Freeport-McMoRan Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The unaudited interim financial statements received an independent accountant’s review, not an audit. Freeport-McMoRan (FCX) operates global copper, gold, molybdenum and oil and gas businesses.
Financial performance and position
| Metric | Q1 2016 / Mar. 31, 2016 | Comparable / prior date |
|---|---|---|
| Revenue | $3.527 billion | $4.153 billion in Q1 2015 |
| Operating loss | $3.876 billion | $2.963 billion in Q1 2015 |
| Net loss attributable to common stockholders | $4.184 billion; $3.35 per share | $2.474 billion; $2.38 per share in Q1 2015 |
| Operating cash flow | $740 million | $717 million in Q1 2015 |
| Capital expenditures | $982 million | $1.867 billion in Q1 2015 |
| Cash and cash equivalents | $331 million | $224 million at Dec. 31, 2015 |
| Total debt | $20.777 billion | $20.428 billion at Dec. 31, 2015 |
| Current assets / current liabilities | $7.233 billion / $4.426 billion | $7.462 billion / $4.307 billion at Dec. 31, 2015 |
| Total equity | $7.970 billion | $12.044 billion at Dec. 31, 2015 |
Revenue declined about 15% year over year, mainly reflecting lower realized prices: copper averaged $2.17 per pound versus $2.72, and molybdenum $7.61 versus $10.17. Gold averaged $1,227 per ounce versus $1,186. Copper sales rose to 1.123 billion pounds from 960 million, while gold and molybdenum sales declined. Oil and gas sales were 12.1 million BOE versus 12.5 million, and realized oil prices excluding derivatives fell to $29.06 per barrel from $44.54.
Q1 results included a $3.787 billion oil and gas property impairment, versus $3.104 billion in Q1 2015. FCX also recorded $1.4 billion of tax charges to establish valuation allowances related primarily to U.S. deferred tax assets. Excluding those tax charges, management reported effective tax rates of 34% for Q1 2016 and 37% for Q1 2015. Operating cash flow included $188 million from working-capital sources and other tax-payment changes; operating cash flow less capital expenditures was approximately negative $242 million.
At quarter-end, total debt included $1.139 billion current and $19.638 billion long-term. FCX reported approximately $3.0 billion available under its revolving credit facility, after $480 million drawn and $38 million of letters of credit. The facility commitment was reduced from $4.0 billion to $3.5 billion in February, alongside covenant amendments. Cash net of noncontrolling interests, withholding taxes and other costs was $232 million; most cash was held internationally.
Material changes and management actions
- Lower metal and oil realizations were partly offset by higher copper sales volumes, particularly from the Cerro Verde expansion, and mining cost reductions. Consolidated copper unit net cash costs fell to $1.38 per pound from $1.64.
- Mining production and delivery costs declined by $311 million year over year, while oil and gas production and delivery costs increased by $124 million, primarily because of higher idle-rig costs and inventory write-downs.
- FCX announced asset disposals to reduce debt. The Morenci 13% interest sale for $1.0 billion and oil and gas royalty sale for $102 million were expected to close in Q2 2016. FCX completed the Timok interest sale for $135 million cash on May 2. On May 9, it agreed to sell its 70% interest in TF Holdings for $2.65 billion cash, subject to conditions, with up to $120 million contingent consideration. Proceeds were intended for debt repayment.
- The oil and gas business review did not identify a buyer for the entire business; FCX continued discussions on selected assets or joint ventures. Management announced an approximately 25% oil and gas workforce reduction and expected about $40 million of related restructuring charges in Q2.
- The common dividend was suspended in December 2015. Credit agreements prohibited common dividends through March 31, 2017.
Outlook, risks and contingencies
- 2016 outlook: Projected copper sales of 5.015 billion pounds, gold sales of 1.85 million ounces, molybdenum sales of 71 million pounds and oil and gas sales of 54.4 million BOE. Q2 sales were forecast at approximately 1.15 billion pounds of copper, 195,000 ounces of gold, 19 million pounds of molybdenum and 13.5 million BOE.
- Management forecast 2016 mining copper unit net cash costs of $1.05 per pound and oil and gas cash production costs of about $15 per BOE. Estimated operating cash flow was $4.8 billion, assuming specified remaining-year prices of $2.25/lb copper, $1,250/oz gold, $5/lb molybdenum and $45/bbl Brent; this estimate included $0.8 billion of working-capital sources and other tax payments. Estimated 2016 capital expenditures were $3.3 billion, including $1.5 billion for oil and gas.
- Guidance assumed renewal of PT Freeport Indonesia’s export permit after August 8, 2016. The permit was then valid through that date, and renewal was required every six months. Indonesia also imposed a 5% export duty while reviewing smelter plans. Uncertainty over long-term mining rights, export permits and smelter commitments could affect investment, production and reserves.
- Grasberg equipment failures were expected to reduce 2016 copper output by 65 million pounds; second-quarter mill rates were expected to remain near Q1 levels. Management expected higher Grasberg ore grades in the second half. Mining outlook also depends on prices, volumes and execution of development plans.
- Further oil and gas impairments remained possible if trailing average prices fell or reserves, costs or property evaluations changed. FCX estimated a hypothetical additional $0.4 billion pre-tax impairment under specified lower price assumptions. It reported $1.7 billion of unevaluated oil and gas property costs excluded from amortization.
- After quarter-end, FCX agreed to terminate two drilling rig contracts through a settlement providing Noble $540 million in value, payable in cash, FCX shares or eligible bonds, plus up to $75 million contingent on oil prices. Noble released FCX from $0.8 billion of payment obligations. FCX estimated idle-rig costs, including the settlement, of $0.8 billion in 2016 and $0.2 billion in 2017.
- Peru’s Cerro Verde royalty assessments through September 2011 totaled $413 million, and FCX estimated total exposure through 2013 at about $515 million, including interest and penalties. No amount was accrued because Cerro Verde disputed the assessments and believed payments would be recoverable. Indonesia surface-water tax assessments through April 29 totaled about $207 million; no amount was accrued while PT-FI contested them.
Important facts for investors to verify
- Completion, approvals, timing and net proceeds of the Morenci, Tenke, royalty and other announced asset sales—and the extent to which proceeds reduce debt.
- Cash generation, liquidity, debt maturities and covenant compliance, including the effect of reduced credit-facility capacity and restrictions on dividends.
- Actual commodity prices, production volumes and costs versus 2016 assumptions, especially Grasberg recovery, export-permit renewal and underground project spending.
- Whether further oil and gas impairments occur, and the realized cost and cash-flow effects of the Noble settlement and restructuring.
- Outcomes of Cerro Verde royalty and Indonesian tax disputes, including possible additional assessments, penalties or required accruals.