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Copper-Gold Miner Lowers Guidance on Slowed Indonesia Project
Research Report

Source:

Ralph Profiti, an Eight Capital analyst, reviewed this producer's Q1/18 financials and revised outlook.

In an April 25 research note, analyst Ralph Profiti reported that Eight Capital lowered its price target on Freeport-McMoRan Inc. (FCX:NYSE) to $20 from $23 following its "slight miss" on Q1/18 results and reduction in both sales and production guidance for the next few years. The company's current share price is $15.21.

The mining firm's Q1/18 numbers came in below estimates due to "lower-than-expected gold sales," Profiti noted. Adjusted earnings per share of $0.46 compares to consensus and Eight Capital's forecasted $0.56. Adjusted EBITDA was $1.93 billion ($1.93B); consensus was $2.15B and Eight Capital's estimate was $2.25B. Cash costs, net of byproduct credits, were in line with guidance at $0.98 per pound.

In terms of Q1/18 sales, those of copper were 993 million pounds (993 Mlb), which were as anticipated. However, gold sales of 610 thousand ounces (610 Koz) were 10% below guidance of 675 Koz. This resulted from maintenance on the Grasberg mill negatively impacting throughput.

Freeport-McMoRan revised its sales guidance for 2018 and 2019, reducing the copper quantity in both years but the gold amount only in the second year. For 2018, it outlined sales of 3.8 billion pounds (3.8 Blb) of copper (previously 3.9 Blb), along with 2.4 million ounces (2.4 Moz) of gold. For 2019, it guided to 3.3 Blb of copper (previously 3.45 Blb) and 0.65 Moz gold (previously 1 Moz).

The miner also lowered its 2018-2022 production guidance for both metals. This is because development of the Grasberg block cave underground mine in Indonesia has slowed due to regulatory uncertainty and necessary mine plan revisions to address seismic activity.

Freeport-McMoRan revised its capital spending guidance, reducing it for this year, to $2B from $2.1B and raising it for next year, to $2.3B from $2.2B. The new figures include capital outlays for Grasberg, $0.75B in both 2018 and 2019, and for Lone Star, $0.22B in 2018 and $0.37B in 2019.

The good news is "Freeport-McMoRan still remains well positioned to benefit from strong copper prices, and the balance sheet continues to improve," Profiti noted. The company exited Q1/18 with $3.7B and net debt of $7.9B, having reduced debt by $0.8B during the quarter. By the end of this year, Eight Capital expects Freeport to further reduce debt to $5.1B and by year-end 2019, to $3.6B.

Another bright spot for the company is first production is expected by 2020 at its Lone Star oxide project in Arizona. The mine is forecast to produce about 200 Mlb of copper a year over roughly 20 years at a capital cost of $850 million. "Lone Star presents a low-risk opportunity for Freeport-McMoRan given its proximity to pre-existing operations and is capital efficient at $9,000 per ton of copper equivalent versus the industry average of approximately $15,000 per ton," wrote Profiti.

The miner has begun additional drilling to follow up on the potential to expand Lone Star.

Profiti concluded about Freeport-McMoRan, on which Eight Capital has a Neutral rating, that it "maintains a high-quality copper business and screens as one of the most disciplined capital allocators in the peer group. Exposure to rising copper and gold prices and advancing the copper development pipeline (El Abra, Cerro Verde and Lone Star) provide the potential for significant unlocking of value."

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Disclosures from Eight Capital, Freeport-McMoRan., Target Revision, Apr. 25, 2018

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