Update Freeport McMoRan Copper & Gold (FCX)

04/21/2011 3:00 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

On April 20 Freeport McMoRan Copper & Gold (FCX) reported first quarter earnings of $1.57 a share, 28 cents a share above the Wall Street analyst consensus, and 57% above the $1 a share reported in the first quarter of 2010. Revenue increased by almost 31% from the first quarter of 2010 to $5.71 billion versus the $5.31 billion Wall Street projection.

Sales for the first quarter totaled 926 million pounds of copper, 480,000 ounces of gold, and 20 million pounds of molybdenum. That was down from sales of 960 million pounds of copper in the first quarter of 2010 but was well above the company’s own estimating in January of 840 million pounds. Sales of gold and molybdenum, however, climbed from that quarter in 2010 when they totaled 478,000 ounces of gold and 17 million pounds of molybdenum.

A good part of the company’s jump in earnings is attributable to the rising price of copper and gold. Freeport McMoRan expects prices to stay near current levels for 2011. For the year the company’s financial estimates assume gold at $1400 an ounce (versus $1500 on April 20) and copper at $4.25 a pound (versus $4.30 on April 20). The company is confident enough in those projections to announce a supplemental dividend of 50 cents a share to shareholders of record on May 15. The supplemental dividend, to be paid in June, is in addition to the company’s regular quarterly dividend of 25 cents a share.

The increase in Freeport McMoRan’s earnings from higher copper and gold prices isn’t exactly a surprise. Commodity prices have rallied strongly in 2010 and this year on growing demand from China and a weaker U.S. dollar.

What is surprising is that the company’s production of copper came in so far over January’s estimates and that first quarter 2011 production of gold and molybdenum beat production in the first quarter of 2010. (And that for the second quarter of the company projected an increase in copper sales to 965 million pounds.)

That was the result of some usual news from the company’s Grasberg Indonesia mine. So far in 2011 mining companies have been cutting production estimates and telling Wall Street that they’ve run into lower than expected grades of ore that require them to move more rock to get the same amount of metal. Instead Freeport McMoRan reported that it had run into a higher grad of ore in Grasberg than expected and that had allowed the company to accelerate production that it had anticipated to mine in future quarters. One of the effects of that is to remove some of my worry about rising costs for Freeport McMoRan.

For the quarter that change in ore grade at Grasberg meant higher than expected gold production (480,000 ounces versus prior guidance of 325,000 ounces) and that has led the company to lower its projections for the net cash cost (net of byproduct credits) of copper in 2011 to $1.04 a pound from $1.10.

Freeport McMoRan Copper & Gold is a member of both my Jubak’s Picks http://jubakpicks.com/ and Jubak Picks 50 http://jubakpicks.com// portfolios.

Putting these higher production and sales volumes and those lower cash costs into my calculations gives me a higher target price of Freeport McMoRan Copper & Gold. I’m raising my Jubak’s Picks target price for these shares to $72 a share by September from my previous target of $70. I would have raised the target even more if the company had given more detail on its Tenke Fungurume copper/cobalt mine in the Democratic Republic of Congo.  The Congo is a very high-risk place to mine and I would have liked more information on the political status of the project. The company did say that it expects to increase copper sales from this mine to 285 million pounds of copper in 2011.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Freeport McMoRan Copper & Gold as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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