Freeport-McMoRan Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company is a global copper, gold and molybdenum miner, with major operations in Indonesia, North America and South America. Amounts are U.S. dollars unless otherwise noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $5.748B | $3.054B | $10.598B | $5.852B |
| Operating income (loss) | $2.067B | $321M | $3.599B | $(152)M |
| Net income (loss) attributable to common stockholders | $1.083B | $53M | $1.801B | $(438)M |
| Diluted EPS | $0.73 | $0.03 | $1.21 | $(0.30) |
| Operating cash flow | $2.395B | $491M | $3.470B | $453M |
| Capital expenditures | $433M | $527M | $803M | $1.137B |
Calculated operating margin was approximately 36% in Q2 2021, versus 11% in Q2 2020; for the first six months, it was approximately 34%, versus negative 3% in 2020. Q2 copper sales were 929 million pounds at an average realized price of $4.34 per pound, compared with 759 million pounds at $2.55. For the first six months, copper sales were 1.754 billion pounds at $4.25 per pound. Management attributed the improvement primarily to higher copper prices and sales volumes, including the ramp-up of Grasberg underground mining.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $6.313B; total debt was $9.695B; net debt, a non-GAAP measure, was $3.382B, down $2.672B from year-end 2020.
- Liquidity was approximately $9.8B, comprising cash and $3.5B available under the revolving credit facility, with no revolver borrowings outstanding. Current assets were $12.599B and current liabilities $5.527B.
- Debt included $1.057B classified as current, with approximately $1.1B of maturities through June 2022, including $0.5B of senior notes and the $0.5B Cerro Verde term loan.
- FCX reinstated its common dividend; Q2 declared dividends were $0.075 per share. The board’s policy includes a $0.30 annual base dividend and a discretionary performance-based shareholder payout framework after reaching its net-debt target. The company said it had reached that target, with net debt of $3.4B.
Material changes and operating developments
- Revenue increased 88% year over year in Q2. Average realized copper prices rose 70% in the quarter, while gold and molybdenum prices rose 3% and 25%, respectively. Higher sales volumes also contributed, especially at PT-FI in Indonesia.
- PT-FI copper production was 308 million pounds in Q2, versus 181 million a year earlier; gold production was 303,000 ounces, versus 189,000. The underground ramp-up was reported at about 78% of projected ultimate annualized production, with management expecting full levels by year-end 2021.
- Consolidated unit net cash costs for copper mines were $1.48 per pound in Q2 and $1.44 for the first six months, compared with $1.47 and $1.68 in the corresponding 2020 periods. South America costs rose, partly due to $69M of nonrecurring Cerro Verde labor-related charges.
- Six-month production and delivery costs increased to $5.853B from $4.939B, reflecting higher sales volumes, mining and milling costs, and labor charges. DD&A increased to $902M from $699M, primarily with PT-FI ramp-up and assets placed in service.
- Six-month cash from operations rose to $3.470B from $453M. Cash generation included $187M of working-capital and other sources; working-capital changes included increased receivables and inventories, partly offset by accrued tax timing.
- FCX acquired an additional 14.5% of PT Smelting for $33M, increasing its interest to 39.5%; it continues to account for the investment under the equity method.
Outlook, risks and unusual items
- 2021 guidance: consolidated sales of 3.85B pounds of copper, 1.3M ounces of gold and 86M pounds of molybdenum. Q3 sales were forecast at approximately 1.035B pounds of copper, 360,000 ounces of gold and 21M pounds of molybdenum.
- Assuming second-half prices of $4.25/lb copper, $1,800/oz gold and $16/lb molybdenum, FCX forecast 2021 operating cash flow of approximately $7.5B, including $0.4B of working-capital and other sources, and an estimated income tax provision of $2.5B. Forecast cash flow sensitivity: about $200M per $0.10/lb copper-price change, $50M per $100/oz gold change and $55M per $2/lb molybdenum change.
- Management forecast consolidated copper-mine unit net cash costs of $1.35/lb for 2021, using the stated commodity-price assumptions. Capital expenditures were projected at $2.2B, excluding approximately $0.4B for Indonesia smelter development.
- Indonesia smelter development remains a major investment and execution risk. A July 2021 Chiyoda contract for a new Gresik smelter had an estimated cost of $2.8B and a target completion as soon as feasible in 2024, subject to no further pandemic disruptions. PT-FI received a $1B five-year unsecured credit facility in July to help fund smelter-related projects. Costs are to be shared 49% by FCX and 51% by PT Inalum.
- PT-FI was assessed a $149M Indonesian administrative fine for alleged smelter-development delays. FCX recorded $16M of charges in the first half toward a potential settlement; the final amount could differ. The company continued discussions with the government.
- Notable contingencies include a $308M Newtown Creek environmental liability, with ultimate remediation costs and allocation uncertain, and a $130M liability tied to a proposed talc-litigation settlement subject to bankruptcy-court and claimant approvals.
- Other risks highlighted include commodity-price volatility, COVID-19 and operating disruptions, underground ramp-up performance, labor negotiations, Indonesian export-license and smelter requirements, political and regulatory changes, and environmental and litigation outcomes. Management reported no material change to previously disclosed risk factors.
- After quarter-end, FCX agreed to sell its specialty cobalt business for stated consideration of $85M plus net working capital, with potential contingent consideration; closing was subject to financing and customary conditions. FCX expected to record a gain.
Most important facts for investors to verify
- Whether Grasberg’s underground ramp-up achieves targeted production and sales levels, and whether the projected 2021 cost and cash-flow assumptions hold.
- Actual copper, gold and molybdenum prices and the effect of provisionally priced sales; at June 30, 368M pounds of copper sales remained provisionally priced, and a $0.05/lb price change was estimated to affect 2021 common-stockholder income by about $12M.
- Funding, schedule, cost-sharing and government approvals for the Indonesian smelter projects, including the fine settlement and export-license extensions.
- Cash-flow allocation decisions, including any performance-based shareholder distributions, and management’s ability to manage near-term debt maturities.
- Changes in environmental and legal exposure, especially Newtown Creek and the proposed talc settlement, and completion of the cobalt-business sale.
The interim financial statements were reviewed by Ernst & Young LLP; the review was not an audit. Management stated disclosure controls were effective as of June 30, 2021.