A Surprising Find Boosts Freeport McMoRan

04/21/2011 3:23 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

On April 20, Freeport McMoRan Copper & Gold (FCX) reported first-quarter earnings of $1.57 a share. This was 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, beating the Wall Street projection of $5.31 billion.

Copper sales for the first quarter totaled 926 million pounds. That was down from sales of 960 million pounds in the first quarter of 2010, but well above the company’s own January estimate of 840 million pounds.

Sales of gold and molybdenum, however, climbed from the year-ago quarter. Gold totals increased from 478,000 to 480,000 ounces, and 20 million pounds of molybdenum moved, up from 17 million.

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 $1,400 an ounce (versus $1,500 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.

But This Isn’t Just Raging Commodity Prices
That higher copper and gold prices would boost FCX’s earnings isn’t exactly a surprise. Commodity prices have rallied strongly in 2010 and this year, on growing demand from China and a weaker US dollar.

What is surprising, in short:

  • The company’s production of copper came in so far over January’s estimates
  • First-quarter 2011 production of gold and molybdenum beat production in the first quarter of 2010
  • For the second quarter, the company projected an increase in copper sales to 965 million pounds

That was the result of some unusual 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 grade of ore in Grasberg than expected, allowing 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 FCX.

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). This has led the company to lower its projections for the net cash cost (net of byproduct credits) of copper this year, from $1.10 per pound to $1.04.

Freeport McMoRan Copper & Gold is a member of both my Jubak’s Picks and Jubak Picks 50 portfolios.

Putting these higher production and sales volumes—and lower cash costs—into my calculations gives me a higher target price for FCX. 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 the 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 in 2011.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. 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 here.

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