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Freeport-McMoRan’s Grasberg Issues: Impact on 2017 Earnings

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Freeport’s 2017 earnings

Freeport-McMoRan’s (FCX) Indonesian operations have faced labor issues for the last two quarters. Those issues negatively impacted the company’s production profile. It has missed consensus earnings estimates in the last two quarters, mainly due to lower copper and gold production from the Grasberg mine.

In this part of the series, we’ll see how the Grasberg issues could impact Freeport-McMoRan’s 2017 earnings.

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Unit cash costs

In 4Q16, Freeport reported copper unit cash costs after by-product credits of $1.20 per pound. That brought its consolidated 2016 cash costs to $1.26 per pound. Its unit cash costs after by-product credits averaged $1.53 per pound in 2015.

Freeport’s 2016 unit cash costs fell compared to 2015 because the company curtailed its high-cost operations. Higher-grade ore at the Grasberg mine coupled with more gold production also positively impacted Freeport’s 2016 unit cash costs.

Freeport expects its unit cash costs after by-product credits to average $1.06 per pound in 2017. Its Indonesian operations are expected to be the key driver of the reduction in unit cash costs for 2017. The company expects its unit cash costs after by-product credits to average -$0.03 per pound in its Indonesian operations (EIDO).

Impact on 2017 earnings

Freeport’s 2017 earnings could be hit hard if the company is unable to export copper concentrates from the Grasberg mine. It took a substantial hit in its fiscal 2014 earnings since it wasn’t able to export concentrates (SCCO) (BHP) from Indonesia for more than six months. However, the impact this year could be magnified due to higher ore grades coupled with the expected surge in gold mining at Grasberg (RIO).

In the next and final part of this series, we’ll see why a resolution of the Grasberg issues could be a litmus test for Freeport’s management.

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