Freeport-McMoRan Takes Another Huge Earnings Hit

Freeport's Grasberg mine in Indonesia. Source: Freeport.

Many commodities have seen their prices collapse lately, and Freeport-McMoRan has suffered both in its traditional mining business and in its newly acquired oil and gas unit as well. Coming into Thursday's second-quarter financial report, Freeport investors expected big drops in both revenue and net income, reflecting the poor conditions in the commodity markets.

Freeport's results confirmed the company's suffering, and although some found reassurance in the fact that adjusted earnings didn't decline quite as much as they had feared, another big GAAP loss for the mining and energy company raises still more concerns about when Freeport could start to recover. Let's take a closer look at Freeport-McMoRan's latest results and what could loom ahead for the company.

Impairments hit Freeport-McMoRan againFreeport-McMoRan's second-quarter results didn't inspire much confidence among investors. Sales fell 23% to $4.25 billion, missing investor expectations for $4.28 billion in revenue. Due to impairment charges in its oil and gas business, Freeport reported a net loss of $1.85 billion, working out to $1.78 per share. When you take out the impact of the impairment, the resulting figure of $0.14 per share was double what investors had expected to see, but it still represented a huge decline from the $0.58 per share in adjusted earnings in the year-ago quarter.

As we've seen in past quarters, Freeport once again suffered the direct effects of falling commodity prices. The reference price for crude oil that Freeport has to use in measuring the carrying value of its oil and gas properties fell by more than $11 per barrel during the quarter, and that necessitated a $2.7 billion impairment charge, of which about $1.7 billion was attributable to Freeport's common stock.

Beyond the impairment, though, Freeport's financial metrics looked weak across the board. In the oil and gas arena, realized revenue plunged by nearly half from the year-ago quarter, with declining oil and natural-gas liquids production exacerbating the steep declines in prices for natural gas and crude oil. Cash operating margins dropped from $58 per barrel last year to just $31 per barrel this year, further reflecting energy's weakness.

In the mining segment, production volume generally increased, especially in the gold arena. Yet price declines for copper, gold, and molybdenum all held back revenue growth in dollar terms. Net cash costs fell, reflecting larger credits for by-product metals and higher sales volumes. The drop in costs also helped to bolster profitability somewhat, but conditions in several markets remained weak.

Freeport executives still pointed to the positive elements of the business. A joint statement from Chairman Jim Moffett, CEO Richard Adkerson, and Oil & Gas-unit CEO Jim Flores noted that "we are pleased to report achievement of several important milestones as we complete our major development projects and position FCX for improving free cash flow generation." The executives also pointed to strong operating performance and development results throughout the company.

Why Freeport isn't out of the woods yetStill, investors aren't breathing a sigh of relief. Even after multiple impairment charges, Freeport-McMoran might well have to suffer even more damage to its income statement in the future. The company noted that with spot oil prices below $50, the 12-month historical average used for accounting purposes has considerable potential to drop below the $72 per barrel figure Freeport used in its latest report. In addition, efforts to evaluate Freeport's pool of assets could also lead to further charges.

Looking forward, Freeport-McMoRan is looking at some extreme measures to try to shore up its balance sheet and get the financing it needs to keep both parts of its operation running smoothly. In particular, although some have criticized Freeport's decision to file a registration statement for an IPO of its oil and gas business as being ill-timed, the company clearly wants to ensure that its energy unit is self-sustaining without financial assistance from the mining side of the business.

Investors were far from convinced that Freeport's measures will prove successful, with the stock plunging as much as 10% during the morning hours following the announcement. Until Freeport can demonstrate that it will be able to survive the big shakeout in energy and mining, investors will need to be cautious about considering the company's future prospects.

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