Freeport-McMoRan Copper & Gold Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Comparisons are with Q1 2011 unless otherwise noted. Amounts are in U.S. dollars.
Business context and reporting period
FCX is a global copper, gold and molybdenum miner, with operations in North and South America, Indonesia and the Democratic Republic of Congo, as well as a copper smelting and refining business in Spain. The unaudited interim statements were reviewed by Ernst & Young; the review is not an audit.
Financial and operating results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $4.605 billion | $5.709 billion |
| Operating income | $1.734 billion | $2.936 billion |
| Net income | $1.001 billion | $1.861 billion |
| Net income attributable to FCX common stockholders | $764 million | $1.499 billion |
| Diluted earnings per share | $0.80 | $1.57 |
| Operating cash flow | $801 million | $2.359 billion |
| Capital expenditures | $707 million | $505 million |
- Revenue fell about 19%; operating income fell about 41%; and net income attributable to FCX common stockholders fell about 49%. Operating margin was approximately 37.6%, versus 51.4%.
- Mining sales were 827 million pounds of copper, 288,000 ounces of gold and 21 million pounds of molybdenum. Copper sales and production were 11% and 12% lower, respectively; gold sales and production were 40% and 46% lower. Molybdenum sales increased 5%.
- Average realized prices were $3.82 per pound of copper (down from $4.31), $1,694 per ounce of gold (up from $1,399), and $15.34 per pound of molybdenum (down from $18.10). Copper and gold sales volumes were depressed by lower Indonesian output.
- Consolidated copper-mine site production and delivery costs rose to $1.96 per pound from $1.61; unit net cash costs rose to $1.26 from $0.79. Unit net cash cost is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
- Operating cash flow included $720 million of working-capital uses, compared with $114 million of working-capital sources in Q1 2011. The cash flow decline also reflected lower copper and gold volumes and lower copper realizations.
- At March 31, cash and cash equivalents were $4.496 billion and total debt was approximately $3.5 billion. Current assets were $10.252 billion and current liabilities $2.924 billion (current ratio approximately 3.5). FCX reported $3.4 billion of net cash available to the company after specified deductions for noncontrolling interests, withholding taxes and other items. Its revolving facility had approximately $1.5 billion available.
- Dividends declared were $0.3125 per share for the quarter, up from $0.25 a year earlier. The board raised the annualized dividend rate to $1.25 per share.
Material changes versus the prior comparable period
- Lower copper and gold volumes and lower realized copper prices were the main reported drivers of weaker revenue and earnings. Q1 2012 revenue also benefited from $139 million of favorable net adjustments to prior-period provisionally priced sales.
- PT Freeport Indonesia’s labor-related interruptions and temporary suspension of operations reduced Q1 output; FCX estimated the impact at approximately 80 million pounds of copper and 125,000 ounces of gold.
- FCX issued $3.0 billion of senior notes in February at a weighted-average interest rate of approximately 3%, then redeemed its remaining $3.0 billion of 8.375% senior notes. The redemption generated a $168 million pretax extinguishment loss ($149 million attributable to FCX common stockholders, or $0.16 per diluted share). Management estimated annual interest savings of approximately $160 million from this refinancing.
- Cash declined by $326 million during the quarter. Capital expenditures increased, primarily reflecting mine development and expansion projects.
- FCX’s effective tax rate was 33%, compared with 35% in Q1 2011.
Guidance, outlook, risks and contingencies
- 2012 outlook: FCX forecast mine sales of approximately 3.7 billion pounds of copper, 1.1 million ounces of gold and 81 million pounds of molybdenum. Copper and gold estimates were reduced from the prior annual report by approximately 100 million pounds and 100,000 ounces, respectively, due to lower Indonesian operations.
- Assuming remainder-of-year prices of $3.50 per pound copper, $1,600 per ounce gold and $14 per pound molybdenum, and achievement of sales and cost estimates, FCX projected 2012 operating cash flow of approximately $4.2 billion, including an estimated $1.1 billion working-capital use and $1.9 billion of taxes. It estimated copper-mine unit net cash costs of approximately $1.43 per pound and capital expenditures of approximately $4.3 billion, including $2.7 billion for major projects.
- Management expected PT Freeport Indonesia to restore full operations during Q2 2012, contingent on security and workplace productivity. April mill throughput averaged approximately 194,000 metric tons per day, versus a Q1 average of 114,800. 2012 Indonesia sales guidance assumed a return to normal operations.
- FCX cited commodity-price volatility, mine sequencing and ore grades, production rates, costs, labor relations, security, political and regulatory conditions, weather, environmental matters, litigation and tax disputes as risks to its outlook. The filing cautions that forward-looking statements are not guarantees.
- Security remained a material operational risk in Indonesia: from July 2009 through April 2012, FCX reported 33 shooting incidents around Grasberg, with 15 fatalities and 56 injuries. Prolonged road-access restrictions could adversely affect operations.
- PT Freeport Indonesia faced Indonesian tax assessments totaling $325 million, including interest, for 2005–2007. It had paid $158 million on the disputed assessments by March 31, including $124 million recorded in long-term receivables; objections and appeals were ongoing or planned.
- A newly disclosed New York remediation lawsuit was at an early stage, and FCX said it could not estimate a possible loss or range. A previously reported Oklahoma class-action settlement became final after the appeal deadline passed without an appeal.
- FCX’s interest in Tenke Fungurume was reduced from 57.75% to 56.0% effective March 26, 2012, following DRC-approved changes. Management reported no material change in contractual obligations, environmental and reclamation obligations, market risks or risk factors during the quarter.
Important facts for investors to verify
- Whether Indonesian mine operations and security recover as assumed, and whether the reduced 2012 copper and gold sales forecasts are achieved.
- Whether commodity-price assumptions, ore grades, unit costs and working-capital requirements support the $4.2 billion operating cash flow estimate.
- Whether the $4.3 billion capital program and major development projects remain on budget and on schedule.
- The final outcomes and recoverability of the Indonesian tax assessments, and any exposure from the New York remediation litigation.
- The effect of provisional metal pricing, intercompany profit deferrals, and the one-time $168 million debt-redemption loss on reported earnings and cash flow.