Freeport-McMoran shares declined by more than 20% following the company's Q1 earnings report due to weak guidance and a general risk-off mood in the markets which was particularly inhospitable for cyclical stocks. Notably, the company did top analysts' estimates on the top and bottom line due to soaring copper prices amid strong demand and continued production constraints.
Even after this sharp decline, the stock is still green on a YTD basis and up 15% over the last year. Investors are clearly betting on an economic slowdown and a drop in copper prices as its P/E ratio is quite low relative to historical norms.
Inside the Numbers
Therefore with FCX, we have the tricky situation of really impressive earnings but the stock more responsive to a worsening outlook which got more credence after the company's underwhelming guidance.
In Q1, the company reported $1.07 per share in earnings which was well above analysts' estimates of $0.15 per share in earnings. Overall, it sold 1 billion pounds of copper and 409,000 ounces of gold which were increases of 24% and 59% compared to last year.
The biggest driver was the increase in average selling price. Gold was 12% higher, while copper was up 18%. The average cost of production for copper was $1.33 per pound in the quarter. The company also returned $1.1 billion to shareholders via dividends and share buybacks.
The outlook is what caught investors by surprise as fears are already growing of a cyclical slowdown that is happening at the same time as the Fed hikes rates. In an ideal scenario, the Fed is able to soften a slowdown by cutting rates.
Another headwind for FCX investors is that the company reduced its outlook for Q2 sales to 1.04 billion pounds from 1.08 billion pounds and made similar reductions for Q2 and Q3. It also sees higher production costs by about 15% which will dent its margins and earnings.
It's also interesting that the company is using the bulk of its free cash flow to return cash to shareholders rather than CAPEX. In Q1, it returned $1.1 billion to shareholders vs spending $700 million on CAPEX.
Given that copper demand is expected to be strong due to multiple factors including EV demand and supply remains constrained, this is likely an indication that the long-term bull market in copper is likely to continue even if we could be due for a period of profit-taking.
