Key Drivers of Freeport-McMoRan’s Performance
3Q15 earnings
Freeport-McMoRan (FCX) is expected to release its 3Q15 financial results on October 22, 2015. According to a Bloomberg survey, the company is expected to post an EBITDA (earnings before interest, taxes, depreciation, and amortization) of $1.158 billion on sales of $4.27 billion. In 2Q15, Freeport had posted an adjusted EBITDA of $1.21 billion on net revenues of $4.248 billion.
Can Freeport surprise?
In each of the last five quarters, Freeport’s share price has fallen after it released its earnings. Its 2Q15 earnings were met with a sharp negative reaction on Wall Street, and the stock tumbled ~10% after the earnings announcement.
Spot copper prices have averaged $5,259 per metric ton in 3Q15 as compared to $6,043 per ton in the previous quarter. While WTI (West Texas Intermediate) has averaged $46 per barrel in 3Q15 as compared to $58 in 2Q15.
Looking at Freeport’s earnings sensitivity to WTI and copper prices, its 3Q15 earnings could take a hit as compared to the previous quarter. A positive earnings surprise looks unlikely considering the way commodity prices have trended in the quarter.
What should you watch for?
Investors should watch how Freeport’s unit production costs progress in 3Q15. Unit production costs are a key driver for companies in the metals and mining space (XME). Freeport’s unit cash costs are currently higher as compared to Southern Copper (SCCO), BHP Billiton (BHP), and Turquoise Hill Resources (TRQ).
Another key aspect to be aware of in Freeport’s 3Q15 earnings conference call would be its free cash flow generation. The company has generated negative free cash flows in the last few quarters. However, in 3Q15, the company might post positive free cash flows largely due to its fresh equity issuance of $1 billion.
Positive free cash flows would help reduce Freeport’s net debt, which has risen steadily as seen in the chart above. Any reduction in Freeport’s net debt would be positively received by the markets.
Visit Market Realist’s Copper page to learn more about Freeport-McMoRan.
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