Will Freeport (FCX) Disappoint this Earnings Season? - Analyst Blog

Last quarter, the mining company delivered a negative surprise of 28.57%. Freeport has beaten the Zacks Consensus Estimate in three of the trailing four quarters with an average positive surprise of 3.14%.

 Let’s see how things are shaping up for this announcement.
 
Factors to Watch For

For the first quarter of 2015, the company expects 950 million pounds of copper, 225,000 ounces of gold, 23 million pounds of molybdenum and 13.1 million barrels of oil equivalent (MMBOE).

Freeport is conducting exploration activities near its existing mines in order to expand reserves that will support the development of additional future production capacity in the large minerals districts, where it currently operates. Favorable exploration results indicate opportunities for significant future potential reserve additions in North and South America and in the Tenke Fungurume minerals district. The drilling data in North America continues to reflect potential for expanded sulfide production.

Freeport continues to progress with its expansion initiatives. The company is evaluating a potential large-scale milling operation at El Abra mine in Chile to process additional sulfide material and attain higher recoveries. At Cerro Verde, Peru, a large-scale concentrator expansion continues to advance. Freeport is also expanding mining and milling capacity at Morenci to process additional sulfide ores which would lead to incremental annual copper production.

However, Freeport’s copper business remains affected by the sluggish global economy and supply related issues. The difficult market conditions in Europe are still impacting the copper markets. Demand from key end markets, including construction materials and electronics, still remain weak. The recent slowdown in China (a major market for copper) adds to the concern. Freeport sees further drop in copper prices in 2015.

The Grasberg minerals district, the most significant operating asset for Freeport, is still exposed to Indonesian political, economic and social uncertainties. The mine remains susceptible to strikes, which could affect production as a result of reduced capacity. The company is currently in active discussions with the new government in Indonesia to amend its contract or to extend its rights to operate beyond 2021 (the expiration timeline of the existing contract).

While Freeport has been aggressively managing its costs of late, high production cost still remains a concern for the company. Moreover, unit costs remain higher in South America as a result of lower volume.

Earnings Whispers

Our proven model does not conclusively show that Freeport will beat earnings estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Ranks #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Negative Zacks ESP: The Earnings ESP for Freeport is -75.00% -- as the Most Accurate estimate stands at a loss of 7 cents while the Zacks Consensus Estimate stands at a loss of 4 cents.

Zacks Rank #3 (Hold): Freeport currently holds a Zacks Rank #3, which when combined with a negative ESP makes surprise prediction difficult. We caution against stocks with Zacks #4 and #5 Ranks (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some other companies in the mining sector you may want to consider, as our model shows they have the right combination of elements to post an earnings beat this quarter:

Alamos Gold Inc. AGI has an earnings ESP of +50.00% and a Zacks Rank #3.

Eldorado Gold Corporation EGO has an earnings ESP of +50.00% and a Zacks Rank #3.

Cliffs Natural Resources Inc. CLF has an earnings ESP of +15.79% and a Zacks Rank #3.