Business context and reporting period
Freeport-McMoRan Inc. (FCX) filed this Form 10-K for the fiscal year ended December 31, 2015. The company operates copper, gold, molybdenum and cobalt mines across the Americas, Indonesia and the Democratic Republic of Congo, plus U.S. oil and gas assets. In response to weak commodity markets, FCX cut costs and capital spending, curtailed mining at selected sites and prioritized debt reduction. Results include major noncash impairment charges.
Key financial and operating metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $15.877 billion | $21.438 billion |
| Operating income (loss) | ($13.382 billion) | $97 million |
| Net income (loss) attributable to common stockholders | ($12.236 billion); ($11.31) per diluted share | ($1.308 billion); ($1.26) per diluted share |
| Operating cash flow | $3.220 billion | $5.631 billion |
| Capital expenditures | $6.353 billion | $7.215 billion |
| Cash and cash equivalents at year-end | $224 million | $464 million |
| Total debt at year-end | $20.428 billion | $18.849 billion |
- Revenue fell about 26%, mainly as realized prices declined: copper averaged $2.42/lb versus $3.09/lb, gold $1,129/oz versus $1,231/oz, and molybdenum $8.70/lb versus $12.74/lb. Oil and gas realized revenue was $43.54/BOE versus $71.83/BOE.
- The 2015 loss included $13.144 billion of oil and gas property impairments, $338 million of copper and molybdenum inventory write-downs and other charges. The filing also reports a $3.3 billion tax valuation allowance associated with the oil and gas impairments. These items materially affected reported earnings.
- Cash from operations declined about 43%. Capital spending exceeded operating cash flow by approximately $3.1 billion. Cash available to the parent, net of noncontrolling interests, withholding taxes and other costs, was $169 million.
- Consolidated copper production was 4.017 billion pounds, up from 3.904 billion; copper sales were 4.070 billion pounds. The company’s copper unit net cash cost was $1.53/lb versus $1.51/lb. Oil and gas sales were 52.6 MMBOE, down from 56.8 MMBOE; cash production costs were $18.59/BOE versus $20.08/BOE.
- At year-end, current assets were $7.462 billion and current liabilities were $4.307 billion. FCX reported $4.0 billion of availability under its revolving credit facility at December 31, 2015, before its subsequent amendment.
Material changes versus the prior period
- Lower commodity prices drove sharply lower revenue and operating cash flow, while the oil and gas business recorded substantially higher impairment charges than in 2014. The 2014 comparison also included a $1.7 billion goodwill impairment and gains from asset sales.
- FCX raised approximately $1.96 billion in gross proceeds through at-the-market share sales in 2015, issuing 206 million shares. The share count increased, and stockholders’ equity fell to $7.828 billion from $18.287 billion.
- The annual common dividend was reduced from $1.25 to $0.20 per share in March 2015 and suspended in December. FCX said suspension was expected to save about $1.6 billion annually.
- Mining curtailments reduced planned output, including suspension of mining at Miami and production at Sierrita, a 50% reduction in Tyrone mining rates, and a roughly 50% reduction in El Abra mining and stacking rates. Henderson molybdenum output plans were reduced approximately 65%.
- In February 2016, FCX agreed to sell a 13% interest in Morenci for $1.0 billion cash, subject to closing conditions; it expected the deal to close mid-2016 and use proceeds to repay borrowings.
Outlook, management commentary and principal risks
- For 2016, FCX projected copper sales of 5.130 billion pounds, gold sales of 1.835 million ounces, molybdenum sales of 73 million pounds and oil and gas sales of 57.6 MMBOE. Estimates assume renewal of PT-FI’s export permit after August 8, 2016, and exclude the effects of potential asset sales and continued 5% Indonesian export duties.
- Under stated price and operating assumptions, management estimated 2016 operating cash flow of $3.4 billion, net of $0.6 billion in idle drillship costs, and capital expenditures of approximately $3.4 billion. It forecast copper-mine unit net cash costs of $1.10/lb and oil and gas cash costs of about $15/BOE.
- FCX’s Board was reviewing strategic alternatives for FM O&G, including sales or joint ventures, and the company was evaluating additional mining-asset transactions. Management described its strategy as refocusing on copper and using asset proceeds to reduce debt.
- On February 26, 2016, FCX amended its term loan and revolver. The revolver commitment fell from $4.0 billion to $3.5 billion, while leverage and interest-coverage covenant terms were loosened. If asset-sale agreements totaling $3.0 billion were not entered into by June 30, 2016, and completed by December 31, 2016, the facilities could require collateral and guarantees. The amendments also restrict dividends through March 31, 2017.
- Key risks include further copper and oil price declines, additional oil and gas ceiling-test impairments, high debt and limited liquidity, and execution of planned asset sales. The filing identifies uncertainty around PT-FI’s long-term mining rights, export-permit renewals, smelter commitments and potential additional divestment in Indonesia. Water availability, environmental and reclamation obligations, tax disputes, labor actions, political/security conditions and mine or offshore operating incidents are also material risks.
- Environmental obligations were recorded at $1.2 billion and asset retirement obligations at $2.8 billion. FCX estimated financial-assurance obligations of approximately $2.6 billion; ratings downgrades could require additional or alternative assurance. The company also disclosed substantial disputed tax assessments, including a potential Cerro Verde royalty exposure estimated at approximately $500 million, which was not accrued.
Important facts for investors to verify
- Whether the Morenci sale and other asset transactions close on schedule, their net proceeds, and how much debt is repaid.
- FCX’s ability to meet amended credit-facility covenants and the $3.0 billion asset-sale milestones, and the availability and cost of required collateral if triggered.
- Actual commodity prices, operating cash flow, capital spending and production versus the 2016 assumptions and guidance.
- PT-FI export-permit renewals, export duties, smelter progress and definitive terms for operating beyond the 2021 Contract of Work term.
- Whether further oil and gas or mining impairments, tax valuation allowances, environmental costs or disputed assessments arise.
- The impact of share issuance and the dividend suspension on per-share value and future capital needs.