FREEPORT-MCMORAN INC quarterly report, Q2 FY2014

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Freeport-McMoRan Inc. — Q2 2014 Form 10-Q

Business context and reporting period

Quarter ended June 30, 2014; filed August 8, 2014. Freeport-McMoRan operates global copper, gold, molybdenum and U.S. oil-and-gas businesses. The company changed its name from Freeport-McMoRan Copper & Gold Inc. effective July 14, 2014.

Comparisons with 2013 are affected by the oil-and-gas acquisitions: 2014 includes six months of those operations, while 2013 includes them beginning June 1. Indonesia’s export restrictions also constrained 2014 mining output; Q2 2013 had been affected by a temporary PT-FI production suspension.

Financial and operating performance

  • Revenue: Q2 revenue was $5.522 billion, up from $4.288 billion; first-half revenue was $10.507 billion, up from $8.871 billion. For context, pro forma Q2 2013 revenue including the acquired oil-and-gas businesses was $5.330 billion.
  • Profit: Q2 operating income was $1.153 billion versus $639 million; net income attributable to FCX common stockholders was $482 million in both periods. Diluted EPS declined to $0.46 from $0.49. First-half operating income was $2.264 billion versus $1.994 billion; attributable net income was $992 million versus $1.130 billion, and diluted EPS was $0.95 versus $1.17.
  • Margins and costs: Q2 operating margin was approximately 20.9% (versus 14.9%); first-half operating margin was approximately 21.5% (versus 22.5%). Copper-mine unit net cash costs averaged $1.72/lb in Q2 and $1.64/lb for the first half, compared with $1.85/lb and $1.71/lb, respectively. These are non-GAAP measures.
  • Cash flow and investment: First-half operating cash flow was $2.587 billion, up from $1.865 billion; Q2 operating cash flow was $1.386 billion. First-half capital expenditures were $3.562 billion versus $1.978 billion, implying a negative operating-cash-flow-less-capex measure of about $975 million. Cash and equivalents fell to $1.458 billion from $1.985 billion at year-end.
  • Debt and liquidity: Total debt was $20.296 billion at June 30, down from $20.706 billion at December 31; cash-adjusted debt was approximately $18.8 billion. Current liabilities were $7.558 billion and current assets $10.254 billion. The amended $4.0 billion revolving facility had no borrowings and $46 million of letters of credit outstanding; reported availability was approximately $4.0 billion.
  • Other metrics: Q2 copper sales were 968 million pounds and gold sales 159,000 ounces; first-half copper and gold sales were 1.839 billion pounds and 346,000 ounces. First-half oil-and-gas sales were 32.2 million BOE. The quarterly common dividend declared was $0.3125 per share.

Material changes versus the prior comparable period

  • Revenue growth largely reflects a full six months of oil-and-gas results in 2014 versus only June 2013 in the reported comparison. On a pro forma basis, Q2 2013 operating income was $1.330 billion, above reported Q2 2014 operating income of $1.153 billion.
  • Indonesia export restrictions deferred approximately 150 million pounds of copper and 240,000 ounces of gold in Q2, and 275 million pounds of copper and 380,000 ounces of gold in the first half. PT-FI ran at about half of normal milling rates, with $56 million of fixed costs charged to Q2 cost of sales.
  • Higher oil-and-gas depreciation and depletion contributed to consolidated DD&A rising to $1.013 billion in Q2 from $530 million and to $1.979 billion in the first half from $859 million. First-half interest expense, excluding capitalized interest, rose to $449 million from $242 million.
  • Net charges for environmental obligations and shutdown costs were $76 million in Q2 and $82 million in the first half, including $69 million of environmental-obligation and litigation-reserve charges.
  • FCX sold Eagle Ford assets for $3.1 billion before closing adjustments and acquired additional Deepwater Gulf of Mexico interests for $919 million. The Eagle Ford sale was generally recorded as a reduction of capitalized oil-and-gas property costs, not a gain; it generated a $58 million deferred-tax charge.

Outlook, commentary, risks and contingencies

  • 2014 outlook: Projected sales were 4.075 billion pounds of copper, 1.340 million ounces of gold, 98 million pounds of molybdenum and 58.4 million BOE. Q3 sales were expected to approximate 1.1 billion pounds of copper, 445,000 ounces of gold, 23 million pounds of molybdenum and 12.2 million BOE.
  • Management forecast 2014 copper-mine unit net cash costs of $1.54/lb, oil-and-gas cash production costs of $20/BOE, operating cash flow of approximately $6.7 billion (including $700 million of working-capital uses and other tax-payment changes), capital expenditures of approximately $7.6 billion, and an effective tax rate of approximately 34%. Cash-flow estimates assumed specified second-half commodity prices, including copper at $3.25/lb and Brent crude at $110/barrel.
  • Management targeted significant debt reduction by the end of 2016 using cash flow after capital expenditures and other cash needs, and potentially asset-sale proceeds. The board retains discretion over dividends.
  • On July 25, PT-FI and Indonesia signed an MOU to negotiate an amended Contract of Work within six months. Concentrate exports resumed in August. The MOU includes higher royalties, a $115 million smelter-assurance bond and export duties; negotiations also address future operating rights, smelter development and possible divestment of up to an additional 20.64% interest in PT-FI. Final terms and post-2021 operating rights remain uncertain and could affect costs, investment and production.
  • On July 23, after quarter-end, FCX redeemed notes with $1.7 billion aggregate principal and $1.8 billion book value, funded with cash and approximately $950 million of revolver and uncommitted-line borrowings. FCX expected to record a $58 million gain in Q3.
  • Oil-and-gas property ceiling-test headroom was approximately 1% at June 30. Lower oil-and-gas prices, reserve revisions, or costs transferred into the amortization pool without sufficient reserve value could trigger impairment; goodwill of $1.7 billion is also assigned to the U.S. oil-and-gas reporting unit.
  • Other risks include commodity-price volatility, ongoing Indonesia tax assessments and disputes, and environmental and legal matters. Management reported no significant updates to previously disclosed legal proceedings; it did not identify a material change in contingencies in the quarter.

Important facts for investors to verify

  • Whether Indonesia’s amended Contract of Work negotiations, export permits, new royalties and export duties preserve PT-FI’s long-term rights and planned underground investment.
  • Whether the stated 2014 sales, unit-cost, operating-cash-flow and capital-spending outlook remains achievable, given commodity prices and operating conditions.
  • How debt reduction, the July note redemption and future capital expenditures affect leverage, liquidity and the 2016 deleveraging target.
  • Whether the narrow oil-and-gas ceiling-test cushion leads to impairment as reserves are assessed and commodity prices change.
  • The effect of provisional copper pricing, deferred Indonesia sales, environmental charges and working-capital movements on reported earnings and cash generation.