The story in Freeport-McMoRan Copper & Gold’s (FCX) third quarter earnings report today was better news for the company than it was for the copper market in particular or the global commodities sector in general.
The company did miss Wall Street estimates on both earnings and revenue with earnings of 13 cents a share 6 cents below projections, and revenue of $3.88 billion below the $3.96 billion consensus (although revenue was up 14.6% year over year.) The company also lowered its guidance for operating cash flows in 2016 to $3.6 billion but also cut guidance for capital spending to $2.8 billion for 2016 from earlier guidance of $3.1 billion. The best news came on the debt front where the company continued to sell assets (while holding onto its core copper assets) in order to reduce debt. The company said it had agreed to sell $6.6 billion in assets in 2016. Debt is forecast to drop, the company said from $17.9 billion at the end of the September quarter to $9.5 billion by the end of 2017 (assuming copper prices average $2.25 a pound. Copper closed today at $2.137 a pound, up 2.13%.)
But the news on copper and the commodity sector was distressingly familiar. While the current surplus of copper over demand is lower than expected, the industry has reacted to higher copper prices and lower than expected surpluses by increasing production. The recent growth in supply is not sustainable, Freeport-McMoRan said in its conference call. And relatively small gains in demand or disruptions in supply could move the supply/demand situation to a deficit. But commodity investors have heard this hope of restraint in supply growth before. The problem is that as long as global capital remains very cheap, companies will decide to increase supply on any signs of firming prices. Which will, of course, depress prices again. In its debt model, Freeport-McMoRan assumes copper prices of $2.00 to $2.50 at the end of 2017. The upper end of that range is better than today’s $2.137 a pound, but it’s not all that better. And the lower end of that range is, well, lower.
Freeport-McMoran is a member of my long-term 50 stocks portfolio on the strength of its copper assets. But it looks like investors will have to be patient to see the value of those assets reflected in the share price.