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Why Freeport’s Earnings Are Expected to Slump in Q1

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Freeport’s earnings

Freeport-McMoRan’s (FCX) adjusted EBITDA are expected to fall to $856 million in the first quarter. It posted EBITDA of $885 million in the fourth quarter and $1.93 billion in the first quarter of 2018. For miners like Freeport, earnings tend to be a function of shipments, unit costs, and commodity prices.

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Shipments

Freeport expects to ship 825,000 million pounds of copper and 255,000 ounces of gold in the first quarter. The company shipped 785,000 million pounds of copper and 266,000 ounces of gold in the fourth quarter. Higher copper shipments are expected to support Freeport’s first-quarter earnings.

However, at the same time, the company expects a sharp rise in its unit production costs. In its fourth-quarter earnings release, Freeport said that its unit cash costs after byproduct credits are expected to rise to $1.73 per pound in the first quarter as compared to $1.54 per pound in the fourth quarter. Higher costs are expected to dent Freeport’s first-quarter earnings.

Copper prices

After falling sharply in the fourth quarter, copper prices bounced back in the first quarter. Freeport’s average realized prices are a function of copper prices at the end of the preceding quarter and average copper prices in the quarter. Higher average copper prices in the first quarter should lift Freeport’s first-quarter average realized copper prices.

Meanwhile, the sharp increase in Freeport’s unit cash costs is expected to be the biggest drag on its first-quarter earnings. The company’s unit cash costs are expected to fall meaningfully after it ramps up underground operations at its Grasberg mine. In the transition years between now and 2021, Freeport’s earnings are expected to remain subdued.

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