport-McMoRan’s Q2 Earnings Rose Sequentially

There are several metrics you can use to measure a company’s profitability. However, for companies in the commodities space, EBITDA (earnings before interest, tax, depreciation, and amortization) is generally used.

Freeport-McMoRan (FCX) generated adjusted EBITDA of $966 million in 2Q16. To put this in context, consider that Freeport posted adjusted EBITDA of $873 million in 1Q16 and ~$1.2 billion in 2Q15.

Freeport’s EBITDA has risen on a sequential basis while registering a year-over-year decline. Let’s see what factors drove the sequential increase in Freeport’s 2Q16 EBITDA.

As we discussed in the previous part of this series, Freeport’s average realized prices increased in 2Q16 from the sequential quarter. Earnings of commodity producers like Freeport, Southern Copper (SCCO), and Rio Tinto (RIO) (TRQ) are sensitive to commodity prices (DBC). Higher commodity prices helped Freeport post higher sequential EBITDA in 2Q16.

Meanwhile, along with average selling prices, Freeport’s unit cash costs also improved in the quarter. The company reported unit cash costs of $1.33 per pound of copper in 2Q16 versus $1.38 per pound in 1Q16. In energy, Freeport’s unit cash cost fell from $15.85 per barrel of oil equivalent (or BOE) to $15 per barrel of BOE.

The company expects its unit copper cash costs to average $1.05 per pound in fiscal 2016 while unit cash costs are expected to average $15.5 BOE in the year. We could see a sequential increase in Freeport’s EBITDA in the second half of the year. You can explore this outlook more in Forget 2Q16: Real Action Could be in Freeport-McMoRan’s 2H16 Earnings. 

In the next part of this series, we’ll look at the key takeaways from Freeport’s 2Q16 earnings call.