Business context and reporting period
Freeport-McMoRan Copper & Gold Inc. (FCX) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2009. FCX operates copper, gold and molybdenum mines in the Americas, Indonesia and the Democratic Republic of Congo (DRC), as well as smelting and refining businesses. Results are materially exposed to metal prices, production volumes and mine sequencing.
Financial results and key metrics
Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Revenue | $4,144 | $4,616 | $10,430 | $15,729 |
| Operating income | $2,084 | $1,133 | $4,264 | $5,582 |
| Operating margin | 50.3% | 24.5% | 40.9% | 35.5% |
| Net income | $1,203 | $742 | $2,222 | $3,531 |
| Net income attributable to FCX common stockholders | $925 | $523 | $1,556 | $2,592 |
| Diluted EPS | $2.07 | $1.31 | $3.70 | $6.20 |
- Metal price realizations: copper averaged $2.75/lb in Q3 and $2.35/lb for 9M, versus $3.14 and $3.43; gold averaged $987/oz and $944/oz, versus $869 and $897; molybdenum averaged $13.95/lb and $11.93/lb, versus $32.11 and $31.78.
- Q3 copper sales were 1.0 billion lb, gold 706,000 oz and molybdenum 16 million lb. For 9M, sales were 3.122 billion lb, 2.088 million oz and 42 million lb, respectively.
- Cash from operations for 9M was $2.850 billion, compared with $3.169 billion. It included a $523 million working-capital use, versus $1.5 billion in 9M 2008. Investing cash use was $1.146 billion, including $1.138 billion of capital expenditures; financing cash use was $307 million. Cash increased by $1.397 billion to $2.269 billion.
- At September 30, cash was $2.269 billion versus $872 million at December 31, 2008. Current assets were $7.406 billion and current liabilities $3.157 billion. Net cash available to the FCX parent, after noncontrolling interests and withholding taxes/other, was $1.679 billion.
- Total debt, including current maturities, was approximately $6.622 billion, down from $7.351 billion at year-end 2008. FCX had no revolver borrowings and approximately $1.4 billion of facility availability; availability plus domestic cash was approximately $2.7 billion.
- FCX equity was $9.934 billion versus $7.101 billion at year-end. The increase included the February common-stock offering, preferred-stock conversion and earnings. The 5½% convertible preferred stock converted into 17.9 million common shares; the 6¾% mandatory convertible preferred stock is scheduled to convert in May 2010.
Material changes versus prior comparable periods
- Q3 revenue declined 10% year over year, while operating income rose to $2.084 billion from $1.133 billion and common-stockholder earnings rose to $925 million from $523 million. Improved Q3 results reflected stronger Grasberg copper and gold volumes and a lower North America cost structure, despite lower copper and molybdenum prices.
- For 9M, revenue fell 34% and common-stockholder earnings fell 40%, chiefly reflecting sharply lower copper and molybdenum realizations. Higher Grasberg volumes and gold output partly offset the declines.
- Consolidated copper unit site production and delivery costs, excluding noncash/nonrecurring items and Africa, fell to $1.15/lb in Q3 and $1.08/lb for 9M, from $1.66/lb and $1.58/lb. Reported unit net cash costs were $0.50/lb and $0.53/lb, respectively, versus $1.29/lb and $1.21/lb.
- FCX curtailed higher-cost North America copper operations and reduced Henderson molybdenum output amid the 2008 downturn. Capital expenditures fell to $1.1 billion for 9M from $1.9 billion; common dividends were suspended during 9M 2009, compared with $504 million paid in 9M 2008.
Outlook, management commentary, risks and unusual items
- Management forecast 2009 mine sales of approximately 4.0 billion lb copper, 2.5 million oz gold and 56 million lb molybdenum. Q4 estimates were 915 million lb copper, 425,000 oz gold and 14 million lb molybdenum.
- Assuming Q4 prices of $2.75/lb copper, $1,000/oz gold and $10/lb molybdenum, management expected 2009 operating cash flow to exceed $4.0 billion, net of approximately $300 million of working-capital requirements. Estimated 2009 capital expenditures were approximately $1.4 billion. Management estimated copper-price sensitivity of about $80 million of Q4 operating cash flow per $0.10/lb, gold sensitivity of $30 million per $50/oz and molybdenum sensitivity of $5 million per $1/lb.
- Management cited positive long-term copper fundamentals but warned that metal prices remain volatile and near-term conditions uncertain. It expected 2010 North America copper production to be about 1.0 billion lb and Indonesia sales to decline from 2009 levels as Grasberg moves to lower-grade ore.
- FCX announced plans to resume selected development: El Abra sulfide project (approximately $600 million total investment), Cerro Verde concentrator optimization (approximately $50 million), and limited Miami mine restart (approximately $40 million). Tenke Fungurume copper production began in March and reached targeted rates in September; commissioning/start-up issues at cobalt and sulphuric acid plants remained under work.
- In October, the board reinstated an annual common dividend of $0.60/share, payable quarterly at $0.15/share, with the initial payment expected February 1, 2010. The filing also reports October debt purchases and an expected approximately $10 million Q4 extinguishment loss.
- Q3 included $31 million of losses on early debt extinguishments. 9M included $23 million net restructuring and other charges and $19 million of molybdenum inventory write-downs. Q3 provisional copper-price adjustments increased revenue by $237 million; open copper sales at September 30 totaled 398 million lb at an average recorded price of $2.79/lb, subject to final pricing.
- Key risks include commodity-price volatility, Indonesian security incidents (three fatalities reported since July, with operations continuing), the unresolved DRC contract review and political/legal uncertainty, and a Peruvian royalty assessment of approximately $50 million challenged by Cerro Verde. Tenke paid approximately $16 million in fees and penalties under a DRC audit settlement. A new Oklahoma lawsuit alleges historical zinc-smelter contamination and seeks unspecified damages; FCX intends to defend it.
- The interim financial statements received an independent accountant’s review, not an audit; the accountant reported no material modifications were identified. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether metal prices, volumes and provisional-sales settlements support the 2009 cash-flow and sales outlook, and how much of earnings depends on Grasberg’s temporarily higher grades.
- Actual cash available to FCX parent versus consolidated cash, including restrictions, noncontrolling interests and withholding taxes; also monitor debt reduction and planned dividend payments.
- Execution, ramp-up costs and capital needs for Tenke and resumed development projects, together with the DRC contract review and other jurisdictional exposures.
- Outcome and potential financial exposure from the Cerro Verde royalty assessment, Indonesia security risks and Blackwell environmental litigation.
- Potential common-share dilution from mandatory preferred conversion and the sensitivity of future margins and taxes to commodity prices and geographic earnings mix.