Freeport-McMoRan Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Freeport-McMoRan is a global copper, gold and molybdenum miner with operations in North America, South America and Indonesia. Unless indicated otherwise, financial amounts are in U.S. dollars.
Financial results and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $2.798 billion | $3.792 billion |
| Operating income (loss) | $(473) million | $321 million |
| Net income (loss) attributable to common stockholders | $(491) million; $(0.34) per share | $31 million; $0.02 per share |
| Operating cash flow | $(38) million | $534 million |
| Capital expenditures | $610 million | $622 million |
| Cash and cash equivalents, March 31 | $1.602 billion | $2.833 billion, March 31, 2019 |
| Total debt, March 31 | $10.074 billion | $9.905 billion, March 31, 2019 |
Operating margin was approximately negative 16.9%, versus positive 8.5% in Q1 2019; net loss attributable to common stockholders was approximately 17.5% of revenue, versus income of approximately 0.8%. These are calculated from reported figures. Total current assets were $7.357 billion and current liabilities were $3.143 billion at March 31. The company reported $5.1 billion of liquidity, comprising $1.6 billion cash and approximately $3.5 billion available on its revolving credit facility. It had no revolver borrowings and was in compliance with facility covenants.
Changes from the prior comparable period
- Revenue fell approximately 26%, reflecting lower copper prices and copper and gold sales volumes, unfavorable provisional copper pricing adjustments, and lower Atlantic Copper, purchased-copper and cobalt revenues. Realized copper price was $2.43 per pound versus $2.90; gold was $1,606 per ounce versus $1,291; and molybdenum was $11.10 per pound versus $12.69.
- Copper sales, excluding purchases, declined to 729 million pounds from 784 million; gold sales fell to 144,000 ounces from 242,000; and molybdenum sales were 21 million pounds versus 22 million.
- The company recorded $222 million of metals inventory write-downs to net realizable value, principally copper ($205 million) and molybdenum ($17 million), versus $57 million in Q1 2019. Provisional copper sales generated unfavorable adjustments of $107 million from prior periods, compared with favorable adjustments of $70 million a year earlier.
- Operating cash flow declined by $572 million year over year, primarily due to lower copper and gold sales volumes and lower copper prices. Working capital and other sources contributed $119 million in Q1 2020, compared with $56 million of uses in Q1 2019.
Outlook, management commentary and risks
- In April 2020, management revised operating plans in response to COVID-19 and weaker commodity markets, emphasizing cash generation, liquidity and preservation of long-term asset value. Estimated 2020 reductions include $1.3 billion in operating costs, $800 million in capital spending, $100 million in exploration and administrative costs, and approximately 400 million pounds of North and South America copper sales.
- Revised 2020 estimates assume copper at $2.30 per pound and project copper sales of 3.1 billion pounds, gold sales of 780,000 ounces and molybdenum sales of 80 million pounds. Estimated operating cash flow is $1.8 billion, including $0.8 billion from working capital and other sources; capital expenditures are approximately $2.0 billion, excluding the Indonesia smelter. Management expects most operating cash flow in the second half of the year and estimates year-end cash of $1.7 billion and debt of $9.7 billion. These are forward-looking estimates, not guarantees.
- Second-quarter 2020 sales were forecast at approximately 690 million pounds of copper, 165,000 ounces of gold and 19 million pounds of molybdenum. The company expects PT-FI’s Grasberg underground ramp-up to support materially higher production in 2021. Its 2020 plans also anticipate limited Cerro Verde operations in Q2 and higher rates in the second half, subject to government approvals and operating conditions.
- Cerro Verde temporarily moved to care and maintenance under Peruvian emergency measures; it operated at about one-third of planned rates during April, then increased to more than 50% of capacity late in the month. Chino was suspended in April, with restart timing under review. These disruptions, COVID-19 outbreaks, government restrictions, shipment timing and operational performance could affect production and forecasts.
- FCX issued $1.3 billion of senior notes in March and used proceeds to repurchase portions of notes due 2021 and 2022; it redeemed the remaining 2021 notes on April 3. Q1 included a $32 million debt-extinguishment loss, and management expected a further $9 million loss in Q2. No senior notes were expected to mature before 2022 after the redemption.
- The Board suspended the planned May dividend and did not expect to declare common dividends during 2020 under then-current conditions. The company also entered April forward sales for 150 million pounds of copper at $2.34 per pound for May and June settlement, covering about 60% of projected North America sales in those months.
- Key uncertainties include commodity prices, COVID-19 effects on mines and markets, Peru operating approvals, Indonesia security and export-license extensions, underground-mine execution, the deferred Indonesia smelter schedule, and environmental and legal matters. The company reported no significant long-lived-asset impairment at March 31, but further price declines could lead to additional inventory write-downs or impairments.
- Contingencies include asbestos/talc litigation involving subsidiaries and disputed access to legacy insurance; FCX said it could not estimate the possible loss range and did not then believe losses were material. Cerro Verde’s international arbitration against the Peruvian government over a royalty dispute was filed in February 2020.
Important facts for investors to verify
- Whether copper prices and sales volumes, particularly the provisional pricing exposure, differ materially from the assumptions underlying the April 2020 forecast.
- Whether Cerro Verde resumes operations as planned, and the duration and production impact of the Chino suspension and other COVID-19 measures.
- Whether the company achieves forecast operating cash flow, working-capital contributions, cost reductions and capital spending while maintaining liquidity.
- Progress and costs in the Grasberg underground ramp-up, the Lone Star project and the revised Indonesia smelter timeline.
- Developments in the talc litigation and insurance dispute, Cerro Verde royalty arbitration, and Indonesia security and export-license risks.