Freeport-McMoRan Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; filed November 9, 2016. Freeport-McMoRan is a copper-focused mining company with gold and molybdenum production and, during the period, oil and gas operations. Tenke results are presented as discontinued operations following the agreement to sell the company’s interest in TF Holdings Limited. Interim financial statements were reviewed by the independent auditor, not audited.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $3.877B | $3.382B | $10.453B | $11.091B |
| Operating income (loss) | $359M | $(3.964)B | $(3.495)B | $(9.415)B |
| Net income (loss) attributable to common stockholders | $217M | $(3.830)B | $(4.446)B | $(8.155)B |
| Diluted earnings (loss) per share | $0.16 | $(3.58) | $(3.45) | $(7.77) |
| Operating cash flow | $980M | $822M | $2.594B | $2.608B |
| Capital expenditures | $494M | $1.527B | $2.309B | $5.055B |
- Q3 revenue rose about 15% year over year, mainly on higher copper sales volumes; nine-month revenue declined about 6%, primarily reflecting lower realized copper prices.
- Q3 operating margin was approximately 9% (calculated from reported revenue and operating income). The reported operating recovery largely reflects substantially lower oil and gas impairment charges, not just improved underlying operations.
- Oil and gas property impairments were $239M in Q3 and $4.317B for the first nine months of 2016, versus $3.652B and $9.442B, respectively, in 2015. The 2016 nine-month loss also included $942M of oil and gas charges, primarily drillship settlements/idle rig costs, impairments and inventory adjustments; $762M of asset-sale gains partly offset charges.
- Copper sales, excluding discontinued Tenke, were 1.113B pounds in Q3 and 3.100B pounds year to date. Average realized copper prices were $2.19 and $2.17 per pound, respectively, compared with $2.39 and $2.54 in the prior-year periods. Mining cost reductions and higher volumes supported lower copper unit costs.
- At September 30, cash was $1.108B and total debt was $18.982B, down from $20.428B at December 31, 2015. Cash net of noncontrolling interests, withholding taxes and other costs was $981M. The $3.5B revolving facility had no borrowings, $43M of letters of credit and approximately $3.5B available.
- Common stockholders’ equity was $4.732B, compared with $7.828B at year-end 2015; the accumulated deficit increased to $16.832B. Outstanding shares increased through at-the-market issuances and debt-for-equity exchanges. No common dividend was declared in the 2016 periods; credit agreements prohibit common dividends through March 31, 2017.
Changes, transactions and liquidity
- Operating cash flow was nearly unchanged year over year for the first nine months despite lower copper realizations, with working-capital sources and lower international tax payments providing support. Investing cash use improved materially as capital spending declined and asset-sale proceeds were received.
- Capital expenditures fell to $2.309B from $5.055B, reflecting lower oil and gas spending and the completion of the Cerro Verde expansion. The company reported $1.4B of cash proceeds from asset sales through September and announced approximately $6.6B in asset-sale transactions.
- Pending transactions were expected to provide approximately $5.2B of gross proceeds in Q4 2016: $2.65B for the TFHL interest, $2.0B for Deepwater Gulf of Mexico properties and $592M for onshore California properties, before adjustments and excluding contingent consideration. Under the Term Loan, half of specified asset-sale proceeds must be used for repayment.
- FCX launched a new at-the-market offering of up to $1.5B. By November 8, it had sold 59.8M shares for $719M gross proceeds. During 2016 it also issued shares in settlement of drilling-rig contracts and exchanged $369M principal of senior notes for 28M shares.
Outlook, commentary and principal risks
- For 2016, management projected continuing-operations copper sales of 4.320B pounds, gold sales of 1.264M ounces, molybdenum sales of 73M pounds and oil and gas sales of 48.1MMBOE. Forecast consolidated copper unit net cash costs were about $1.20 per pound; oil and gas cash production costs were expected to be about $16 per BOE.
- Management estimated 2016 operating cash flow of approximately $3.6B, assuming stated fourth-quarter commodity-price, sales-volume and cost assumptions; projected capital expenditures were approximately $2.8B. Management said 2017 operating cash flow, together with available cash and credit, was expected to cover planned capital expenditures, scheduled debt maturities and other cash needs, subject to commodity prices and a favorable resolution of Indonesian regulatory matters.
- Management cited the Cerro Verde expansion and expected access to higher-grade Grasberg ore as potential cash-flow supports. It also said it was reviewing development timing and costs amid market conditions and regulatory uncertainty.
- Indonesia: PT-FI’s export permit ran through January 11, 2017; regulations then in force prohibited exports of copper concentrate and anode slimes thereafter. FCX warned that a prolonged inability to export could suspend all Indonesian production, materially affecting cash flow, liquidity and profitability and potentially impairing assets and reserves. Extension of PT-FI’s Contract of Work beyond 2021 remained subject to negotiations and government approval.
- Pending sales and disputes: The TFHL sale remained subject to customary conditions, including resolution of Lundin Mining’s right of first offer; Gécamines had initiated arbitration challenging the transaction. The Deepwater and California sales also remained subject to closing conditions.
- Contingencies: Cerro Verde disputed royalty assessments with estimated exposure of about $537M through 2013; no accrual was recorded. PT-FI disputed Papua surface-water tax assessments totaling about $231M; no accrual was recorded. FCX also identified potential substantial costs from proposed U.S. hard-rock mining financial-assurance rules. Management stated that litigation outcomes could be material to individual reporting periods.
- Commodity prices, mine grades and sequencing, labor and operating performance, asset-sale completion, tax outcomes, environmental obligations and future oil and gas impairments remain important sources of uncertainty.
Important facts for investors to verify
- Whether the TFHL, Deepwater Gulf of Mexico and California asset sales closed on expected terms and timing, and the resulting net proceeds and debt repayments.
- Whether Indonesia’s export rules were revised before January 12, 2017, and the status and terms of PT-FI’s longer-term operating rights.
- Progress in reducing debt, remaining equity issuance capacity and the resulting dilution; also confirm the applicable dividend restrictions.
- Actual commodity prices, sales volumes, operating costs and cash flow versus management’s 2016 assumptions and guidance.
- Developments in the unaccrued Peru and Indonesia tax disputes, the TFHL arbitration and proposed U.S. mining financial-assurance requirements.