Freeport-McMoRan Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. Amounts are in U.S. dollars unless noted.
Business context
FCX is a global copper producer with operations in North America, South America and Indonesia, and also produces gold and molybdenum. Its key 2019 transition was completing the final phase of the Grasberg open pit while ramping up underground mines in Indonesia. FCX owns 48.76% of PT Freeport Indonesia (PT-FI), but its economic interest is expected to be about 81% through 2022 under existing arrangements; it expects that interest to fall to 48.76% from 2023.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $14.402 billion | $18.628 billion |
| Operating income | $1.091 billion | $4.754 billion |
| Operating margin | 7.6% | 25.5% |
| Net income (loss) attributable to common stockholders | $(239) million | $2.602 billion |
| Diluted EPS | $(0.17) | $1.78 |
| Operating cash flow | $1.482 billion | $3.863 billion |
| Capital expenditures | $2.652 billion | $1.971 billion |
| Cash and cash equivalents at year-end | $2.020 billion | $4.217 billion |
| Total debt at year-end | $9.826 billion | $11.141 billion |
- Revenue fell about 23%; operating income declined about 77%. Operating cash flow less capital expenditures was approximately negative $1.17 billion in 2019, compared with positive approximately $1.89 billion in 2018.
- Average realized copper price decreased to $2.73/lb from $2.91/lb. Copper sales were 3.292 billion lb, versus 3.811 billion lb; gold sales were 991,000 oz, versus 2.389 million oz. Molybdenum sales were 90 million lb, versus 94 million lb.
- Consolidated copper production was 3.247 billion lb, down from 3.813 billion lb. Indonesia production fell sharply during the open-pit-to-underground transition; Indonesia copper production was 607 million lb versus 1.160 billion lb, and gold production was 863,000 oz versus 2.416 million oz.
- Consolidated copper-mine unit net cash costs were $1.74/lb, up from $1.07/lb, principally reflecting lower Indonesia volumes and gold by-product credits. Site production and delivery costs were $2.15/lb versus $1.76/lb.
- Year-end current assets were $7.915 billion and current liabilities $3.209 billion. FCX had no borrowings under its revolving facility and approximately $3.5 billion available. Debt carried a 4.5% weighted-average interest rate.
- FCX declared dividends of $0.20 per share for 2019 and paid $291 million in common dividends.
Material changes and unusual items
- Lower Indonesia copper and gold volumes, lower copper prices, and lower cobalt and Atlantic Copper revenues drove the revenue decline. Higher gold prices partly offset these pressures.
- 2019 operating income included $417 million of gains on asset sales, primarily the Timok lower-zone interest and part of the cobalt business. FCX sold the Kokkola cobalt refinery and related precursor business in the fourth quarter.
- FCX recorded $179 million of metals inventory adjustments, compared with $4 million in 2018, including adjustments for molybdenum, cobalt and copper.
- PT-FI charges included a $155 million reserve related to disputed historical export duties and $294 million of charges associated with historical contested tax matters and related items. A $250 million payment was made in December 2019 under a proposed framework to resolve certain tax disputes; administrative steps remained to be completed.
- FCX issued $1.2 billion of senior notes in 2019 and used proceeds to redeem or repurchase other notes. Debt declined by approximately $1.3 billion on a net basis; a $26 million loss was recorded on early debt extinguishment.
Outlook, commentary and principal risks
- Management projected 2020 sales of 3.48 billion lb copper, 775,000 oz gold and 88 million lb molybdenum. Estimated 2020 operating cash flow was $2.4 billion, assuming copper at $2.85/lb, gold at $1,500/oz and molybdenum at $10/lb; projected capital expenditures were $2.8 billion, excluding the Indonesia smelter.
- Management expected 2021 sales to rise to approximately 4.3 billion lb copper and 1.4 million oz gold, mainly from Grasberg underground ramp-up. These are forecasts, not guarantees.
- The initial Lone Star leach project was about 75% complete at year-end, with first production expected in 2020 and eventual production averaging about 200 million lb copper annually after ramp-up. Project cost was estimated at approximately $850 million; $655 million had been incurred.
- PT-FI must construct a new Indonesia smelter by December 2023 to support mining-right extensions through 2041. The preliminary cost estimate was approximately $3 billion, with about $0.5 billion of 2020 spending expected; the project was expected to be financed by a PT-FI bank loan. Export licenses and quotas require Indonesian government approvals, and the relevant export licenses were due to expire in March 2020.
- Major risks include commodity-price volatility, underground ramp-up and geotechnical risk, permitting and smelter execution, Indonesian regulatory and political risk, labor negotiations, water rights and availability, environmental and tailings obligations, and unresolved tax and legal disputes. FCX recorded $1.6 billion of environmental obligations and $2.5 billion of asset retirement obligations; it also disclosed $1.7 billion of Indonesia and Peru uncertain tax positions not recorded as liabilities.
- FCX estimated 2020 environmental capital and other compliance costs of about $0.5 billion and ARO payments of about $0.3 billion. The filing also reported a proposed Louisiana coastal-erosion settlement with a maximum FCX-affiliate payment of $23.5 million, subject to execution and conditions.
Important facts for investors to verify
- Whether Grasberg underground mines achieve planned production rates and grades, and whether the projected 2021 sales recovery follows.
- Renewal of PT-FI and PT Smelting export-related licenses, progress and financing for the new smelter, and compliance with IUPK requirements.
- Actual 2020 commodity prices, sales volumes, unit costs, cash generation and capital spending versus management assumptions.
- Resolution and potential cash impact of PT-FI tax and export-duty disputes, Cerro Verde royalty and tax matters, and environmental and reclamation obligations.
- Whether water-right litigation, labor negotiations, civil unrest, severe weather or tailings-management requirements disrupt operations or increase costs.