Freeport touts energy opportunity as metals prices fall

Thu Apr 18, 2013 3:12pm EDT

(Reuters) - Freeport-McMoRan Copper & Gold Inc (FCX.N) sought to shore up shareholder support for its foray into the U.S. energy sector on Thursday by highlighting the benefit of diversifying into oil and gas at a time when metal prices are softening.

A $9 billion takeover of two energy companies, announced by Freeport in December, will add new growth opportunities that compliment plans to boost copper sales to more than 5 billion pounds a year by 2015, Chief Executive Richard Adkerson said during a conference call.

"We've got near-term exposure to oil growth and oil revenues, and longer-term exposure to exploration potential by the U.S. natural gas business," he said. "That adds an exciting and attractive asset mix to our company."

Adkerson spoke after Freeport, one of the world's largest copper producers, reported a 15 percent drop in first-quarter profit as higher copper sales were offset by increased costs, lower copper prices and a fall in gold sales.

Copper and gold prices have tumbled in recent weeks, while natural gas prices are up. That has Freeport's unpopular bid for Plains Exploration & Production Co PXP.N and McMoRan Exploration Co MMR.N looking more favorable than when first announced.

Shares of Freeport rose 0.9 percent to $28.25 on Thursday afternoon on the New York Stock Exchange. The stock was trading in the $38 range the day before the energy deals were announced.

Critics have said the takeovers are pricey and an unnecessary distraction. But Freeport, the world's largest publicly listed copper producer, says there is a lack of good copper assets on the market, and that the U.S. energy assets will enhance its geographical profile. The company already owns mining projects around the globe.

The deal will transform Freeport, with about a quarter of the combined company's 2013 operating earnings expected to come from oil and gas, an attractive shift at a time when the United States is poised to become the world's top oil producer.

At the same time, the Arizona-based company expects to spend some $4.4 billion on its mining projects this year, including $2.6 billion on new projects and $1.8 billion in sustaining capital.

Freeport plans to boost its copper sales to some 5 billion pounds a year by 2015, up from 3.65 billion pounds in 2012, mainly through major expansions at its mines in Peru, the U.S. and Africa.

Revenue in the first quarter slipped and came in below analyst estimates, while adjusted earnings slightly exceeded expectations.

Freeport increased its cash-cost outlook for 2013 to $1.45 per pound of copper, up from a previous estimate of $1.35 per pound, based on a lower average gold price, which has plunged about 18 percent this year. Gold is a by-product for Freeport and is used as a credit against copper production costs.

DEAL VALUE DOWN

Gold prices fell to a two-year low at $1,321.35 per ounce earlier this week. Copper prices, meanwhile, hit an 18-month low at $6,800 a metric ton (1.1023 tons) on Thursday on persistent worries over sagging global demand for the metal.

"The demand side data out of China has been pretty terrible," said Garrett Nelson, an analyst with BB&T Capital Markets. "And there are concerns regarding the amount of new supply expected to come online this year and next year."

While copper is under pressure, natural gas prices are rising, making Freeport's bid to diversify into energy seem more attractive, Nelson added.

But falling metal prices are weighing on Freeport's shares, dragging down the value of its offer for Plains by about 13 percent. That has some analysts speculating Freeport may have to increase its offer for the Texas-based oil & gas producer.

Freeport said it expects both deals to close in the second quarter of 2013. It has completed $10.5 billion in debt financings associated with the two takeovers, at a weighted average interest rate of about 3.1 percent.

Freeport's consolidated cash totaled $9.6 billion at the end of the first quarter and total debt was $10.1 billion.

COSTS WEIGH

Net income attributable to shareholders for the quarter dropped to $648 million, or 68 cents a share, compared with $764 million, or 80 cents, a year earlier.

Adjusted to remove one-time items, earnings were 73 cents a share, compared with an average analyst estimate of 71 cents a share, according to Thomson Reuters I/B/E/S.

Revenue fell slightly to $4.58 billion, below analyst estimates of $4.64 billion.

Freeport said its copper sales rose 15 percent to 954 million pounds, up from 827 million pounds, while the realized copper price fell to $3.51 per pound from $3.82. Net cash costs per pound of copper were $1.57, up from $1.26.

Gold sales fell 26 percent to 214,000 ounces, down from 288,000 ounces in the first quarter of 2012, on lower ore grades in Indonesia. The average realized gold price fell to $1,606 per ounce, from $1,694.

(Additional reporting by Allison Martell in Toronto; editing by Frank McGurty and Alden Bentley)

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