Freeport-McMoRan Inc. — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020; comparisons are primarily with FY2019. Freeport-McMoRan (FCX) is a global copper producer with significant operations in North America, South America and Indonesia. It reported under U.S. GAAP; Ernst & Young issued an unqualified opinion on the financial statements and internal controls.
Financial and operating results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $14.198 billion | $14.402 billion |
| Operating income | $2.437 billion | $1.091 billion |
| Operating margin | 17.2% | 7.6% |
| Net income (loss) attributable to common stockholders | $599 million | $(239) million |
| Diluted EPS | $0.41 | $(0.17) |
| Operating cash flow | $3.017 billion | $1.482 billion |
| Capital expenditures | $1.961 billion | $2.652 billion |
| Cash and cash equivalents at year-end | $3.657 billion | $2.020 billion |
| Total debt at year-end | $9.711 billion | $9.826 billion |
Net debt was approximately $6.1 billion at year-end. FCX had $7.2 billion of reported liquidity: $3.7 billion cash and $3.5 billion available on its revolving credit facility, with no revolver borrowings. Debt carried a 4.6% weighted-average interest rate. Current assets were $9.303 billion and current liabilities $3.417 billion.
Revenue declined about 1.4%, while operating income improved substantially. Management attributed the earnings recovery mainly to higher realized copper and gold prices and lower production and delivery costs. Average realized prices were $2.95/lb copper versus $2.73, $1,832/oz gold versus $1,415, and $10.20/lb molybdenum versus $12.61. Copper production was 3.206 billion lb versus 3.247 billion; gold production was 857,000 oz versus 882,000 oz; and molybdenum production was 76 million lb versus 90 million lb.
Operating cash flow rose to $3.0 billion, including $665 million from working capital and other sources. The consolidated copper-mine unit net cash cost, a non-GAAP measure, declined to $1.48/lb from $1.74/lb. The filing reports no single consolidated gross margin; operating margin above is calculated from reported operating income and revenue.
Material changes and notable items
- South America copper sales fell to 976 million lb from 1.183 billion lb, reflecting COVID-related restrictions, lower grades and revised operating plans. Indonesia copper sales rose to 804 million lb from 667 million lb as grades improved during the underground ramp-up; North America sales were broadly stable.
- COVID-19 led to revised operating plans, reduced production and capital spending, and temporary suspension or curtailment at several sites. Cerro Verde returned to operations during 2020; Chino restarted at a reduced rate in January 2021.
- Operating income included $473 million in net gains on asset sales, chiefly the $486 million gain on the Kisanfu project sale, compared with $417 million of net asset-sale gains in 2019. 2020 also included $258 million of COVID/revised-plan charges, $96 million of unfavorable metals inventory adjustments and $130 million for the talc litigation settlement framework.
- FCX issued $2.8 billion of senior notes in 2020 and used most proceeds to repurchase or redeem existing notes, extending maturities. It had no significant scheduled debt maturities in 2021.
- Cash dividends were suspended in March 2020. In February 2021, the Board reinstated an annualized $0.30/share dividend, subject to required covenant actions and future Board decisions.
Outlook, risks and contingencies
For 2021, FCX projected sales of 3.820 billion lb copper, 1.325 million oz gold and 85 million lb molybdenum. At assumed prices of $3.50/lb copper, $1,850/oz gold and $9.00/lb molybdenum, it forecast approximately $5.5 billion of operating cash flow, including $0.4 billion from working capital and other sources, and a 2021 consolidated copper-mine unit net cash cost of $1.25/lb. Projected capital expenditures were $2.3 billion, including $1.4 billion for major projects; the Indonesia smelter estimate was additional.
FCX expected Grasberg underground production to continue ramping up, with 2021 PT-FI sales projected at 1.3 billion lb copper and 1.3 million oz gold. The ramp-up, export-license renewal, COVID-19 impacts and operational performance are key dependencies. Management’s longer-term outlook is positive, citing copper’s role in the economy and constraints on new supply, while acknowledging commodity-price and economic uncertainty.
- Indonesia smelter and license: PT-FI’s export license was due to expire March 15, 2021. The IUPK extension to 2041 depends on meeting obligations including smelter construction. The government levied a $149 million administrative fine in January 2021; PT-FI disputed liability and recorded no accrual. The proposed new smelter’s preliminary cost estimate was about $3 billion, and the COVID-related schedule extension remained under discussion. PT-FI was also considering alternative arrangements, including a PT Smelting expansion.
- Tax disputes: The filing discloses $1.7 billion of Indonesia and Peru income-tax assessments, including penalties and interest, that were not recorded as liabilities; this was an auditor critical audit matter. The company also reported tax receivables and recorded reserves/charges on other disputed matters.
- Environmental and closure obligations: Recorded environmental obligations were $1.6 billion and asset-retirement obligations $2.5 billion. FCX estimated U.S. mine closure/reclamation financial assurance of $1.5 billion and oil-and-gas plugging/abandonment assurance of about $0.5 billion. Environmental costs and regulatory requirements may increase.
- Other exposures: Risks include commodity-price volatility, underground mine execution and seismicity, tailings and Indonesia environmental management, security incidents in Papua, water-rights litigation affecting Arizona operations, labor negotiations, and the COVID-19 pandemic. FCX reported five workplace fatalities in 2020.
Important facts for investors to verify
- Whether 2021 sales, Grasberg ramp-up and cost projections were achieved, and how actual commodity prices compared with the guidance assumptions.
- Renewal of PT-FI’s export license, resolution of the $149 million fine, and progress, financing and schedule for smelter obligations tied to mining rights through 2041.
- Cash conversion and the contribution of working capital to 2020 and projected 2021 operating cash flow; confirm the durability of lower unit costs.
- Debt reduction toward the stated $3–$4 billion net-debt target, covenant reversion conditions, and the sustainability of the reinstated dividend and proposed shareholder-return policy.
- Developments in the $1.7 billion unrecorded tax assessments, environmental and reclamation estimates, talc settlement approvals, and other legal contingencies.