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Gold Could Put the Sparkle Back in Freeport-McMoRan’s 2017 Earnings

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Aug. 25 2016, Updated 8:05 a.m. ET

Freeport’s earnings

As discussed in the previous part of this series, analysts expect Freeport-McMoRan (FCX) to post EBITDA[1. earnings before interest, tax, depreciation, and amortization] of ~$7.3 billion in the next four quarters. To put this into context, the company generated only ~$1.8 billion in EBITDA in 1H16.

In this part of the series, we’ll explore why analysts expect Freeport-McMoRan’s earnings to rise sequentially over the next four quarters.

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Copper production

Freeport-McMoRan (FCX) produced 1.12 billion pounds of copper in 1Q16 and 1.11 billion pounds of copper in 2Q16. However, the company expects its copper volumes to increase to 1.3 billion pounds in 3Q16 and ~1.4 billion pounds in 4Q16. Because Freeport-McMoRan gets most of its earnings from copper, higher copper volumes would boost the company’s revenues and EBITDA in 2H16.

Notably, while Freeport-McMoRan’s copper volumes are expected to rise in 2H16, we could see a decline in 2016. FCX has sold some of its copper assets to raise cash in a bid to strengthen its balance sheet. As a result of these asset sales, Freeport-McMoRan expects its copper volumes to fall to 4.2 billion pounds in fiscal 2017 from expected copper volumes of 5 billion pounds in fiscal 2016.

Gold volumes

Although copper is the key driver of Freeport-McMoRan’s earnings, its earnings would get a leg up in the next few quarters due to higher gold volumes from the Grasberg mine. Gold is produced as a by-product of copper mining. Among the other copper producers, Southern Copper (SCCO) and Turquoise Hill Resources (TRQ) (RIO) also produce gold.

Freeport-McMoRan’s gold volumes in 1H16 totaled only 357,000 ounces. However, the company expects its gold volumes to increase to ~1.4 million ounces in 2H16. FCX’s gold volumes in fiscal 2017 are expected to jump to 2.5 million ounces, compared to its expected volume of 1.7 million ounces in fiscal 2016.

Rising gold volumes coupled with higher gold prices (GLD) might be the key driver of Freeport-McMoRan’s earnings over the next few quarters.

In the final part of this series, we’ll discover how Freeport-McMoRan is positioned with respect to copper.

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