Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2007, for Freeport-McMoRan Copper & Gold Inc. (FCX). The reporting period is significantly impacted by the acquisition of Phelps Dodge Corporation, completed on March 19, 2007. Consequently, the nine-month results include Phelps Dodge operations only from March 20, 2007, through September 30, 2007. Additionally, the company agreed to sell its international wire and cable business, Phelps Dodge International Corporation (PDIC), on September 12, 2007; PDIC results are reported as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2007 | Nine Months Ended Sept 30, 2007 | Nine Months Ended Sept 30, 2006 |
|---|---|---|---|
| Revenues | $5,066 million | $12,755 million | $4,148 million |
| Operating Income | $1,877 million | $5,403 million | $2,006 million |
| Net Income (Applicable to Common Stock) | $775 million | $2,355 million | $970 million |
| Diluted EPS (Common Stock) | $1.87 | $6.58 | $4.64 |
| Operating Cash Flow | N/A | $4,927 million | $1,068 million |
| Total Debt | $8.732 billion | $8.732 billion | $0.7 billion |
| Cash and Cash Equivalents | $2,377 million | $2,377 million | $699 million |
Note: Debt figures reflect the significant increase due to the Phelps Dodge acquisition financing.
Material Changes vs. Prior Period
- Revenue Growth: Revenues for the nine months ended September 30, 2007, increased by approximately 207% compared to the same period in 2006. This surge is primarily attributable to the inclusion of Phelps Dodge operations and higher realized prices for copper and gold.
- Profitability: Net income applicable to common stock for the nine months ended September 30, 2007, more than doubled to $2.355 billion from $970 million in the prior year period.
- Balance Sheet Expansion: Total assets increased from $5.39 billion at December 31, 2006, to $41.39 billion at September 30, 2007, driven by the acquisition. Total liabilities increased to $21.78 billion, with long-term debt rising to $8.665 billion.
- Discontinued Operations: The PDIC segment, previously a significant revenue contributor, is now classified as discontinued operations. For the nine months ended September 30, 2007, PDIC contributed $44 million to net income.
Guidance, Outlook, and Risks
Outlook and Guidance
- Production Volumes: FCX projects full-year 2007 consolidated sales volumes of approximately 3.4 billion pounds of copper, 2.2 million ounces of gold, and 51 million pounds of molybdenum.
- Price Sensitivity: Management estimates that each $0.20 per pound change in the average copper price for the balance of 2007 would impact 2007 revenues by approximately $275 million and net income by approximately $130 million.
- Capital Expenditures: Estimated capital expenditures for 2007 are approximately $1.9 billion, including significant spending on the Tenke Fungurume project in the DRC and the Safford mine in Arizona.
Risks and Contingencies
- Purchase Accounting Adjustments: The preliminary purchase price allocation for Phelps Dodge is subject to adjustment. Significant declines in metal prices could result in impairment charges to goodwill, inventories, and property, plant, and equipment.
- Environmental Obligations: FCX has recorded environmental reserves of $348 million and asset retirement obligations (AROs) of $527 million related to Phelps Dodge. Future costs may vary based on regulatory changes and engineering designs.
- Commodity Price Risk: Revenues and net income are highly sensitive to fluctuations in copper, gold, and molybdenum prices.
- Legal Proceedings: Ongoing litigation includes antitrust claims related to carbon black (settled for $6 million) and environmental remediation disputes, such as the Pinal Creek site in Arizona.
Investor Verification Checklist
- Phelps Dodge Integration: Verify the finalization of the purchase price allocation and any subsequent adjustments to goodwill or asset valuations.
- Debt Reduction Strategy: Monitor the company's progress in reducing the $8.7 billion debt load incurred for the acquisition, specifically the repayment of term loans and senior notes.
- PDIC Sale Completion: Confirm the final net proceeds from the sale of PDIC (expected ~$620 million) and the application of these funds toward debt reduction.
- Commodity Hedging: Review the impact of the 2007 copper price protection program (zero-premium collars and put options) on revenues, which resulted in mark-to-market charges of $212 million for the nine-month period.
- Environmental Liabilities: Assess the potential for increased environmental reserves or AROs, particularly regarding the Chino and Tyrone mines in New Mexico where updated closure plans were submitted.