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Freeport profit falls 14% as costs jump and output drops

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Freeport profit falls 14% as costs jump and output drops

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Phoenix-based Freeport-McMoRan Copper & Gold Inc., one of Southern Arizona's largest employers, said today second-quarter profit fell 14 percent, as costs jumped and lower-grade ore cut output.

Net income declined to $947 million, or $2.25 a share, from $1.1 billion, or $2.62, a year earlier, Freeport said in a statement. That trails the $2.44 average estimate of four analysts surveyed by Bloomberg. Sales were little changed at $5.44 billion.

CEO Richard Adkerson is digging new mines to exploit record metal prices and further reduce reliance on the Grasberg mine, where lower-grade ore curbed output during the quarter. Freeport is also contending with surging costs for fuel, skilled labor and equipment.

"The big thing is the movement in costs," Charl Malan, a fund manager at Van Eck Associates in New York, said today in an interview. "Most of their mines use trucks and shovels, which gives them exposure to recent diesel price increases."

Freeport operates the Sierrita mine southwest of Tucson, the Morenci mine in east-central Arizona and the new mine near Safford, among others. The company had 5,840 full-time-equivalent positions in Southern Arizona at the beginning of the year, according to the Star 200 survey. That ranked it 9th among Southern Arizona's biggest employers.

Freeport fell $7.66, or 7.2 percent, to $99.35 at 12:22 p.m. in New York Stock Exchange composite trading. A close at that price would be the biggest one-day drop since March 19. Before today, the shares gained 4.5 percent this year.

Copper-production costs more than doubled to $1.25 a pound during the quarter "principally" because of higher prices for energy, Freeport said. The estimated average cost this year will be $1.10, 10 percent more than forecast in April, the company said.

Crude-oil prices climbed 37 percent this year through yesterday and reached a record $147.27 a barrel on July 11. Energy now accounts for about 30 percent of the company's total operating expenses, Adkerson said today on a conference call.

"We're seeing higher costs everywhere in our industry," Adkerson said. "Energy costs are up, sulfur costs are up."

Copper averaged $3.78 a pound during the quarter, 9.3 percent higher than a year earlier. Gold, at an average $898.85 an ounce, was 34 percent higher.

"The copper price has been very good, the molybdenum price has been flat at a higher level and gold has picked up," Chuck Bradford, a New York-based analyst at Soleil Securities, said yesterday in an interview. "That's all in their favor."