Freeport-McMoRan Copper & Gold Inc.'s (FCX) third-quarter
net profit fell 11% as output disruptions due to labor strikes
overwhelmed the positive impact of higher metal prices.
The world's largest listed copper mining company reported a
profit of $1.05 billion, or $1.10 a share, for the quarter ended
Sept. 30, down from $1.18 billion, or $1.24 a share, a year
earlier.
Still, the profit beat analysts' expectations. Analysts polled
by Thomson Reuters had forecast average earnings of $1.02 a
share.
Labor strikes at the world's third-largest copper mine, Grasberg
in Indonesia, took their toll on Freeport's bottom line. The
company expects to lose 100 million pounds of copper and 100,000
ounces of gold production this year. Production at the Indonesian
mine fell 15% over the previous nine months when compared to the
same period last year.
Grasberg workers have been on strike since Sept. 15 and are
demanding an eightfold increase in the minimum wage, which is $1.50
an hour now. They also held an eight-day strike in July.
Chief Executive Richard Adkerson said the strike hurts all
stakeholders at the mine. "It results in lower taxes and royalties
to the government of Indonesia, and of course, the workers who are
on strike are not being paid," he said in a conference call after
Freeport's earnings were released Wednesday.
Despite the labor action, Grasberg has been operating at about
80% capacity, Adkerson said.
"Our hope is that we get the strike resolved and we get
everybody back to work," he said.
The company is also facing a labor disruption at its Cerro Verde
copper mine, though output there hasn't been affected. Union
workers walked off the job Sept. 29, seeking higher wages. Cerro
Verde is Peru's third-largest copper producer.
"We are actively negotiating with the union, with the assistance
of the government," Adkerson said.
Freeport's total copper production shrank 8.7% in the quarter,
while gold production fell 22%. Molybdenum output increased
21%.
Third-quarter revenue rose 0.8% to $5.2 billion, helped by
higher metal prices, which remain above last year's levels despite
recent declines. Freeport's average sales price of gold was 34%
higher, while copper prices were up 2.9% during the third
quarter.
However, the nature of Freeport's business leaves it vulnerable
to volatile metal prices. In September, when copper fell 25%,
Freeport had to refund money to customers who had paid provisional
prices that were higher than what was available in the market. On
some copper orders, customers pay a provisional price at the time
of shipment, but the final price isn't set until the customer
receives the shipment.
In the third quarter, Freeport lost about 11 cents a share due
to provisionally priced copper sales. If prices rally in the fourth
quarter, Freeport's earnings could get a boost, because the
quarter's provisional prices were paid at lower levels, said Jordi
Dominguez, an analyst with Societe Generale in New York.
"If copper stays above $3.18 a pound it should reflect
positively on earnings," he said.
Copper for October delivery settled at $3.239 a pound on the
Comex division of the New York Mercantile Exchange on
Wednesday.
Adkerson said the company is mindful of the uncertain global
growth outlook and is prepared to adjust production to fit changing
economic circumstances.
"Today's conditions are nowhere nearly as significant as they
were" in 2008, Adkerson said.
Moreover, the physical market for copper remains relatively
tight in Europe and the U.S., despite slower growth than at the
start of this year.
"China continues to consume copper, although there's concern
about its credit-tightening activities," Adkerson said. He added
that the challenge of finding and developing new copper mines,
coupled with growing demand for the industrial metal, bodes well
for the industry's future and for Freeport's outlook.
"Our ability to produce copper at less than $1 a pound indicates
that we're very profitable and can generate cash in excess of our
capital-expenditure requirements," Adkerson said.
Freeport's spending on expanding its operations will likely rise
37% to $3.7 billion in 2012 as the company hopes to expand
operations at the Cerro Verde mine, its Morenci mine in the U.S.
and the Tenke Fungurume operations in the Democratic Republic of
Congo. These projects have yet to be approved by the board of
directors, Adkerson said.
Kathleen Quirk, chief financial officer at Freeport, said the
additional spending will likely be "evenly distributed between
those three projects."
Shares closed down 2.83% at $34.38.
-By Tatyana Shumsky, Dow Jones Newswires; 212-416-3095;
tatyana.shumsky@dowjones.com
--Ben Fox Rubin contributed to this article.
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