Freeport-McMoRan Wins By Losing (FCX)

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Copper and gold miner Freeport-McMoRan Copper and Gold Inc. (NYSE:FCX) reported a net loss of $13.9 billion for the fourth quarter of 2008, a whopping -$36.78 EPS. But wait, there’s more: the company’s net income after special items totaling $14 billion, is actually $23 million, or a positive EPS of $0.06. Analysts had been expecting an EPS loss of -$1.16, so depending on your perspective, Freeport’s report was either very bad news or surprisingly good news.

Investors must have taken the good news route because the stock openedat $23.33 and closed at $24.94. Once the market got over the initialshock of the size of the reported loss, it noticed that Freeport haddecided to write down the value of the company’s inventories, certainassets, and goodwill related to the purchase in 2007 of Phelps Dodge.Hooray!

Still, there was little good news in Freeport’s release related to2009. The company expects copper sales in 2009 to be off 2008 levels by9%, molybdenum sales are projected to be off 25%, and gold sales areexpected to be flat. Operating cash flows in 2009 are expected to belower by more than two thirds, from $3.4 billion in 2008 to $1 billionin 2009.

Copper prices have fallen by more than 60% in the past year. Priceswere up slightly yesterday, and that may have helped Freeport, whichowns about 58% of a copper and cobalt mining concession in  DemocraticRepublic of Congo’s Katanga province.

Through the end of  2008, the company has spent about $1.4 billion ondevelopment of the Congolese mine, and expects initial production tobegin in the second half of 2009. Production is expected to reach 250million pounds of copper and 18 million pounds of cobalt annually inthe initial years, and Freeport "expects the results of drillingactivities will enable significant future expansion of initialproduction rates." In 2008, Freeport sold a total of 4.1 billion poundsof copper, so the African mine bumps production by just 6% in theinitial stages of mining.

It’s hard to see what caused yesterday’s enthusiasm for Freeportshares. Maybe the company was being rewarded for taking its medicine.

Paul Ausick
January 27, 2009