Freeport-McMoRan Copper & Gold Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The company completed acquisitions of Plains Exploration & Production (PXP) on May 31 and McMoRan Exploration (MMR) on June 3; their operating results are consolidated only from June 1 and June 4, respectively. Comparisons with 2012 therefore do not reflect a full-period oil and gas business.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $4.288bn | $4.475bn | $8.871bn | $9.080bn |
| Operating income | $639m | $1.311bn | $1.994bn | $3.045bn |
| Net income attributable to FCX common stockholders | $482m | $710m | $1.130bn | $1.474bn |
| Diluted EPS | $0.49 | $0.74 | $1.17 | $1.55 |
| Operating cash flow | Not separately stated | Not separately stated | $1.865bn | $1.983bn |
- Q2 operating margin was approximately 14.9%, compared with 29.3% a year earlier; six-month margin was approximately 22.5%, versus 33.5%. These are calculated from reported revenue and operating income.
- Six-month capital expenditures were $1.978bn, versus $1.547bn. Operating cash flow less capital expenditures was approximately negative $113m, before acquisition spending and other investing items.
- At June 30, cash and cash equivalents were $3.294bn, total current assets $10.578bn and current liabilities $5.610bn. Management reported approximately $2.4bn of net cash available after noncontrolling interests, withholding taxes and other costs. The $3.0bn revolving facility was essentially undrawn.
- Total debt was $21.215bn, up from $3.527bn at year-end 2012; debt fair value was reported as $20.335bn. The increase reflects acquisition financing and debt assumed from PXP and MMR. Total assets were $63.157bn and total equity $23.867bn.
- The company declared $1.3125 per common share for Q2, including a $1.00 supplemental dividend paid July 1; the regular quarterly dividend was $0.3125 per share.
Changes versus prior periods
- Reported revenue declined 4% in Q2 and 2% for the first six months. Lower realized prices were significant: Q2 copper averaged $3.17/lb versus $3.53, gold $1,322/oz versus $1,588, and molybdenum $12.35/lb versus $15.44.
- Operating income declined 51% in Q2 and 35% for the first six months. Besides lower metals prices, Q2 reflected higher production and delivery costs, increased depreciation and acquisition-related costs.
- Q2 common-stockholder earnings included a $128m gain on the MMR investment and $183m of acquisition-related tax benefits; acquisition transaction costs were $61m. Six-month earnings also included a $45m debt-extinguishment loss. These items affect comparability.
- Mining copper sales rose to 951m lb in Q2 from 927m lb, while gold sales fell to 173,000 oz from 266,000 oz. Indonesia’s temporary shutdown after a fatal accident reduced estimated production by approximately 125m lb of copper and 125,000 oz of gold.
- Freeport added an oil and gas business, contributing $336m of revenue and $64m of operating income since acquisition dates. June oil and gas sales were 5.0m BOE; these results are included for only part of the quarter.
Outlook, management commentary and risks
- Management estimated 2013 operating cash flow of approximately $5.8bn, assuming second-half average prices of $3.15/lb copper, $1,300/oz gold, $10/lb molybdenum and $105/bbl Brent, and current volume and cost estimates. The estimate includes an expected $1.3bn of taxes and the $183m acquisition-related tax benefit.
- 2013 sales guidance: 4.1bn lb copper, 1.1m oz gold, 92m lb molybdenum and 35m BOE of oil and gas (oil and gas guidance covers June–December). Q3 sales were forecast at approximately 1.1bn lb copper, 330,000 oz gold, 22m lb molybdenum and 15m BOE.
- Management reduced or deferred planned capital, exploration and other costs by a total of $1.9bn for 2013–2014, and began exploring sales of conventional Gulf of Mexico Shelf properties. It targeted reducing debt to $12bn over three years. 2013 capital expenditures were estimated at $5.5bn.
- Indonesia’s Grasberg operations were suspended after the May 14 training-facility collapse, which caused 28 fatalities and 10 injuries. Open-pit and concentrating activities resumed June 24; underground operations resumed July 9. Production recovery, safety and labor negotiations remain important operating considerations.
- Key risks include volatile metal and oil prices, acquisition integration and debt reduction, reserve and impairment estimates, oil and gas exploration and deepwater operating hazards, regulation and environmental obligations. The oil and gas hedges may limit gains from rising prices and create mark-to-market earnings volatility.
- Contingencies include a Peruvian royalty dispute estimated at $245m including interest and penalties, for which no amount was accrued, and disputed Indonesian tax assessments for which no amounts were accrued. The filing also reports ongoing shareholder litigation and substantial reclamation obligations.
Most important facts for investors to verify
- Whether the acquisition-driven debt burden can be reduced as planned while funding capital projects, dividends and operating needs.
- Whether the stated 2013 cash-flow, sales-volume and cost assumptions remain achievable, particularly after the Grasberg disruption.
- How much reported earnings reflect recurring operations versus acquisition gains, tax benefits, transaction costs and commodity-derivative mark-to-market adjustments.
- Whether final PXP and MMR purchase-price allocations, oil and gas reserve estimates, and future commodity prices alter goodwill or impairment exposure.
- The outcome and financial exposure of the Peru and Indonesia tax matters, litigation, and oil and gas reclamation and other commitments.