Freeport-McMoRan Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Freeport-McMoRan (FCX) is a global copper, gold and molybdenum producer. The period was marked by lower Indonesian output as PT Freeport Indonesia (PT-FI) transitioned from the Grasberg open pit to underground mines.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $3.153B | $4.908B | $10.491B | $14.944B |
| Operating income (loss) | $(38)M | $1.315B | $316M | $4.438B |
| Net income (loss) attributable to common stockholders | $(207)M | $556M | $(248)M | $2.117B |
| Diluted EPS | $(0.15) | $0.38 | $(0.17) | $1.45 |
| Operating cash flow | $224M | $1.247B | $1.312B | $3.925B |
| Capital expenditures | $666M | $507M | $1.917B | $1.391B |
- Quarterly operating margin was approximately negative 1.2%, versus 26.8% a year earlier; nine-month operating margin was approximately 3.0%, versus 29.7%.
- At September 30, cash and cash equivalents were $2.247B, total debt was $9.919B and total equity was $17.542B. Current assets of $8.347B exceeded current liabilities of $3.381B.
- Cash, cash equivalents and restricted cash totaled $2.512B, down $1.943B from the start of the year. Nine-month operating cash flow less capital expenditures was approximately negative $605M.
- Quarterly common dividend declared was $0.05 per share; $0.15 per share was declared for the first nine months.
Changes versus comparable periods
- Revenue declined about 36% year over year in Q3 and 30% for the first nine months. Lower copper and gold sales volumes were the main drivers, reflecting Grasberg’s open-pit-to-underground transition; lower copper prices also reduced revenue.
- Consolidated copper sales, excluding purchases, fell to 795M pounds in Q3 from 1.044B; gold sales fell to 243,000 ounces from 837,000. Average realized copper price was $2.62/lb versus $2.80; realized gold price rose to $1,487/oz from $1,191.
- Operating cash flow for nine months fell to $1.312B from $3.925B, primarily due to lower copper and gold volumes and lower copper prices. Capital expenditures increased to $1.917B, largely reflecting Grasberg underground development and the Lone Star project.
- Debt decreased from $11.141B at year-end 2018 to $9.919B. The company issued $1.2B of notes due 2027 and 2029 and used proceeds to refinance or tender for other notes; the transactions generated a $21M Q3 extinguishment loss.
Outlook, commentary and material items
- Management forecast 2019 sales of 3.255B pounds of copper, 874,000 ounces of gold and 92M pounds of molybdenum. Q4 sales were expected at approximately 870M pounds of copper, 200,000 ounces of gold and 24M pounds of molybdenum.
- For 2019, management projected copper-mine unit net cash costs of $1.76/lb, operating cash flow of approximately $1.6B and capital expenditures of approximately $2.6B, including $1.6B for major mining projects. Cash-flow assumptions included Q4 prices of $2.60/lb copper, $1,500/oz gold and $12/lb molybdenum. Management expected available cash and credit capacity to fund planned spending and other cash needs.
- Management said PT-FI production was expected to improve significantly by 2021. Grasberg Block Cave and DMLZ ramp-ups were progressing, but production timing remains subject to underground mining and geotechnical risks. A new Indonesian smelter, with preliminary estimated cost of about $3B, is required under PT-FI’s mining-rights arrangements; construction was expected to begin in 2020.
- Export-duty adjustment: After the October 29, 2019 Indonesian Supreme Court posting of unfavorable rulings, FCX recorded a $155M Q3 charge to reserve for disputed PT-FI export duties, reducing common-stockholder earnings by $76M, or $0.05/share. The filing says the charge did not affect operating cash flow. PT-FI disputes the duty and is evaluating recovery options.
- Further Indonesian tax uncertainty: An October 31, 2019 Supreme Court ruling on PT-FI mine-development-cost tax treatment was unfavorable. Potential exposure, including penalties and interest and possible application to other disputed years, could be significant; FCX expected to reflect any adjustment in Q4 2019 and could not yet quantify it clearly.
- Other items include a Louisiana coastal-erosion settlement agreement in principle with maximum payments of $23.5M, subject to execution and state legislation; asbestos/talc litigation involving subsidiaries, with insurance access disputed in Imerys bankruptcy; and a planned cobalt-business sale for approximately $150M plus working capital, expected by year-end subject to conditions.
- In November 2019, FCX agreed to sell its Timok lower-zone interest for $240M at closing plus deferred consideration; FCX expected to record a gain of approximately $340M at closing, anticipated by Q1 2020 subject to approvals.
- Risks cited include commodity-price volatility, Indonesia export-license and regulatory issues, underground mine execution, labor relations, protests and operational disruptions in South America, weather, litigation and tax outcomes. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- PT-FI underground production ramp-up, grades, sales volumes and export-license status after March 8, 2020.
- Final outcome and cash impact of the export-duty dispute and the still-unquantified mine-development-cost tax exposure.
- Progress and actual funding needs for Grasberg development, Lone Star and the required Indonesian smelter; compare capital spending with operating cash generation.
- Whether 2019 sales, unit-cost, operating-cash-flow and capital-expenditure forecasts were achieved, and the sensitivity of results to copper, gold and molybdenum prices.
- Liquidity, debt-refinancing costs and contingent or litigation obligations, including the Louisiana settlement, talc claims, cobalt sale and Timok transaction.