Freeport-McMoRan: A Pleasant Q2 Update For A Change (NYSE:FCX)

PHOTO DESCRIPTION: Sierrita Operations in Arizona – Source: FCX

Investment Thesis

The Phoenix-based Freeport-McMoRan (FCX) is the world’s biggest publicly traded copper company. The miner is also producing a significant amount of gold and molybdenum as secondary metal products. On July 6, 2020, the company released a production update for the second quarter of 2020.

This article will analyze the production update and what to expect for the following second-quarter results.

The investment thesis is not very clear this year and even next year, especially with the dismal state of the world economy. However, the company is signaling a better outlook for the second quarter of 2020 and should do well in 2021 when Grasberg underground ramp-up is finally completed and running.

Below is the production per mine and per metals that the company indicated in the first quarter of 2020.

One of the main projects is the underground ramp-up at Grasberg mine, located in Papua, Indonesia. Grasberg mine is the second-largest copper mine in the world, but it also provides the majority of the company’s gold output. According to FCX website:

FCX has a 48.76 percent interest in PT-FI and manages its mining operations. PT-FI’s results are consolidated in FCX’s financial statements.

During fourth-quarter 2019, PT-FI completed mining the final phase of the Grasberg open pit and continues to achieve important milestones in ramping-up production of large-scale quantities of copper and gold from its significant underground ore bodies.

FCX 1Q presentation

The investment thesis has been clouded this year by the severe effect of the COVID-19 pandemic on the economy. The company has announced in April 2020 revised operating plans in response to the COVID-19 pandemic in connection with its first-quarter results that I covered here.

Freeport-McMoRan guided consolidated sales volumes for 2020 of around 3.1 MM Cu pounds of copper, 800K Au ounces of gold, and 80 M pounds of molybdenum. The company expected CapEx to be approximately $2.0 billion in 2020 ($2.65 billion in 2019).

One of the primary negative arguments that could play against a long-term investment is that the company has stopped paying a dividend for the time being. Conversely, one positive is that copper price is now projected to be more bullish in H2 2020.

In a new report, Fitch analysts are revising up their 2020 copper price forecast to $5,900/tonne from $5,700/tonne as they now expect increased stimulus from the Chinese government to lift prices higher over the back half of the year.

Also, coronavirus cases are mounting in Chile, and are disrupting the Country’s mining industry, pushing the copper prices to six-month high. The connection is evident when we understand that Chile accounts for 25% of the total production of copper in the world.

Chile’s state-run Codelco says 2,433 workers have been diagnosed with the disease and it has temporarily halted construction on a new level at its flagship El Teniente mine.

Benchmark copper on the London Metal Exchange was +1.8% at $6,127/metric ton after touching $6,143/mt, the highest since Jan. 22.

With the risk of Chilean supply disruptions rising, “suddenly a 2020 copper deficit is not beyond the realms of possibility,” says BMO Capital’s Colin Hamilton.

Freeport-McMoRan owns mining assets in Chile (e.g., El Abra).

Thus, the investing idea that I have indicated in the previous quarter has changed again. I still consider FCX as a contrarian after copper-related stocks have taken some severe beating earlier. However, the long-term vision is changing from negative to neutral/positive now.

ChartData by YCharts

It is perhaps the right time to accumulate the stock again on any weakness from here. Meanwhile, I do not see the stock rising exponentially. In contrast, I see some signs of support, and I recommend trading the short term using about 30% to 40% of your long position to take advantage of the volatility that will be high in H2 2020.

Freeport-McMoRan Provides Update for Q2

On July 6, 2020, Freeport-McMoRan provided a new update concerning the expected second-quarter results.

During the second quarter, FCX met or exceeded several key performance targets included in its April 2020 revised operating plans. Second-quarter 2020 copper sales are expected to exceed the April 2020 estimate of 690 million pounds by approximately 8 percent and gold sales are expected to exceed the April 2020 estimate of 165 thousand ounces by approximately 10 percent.

1 – North America

The company indicated that the revised operating plans were successfully implemented with costs and CapEx in line with guidance. Individually, the Lone Star mine is now completed and estimated to produce about 200 million pounds of copper per year starting in the H2 2020.

2 – South America

The Cerro Verde mine operations in Peru have been restored during the second quarter. In the press release, the company said:

During June, Cerro Verde mill operations averaged 315,000 metric tons of ore per day, approximately 80 percent of the 2019 annual average. Cerro Verde’s operating rates are in line with the April 2020 operating plan.

FCX has continued to operate El Abra in Chile during the second quarter, but the increase in coronavirus cases may affect the mine severely.

3 – Indonesia

The company said that the ramp-up of underground production at the Grasberg continues as-planned.

During the second quarter, combined production rates from the Grasberg Block Cave and Deep MLZ (DMLZ) underground mines exceeded 54,000 metric tons of ore per day, approximately 9 percent above the April 2020 estimate and 46 percent above the first-quarter 2020 average. At the end of June 2020, combined production from the Grasberg Block Cave and DMLZ averaged approximately 70,000 metric tons of ore per day.

PT Freeport Indonesia (FCX owns 48.76%) anticipates its 2021 copper and gold production to be about 1.4 billion pounds of copper and 1.4 million ounces of gold. It is a big jump from the projected 2020 levels.

Finally, the company has indicated that second-quarter 2020 consolidated Copper and Gold sales will be above target.

Assuming an average estimated second-quarter 2020 copper price realization of $2.54 per pound and preliminary sales estimates, FCX expects second-quarter 2020 adjusted earnings before interest, taxes, depreciation, and amortization (Adjusted EBITDA) to approximate $650 million and expects to record a small net loss before nonrecurring items (adjusted net income) approximating $0.03 per share.

Note: Copper prices were $2.75 in the second quarter of 2019 and $2.43 in the first quarter of 2020.

Also, On June 30, 2020, FCX had no amounts drawn under its $3.5 billion revolving credit facility. Total consolidated debt is estimated to approximate $9.9 billion, and consolidated cash is expected to be approximately $1.5 billion.

Conclusion and Technical Analysis

Freeport-McMoRan is presenting a good case for investors who can look at the distant future and see an economy post-COVID-19, which has recovered plainly. Yes, the stock has already corrected mostly since March’s low, which looks like a rare opportunity for the ones who dared to invest in these dark moments. Backward insight is always 100%.

However, despite this optimism’s boots that have revitalized the market recently, it is only a beautiful facade, newly painted, which is only hiding a desolate economic landscape in search of direction. For one-step upward, it will be another one downward, maintaining a fragile balance. Thus, it is vital to cut expectations in terms of revenues and outlook to a three month horizon at the most. While building a small long-term position on weakness, I think FCX should be mainly traded short term based on technical analysis and copper price outlook.

Technical Analysis

FCX is forming a clear ascending channel pattern with line resistance at $13.10 and line support at $11.

Based on the RSI (14), the volume and the pattern it seems an excellent time to take the profit off the table, around 50% seems right. A good entry accumulation is $10.20 – $10, which is the 50MA/200MA, which means a potential support breakout of the pattern.

Depending on the future price of copper and gold, FCX may eventually cross the support and finally retest $8.50 – $8, but it is not very likely. Conversely, assuming a bullish copper price going forward, FCX may continue climbing within the pattern with a potential top at $15.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I trade short term FCX occasionally

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