Freeport-McMoRan Inc. (FCX) — Q3 2013 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2013. FCX remained a major global copper and gold producer and, following its May–June acquisitions of Plains Exploration & Production (PXP) and McMoRan Exploration (MMR), added a substantial U.S. oil and gas business. The 2013 nine-month results include oil and gas operations only from June 1, so comparisons with 2012 are not fully like-for-like.
Financial results and liquidity
- Q3 revenue: $6.165 billion, up from $4.417 billion a year earlier. Operating income: $1.707 billion versus $1.411 billion; operating margin was about 27.7% versus 31.9%. Net income attributable to FCX common stockholders: $821 million versus $824 million; diluted EPS was $0.79 versus $0.86.
- Nine-month revenue: $15.036 billion versus $13.497 billion. Operating income was $3.701 billion versus $4.456 billion; net income attributable to common stockholders was $1.951 billion versus $2.298 billion; diluted EPS was $1.96 versus $2.41. The acquired oil and gas business contributed $1.5 billion of revenue and $338 million of operating income from June 1 through September 30.
- Commodity prices and volumes: Q3 copper sales rose to 1.041 billion pounds from 922 million, while realized copper price fell to $3.28/lb from $3.64. Gold sales increased to 305,000 ounces from 202,000, while realized price fell to $1,329/oz from $1,728. Molybdenum realized price fell to $11.21/lb from $13.62.
- Cash flow and investment: Nine-month operating cash flow was $3.743 billion versus $2.509 billion. Capital expenditures were $3.623 billion versus $2.518 billion; investing cash outflow was $9.088 billion, including acquisition spending. Cash declined $1.486 billion during the period to $2.219 billion.
- Debt and liquidity: Total debt was $21.123 billion, up from $3.527 billion at year-end 2012, largely reflecting acquisition financing and assumed PXP/MMR debt. Cash was $2.219 billion; the company reported approximately $1.3 billion of net cash available after noncontrolling interests, withholding taxes and other costs. Its $3.0 billion revolving facility was essentially undrawn, with $46 million of letters of credit. Current assets were $9.606 billion and current liabilities $4.498 billion.
- Margins and costs: Consolidated copper-mine site production and delivery cost averaged $1.85/lb in Q3 and $1.96/lb for nine months. Oil and gas Q3 cash operating margin was $64.13/BOE, based on $80.93/BOE realized revenue and $16.80/BOE cash production cost.
Material changes versus the prior period
- The PXP and MMR acquisitions transformed FCX into a combined mining and oil and gas company, adding acquired assets, goodwill, liabilities and operating results. They also substantially increased debt, depreciation and interest expense.
- Higher mining sales volumes and newly consolidated oil and gas revenue lifted reported revenue, but lower realized copper, gold and molybdenum prices weighed on mining results. Higher copper volumes and Q3 gold volumes in Indonesia partly offset weaker prices.
- Nine-month net income included a $128 million gain on the MMR investment and a $183 million acquisition-related net tax benefit, partly offset by $45 million of debt-extinguishment losses and $76 million of acquisition-related costs. Oil and gas derivative mark-to-market losses were $158 million in Q3 and $194 million for the four months consolidated.
Outlook, commentary and risks
- Management forecast 2013 sales of approximately 4.06 billion pounds of copper, 1.1 million ounces of gold, 92 million pounds of molybdenum and 37.5 million BOE of oil and gas (the latter for June–December). Estimated 2013 operating cash flow was about $6 billion, assuming specified commodity prices and operating estimates.
- FCX projected 2013 capital expenditures of about $5.5 billion and targeted reducing total debt to $12 billion over three years. Management said it was pursuing $1.9 billion of targeted cost and capital reductions for 2013–2014 and considering asset sales, joint ventures and spending changes. The current annual common dividend rate was $1.25 per share; future dividends remain at the Board’s discretion.
- Major projects include the Morenci expansion, targeted for completion in the first half of 2014, and the Cerro Verde expansion, now estimated at $4.6 billion with expected incremental production beginning in 2016. Grasberg underground development and oil and gas drilling also require significant investment.
- Key exposures include volatile metal and oil prices; acquired oil and gas hedges, which generated material unrealized losses and may limit participation in price increases; reserve and impairment-estimation uncertainty; integration of PXP/MMR; operational, regulatory, environmental and political risks; and potential cost overruns.
- Contingencies: Cerro Verde disputed Peruvian royalty assessments; a $176 million demand covering 2006–2008 periods was served after quarter-end, and a further $72 million assessment for 2009 was disclosed. No amount was accrued because FCX believes its stability agreement provides an exemption. Potential later-year assessments could be similar in aggregate to the disclosed assessments. FCX also described disputed Indonesian tax matters and ongoing shareholder litigation. The company stated it did not believe disclosed proceedings would materially affect financial condition, though individual outcomes could affect a period’s results.
Important facts for investors to verify
- Whether cash generation, planned spending reductions, asset actions and dividends can support the stated three-year debt-reduction target.
- How much reported growth and earnings reflect acquired oil and gas operations versus changes in mining volumes, prices and costs; review comparable pro forma results and integration progress.
- The performance and valuation effects of oil and gas derivatives, including hedge maturities, premiums and potential limits on upside.
- Progress, remaining costs and timing for Morenci, Cerro Verde and Grasberg projects, alongside the company’s revised capital-spending plans.
- Developments in the Cerro Verde royalty dispute and Indonesian tax assessments, and any changes to acquisition purchase-price allocations, reserves or impairment assessments.