Freeport-McMoRan Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Freeport-McMoRan (FCX) is a global copper, gold and molybdenum miner, with major operations in the Americas and Indonesia. Unless noted, amounts are U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $4.868 billion | $3.341 billion |
| Operating income | $1.459 billion | $597 million |
| Net income from continuing operations | $828 million | $268 million |
| Net income attributable to common stockholders | $692 million; diluted EPS $0.47 | $228 million; diluted EPS $0.16 |
| Operating cash flow | $1.369 billion | $792 million |
| Capital expenditures | $402 million | $344 million |
- Revenue rose approximately 46% and operating income more than doubled year over year. Operating margin was approximately 30%, versus 18% in Q1 2017.
- Higher copper and gold sales volumes and higher realized prices drove the improvement; higher foreign income tax expense partly offset it. Average realized prices were $3.11/lb for copper, $1,312/oz for gold and $11.95/lb for molybdenum.
- Cash and cash equivalents were $3.702 billion at quarter-end, down from $4.447 billion at year-end 2017. Total debt was $11.606 billion, down from $13.117 billion; net debt was approximately $7.9 billion. Current assets were $10.106 billion and current liabilities $4.344 billion. The company reported approximately $3.5 billion available under its revolving credit facility and no borrowings under that facility.
- Operating cash flow included $21 million of working-capital uses and timing of other tax payments, compared with $189 million of such sources in Q1 2017. Cash flow less reported capital expenditures was approximately $967 million.
Material changes and operating developments
- Indonesia drove much of the year-over-year volume increase: consolidated copper sales rose to 993 million pounds from 809 million, and gold sales to 610,000 ounces from 182,000. Q1 2017 production had been constrained by restrictions on PT-FI concentrate exports.
- Q1 copper production was 952 million pounds, compared with 851 million; gold production was 599,000 ounces, compared with 239,000. Molybdenum production was 22 million pounds, versus 23 million.
- Consolidated unit net cash costs for copper mines declined to $0.98/lb from $1.39/lb, benefiting from higher gold and silver by-product credits, especially in Indonesia. Site production and delivery costs per pound increased to $1.67 from $1.60, reflecting higher mining rates and repair and maintenance costs.
- FCX repaid approximately $1.5 billion of debt during the quarter, including $1.4 billion of notes that matured in March and a $100 million Cerro Verde facility prepayment. In April, it redeemed an additional $454 million of notes and expected a $10 million extinguishment gain and approximately $30 million in annual interest savings.
- The Board reinstated a common-stock dividend: $0.05 per share, paid May 1, 2018. Dividends remain subject to Board discretion.
Outlook, risks and contingencies
- For 2018, FCX projected sales of 3.83 billion pounds of copper, 2.43 million ounces of gold and 95 million pounds of molybdenum. Q2 sales were expected to approximate 970 million pounds of copper, 700,000 ounces of gold and 24 million pounds of molybdenum.
- Assuming specified commodity prices and achievement of current volume and cost estimates, FCX projected 2018 copper-mine unit net cash costs of $1.01/lb, operating cash flow of approximately $5.6 billion (including $0.2 billion of working-capital sources and tax-payment timing), and capital expenditures of approximately $2.0 billion, including $1.1 billion for major mining projects. The projected consolidated effective tax rate was approximately 36%.
- These projections assume resolution of PT-FI’s long-term Indonesian mining rights or an extension of its temporary IUPK after June 30, 2018. Negotiations include long-term rights through 2041, a proposed 51% divestment of project-area interests to Indonesian participants, and a new smelter commitment. Environmental-permit and controlled riverine tailings issues also require resolution. Failure to reach agreement could lead FCX to significantly reduce or defer underground investment and pursue dispute procedures under its Contract of Work.
- PT-FI’s temporary export license had been extended to February 15, 2019. The Grasberg open-pit-to-underground transition was expected to begin in 2019; the company warned that Indonesian sales projections depend on operating performance, shipment timing and regulatory outcomes. DMLZ ramp-up plans had been slowed following mining-induced seismic activity.
- Commodity prices and provisional copper pricing create earnings volatility. At March 31, 324 million pounds of copper sales remained provisionally priced at an average $3.04/lb; a $0.05/lb price change was estimated to affect 2018 common-stockholder net income by about $10 million. Company cash-flow sensitivities were estimated at $250 million per $0.10/lb copper-price change, $90 million per $50/oz gold-price change and $85 million per $2/lb molybdenum-price change.
- A California offshore-worker class action has estimated potential exposure of $50–$80 million if state wage law applies retroactively; FCX recorded no reserve because it did not consider a loss probable and intends to defend the case. Indonesian surface-water tax assessments had remaining stated exposure of $161 million, including $81 million in penalties; FCX recorded no charge and said PT-FI did not intend to pay. Other legal, environmental, tax, political, security and regulatory risks remain.
- Unusual items included $40 million of mining-operation charges associated with PT-FI export restrictions and Morenci asset impairments, $19 million of environmental and related litigation charges, an $11 million net asset-sale gain, and an $11 million discontinued-operations loss. Q1 2018 also included $24 million of interest received by PT-FI on prior-year tax receivables.
Important facts for investors to verify
- Progress and definitive terms for PT-FI’s long-term mining rights, proposed divestment, smelter commitment and environmental-permit resolution.
- Whether Indonesian regulatory or export changes affect PT-FI operations, sales, capital spending or the projected 2018 volumes.
- Actual copper, gold and molybdenum prices, sales volumes, provisional-price settlements and unit costs versus management assumptions.
- Debt reduction, liquidity, capital expenditures and operating cash flow relative to projections; confirm treatment of restricted cash when assessing available liquidity.
- Developments in the Garcia litigation, Indonesian tax assessments and other environmental and legal contingencies, including whether reserves or disclosures change.