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Portfolio Update

Lifelong Income Portfolio: Another Quarter of Solid Results

By Roger S. Conrad, on Nov. 5, 2013

Although Freeport McMoRan Copper & Gold’s third-quarter earnings per share dipped to $0.79 from $0.86 a year ago, these results blew away the Bloomberg consensus estimate and confirmed that the company’s recent diversification into oil and gas is panning out. Excluding noncash items, the mining giant’s net income per share came in at $0.89 per share.

Shares of Freeport McMoRan Copper & Gold sold off after the company announced plans to buy McMoran Exploration and Plains Exploration & Production for about $9 billion in stock and cash. Skeptics questioned whether management was putting its own interests ahead of shareholders and the company, while accusing the firm of overpaying for these assets.

But the company’s third-quarter results should lay these fears to rest; the newly acquired oil and gas assets provided a welcome influx of cash flow amid weaker prices for copper and gold. In fact, these new operations topped management’s revenue guidance by 10 percent, thanks to strong production from the Eagle Ford Shale in south Texas and the deepwater Gulf of Mexico. The company’s costs per barrel of oil-equivalent production also surprised to the upside, coming in at $16.80 from an initial estimate of $19.00.

With several projects slated to come onstream over the next several quarters, Freeport McMoran Copper & Gold’s hydrocarbon production and related revenue should increase.

Nevertheless, mining remains the company’s largest business line. The firm’s average price realization on copper tumbled 10 percent from year-ago levels, while the average gold price fell 23 percent. Fortunately, volume growth and lower production costs partially offset this headwind.

The return of normal operations at the Grasberg mine in Indonesia drove a 13.3 percent increase in copper sales volumes and lowered per unit production costs by about 10 percent. Freeport McMoRan Copper & Gold also increased its gold output by 60.2 percent over this 12-month period, while sales volumes of molybdenum–an element used to strengthen steel–climbed by 25 percent.

Consistent operations at the Grasberg mine a top priority for Freeport McMoRan Copper & Gold. A new biannual labor agreement announced in October should go a long way toward avoiding unanticipated shutdowns and placate government authorities. The company also reported solid progress with efforts to boost production and reduce costs by revamping the Grasberg mine.

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