Jul 19, 2012 (Dow Jones) -- The world's largest listed copper producer, Freeport McMoRan Copper & Gold Inc. (FCX), reported a 48% drop in second-quarter earnings as copper prices stagnated and production declined.
The company plans to counter that trend by expanding existing mines to increase annual copper production by more than 25% over the next three years.
Freeport will invest around $6 billion in this effort, adding about 1 billion pounds of copper to its annual output, chief executive Richard Adkerson said on the company's earnings conference call.
"Our strength is not built on acquisition, it's not built on major new greenfield projects," Mr. Adkerson added. Greenfield projects are mines started from scratch.
Instead, the company is focused on developing its geographically diverse existing operations, which have large resources and reserves, he said.
The company is preparing to take work underground at its open-pit Grasberg copper and gold mine in Indonesia and expand operations at the Tenke Fungurume copper and cobalt mine in the Democratic Republic of Congo. Freeport is also increasing output the Morenci copper mine in Arizona and expanding Cerro Verde, Peru's third-largest copper mine. The company also is counting on ramping up its Climax project in Colorado that mines molybdenum, a metal used to harden steel. Production started there in the second quarter.
Freeport-McMoran reported a profit of $710 million, or 74 cents a share, down from $1.37 billion, or $1.43 a share, a year earlier. Revenue dropped 23% to $4.48 billion.
The most recent quarter's results include per-share charges of 6 cents for adjustments to environmental obligations and related litigation reserves, while last year's results included a 4-cent per-share charge on similar expenses.
Analysts surveyed by Thomson Reuters recently predicted earnings of 75 cents a share on revenue of $4.43 billion.
Labor unrest at the world's third-largest open-pit copper mine, Grasberg in Indonesia, took a toll on Freeport's profitability earlier this year. A shut-down from late February to mid-March saw the company lose about 80 million pounds of copper and around 125,000 ounces of gold production.
However, operations at the open pit mine are returning to "normal" levels, Mr. Adkerson said.
"Our relationships with our workforce has improved significantly," he said, adding that the company has "made further progress to improve productivity."
The Grasberg disruptions have raised Freeport's companywide copper-mining costs by about 30 cents a pound, Mr. Adkerson said. The cost of getting a pound of copper out of the ground, excluding company-wide costs like overhead and depreciation, is now seen at $1.47 a pound in 2012. This is up from previous forecasts of $1.43.
Freeport continues to work "cooperatively" with the Indonesian government on the review of the company's contract and on extending that contract to 2041 from 2021, Mr. Adkerson said. He declined further details of the talks, as discussions are ongoing.
Freeport's copper production fell 8.3% while gold production fell 28% during the second quarter. Molybdenum output declined 9.1%.
Lower metal prices also dented profitability, compared to the previous year's second quarter. The average price the company received for its metals sales fell 16% for copper to $3.53 a pound and rose 5.2% for gold to $1,588 a troy ounce.
Freeport is well positioned to weather a period of low copper prices, Mr. Adkerson said, adding that the company's copper operations remained profitable when copper prices fell to around $1.50 a pound in during the 2008 recession. Comex copper futures settled Thursday trade at $3.5345 a pound.
Moreover, while copper prices have been high relative to historic average, "the industry has not responded as it did in the past. The supply has been slow to develop," he said. This puts copper prices on firm footing going forward.
"The outlook for copper, we believe, is very positive, supported by the continued challenges of the industry in terms of supply," Mr. Adkerson said.
Freeport shares were recently trading up 4.5% at $34.50 per share. The stock is off 39% in the last 12 months through Wednesday's close.