Lower Prices, Stubborn Costs Could Weigh on Copper Miners' Quarterly Results

COPPER - STOCK RECOMMENDATION - North American copper miners are expected to report a decline in first-quarter earnings this week due to lower prices of the red metal amid persistently high costs. 

Freeport-McMoRan (FCX.N) and Canada's Teck Resources (TECKb.TO) are expected to post a combined adjusted net income of $666.3 million, according to LSEG estimates, compared with $1.43 billion in the year-ago quarter. 

Copper prices touched a multi-year high last month after major Chinese copper smelters agreed to limit capacity expansion. 

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Despite the late rally, average benchmark copper prices were down about 5% during the quarter compared to last year, weighed by concerns over demand in top-consumer China and fears of elevated interest rates.

"I would expect first-quarter cash flow to be low because, again, the copper price had not yet really risen," said Chris LaFemina, managing director, of global metals and mining equities research at Jefferies.

The miners are also grappling with a labor shortage, especially in countries such as the U.S., and lower grades of ore, raising the per-unit production cost.  

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"In mining, costs tend to lag prices. So when the prices go down, it takes time before the costs are lower," LaFemina said.

In addition, Teck's quarterly earnings may see a hit from inclement weather in British Columbia, while Freeport's ongoing tussle with the Indonesian government over export permits could add to its costs, analysts said.

Over 50% of Wall Street analysts who cover Freeport and Teck have lowered their earnings estimates for both miners in the past 30 days, according to LSEG data. 

However, a surge in the prices of gold, often mined as a by-product, could provide relief to miners like Freeport, analysts said.

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"We think estimates are too pessimistic for Freeport-McMoRan, as the consensus doesn't appear to be giving Freeport credit for the significant gold production from Grasberg in Indonesia," CFRA analyst Matthew Miller said in a statement. 

The late rally in copper prices will likely boost the free cash flow of miners in the second quarter, analysts said.