Freeport-McMoRan Inc. — Q3 2015 Form 10-Q
Business context and period. Freeport-McMoRan (FCX) is a global copper and gold miner with oil and gas operations. This unaudited quarterly filing covers the three and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless noted. The interim financial statements received an independent accountant’s review, not an audit.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $3.681B | $5.696B | $12.082B | $16.203B |
| Operating income (loss) | $(3.945)B | $1.132B | $(9.282)B | $3.396B |
| Net income (loss) attributable to common stockholders | $(3.830)B | $552M | $(8.155)B | $1.544B |
| Diluted EPS | $(3.58) | $0.53 | $(7.77) | $1.47 |
| Operating cash flow | $822M | $1.926B | $2.608B | $4.513B |
| Capital expenditures | $1.527B | $1.853B | $5.055B | $5.415B |
- Q3 and nine-month 2015 results included oil and gas property impairments of $3.652B and $9.442B, respectively. The nine-month amount also included $1.910B in net tax charges to establish valuation allowances; total reported tax benefit was $1.742B.
- Excluding those noncash impairments, earnings were still pressured by sharply lower realized commodity prices and, in Q3, lower copper and gold sales volumes. Q3 realized copper was $2.38/lb versus $3.12; gold was $1,117/oz versus $1,220; and molybdenum was $7.91/lb versus $14.71.
- For the first nine months, operating cash flow less capital expenditures was approximately negative $2.447B. Cash and equivalents were $338M at September 30, down from $464M at year-end 2014.
- Total debt was $20.698B, up from $18.849B at year-end 2014; current debt was $906M. FCX had approximately $3.5B available under its $4.0B revolving facility. Net cash available to the parent, after noncontrolling interests, withholding taxes and other costs, was $243M.
- Total assets were $50.383B, compared with $58.674B at year-end; total equity was $15.205B, compared with $22.474B.
Material changes versus prior periods
- Nine-month revenue fell about 25%, and operating results shifted from profit to a substantial loss, principally reflecting lower commodity realizations and the large oil and gas impairments. Prior-year comparisons also include businesses later sold, notably Eagle Ford and the Candelaria and Ojos del Salado mines.
- Q3 copper sales were 1.001B pounds versus 1.077B; gold sales were 294,000 ounces versus 525,000. Nine-month copper sales were broadly level at 2.925B pounds, while gold sales rose to 909,000 ounces from 871,000. Oil-equivalent sales were 39.4MMBOE for nine months versus 44.7MMBOE, partly reflecting the Eagle Ford sale.
- Nine-month operating cash flow declined by $1.905B. FCX issued approximately 97.5M shares through at-the-market programs by September 30, raising $1.0B net; this increased the share count and provided liquidity.
- The annual common dividend rate was cut in March 2015 from $1.25 to $0.20 per share. A quarterly dividend of $0.05 per share was declared in September.
Outlook, management commentary and risks
- Management reduced estimated 2016 capital spending by 29%, from $5.6B to $4.0B, and announced production cuts, cost reductions and project deferrals. Sierrita began operating-rate reductions in October; management was evaluating a possible full shutdown. Combined announced curtailments were expected to reduce annual output by about 250M pounds of copper and 20M pounds of molybdenum.
- For 2015, FCX projected sales of 4.055B pounds of copper, 1.2M ounces of gold, 90M pounds of molybdenum and 52.7MMBOE. It estimated operating cash flow of approximately $3.3B, assuming stated Q4 commodity prices and current volume and cost estimates. For 2016, it projected 5.2B pounds of copper sales and approximately $6.8B of operating cash flow, including $1.3B of working-capital sources; these are estimates, not guarantees.
- FCX’s board was reviewing alternatives for the oil and gas business, including a minority IPO, spinoff, joint ventures and further spending reductions. Management identified reducing debt over time as a key objective.
- Oil and gas impairment exposure remains material: management disclosed that a hypothetical lower-price scenario would have implied an additional $1.2B pretax impairment in Q3, and further ceiling-test charges could occur if reference prices decline. The Morocco exploration well found no hydrocarbons and led to a $0.2B impairment; the California unevaluated-property review transferred $837M of costs into the full-cost pool.
- Indonesia risks include export-permit renewal, long-term operating rights under PT-FI’s Contract of Work, labor negotiations and weather-related production disruption. An October 2015 government letter indicated support for extending operations beyond 2021 on existing rights, but a final agreement remained subject to negotiation. The current export permit ran through January 28, 2016.
- PT-FI’s water-rights tax assessments totaled 2.6 trillion rupiah, or about $177M, through October 31, 2015; FCX had accrued no amount, disputing liability. Additional penalties could be significant. Other key sensitivities include copper, gold, molybdenum and oil prices, mine grades and volumes, covenant compliance, and environmental and litigation matters.
- Management stated that available cash, credit availability and projected cash flows were expected to cover budgeted requirements for the next 12 months, subject to commodity prices and operating assumptions. The filing notes leverage and interest-coverage covenants and says further covenant amendments may be needed.
Most important facts for investors to verify
- Whether commodity prices and operating performance support the 2015–2016 sales, cash-flow and capital-spending estimates, and whether additional asset impairments arise.
- Debt maturities, liquidity and covenant headroom, including the effects of continued equity issuance and the company’s stated debt-reduction objective.
- Progress and final terms for PT-FI’s post-2021 operating rights, export permits, smelter commitments and disputed tax assessments.
- Execution, timing and funding of the Cerro Verde expansion and Grasberg underground projects, alongside announced mine curtailments.
- Outcome of the oil and gas strategic review and whether that business can fund its capital needs without materially increasing FCX’s financing burden.