FCX Analysis

FCX reported earnings of 11 cents per share, slightly below expectations of 13 cents a share and dramatically lower than last year's $2.64 per share. Revenue was $2.6 billion vs. the consensus of $2.69 billion. Analyst estimates covered a wide range, from a loss of 14 cents per share to a gain of 34 cents per share.

The results were announced before the market opened and the two-hour call ended at noon. The stock traded through a 9% range without any apparent link to the actual information revealed on the call. Many questions related to exploration and other long-range factors.

Key developments:

* The company succeeded in various cost-containment efforts promised last quarter. The cost-reduction strategy helped in achieving a positive quarter. When the time comes, this will take many months to reverse.

* The company sold 26.8 million shares of common stock at an average price of $28, raising net proceeds of $740 million. There are now 412 million shares outstanding, 469 million including convertibles.

* Proceeds from the stock sale helped to offset an unusually large expense ($919 million) for customer settlements related to provisionally priced sales (a normal business practice).

* The company has a policy against hedging by selling future production, preferring to give shareholders unhedged exposure to the underlying commodities. For the first quarter, Freeport did lock in some prices to protect liquidity in the face of working capital needs.

* Realized copper prices during the quarter were $1.72/pound, better than the LME average of $1.56.

Briefly put, Freeport-McMoRan has successfully implemented a de-leveraging strategy in the aftermath of the Phelps Dodge acquisition. This approach reflects current economic and demand conditions and helped to protect the cash balance of $644 million. Debt is at $7.2 billion, and a $1.5 billion revolving credit line was not used.

Management continues to see firm demand from China as a factor supporting copper prices. The company sees a resumption of growth in developing countries and positive effects from the stimulus programs in the U.S. but offers no guesses about timing.

Freeport makes forecasts of production but not revenue or earnings. The company expects consolidated sales from mines "to approximate 3.9 billion pounds of copper, 2.3 million ounces of gold and 50 million pounds of molybdenum for the year 2009, including 955 million pounds of copper, 650 thousand ounces of gold and 11 million pounds of molybdenum for second quarter 2009."

The company provides simulated results using copper prices of $2.00 a pound to reach estimated cash flow of $2.5 billion, net of working capital requirements. Investors can substitute their own price assumptions by making suggested adjustments as follows:

* $240 million for each 10-cent-per-pound change for copper;

* $75 million for each $50-per-ounce change for gold; and

* $30 million for each $1-per-pound change for molybdenum.

The company strategy, approach to hedging, and helpful metrics all encourage shareholders to consider investing as a pure commodity play, especially on copper prices.