Freeport McMoRan reports Strong Q3-2013, Caterpillar disapoints

freeport Copper and GoldCatepillar

Dear PGM Capital Blog readers,
In this mid-weekend’s blog edition, we want to discuss with you the Q3-2013 earnings reports of Freeport McMoRan (Nyse: FCX), reported on Tuesday October 22nd before the bell, and the one of Caterpillar (Nyse: CAT), reported this morning October 23rd before the NYSE opening bell.

About Freeport McMoRan:
Freeport-McMoRan Copper & Gold Inc. engages in the exploration of mineral resource properties. The company primarily explores for copper, gold, molybdenum, cobalt, silver, and other metals, such as rhenium and magnetite. It operates in five segments: North America Copper Mines, South America Mining, Indonesia Mining, Africa Mining, and Molybdenum Operations.

It is worth mentioning that the company, is the biggest operator in the Indonesian “Grasberg Mine” which is the largest gold mine and the third largest copper mine in the world.

In 2013, the company acquires Plains Exploration & Production Company and McMoRan Exploration Co. – adding a high quality portfolio of oil and gas assets to its global mining business.

Highlights: -Freeport-McMoRan Copper & Gold Q3-2013 results-

  • Revenues increased 40 percent to US$ 6.2 billion in Q3 2013 compared to $4.4 billion in Q3 2012.
  • Operating cash flow jumped 257 percent from US$ 526 million in Q3-2012 to $1.9 billion during last quarter.
  • Consolidated copper volumes increased 13 percent to 1,041 mm lbs in Q3 2013 compared to 922 mm lbs in Q3 2012.
  • Consolidated gold volumes increased 51 percent from 202k oz in the third quarter 2012 to 305k oz in the same period in 2013.

Source:

About Caterpillar:
Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. With more than US$ 89 billion in assets, Caterpillar ranked number one in its industry and number 42 overall in the 2013 Fortune 500.

Caterpillar stock is a component of the prestigious Dow Jones Industrial Average.

Highlights: -Caterpillar Q3-2013 results- 

  • Third-quarter sales and revenues of US$ 13.423 billion were 18 percent lower than the third quarter of 2012.
  • Profit per share was US$ 1.45 in the third quarter of 2013, compared with US$ 2.54 in the third quarter of 2012, a decrease of US$ 1.09 or 43 percent.

Furthermore the company revised down its 2013 outlook as follows:

  • ƒThe revised 2013 outlook reflects sales and revenues of about US$ 55 billion, compared with the previous sales and revenues outlook which was projected in a range of U$ 56 to US$ 58 billion.
  • ƒThe revised 2013 profit outlook is profit per share of about U$ 5.50., compared with a previous profit outlook of about US$6.50 per share.
  • Capital expenditures for 2013 will be less than US$3 billion, compared with Capital expenditures of US$3.4 billion in 2012.

ƒ The preliminary 2014 outlook for sales and revenues is flat with 2013 in a plus or minus 5 percent range.

Source:

PGM Capital comments:
In a statement, Caterpillar, said that, the main cause for the 44 percent decrease in
Q3-2013 profit, compared with the one of Q3-2013, was the slump in demand for mining equipment around the world.

In several of our previous blog articles we already warned  investors, that the decreasing gold and silver prices below their average break-even production cost would lead to decreasing production in this sector and even for some mining companies for mothball some of their mines or even to consider going out of business.

The recent earning report of the world’s largest and diversified mining groups – including BHP Billiton (Nyse: BHP),  Rio Tinto (Nyse: RIO), VALE S.A. (Nyse: VALE), and Freeport-McMorRan (Nyse: FCX)– which have shown robust production numbers, sustains our point, that the current slump in the mining sector is mainly effecting junior miners and mono-mining companies.

Commodities prices below the average break-even cost of those mining companies in combination with high debt load on their balance sheet, unless we see a rebound in the commodity prices, might lead to cash crisis for most of the junior miners in 2014- 2015.

Below 2-year chart of the Reuters/Jefferies CRB Index (INDX: CRB), which tracks a basket of commodity prices, shows the down trend in commodity prices during the last two year.

CRB_Chart_7-30-13

The main reason we are so interested in the results of Caterpillar is because the Q3-2013 results of this company, as the biggest producer of construction equipment, may give us an indication that beside a a slump in mining activities, we may also have a world wide slump or slowdown in construction and infrastructure projects, which may be the first signs of a coming (global) recession in 2014-2015.

Based on the above we maintain our CAUTIOUS BUY rating on stocks of the world’s biggest and diversified mining companies and a HOLD rating on the stock of caterpillar.

Disclosure:
We own all of the above mentioned big diversified mining companies in our own portfolio and we don’t own any Caterpillar stocks.

Before following any investment advise, please consider your investment horizon, financial position and risk tolerances and keep in mind that mining stocks might be very volatile and that sharp corrections might happen in the short term.

Until Next Time

Eric Panneflek

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