Freeport-McMoRan Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; balance-sheet comparisons are with December 31, 2016. Freeport-McMoRan (FCX) is a global mining company focused principally on copper, gold and molybdenum. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise. Interim statements were reviewed, not audited.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $4,310 | $3,877 | $11,362 | $10,453 |
| Operating income (loss) | $917 | $359 | $2,166 | $(3,495) |
| Net income (loss) attributable to common stockholders | $280 | $217 | $776 | $(4,446) |
| Diluted earnings (loss) per share | $0.19 | $0.16 | $0.53 | $(3.45) |
| Operating cash flow | $1,189 | $980 | $3,018 | $2,594 |
| Capital expenditures | $314 | $494 | $1,020 | $2,309 |
- Q3 operating margin was approximately 21% versus 9% a year earlier; nine-month operating margin was approximately 19%, compared with an operating loss in 2016.
- At September 30, cash and equivalents were $4,957, total debt was $14,782, and net debt was approximately $9.8 billion. Current assets were $11,150 versus current liabilities of $5,517. The revolving credit facility had no borrowings and approximately $3.5 billion available.
- Debt declined $1.25 billion during the first nine months. FCX redeemed $543 million of notes in Q3, citing approximately $35 million of annual cash interest savings. The board had suspended the common dividend in December 2015.
Changes and operating performance
- Revenue increased year over year, primarily reflecting higher copper prices: average realized copper price was $2.94/lb in Q3 versus $2.19/lb. Copper sales volumes fell to 932 million pounds from 1.113 billion, while gold sales rose to 355 thousand ounces from 317 thousand.
- Nine-month revenue rose to $11.4 billion from $10.5 billion. Higher copper prices and increased gold and molybdenum sales helped offset lower copper volumes and the 2016 divestiture of oil and gas assets and the Tenke interest.
- Q3 copper production was 996 million pounds versus 1.093 billion; nine-month production was 2.730 billion versus 3.091 billion. Consolidated unit net cash costs were $1.21/lb in Q3 and $1.26/lb for nine months.
- 2016 results included a $4.3 billion oil-and-gas-property impairment for the first nine months, a major reason for the prior-year loss. Q3 2017 also included a $357 million pre-tax charge related to the Cerro Verde royalty dispute.
- Cash from operations exceeded capital expenditures by approximately $2.0 billion in the first nine months, before financing and other investing flows. The filing also reports $395 million of working-capital sources and changes in tax payments within nine-month operating cash flow.
Outlook, commentary and material risks
- For 2017, FCX projected sales of 3.71 billion pounds of copper, 1.6 million ounces of gold and 94 million pounds of molybdenum. Q4 sales were expected to be about 1.0 billion pounds of copper, 625 thousand ounces of gold and 23 million pounds of molybdenum.
- Using stated Q4 price assumptions of $3.00/lb copper, $1,300/oz gold and $8.00/lb molybdenum, management estimated 2017 operating cash flow of approximately $4.3 billion, including $0.5 billion of working-capital sources and tax payments; projected capital expenditures were approximately $1.5 billion. Management expected operating cash flow to exceed capital expenditures in 2017 and 2018, subject to prices and operating results.
- Management estimated 2017 consolidated copper-mine unit net cash costs of $1.19/lb under its assumptions and a continuing-operations effective tax rate of approximately 45%. The filing cautions that actual results may differ materially from projections.
- Indonesia: An August framework contemplated PT-FI operating rights through 2041, fiscal and legal stability provisions, a new smelter within five years of a definitive agreement, and divestment of 51% of project-area interests at fair market value while FCX retains operational and governance control. Definitive documentation, board and Rio Tinto approvals, and implementation details remained unresolved. Export rights were extended only through December 31, 2017. Failure to reach agreement could prompt significant deferral or reduction of underground-development investment and arbitration.
- PT-FI’s operations also faced labor disruption, regulatory uncertainty, environmental-permit issues and security incidents; the filing reported six shootings within the project area from August through November 3, 2017, with one fatality and 12 injuries. The DMLZ ramp-up was revised to a slower pace after seismic activity.
- Peru: Following an unfavorable October 2017 Supreme Court ruling on Cerro Verde royalties, FCX accrued $357 million pre-tax ($188 million net of noncontrolling interests). It did not accrue a further $360 million of potential penalties and interest, asserting it expects to obtain a waiver. The company continues to evaluate its legal options.
- Indonesia tax assessments: PT-FI disputed surface-water tax assessments totaling an estimated $516 million, including penalties; no charge was recorded as of September 30, 2017. Indonesian courts had ruled against PT-FI on earlier assessments.
- Environmental matters included a $59 million Q3 charge for remediation at a former New Jersey smelter site; further sampling could change the estimate. Separately, a $41 million credit was recorded in Q2 after court approval of a uranium-site remediation consent decree.
Important facts for investors to verify
- Progress and final terms of PT-FI’s long-term Indonesian operating agreement, export authorization, required divestment, smelter commitment and related capital spending.
- Whether the Cerro Verde royalty assessments, unaccrued penalties and interest, and Indonesia surface-water tax assessments result in additional payments, accruals or recoveries.
- Actual copper, gold and molybdenum sales volumes, prices and unit costs against management’s 2017 projections, including Grasberg mine sequencing and underground ramp-up.
- Cash-flow conversion and liquidity, including working-capital and tax-payment effects, scheduled debt maturities, and planned capital expenditures.
- Potential changes to environmental obligations, including the Carteret remediation estimate, and the operational and financial effects of Indonesia’s security, labor and permitting risks.