Freeport-McMoRan Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The unaudited interim financial statements were reviewed by Ernst & Young; the review was not an audit.
Business context
FCX is a global copper producer with operations in North America, South America and Indonesia, as well as gold and molybdenum production. Results are highly sensitive to metal prices, production and shipment volumes, operating costs and taxes.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $5.416 billion | $5.748 billion | $12.019 billion | $10.598 billion |
| Operating income | $1.736 billion | $2.067 billion | $4.545 billion | $3.599 billion |
| Net income attributable to common stockholders | $840 million | $1.083 billion | $2.367 billion | $1.801 billion |
| Diluted earnings per share | $0.57 | $0.73 | $1.61 | $1.21 |
| Operating cash flow | $1.621 billion | $2.395 billion | $3.312 billion | $3.470 billion |
| Capital expenditures | $863 million | $433 million | $1.586 billion | $803 million |
Q2 operating margin was approximately 32% of revenue, compared with 36% a year earlier; first-half operating margin was approximately 38%, versus 34%. Copper sales volumes rose to 1.087 billion pounds in Q2 and 2.111 billion pounds in the first half. Average realized copper prices were $4.03 and $4.18 per pound, respectively. Q2 gold sales were 476,000 ounces and molybdenum sales were 20 million pounds.
At June 30, cash and cash equivalents were $9.492 billion and total debt was $11.092 billion, for reported net debt of $1.600 billion. Net debt excluding Indonesia smelter project debt was $1.015 billion. FCX reported $3.5 billion available on its revolving facility; PT-FI and Cerro Verde had an additional $1.3 billion and $350 million of facility availability, respectively. Current assets were $16.182 billion and current liabilities $5.932 billion.
Changes versus comparable periods
- Q2 revenue and common-stockholder earnings declined year over year, principally due to lower copper prices and unfavorable provisional copper pricing adjustments, partly offset by higher copper and gold sales volumes. The Q2 adjustment to prior-period provisionally priced copper sales was unfavorable by $355 million.
- First-half revenue and earnings increased year over year, primarily on higher copper and gold sales volumes, despite lower copper prices and a higher tax provision. First-half operating cash flow was slightly lower, mainly due to increased international income-tax payments.
- Operating performance improved at Grasberg and Cerro Verde. Copper production rose 18% year over year in the first half to 2.084 billion pounds; gold production rose to 891,000 ounces from 602,000 ounces.
- Cost inflation, including energy, sulfuric acid, explosives and steel, raised consolidated copper site production and delivery costs to $2.06 per pound for the first half from $1.94. Higher operating volumes and by-product credits helped keep unit net cash costs lower, at $1.37 per pound versus $1.44.
- Capital spending nearly doubled year over year in the first half, reflecting mine development and Indonesia smelter construction. Debt increased following PT-FI’s $3.0 billion senior-note issuance; proceeds also supported repayment of PT-FI and Cerro Verde term loans and funding for smelter projects.
Outlook, commentary and notable items
- 2022 projected sales: 4.214 billion pounds of copper, 1.7 million ounces of gold and 80 million pounds of molybdenum. Q3 sales were expected to be approximately 1.0 billion pounds of copper, 400,000 ounces of gold and 21 million pounds of molybdenum.
- Based on stated assumptions—including second-half copper at $3.25 per pound, gold at $1,700 per ounce and molybdenum at $16 per pound—FCX projected 2022 operating cash flow of about $4.5 billion, net of $1.4 billion of working-capital and other uses. Projected capital expenditures were about $4.5 billion, including $1.4 billion for Indonesia smelter projects. Management said it would adjust plans if needed to protect liquidity and asset value.
- FCX projected 2022 consolidated copper-mine unit net cash costs of $1.50 per pound and an effective tax rate of about 34%, subject to prices, volumes and cost estimates. Cost inflation and lower projected gold and molybdenum prices were pressuring costs and by-product credits.
- Copper fell from $4.69 per pound at March 31 to $3.74 at June 30 and $3.54 on July 29, 2022. Management cited near-term economic uncertainty but considered longer-term copper demand fundamentals favorable, including demand associated with decarbonization.
- PT-FI’s new notes carry coupons of 4.763% to 6.200%, with maturities from 2027 to 2052. FCX’s weighted-average debt interest rate was 5.0%; nearly all debt was fixed-rate. FCX purchased $582 million principal amount of its notes in Q2 for $558 million, recognizing an $8 million net gain on early debt extinguishment for the period.
- The Board increased the share-repurchase authorization from $3 billion to $5 billion in July. Through August 5, FCX had repurchased 47.9 million shares for $1.8 billion, with $3.2 billion remaining. The Q2 declared dividend was $0.15 per share, comprising base and variable components.
- Indonesia’s greenfield smelter was approximately 30% complete and expected to be completed as soon as feasible in 2024. PT-FI’s export license was extended through March 19, 2023. The company expects export duties to fall to 2.5% by year-end 2022 and be eliminated in the second half of 2023, based on construction progress.
- Contingencies include potential additional Indonesia smelter-development fines, which PT-FI says it would dispute; a $57 million fine was paid in March 2022. Bagdad’s updated closure plan increased its asset-retirement obligation by $62 million; updates at Morenci and other Arizona sites could also increase costs significantly. The stay covering approximately 950 talc-related lawsuits was extended through at least January 2023, while bankruptcy-case mediation continued.
- Other notable items: an $18 million metals inventory adjustment; El Abra revised recovery assumptions, reducing estimated recoverable copper in a leach stockpile by 135 million pounds; and a $60 million sale of Jervois Global shares. Management warned that further commodity-price declines could cause additional inventory write-downs. The filing reported no material change in previously disclosed risk factors.
Key facts for investors to verify
- Whether copper prices, provisional pricing settlements and volumes support the stated 2022 sales and cash-flow assumptions.
- Whether inflation, operating performance and by-product prices keep unit costs near guidance.
- Smelter construction progress, project financing, export-license renewals and the timing of export-duty reductions.
- Actual capital spending, debt levels and liquidity after buybacks, dividends and planned project investment.
- Potential exposure from environmental closure-plan revisions, Indonesia fines and the talc-related proceedings.