Freeport-McMoRan Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; filed August 3, 2023. The company is a global copper, gold and molybdenum miner, with major operations in North America, South America and Indonesia. Figures below are in U.S. dollars unless noted.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $5.737B | $5.416B | $11.126B | $12.019B |
| Operating income | $1.410B | $1.736B | $3.011B | $4.545B |
| Operating margin | 24.6% | 32.1% | 27.1% | 37.8% |
| Net income attributable to common stockholders | $343M | $840M | $1.006B | $2.367B |
| Diluted earnings per share | $0.23 | $0.57 | $0.69 | $1.61 |
| Operating cash flow | $1.673B | $1.621B | $2.723B | $3.312B |
| Capital expenditures | $1.163B | $863M | $2.284B | $1.586B |
- Q2 consolidated copper sales were 1.029 billion pounds at an average realized price of $3.84 per pound, versus 1.087 billion pounds at $4.03 a year earlier. Consolidated unit net cash costs were $1.47 per pound, compared with $1.41.
- At June 30, cash and cash equivalents were $6.683B, total debt was $9.495B and reported net debt was $2.8B. Net debt excluding the Indonesia smelter projects was $0.9B. Cash included $1.1B designated for those projects.
- FCX had no borrowings under its $3.0B revolving facility; PT-FI and Cerro Verde also had no borrowings under their respective facilities. The company reported $3.0B, $1.3B and $350M of availability, respectively.
- The board declared a quarterly dividend of $0.15 per share, comprising a $0.075 base dividend and a $0.075 variable dividend. It anticipated total 2023 dividends of $0.60 per share, subject to board discretion and conditions.
Material changes and drivers
- Q2 revenue rose 6% year over year, but operating income fell 19% and common-stockholder net income fell 59%. For the first six months, revenue declined 7% and common-stockholder net income declined 58%.
- Management attributed weaker earnings mainly to lower copper prices and sales volumes, increased maintenance and supply costs, and a change in FCX’s economic interest in PT-FI from approximately 81% to 48.76% beginning January 1, 2023. This ownership change also increased the share of income attributable to noncontrolling interests.
- Indonesia shipping delays tied to PT-FI’s export-license renewal reduced copper sales. The PT Smelting relationship also changed to a tolling arrangement in 2023; metal remained in inventory pending future refined-metal sales. At June 30, approximately 85 million pounds of copper and 40,000 ounces of gold were deferred in inventory.
- Costs increased: Q2 production and delivery costs were $3.548B versus $3.003B, and first-half costs were $6.712B versus $6.153B. Higher maintenance, supplies, labor and operating rates contributed. First-half environmental and shutdown costs were $141M versus $45M, including $116M of revisions to historical environmental obligations.
- The first-half effective tax rate was 37%, up from 32%, including $142M of pretax nondeductible charges tied to contested Peruvian tax rulings. Interest costs also included $74M for those rulings in the first half.
Outlook, risks and unusual items
- For 2023, FCX projected consolidated sales of 4.017B pounds of copper, 1.75M ounces of gold and 79M pounds of molybdenum. Q3 sales were expected to be approximately 1.0B pounds of copper, 420,000 ounces of gold and 20M pounds of molybdenum.
- Based on remainder-of-year assumptions of $3.90 per pound copper, $1,950 per ounce gold and $20 per pound molybdenum, management estimated 2023 operating cash flow of approximately $6.4B, capital expenditures of approximately $4.8B and an effective tax rate of approximately 36%. These are estimates, not guarantees.
- FCX expected 2023 consolidated copper-mine unit net cash costs of $1.55 per pound. The estimates exclude a possible 7.5% Indonesia export duty for the second half of 2023; if applied, management estimated a roughly $250M revenue impact and an $80M impact to common-stockholder net income for 2023, including approximately $40M of the latter in Q3. PT-FI is disputing the duty’s applicability.
- PT-FI received an export license on July 24, 2023, allowing exports of 1.7M metric tons of copper concentrate through May 2024. The Manyar smelter was approximately 75% complete; construction was expected to finish in mid-2024, followed by commissioning and ramp-up through year-end. Indonesia rules could also require an additional refundable deposit of about $250M and temporary deposit of 30% of gross export proceeds in local banks for 90 days.
- PT-FI accrued a potential $55M administrative fine related to smelter delays; it disputes that additional fines should apply. A revised tax ruling in Peru, commodity-price volatility, operating and shipment risks, labor and supply constraints, and Indonesia regulatory changes could affect results and liquidity.
- Management cited leach-innovation initiatives targeting an annual run rate of approximately 200M pounds of incremental copper by year-end 2023. It also described ongoing Grasberg development and other growth projects. The company cautioned that commodity prices and actual operating performance may differ from planning assumptions.
- Other disclosed items include a $69M Q2 charge associated with Cerro Verde’s contested tax rulings, a settlement of a New Jersey historical-smelter-site class action for an amount not material to FCX, and a dispute over whether Terrebonne Parish is bound by a Louisiana coastal-erosion settlement.
Most important facts for investors to verify
- Whether PT-FI maintains export access and whether Indonesia assesses the revised export duties, administrative fine or additional smelter deposit.
- Progress, cost and timing of the Manyar smelter and related refinery projects, including the effect of export-proceeds deposit requirements on usable cash.
- Actual copper, gold and molybdenum prices, sales volumes, operating costs and working-capital movements relative to management’s 2023 assumptions.
- Resolution and financial effects of the Peruvian tax disputes, including related tax and interest charges.
- Whether forecast operating cash flow, capital spending and dividends remain consistent with FCX’s net-debt policy and board discretion.