FREEPORT-MCMORAN INC quarterly report, Q2 FY2010

Freeport-McMoRan Copper & Gold Inc. — Q2 2010 Form 10-Q

Business context and period. The filing covers the quarter and six months ended June 30, 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. Financial statements are unaudited; the independent accountant performed an interim review, not an audit.

Financial results and liquidity

Unless stated otherwise, financial amounts are in millions of dollars.

Metric	Q2 2010	Q2 2009	Six months 2010	Six months 2009
Revenue	$3,864	$3,684	$8,227	$6,286
Operating income	$1,424	$1,508	$3,472	$2,180
Net income	$832	$812	$2,047	$1,019
Net income attributable to FCX common stockholders	$649	$588	$1,546	$631
Diluted EPS attributable to FCX common stockholders	$1.40	$1.38	$3.40	$1.54

Revenue rose 5% in Q2 and 31% for the first half year over year. Higher realized metal prices drove growth, partly offset by lower copper and gold sales volumes.
Operating income was lower in Q2 but higher for the first half. Operating margin was approximately 36.9% in Q2 2010 versus 40.9% in Q2 2009, and 42.2% for the first half versus 34.7%.
First-half operating cash flow was $2,882, versus $896 in 2009; it included $107 of working-capital sources. Investing cash flow was a $519 use, including $527 of capital expenditures, versus $895 and $894, respectively, in 2009.
Cash and cash equivalents were $3,042 at June 30, up from $2,656 at year-end 2009. Current assets were $7,293 and current liabilities $2,983.
Total debt, including current maturities, was approximately $4,785, down from $6,346 at year-end. Total liabilities were $13,686. FCX had no revolver borrowings and approximately $1.5 billion of revolving-credit availability; management reported $3.1 billion of availability plus eligible domestic cash.
Cash net of noncontrolling interests and withholding taxes was reported as $2.2 billion. Cash dividends on common stock were reinstated and increased to an annualized $1.20 per share; the mandatory convertible preferred stock converted into common stock during Q2.

Material changes and operating performance

Realized prices increased year over year: copper averaged $3.06 per pound in Q2 and $3.13 for the first half; gold averaged $1,234 per ounce and $1,171; molybdenum averaged $18.18 per pound and $16.62.
Consolidated copper sales fell to 914 million pounds in Q2 from 1.102 billion, and first-half sales were 1.874 billion pounds versus 2.122 billion. Gold sales fell to 298,000 ounces in Q2 from 837,000, and to 776,000 ounces for the first half from 1.382 million. Grasberg mine sequencing and lower ore grades were the principal factors.
Q2 operating income at Indonesia mining was $420 versus $1,095 a year earlier, reflecting lower sales volumes; North America and Africa mining operating income improved. Tenke Fungurume contributed increasing production as operations ramped up.
Consolidated production and delivery costs increased to $2,052 in Q2 from $1,809, and to $3,970 for the first half from $3,371. Management cited higher input costs and higher Atlantic Copper concentrate purchase costs. Copper mining site costs per pound also increased, principally with lower Grasberg and South America volumes.
Interest expense declined year over year, but debt extinguishment losses were $50 in Q2 and $77 for the first half, associated with note redemption and open-market debt purchases. These reduced common-stockholder earnings by $42 and $65, respectively.

Outlook, commentary and risks

For 2010, FCX forecast mine sales of approximately 3.8 billion pounds of copper, 1.8 million ounces of gold and 63 million pounds of molybdenum. Q3 estimates were 970 million pounds of copper, 410,000 ounces of gold and 15 million pounds of molybdenum.
Assuming specified commodity prices and planned volumes and costs, management expected 2010 operating cash flow to exceed $5 billion, net of an estimated $200 million of working-capital requirements. Expected 2010 capital expenditures were approximately $1.7 billion, including $800 million for major projects.
Management estimated 2010 consolidated copper unit net cash costs of approximately $0.86 per pound, assuming average remaining-year gold and molybdenum prices of $1,200 per ounce and $14 per pound. The estimate exceeded 2009’s $0.55 per pound, primarily due to lower expected Grasberg copper and gold volumes and higher commodity-based input costs.
Outlook depends on volatile copper, gold, molybdenum and cobalt prices; production rates, mine sequencing, ore grades, costs, weather, labor and project execution. FCX stated that its long-term outlook remained positive, citing constrained copper supply and economic demand, while noting it would adjust operating plans as market conditions change.
At June 30, 364 million pounds of copper sales remained provisionally priced at an average $2.95 per pound. FCX estimated each $0.05 price change would affect 2010 revenue by about $24 million and common-stockholder net income by about $12 million.
FCX revised Grasberg mine plans in July to incorporate precautionary remedial work and geotechnical considerations, deferring some high-grade production. Management said the change affected timing rather than reserves or ultimate open-pit production. Earlier security incidents near the mine had caused fatalities and injuries; no incidents had occurred since January 2010, but access restrictions could disrupt operations.
Material contingencies include Peruvian mining-royalty assessments against Cerro Verde of approximately $50 million for 2006–2007 and $40 million for 2008, which FCX is contesting and has not accrued; and the DRC contract review and administrative disputes affecting Tenke, whose timing and outcome management could not predict.
A U.S. government letter advised that it was preparing suit over the Gilt Edge Mine Site and asserted joint and several liability against FCX subsidiaries and others. The government cited approximately $91 million in response costs incurred, plus future costs. FCX disputed the basis and extent of its subsidiaries’ liability and said it intended to defend the matter.

Investor verification priorities

Track copper, gold, molybdenum and cobalt prices alongside provisional-sales settlements and their effects on reported revenue and cash flow.
Compare Grasberg production, grades and revised mine sequencing with company forecasts, including progress on geotechnical remedial work and site security.
Verify whether unit costs, 2010 operating cash flow and capital-spending expectations are achieved, and monitor Tenke’s operating costs and ramp-up.
Follow outcomes and potential exposure from the Cerro Verde royalty assessments, the DRC contract review and Gilt Edge proceedings; the filing does not establish final liabilities for these matters.
Assess debt reduction, cash availability and dividend sustainability against capital projects, distributions to noncontrolling interests and commodity-price volatility.