FREEPORT-MCMORAN INC annual report, FY2021

Business context and reporting period

Freeport-McMoRan Inc. (NYSE: FCX) is a global copper, gold and molybdenum miner with major operations in North America, South America and Indonesia. This 10-K covers the fiscal year ended December 31, 2021; comparisons are primarily with fiscal 2020. It is an annual filing, not a standalone fourth-quarter financial report.

Financial and operating performance

Operating margin was approximately 36.6% in 2021 versus 17.2% in 2020; net income attributable to common stockholders as a share of revenue was approximately 18.9% versus 4.2%, respectively (calculated from reported figures). Net debt, a non-GAAP measure defined as debt less cash, fell to $1.382 billion from $6.054 billion. FCX also reported no borrowings and approximately $3.5 billion available under its revolving credit facility.

Net working capital was approximately $8.9 billion at year-end, based on reported current assets of $14.830 billion and current liabilities of $5.892 billion. FCX reported $7.0 billion of cash net of noncontrolling interests and withholding taxes as available to the parent, versus consolidated cash of $8.1 billion.

Copper sales volumes, excluding purchased copper, rose 19% to 3.807 billion pounds; gold sales increased 59% to 1.360 million ounces. Molybdenum sales were 82 million pounds. Average realized prices were $4.33 per pound for copper, $1,796 per ounce for gold and $15.56 per pound for molybdenum.

Material changes versus 2020

• Higher copper and gold sales volumes, led by the Grasberg underground ramp-up, and higher copper and molybdenum prices drove revenue and earnings growth. Average realized copper and molybdenum prices rose 47% and 53%; gold fell 2%.
• Operating cash flow increased by $4.7 billion, and net debt decreased by $4.7 billion. Cash generation reflected stronger operating performance and favorable copper prices, alongside tax-payment timing.
• Production and delivery costs increased to $12.016 billion from $10.031 billion, reflecting higher volumes, Grasberg ramp-up, higher Cerro Verde milling rates and increased maintenance and input costs.
• Consolidated copper unit net cash costs, net of by-product credits, declined to $1.34 per pound from $1.48, despite higher site production and delivery costs per pound of $1.93 versus $1.88.
• FCX resumed shareholder returns: common dividends paid were $331 million, and $488 million of shares were repurchased in 2021. The company redeemed $524 million of 3.55% notes due 2022 and prepaid $200 million of Cerro Verde debt.

Outlook, commentary, risks and unusual items

Management expected 2022 sales of approximately 4.3 billion pounds of copper, 1.58 million ounces of gold and 80 million pounds of molybdenum. At assumed average prices of $4.50 per pound copper, $1,800 per ounce gold and $19 per pound molybdenum, FCX projected operating cash flow of about $8.0 billion, net of $1.3 billion of working-capital and other uses, and a 30% effective tax rate. Projected 2022 capital expenditures were approximately $4.7 billion, including $1.4 billion for Indonesian smelter projects. These estimates are price- and execution-sensitive, not guarantees.

Management cited Grasberg’s continuing ramp-up, Lone Star’s 2021 production of about 235 million pounds (above its initial 200-million-pound annual design capacity), and planned Cerro Verde milling-rate increases as operating drivers. The company also planned to develop Kucing Liar and pursue potential organic growth at Lone Star, Bagdad and El Abra; major El Abra investment decisions were deferred pending clarity on Chilean regulatory and fiscal matters.

• Indonesia license and smelter obligations: PT-FI’s export license was extended through March 15, 2022. Its IUPK extension through 2041 depends, among other requirements, on additional domestic smelting capacity. COVID-19 delays affected the greenfield smelter schedule; construction was then expected to finish in 2024, while PT Smelting’s expansion was targeted for 2023. A government administrative fine was under discussion; PT-FI expected a first-quarter 2022 charge above the $16 million already recorded.
• Environmental and closure exposure: Environmental obligations were $1.7 billion and asset retirement obligations $2.7 billion at year-end. U.S. financial assurance for mine closure and reclamation was $1.5 billion. Environmental capital and other costs were expected to be approximately $0.5 billion in 2022. Tailings, Indonesia tailings and overburden management, reclamation estimates and changing regulation could increase costs.
• Tax and litigation uncertainty: The filing describes contested tax assessments in Indonesia and Peru, the Cerro Verde royalty arbitration, environmental remediation claims and proposed talc-litigation settlements. Management did not expect any individual pending legal proceeding to materially affect financial condition, but outcomes could materially affect results in a particular period. Certain disputed assessments and potential penalties were not recorded as liabilities.
• Other risks: Commodity-price volatility, COVID-19, underground mining and seismic risks, water-right disputes in Arizona, political and social instability, labor relations, supply-chain constraints, energy costs, cybersecurity and climate-related physical and regulatory impacts could disrupt operations or increase costs.
• Notable items: A $397 million increase in PT-FI reclamation obligations was recorded, including $340 million in production and delivery costs. Conversely, a Morenci leach-stockpile recovery estimate revision increased estimated recoverable copper by 191 million pounds and 2021 net income by $112 million. FCX sold its remaining cobalt assets for $208 million and recorded a $60 million gain.

The Board’s performance-based payout framework targeted net debt of $3–$4 billion, excluding Indonesian smelter project debt. FCX announced an expected 2022 base-plus-variable dividend rate of $0.60 per share and authorized up to $3.0 billion in repurchases; dividend and repurchase decisions remain discretionary.

Most important facts for investors to verify

• 2022 production, cost and cash-flow guidance against actual results, including sensitivity to copper, gold and molybdenum prices.
• Renewal and terms of PT-FI’s export license, the smelter schedule and costs, any further administrative fine, and progress toward satisfying IUPK requirements.
• Grasberg underground ramp-up performance, development spending and safety/geotechnical risks, including progress and funding for Kucing Liar.
• Cash available to the parent after subsidiary needs, noncontrolling interests, withholding taxes and planned capital spending; also debt maturities and repayment of Cerro Verde’s $325 million term-loan balance due June 2022.
• Changes in environmental and reclamation estimates, contested tax matters, legal proceedings, Arizona water-right adjudications and the effect of higher energy and input costs.
• Whether dividends and repurchases proceed at the announced pace while FCX funds its growth and smelter commitments.