Freeport-McMoRan Copper & Gold (FCX) reported strong
second quarter results on Thursday, surprising Wall Street
expectations with net income of $1.37 billion, or non-GAAP EPS of
$1.49 which bested the consensus of $1.34 by 15 cents. This was not
only more than double the profit from the year-ago quarter, it was
the fourth consecutive positive earnings surprise from the miner
with the average beat for the past year running at 16% now.
Revenues in the quarter surged 50% to $5.81
billion, surpassing the consensus estimate of $5.63 billion.
Consolidated sales from mines totaled 1.0 billion pounds of copper,
356,000 ounces of gold and 21 million pounds of molybdenum compared
with 914 million pounds of copper, 298,000 ounces of gold and 16
million pounds of molybdenum in the second quarter of 2010.
Molybdenum is an element with an extremely high
melting point and is thus valued in the production of high-strength
steel alloys because it readily forms hard, stable carbides.
Freeport is able to extract molybdenum from mineral deposits in an
oxidized state before processing it.
The Doctor Orders Profits
In mid June I was highlighting the extreme buying
opportunity I saw in Freeport below $50. My article "Copper Stocks:
Low-Risk Plays for Long-Term Trend" had three interconnected
themes:
1) Copper demand from China and other Emerging
Markets was still trending strong
2) Copper was under priced near $4 per pound
3) Freeport and other miners like Southern
Copper (SCCO) were a bargain trading below 10 times forward
estimates
Here's what I wrote then...
"Copper, the industrial metal with a PhD in
economics, may be a buy around $4 just from the looks of the chart
alone. And when you consider that China and other emerging markets
are not slowing down their rapid and massive urban development
much, the demand picture looks like it should be consistently solid
for years to come."
And here's a current chart of the good
Doctor...
You can clearly see that the rebound in risk
appetite in late June that lifted equities also boosted commodities
like copper. Also note how strong support was at $4 in June.
Coincident with the good Doctor's rise, we saw a $9+ (20%), rally
in FCX before their earnings report yesterday.
A Billion Pounds, and $1,500 Gold, Give Good
Guidance
Freeport-McMoRan's consolidated unit net cash costs
(net of by-product credits) are estimated to average $1.01 per
pound of copper for 2011, sub $500 per ounce for gold, and $15 per
pound for molybdenum for the second half of 2011. This is what
company CFO Kathleen Quirk had to say about this quarter's sales
and profit picture:
"Our results in the second quarter included
positive pricing of all of our key commodities: copper, gold and
molybdenum. Our realized price for copper of $4.22 per pound was
over $1 higher than the previous year's period. For gold, our price
of $1,509 per ounce in the second quarter of 2011 was higher than
last year's $1,234 per ounce realization, and our price of
molybdenum of $18 per pound approximated the year-ago
period."
A company like Freeport which does little forward
hedging of gold, gets to reap the full benefits of the strong trend
in the barbarous relic. And compared to most gold producers, they
have one of the strongest balance sheets in the mining sector.
If they sell another 350,000 ounces of gold in Q3
at an average price of $1,500 -- the company expects to sell 1.6
million ounces for the year -- that's over half a billion dollars
in revenues. And assuming average prices of $4.25 per pound of
copper and another billion pounds sold in Q3 and Q4 each, the
company's consolidated operating cash flows are estimated to exceed
$8 billion for the year 2011.
While EPS estimates have been trimmed back a bit
since June to $5.98 for this year and $6.21 for 2012, this still
represents a single digit forward P/E multiple. Clearly, the
fortunes of both Dr. Copper and Freeport are tied to the pace of
emerging markets growth. I'll address the warning shot fired by
Caterpillar (CAT) about the global recovery at the end of this
piece.
Southern Profits On Deck
The other copper stock I talked about buying last
month near $30 -- especially for its 7% dividend -- has also done
well in the past month. Southern Copper followed its Doctor's
orders and looked strongly "up and to the left" with a nearly $6
surge. Another 20% winner on my copper call.
In that article (linked above) I showed a Zacks
Price & Consensus chart which is a great way to see how stock
price tends to trend over time with changes in analyst estimates. I
noted the steep pullback in SCCO from $50 to $30 on the
leveling-off of earnings expectations. Here's what I said
then...
"Southern Copper is another one ripe for upward
earnings estimate revisions. If the mood about global growth picks
up, you'll see the estimates for SCCO likely tick up too, which
could move the name from a Zacks #3 Rank (hold) to a #2 Rank
(buy)."
We haven't seen any upward revisions to earnings
estimates yet. But the strong move back above $35 and Freeport's
strength today in a quiet market bodes well for SCCO headed into
its quarterly results next Friday July 29. Here's a snapshot of the
Zacks data for Southern's earnings growth...
When the CAT Speaks on Global Growth...
Explaining its earnings miss today, even on record
sales and revenues, Caterpillar executives spoke about the
slower-than-expected pace of recovery in the second quarter,
particularly due to the impacts of the Japan quake devastation.
But, the company also raised guidance for the
second half of the year, noting that excluding the impact of the
Bucyrus acquisition, they expect revenues in a range of $54 to $56
billion and earnings per share of $6.75 to $7.25, compared with the
prior guidance of $52 to $54 billion of sales and revenues and
earnings per share of $6.25 to $6.75.
CAT anticipates Bucyrus will have a negative impact
of $0.50 per share on profit during the year. Thus is the price of
becoming the largest maker of mining equipment in North America and
if analysts were caught surprised by this, it will quickly sink in
and be looked past.
Keep in mind that both the company and Wall Street
analysts have an incentive to be conservative in their guidance and
estimates, respectively. And the 6% profit-taking in CAT today is
probably presenting buying opportunities for many who still believe
in the global growth story as I do.
This optimism also bodes well for our copper
stocks. Throughout the early quarters of the recovery in 2009, CAT
CEO Jim Owens and his successor Doug Oberhelman were important
"prophets of profit" as they described the strong global demand for
construction and mining equipment coming from emerging markets. I
recommended and bought many industrial, materials, and energy
stocks in 2009 and 2010 based on their analysis of the global
economy -- and CAT's rising earnings because of it.
In this way, Caterpillar was as much a solid
forecasting economist as Dr. Copper. Thankfully, both are still
looking up now.
Kevin Cook is a Senior Stock Strategist for
Zacks.com
CATERPILLAR INC (CAT): Free Stock Analysis Report
FREEPT MC COP-B (FCX): Free Stock Analysis Report
SOUTHERN COPPER (SCCO): Free Stock Analysis Report
Zacks Investment Research
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