Business context and reporting period
Freeport-McMoRan Copper & Gold Inc. (FCX) filed this annual report for the fiscal year ended December 31, 2013; it is not a standalone fourth-quarter filing. FCX operates copper, gold, molybdenum and cobalt mines across North and South America, Indonesia and Africa, and added U.S. oil and gas operations through its second-quarter acquisitions of Plains Exploration & Production (PXP) and McMoRan Exploration (MMR). The 2013 results include oil and gas operations only from June 1, 2013.
Key financial and operating metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $20.921 billion | $18.010 billion |
| Operating income | $5.351 billion | $5.814 billion |
| Net income attributable to FCX common stockholders | $2.658 billion | $3.041 billion |
| Diluted earnings per share | $2.64 | $3.19 |
| Operating cash flow | $6.139 billion | $3.774 billion |
| Capital expenditures | $5.286 billion | $3.494 billion |
| Cash and cash equivalents at year-end | $1.985 billion | $3.705 billion |
| Total debt at year-end | $20.706 billion | $3.527 billion |
Operating margin was approximately 25.6% and common-stockholder net margin approximately 12.7% in 2013, calculated from reported figures. Consolidated production and delivery costs were $11.840 billion; depreciation, depletion and amortization was $2.797 billion. Current assets were $9.972 billion versus current liabilities of $4.773 billion. FCX had $3.0 billion available under its revolving credit facility and no borrowings under it at year-end. The company reported $2.0 billion of consolidated cash, but only about $1.3 billion was estimated to be available net of noncontrolling interests, withholding taxes and other costs.
Mining sales were 4.086 billion pounds of copper, 1.204 million ounces of gold and 93 million pounds of molybdenum. Average realized prices declined year over year: copper to $3.30 per pound from $3.60, gold to $1,315 per ounce from $1,665, and molybdenum to $11.85 per pound from $14.26. Oil and gas sales were 38.1 million BOE for the seven months after acquisition; average realized oil price was $98.32 per barrel. Oil and gas operations generated $1.8 billion of operating cash flow during that period.
Fourth-quarter 2013 revenue was $5.885 billion, operating income $1.650 billion, net income attributable to FCX common stockholders $707 million and diluted EPS $0.68. These quarterly figures include acquisition-related and derivative effects noted below.
Material changes versus the prior comparable period
- Revenue increased 16% from 2012, reflecting the newly acquired oil and gas business and higher copper and gold sales volumes, partly offset by lower metal-price realizations. Comparability is limited because oil and gas results were included for only seven months.
- Operating income fell about 8% and common-stockholder net income fell about 13%; lower metal prices and higher costs, including acquisition-related depreciation and interest, weighed on results.
- Operating cash flow rose to $6.139 billion, including $1.8 billion from acquired oil and gas operations, while capital expenditures increased to $5.286 billion. Cash declined by $1.720 billion during the year.
- Debt rose substantially following the acquisitions: $10.5 billion was acquisition-related debt and $6.7 billion was debt assumed with the oil and gas acquisitions. The company’s debt-reduction target is $12 billion by year-end 2016.
- Mining production increased year over year, led by higher copper and gold volumes in Indonesia, higher North American output and Tenke’s expansion. Tenke completed its second-phase expansion in early 2013.
Outlook, management commentary, risks and unusual items
- For 2014, FCX projected copper sales of 4.430 billion pounds, gold sales of 1.750 million ounces, molybdenum sales of 95 million pounds and oil-equivalent sales of 60.7 million BOE. These estimates depend on operations and, for Indonesia, assume planned concentrate shipments proceed.
- At assumed prices of $3.25 per pound copper, $1,200 per ounce gold, $9.50 per pound molybdenum and $105 per barrel Brent crude, management estimated 2014 operating cash flow of about $9 billion, including $0.8 billion from working-capital sources and tax-payment changes. Estimated taxes were $2.1 billion. Planned capital expenditures were about $7 billion, including $3 billion for mining projects and $3 billion for oil and gas.
- FCX expected consolidated copper-mining unit net cash costs of $1.45 per pound in 2014, oil and gas cash production costs of about $20 per BOE, and an effective tax rate of approximately 35%, subject to forecast assumptions.
- Major growth investments include the Morenci expansion, targeting about 225 million pounds of incremental annual copper beginning in 2014; the Cerro Verde expansion, targeting about 600 million pounds of incremental annual copper and 15 million pounds of molybdenum beginning in 2016; and Grasberg underground development, with DMLZ production planned from 2015 and Grasberg Block Cave from 2017. Project cost and timing remain estimates.
- Indonesia export disruption: January 2014 rules imposed new concentrate-export conditions and duties that FCX said conflict with PT-FI’s Contract of Work. As of February 21, PT-FI lacked 2014 export approval and was milling at about half normal rates. FCX estimated deferred production of 40 million pounds of copper and 80,000 ounces of gold per month while the issue remained unresolved. Prolonged disruption could prompt cost reductions, deferred capital spending, workforce reductions or force majeure.
- Significant risks and contingencies: commodity-price volatility; PT-FI’s export permits and Contract of Work extension; political and security conditions in Indonesia and the DRC; water rights and supply; labor disruptions; mine-development execution; environmental compliance and legacy remediation; and oil and gas operating, regulatory and impairment risks. FCX reported $1.2 billion of environmental obligations, $2.3 billion of asset-retirement obligations and about $2.4 billion of financial-assurance obligations.
- Unusual items: oil and gas derivative losses reduced 2013 results by $312 million before tax (about $194 million after tax to common stockholders); FCX also recorded a $199 million acquisition-related tax benefit and a $128 million gain on its MMR investment. Other charges included $76 million for Morenci leach-stockpile revisions, $37 million for an executive employment restructuring and $80 million of acquisition-related costs. A May 2013 underground training-facility collapse at PT-FI resulted in 28 fatalities and 10 injuries; operations resumed after inspections.
- The board declared $2.25 per share of dividends in 2013, including a $1.00 supplemental dividend; the regular annual rate was $1.25 per share. Future dividends remain at the board’s discretion. FCX reported effective disclosure controls and internal control over financial reporting; Ernst & Young issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether PT-FI secured export approvals, resumed normal milling and avoided material shipment, earnings and cash-flow impacts.
- Whether the 2014 production, cost, cash-flow and capital-spending forecasts were achieved, and how actual commodity prices compared with management’s assumptions.
- Debt paydown progress, the timing and sources of planned deleveraging, and the effect of capital spending and dividends on liquidity.
- Whether Morenci, Cerro Verde and Grasberg projects met stated schedules and budgets, and delivered forecast production and returns.
- Developments in the Cerro Verde royalty dispute, Indonesian tax assessments, water-rights proceedings, environmental claims and required financial assurance.
- Oil and gas reserve revisions, derivative settlements, asset valuations and impairment headroom; the filing reported only about 4% ceiling-test headroom for oil and gas properties at year-end.