Business context and reporting period
Freeport-McMoRan Copper & Gold Inc. (FCX) filed this unaudited Form 10-Q for the three months ended March 31, 2010. FCX is a global copper, gold and molybdenum miner, with operations in North and South America, Indonesia and Africa, as well as smelting and refining businesses. Management said first-quarter results improved mainly because of higher realized metal prices, partly offset by lower copper and gold sales volumes.
Financial and operating results
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Revenue | $4.363 billion | $2.602 billion |
| Operating income | $2.048 billion | $672 million |
| Net income | $1.215 billion | $207 million |
| Net income attributable to FCX common stockholders | $897 million | $43 million |
| Diluted EPS | $2.00 | $0.11 |
| Operating cash flow | $1.818 billion | $(258) million |
| Capital expenditures | $231 million | $519 million |
Operating margin was approximately 47% of revenue; net income attributable to FCX common stockholders was approximately 21% of revenue. Cash and equivalents were $3.752 billion at quarter-end, versus $2.656 billion at year-end 2009. Total debt was approximately $6.1 billion, including $1.017 billion classified as current; debt fair value was $6.543 billion. Working capital contributed $280 million to Q1 2010 operating cash flow. FCX reported $1.5 billion available under revolving credit facilities and no borrowings under them.
Metal sales and realized prices: copper sales were 960 million pounds at $3.42 per pound, versus 1.020 billion pounds at $1.72; gold sales were 478,000 ounces at $1,110 per ounce, versus 545,000 ounces at $904; molybdenum sales were 17 million pounds at $15.09 per pound, versus 10 million pounds at $11.52. Copper production was 929 million pounds and gold production 449,000 ounces, both lower year over year; molybdenum production was 17 million pounds, higher year over year.
Material changes versus the prior comparable period
- Revenue rose approximately 68%, while common-stockholder net income increased to $897 million from $43 million. Higher realized prices contributed substantially; lower copper and gold volumes partly offset the price benefit.
- Operating cash flow improved from a $258 million use to $1.818 billion provided. The prior-year period included $895 million of working-capital uses, including customer settlements on provisionally priced 2008 copper sales.
- Operating income included no restructuring charge or inventory write-down in Q1 2010. Q1 2009 included $25 million of restructuring and other charges and a $19 million molybdenum inventory adjustment; environmental-obligation charges were also cited in the comparison.
- FCX recorded $27 million of debt-extinguishment losses in Q1 2010 from open-market note repurchases. Capitalized interest fell to $6 million from $45 million, principally following completion of initial Tenke Fungurume development.
- Debt declined from $6.346 billion at December 31, 2009, to approximately $6.1 billion at March 31, 2010. The quarter-end balance includes $1 billion of floating-rate notes redeemed on April 1, 2010.
Guidance, outlook, risks and unusual items
For 2010, FCX projected mine sales of approximately 3.8 billion pounds of copper, 1.8 million ounces of gold and 62 million pounds of molybdenum. Q2 sales estimates were 830 million pounds of copper, 270,000 ounces of gold and 15 million pounds of molybdenum; second-half sales were expected to exceed first-half sales, reflecting Grasberg sequencing. Assuming remainder-of-year average prices of $3.50 per pound copper, $1,100 per ounce gold and $15 per pound molybdenum, management forecast operating cash flow above $6 billion, net of an estimated $300 million working-capital requirement, and average copper-mine unit net cash costs of approximately $0.88 per pound, excluding Africa.
Planned 2010 capital expenditures were approximately $1.7 billion, including $0.8 billion for major projects. FCX resumed selected project development, including the Morenci mill and mine ramp-up, El Abra sulfide development and Cerro Verde optimization. Management emphasized that forecasts depend on metal prices, production volumes, mine sequencing, operating performance and other factors; the filing states that quarterly results are not necessarily indicative of full-year results.
- Price exposure: FCX reported no price-protection contracts for mine production at March 31. Provisional copper sales totaled 372 million pounds at an average recorded price of $3.53; a $0.05-per-pound change was estimated to affect 2010 revenue by about $25 million. Based on the May 6 forward curve, management estimated a potential Q2 revenue reduction of about $130 million on these sales.
- Operational and political risks: Lower Grasberg ore grades reduced Q1 copper and gold volumes. Roadway shootings in Indonesia had caused fatalities and injuries; operations continued, but prolonged access limits could adversely affect the mine. DRC contract review and Tenke labor negotiations were ongoing.
- Tax and legal contingencies: Cerro Verde was contesting Peruvian royalty assessments totaling approximately $90 million, plus potential interest; no amount was accrued. FCX also disclosed Newtown Creek Superfund proceedings, where its subsidiary’s share of any remedy could be material, but the remedy and allocation had not been determined.
- Debt, dividends and dilution: FCX redeemed $1 billion of floating-rate notes on April 1 and expected an approximately $22 million related Q2 extinguishment loss. In April, the Board raised the annual common dividend rate from $0.60 to $1.20 per share. The mandatory convertible preferred stock converted on May 1, adding approximately 38 million common shares; FCX reported approximately 470 million common shares outstanding after conversion.
- Other developments: A proposed temporary increase in Chilean mining royalties was subject to legislative approval. FCX said its disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether copper, gold and molybdenum prices and forecast sales volumes support the cash-flow and unit-cost outlook, particularly given provisional copper pricing and Grasberg sequencing.
- Progress and cost estimates for the $1.7 billion 2010 capital program and major mine-development projects, including Grasberg underground development and El Abra.
- Debt reduction after the April redemption and subsequent note purchases, including the related Q2 extinguishment charges and liquidity available after those payments.
- Outcomes of the Cerro Verde royalty dispute, DRC contract review, Tenke labor negotiations, and Newtown Creek environmental proceedings.
- Effects of preferred-stock conversion and the higher common dividend on per-share results, cash requirements and share count.