Freeport-McMoRan Copper & Gold Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Amounts are in U.S. dollars. The interim financial statements were reviewed, not audited. FCX’s Q1 2013 results exclude the oil-and-gas businesses acquired in 2013, so year-over-year comparisons are not like-for-like.
Business context and financial performance
FCX combined global copper, gold, molybdenum and cobalt mining with U.S. oil and gas operations. Management attributed Q1 results chiefly to restricted Indonesian concentrate exports and lower realized metals prices, partly offset by the first-quarter contribution from oil and gas.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $4.985 billion | $4.583 billion |
| Operating income | $1.111 billion | $1.355 billion |
| Operating margin | 22.3% | 29.6% |
| Net income attributable to FCX common stockholders | $510 million | $648 million |
| Diluted earnings per share | $0.49 | $0.68 |
| Operating cash flow | $1.201 billion | $831 million |
| Capital expenditures | $1.612 billion | $805 million |
Revenue included $1.261 billion from U.S. oil and gas, absent from Q1 2013 reported results. Excluding that new business, mining faced lower copper and gold volumes and lower price realizations. Consolidated copper sales were 871 million pounds versus 954 million; gold sales were 187,000 ounces versus 214,000. Average realized copper, gold and molybdenum prices were $3.14/lb, $1,300/oz and $11.21/lb, respectively, all below the prior-year period.
Interest expense, excluding capitalized interest, rose to $224 million from $75 million, primarily reflecting acquisition-related debt. Depreciation, depletion and amortization increased to $966 million from $329 million, including $616 million from oil and gas operations. The Q1 2014 effective income tax rate was 36% versus 34%. Q1 2013 included a $45 million debt-extinguishment loss.
Cash, debt and liquidity
At March 31, 2014, cash and cash equivalents were $1.342 billion, total debt was $20.850 billion, and net debt was approximately $19.5 billion. Total current assets were $9.430 billion and current liabilities $5.383 billion. Cash available to the parent, after noncontrolling interests, withholding taxes and other items, was reported as $778 million. The $3.0 billion revolving facility had no borrowings and $46 million of letters of credit outstanding; $115 million was drawn on uncommitted credit lines.
Operating cash flow exceeded the prior-year quarter despite $413 million of working-capital uses and other tax payments. Cash fell by $643 million during the quarter, reflecting investing and financing outflows. Q1 capital expenditures were $1.612 billion, including $581 million for oil and gas operations. FCX paid $326 million in common dividends and declared a quarterly dividend of $0.3125 per share.
Outlook, material developments and risks
- 2014 outlook: FCX projected sales of 4.3 billion pounds of copper, 1.6 million ounces of gold, 97 million pounds of molybdenum and 64.2 million BOE. The estimates assumed PT-FI export resumption beginning in May and did not include the May-announced oil-and-gas transactions.
- Cash flow and spending: Based on assumed remainder-of-year prices of $3.00/lb copper, $1,300/oz gold, $10/lb molybdenum and $105/bbl Brent, management estimated 2014 operating cash flow of approximately $7.7 billion and capital expenditures of approximately $7 billion. It targeted significant debt reduction by the end of 2016, using cash flow after capital and other requirements.
- Indonesia: PT-FI had not received authorization to export copper concentrate under new Indonesian regulations, which also imposed a progressive export duty. Q1 milling averaged 118,000 metric tons/day, about half normal rates. Export restrictions deferred approximately 125 million pounds of copper and 140,000 ounces of gold in the quarter and led to $53 million of fixed costs charged directly to cost of sales. The 2014 production outlook depended on a resolution and export resumption; continued disruption could prompt cost reductions, capital deferrals, workforce reductions or force majeure.
- Projects and capital needs: 2014 capital spending was expected to support major Morenci and Cerro Verde expansions and Grasberg underground development. Morenci commissioning was expected to begin in Q2; Cerro Verde expansion was planned to add capacity beginning in 2016. Project costs and timing remain subject to execution and market conditions.
- Oil and gas portfolio changes: In May, FCX agreed to sell Eagle Ford assets for $3.1 billion and acquire certain Apache Deepwater GOM interests for $1.4 billion. The transactions were expected to close by the end of Q2, subject to conditions and adjustments. Management estimated combined after-tax net proceeds of about $1.3 billion and expected to use them to repay debt after funding the acquisition.
- Commodity and other exposures: Results and cash flow remain sensitive to copper, gold, molybdenum, oil and gas prices, production volumes, provisional copper pricing, and derivative positions. Q1 included $124 million of unfavorable adjustments on prior-period provisionally priced sales. The company also reported environmental and asset-retirement obligations, shareholder litigation and continuing Cerro Verde royalty and Indonesia tax matters; no significant Q1 changes were reported to the latter disputes.
Investor verification priorities
- Confirm whether PT-FI obtained export authorization and whether production and sales assumptions underlying 2014 guidance were achieved.
- Track actual commodity prices, sales volumes, provisional-pricing adjustments and derivative settlements against management’s cash-flow assumptions.
- Verify completion, proceeds and use of funds for the Eagle Ford sale and Deepwater GOM acquisition, and the resulting debt reduction.
- Assess execution, cost and schedule progress for Morenci, Cerro Verde and Grasberg development, alongside the $7 billion capital-spending plan.
- Reconcile reported earnings and cash generation with acquisition-related interest, elevated depreciation, working-capital needs and the company’s debt-reduction target.