What to expect this year
As we noted in the previous article, Freeport-McMoRan (FCX) witnessed a selling spree after its fourth-quarter earnings release. Its earnings miss was primarily the result of the timing of its sales, as its fourth-quarter gold shipments were lower than its production.
Generally, an earnings miss due to shipment timing might not spook markets the way we saw after Freeport’s earnings miss. However, several other aspects, especially in Freeport’s 2019 guidance, are concerning.
Looking at Freeport’s cash flow guidance, the company could be cash flow negative this year if copper prices average $2.75 per pound. The company’s EBITDA is also expected to fall to $4.0 billion in 2019 before rising to $4.95 billion in 2020.
Even these consensus earnings estimates look elevated considering the current dynamic. Freeport expects its EBITDA to average ~$4 billion in 2019–2020 if copper prices average $3.0 per pound and gold prices average $1,300 per ounce. Currently, both these commodities are below the price level that Freeport has assumed in its guidance.
Copper is known for its supply uncertainty, and even a small supply-side issue could be enough to support copper prices (ANTO) (XME). However, currently, there are concerns about China’s demand outlook. The country’s copper imports fell on a yearly basis in November and December. China’s economic indicators also show a softening demand that’s bearish for copper markets.
Copper bulls seem to be banking too heavily on the projected supply deficit amid the demand surge related to electric vehicles. However, while vehicle electrification is a long-term story, in the short term, copper is quite vulnerable to China’s slowdown and geopolitical tensions.
To sum it up, 2019 looks to be a challenging year for Freeport considering the transition at Grasberg and subdued copper prices. With that said, it’s not exactly the end of the road for Freeport, as we’ll discuss in the next article.