Freeport-McMoRan Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Comparisons are with Q1 2014 unless stated otherwise. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and financial results
Freeport-McMoRan operates global copper, gold, molybdenum and oil and gas businesses. Results reflected lower commodity-price realizations and oil volumes, partly offset by higher copper and gold sales. A $3.104 billion oil and gas property impairment was the dominant factor in the reported loss.
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $4.153 billion | $4.985 billion; down 17% |
| Operating income (loss) | $(2.963) billion | $1.111 billion |
| Net income (loss) attributable to common stockholders | $(2.474) billion | $510 million |
| Diluted EPS | $(2.38) | $0.49 |
| Operating cash flow | $717 million | $1.201 billion |
| Capital expenditures | $1.867 billion | $1.612 billion |
| Cash and cash equivalents | $549 million | $1.342 billion at March 31, 2014 |
| Total debt | $20.312 billion | $20.739 billion at March 31, 2014; $18.849 billion at December 31, 2014 |
| Common dividend declared | $0.05 per share | $0.3125 per share |
Reported operating margin was approximately negative 71%, versus positive 22% in Q1 2014, primarily because of the impairment. Operating cash flow included $86 million of working-capital uses and other tax-payment changes, compared with $413 million in Q1 2014. Current assets were $8.854 billion and current liabilities $4.410 billion at quarter-end. The company reported $3.0 billion of availability under its $4.0 billion revolving facility, after borrowings and letters of credit; management also reported $388 million of net cash available after noncontrolling interests, withholding taxes and other deductions.
Material changes and operating trends
- The $3.104 billion impairment applied to proved U.S. oil and gas properties under full-cost accounting. It reduced common-stockholder results by approximately $1.9 billion. A related $458 million tax charge established a valuation allowance, primarily against U.S. alternative minimum tax credits.
- Revenue fell mainly because of lower oil sales volumes and realizations, and lower copper, gold and molybdenum prices. Copper sales rose to 960 million pounds from 871 million; gold sales rose to 263,000 ounces from 187,000; oil-equivalent sales declined to 12.5 million BOE from 16.1 million, partly reflecting the prior sale of Eagle Ford.
- Average realized copper price decreased to $2.72 per pound from $3.14; gold to $1,186 per ounce from $1,300; and molybdenum to $10.17 per pound from $11.21. Oil and gas realized revenue per BOE declined to $43.71 from $77.22, while cash production cost rose to $20.26 from $18.51.
- Consolidated copper unit net cash cost rose to $1.64 per pound from $1.54. Regional trends differed: South America costs increased, while Indonesia costs declined with higher volumes. These non-GAAP unit-cost measures are not substitutes for GAAP results.
- Cash at quarter-end was $549 million; total debt was $20.312 billion, including $558 million current and $19.754 billion long-term. The company borrowed $2.273 billion and repaid $802 million during the quarter. Debt fair value was reported at $19.866 billion.
Outlook, management commentary and risks
- Management projected 2015 sales of 4.210 billion pounds of copper, 1.3 million ounces of gold, 95 million pounds of molybdenum and 52.3 million BOE. Q2 2015 sales were expected to be about 960 million pounds of copper, 300,000 ounces of gold, 25 million pounds of molybdenum and 12.9 million BOE.
- For 2015, management estimated operating cash flow of approximately $4.4 billion, assuming prices for the remainder of the year of $2.75 per pound copper, $1,200 per ounce gold, $8 per pound molybdenum and $65 per barrel Brent oil. This estimate included an estimated $0.4 billion tax benefit and is sensitive to commodity prices and operating conditions.
- Capital expenditures were projected at approximately $6.5 billion for 2015, including $2.5 billion for major mining projects and $2.8 billion for oil and gas. Management said it had reduced or deferred spending and was considering funding alternatives, including a minority public-equity interest in the oil and gas business.
- Management forecast 2015 copper-mine unit net cash costs of $1.53 per pound, oil and gas cash production costs of about $19 per BOE, and a consolidated effective tax rate of approximately 23%, based on stated volume and commodity-price assumptions.
- Further oil and gas impairments were possible if the trailing twelve-month average WTI price remained below $82.72 per barrel or if reserve revisions, costs or other factors weakened the ceiling-test calculation. The reported April 30 average was $78.58 per barrel.
- Indonesia remained a material operating and regulatory risk: PT Freeport Indonesia’s amended Contract of Work and long-term operating rights were under negotiation, with the memorandum of understanding extended to July 25, 2015; export permits required renewal on that date. Development spending could be reduced or deferred pending negotiations.
- PT Freeport Indonesia disputed Papua water-rights tax assessments totaling approximately $177 million, including penalties; no amount was accrued at March 31, and a charge could be recorded in Q2. Separately, an approved shareholder-litigation settlement was expected to produce net insurance proceeds and a special dividend of about $115 million, or $0.11 per share, subject to the stated timing and settlement terms.
- The Cerro Verde expansion was about 70% complete, with completion expected in late 2015 and incremental production beginning in 2016. Major Grasberg underground projects continued, with timing and spending exposed to operating and regulatory conditions.
Most important facts for investors to verify
- Whether oil prices and reserve/cost assumptions lead to further full-cost ceiling impairments, and the cash-tax implications of the valuation allowance.
- Actual operating cash flow, capital spending, liquidity and debt trajectory against management’s price-dependent 2015 estimates.
- Progress on PT Freeport Indonesia’s contract, export-permit renewal and disputed tax assessments, including any resulting production or financial impact.
- Delivery and cost performance at Cerro Verde, Grasberg, Lucius and other growth projects against the stated schedules and budgets.
- Final insurance proceeds, legal-fee deductions and timing of the anticipated special dividend.
The interim financial statements were reviewed by Ernst & Young, not audited; the auditor reported no material modifications identified in its review.