Business context and reporting period
Freeport-McMoRan Inc. (FCX) filed this Form 10-K for the fiscal year ended December 31, 2014. FCX operates copper, gold, molybdenum and cobalt mines across the Americas, Indonesia and Africa, as well as U.S. oil and gas assets. Comparisons with 2013 are affected by the inclusion of oil and gas results for a full year in 2014 versus only seven months in 2013.
Financial and operating performance
- Revenue: $21.44 billion, up from $20.92 billion in 2013. Copper represented 60% of 2014 revenue, oil 20%, gold 7% and molybdenum 6%.
- Profit and margins: Operating income was $97 million, versus $5.35 billion in 2013; operating margin was approximately 0.5%, compared with approximately 25.6%. Net loss attributable to FCX common stockholders was $1.31 billion, or $1.26 per diluted share, versus income of $2.66 billion, or $2.64 per diluted share, in 2013.
- Cash flow and investment: Operating cash flow was $5.63 billion, down from $6.14 billion. Capital expenditures were $7.22 billion, yielding approximately $1.58 billion of negative operating cash flow less capital expenditures.
- Liquidity and debt: Year-end cash was $464 million, compared with $1.99 billion in 2013. Total debt was $18.97 billion, down from $20.71 billion. FCX reported no borrowings on its $4.0 billion revolving facility at year-end, with $45 million of letters of credit outstanding; $474 million was drawn on short-term lines and $425 million on Cerro Verde’s facility.
- Production and realizations: Copper production was 3.90 billion pounds, down from 4.13 billion; average realized copper price fell to $3.09 per pound from $3.30. Gold sales were 1.25 million ounces at $1,231 per ounce, while molybdenum sales were 95 million pounds at $12.74 per pound.
- Quarterly result: Fourth-quarter revenue was $5.24 billion; operating loss was $3.30 billion and net loss attributable to common stockholders was $2.85 billion, or $2.75 per share.
Material changes versus the prior comparable period
- Oil and gas price declines drove $5.45 billion of non-cash impairment charges: $3.74 billion on oil and gas properties and $1.72 billion to write off all goodwill. The impairment was the principal reason operating income and earnings fell sharply.
- FCX sold its Eagle Ford assets for $3.1 billion and its 80% interests in Candelaria/Ojos del Salado for $1.8 billion. It also acquired additional Deepwater Gulf of Mexico interests for approximately $1.4 billion. The Candelaria/Ojos sale generated a $717 million gain.
- Copper price declines and lower copper volumes—particularly in Indonesia and South America—offset higher North American copper output and the addition of a full year of oil and gas revenue. Oil and gas revenue also included a $627 million non-cash mark-to-market derivative gain.
- FCX reduced debt by approximately $1.74 billion year over year, while cash fell by approximately $1.52 billion. Interest expense, excluding capitalized interest, rose to $866 million from $692 million, primarily reflecting acquisition-related debt.
Outlook, commentary and risks
- 2015 outlook: FCX projected sales of 4.27 billion pounds of copper, 1.285 million ounces of gold, 95 million pounds of molybdenum and 55.5 million BOE of oil and gas. Estimated copper unit net cash costs were $1.53 per pound, assuming gold at $1,300 per ounce and molybdenum at $9 per pound; oil and gas cash production costs were expected to be about $18 per BOE.
- Management estimated 2015 operating cash flow of approximately $4 billion, assuming copper at $2.60 per pound, gold at $1,300 per ounce, molybdenum at $9 per pound and Brent crude at $50 per barrel. Planned 2015 capital expenditures were approximately $6.0 billion. FCX said it had cut budgeted capital expenditures, exploration and other costs by a total of $2 billion and was seeking third-party funding for a substantial portion of oil and gas spending.
- The Board was reviewing the regular $1.25 annual common dividend and could reduce or suspend it. FCX stated that future dividends remain at the Board’s discretion.
- Growth projects include the Morenci mill expansion, expected to lift mine output to more than 900 million pounds of copper annually over five years, and the Cerro Verde expansion, expected to add about 600 million pounds of annual copper production beginning in 2016. Grasberg underground development is central to replacing open-pit production.
- Indonesia: Export restrictions curtailed PT-FI to about half capacity from mid-January through July 2014; exports resumed in August under a memorandum of understanding extended through July 25, 2015. The amended Contract of Work remains under negotiation. Key issues include export permits, higher royalties and export duties, domestic smelter commitments, possible divestment of an additional 20.64% of PT-FI and operating rights after 2021.
- Other material risks: Commodity-price volatility; high leverage and capital requirements; labor disruption; security and political risks in Indonesia and the DRC; water-rights disputes affecting U.S. and South American mines; environmental, reclamation and operational exposures; and possible further oil and gas impairments. Environmental obligations were recorded at $1.2 billion and asset retirement obligations at $2.8 billion at year-end.
- FCX disclosed disputed tax assessments in Peru and Indonesia and stated that no amounts had been accrued for certain contested assessments. A proposed settlement of shareholder derivative litigation would provide $115 million from insurers, subject to court approval, and require a special dividend funded from net settlement proceeds plus $22.5 million from FCX.
Important facts for investors to verify
- Whether the 2015 operating cash flow assumptions, commodity prices and production forecasts were achieved, and how lower realized prices affect liquidity and debt reduction.
- Progress on the Indonesian Contract of Work, export-license renewal, smelter requirements, royalties, divestment and post-2021 operating rights.
- Execution, remaining costs and production ramp-up for the Morenci, Cerro Verde and Grasberg projects.
- Oil and gas impairment exposure under lower oil prices, including the impact of the SEC full-cost ceiling test and the value and settlement of derivative contracts.
- Capital spending, third-party funding, debt amendments and the Board’s decision on the dividend.
- Developments in contested tax matters, environmental and reclamation liabilities, water-rights proceedings and the proposed shareholder-litigation settlement.
The filing reports unqualified audit opinions on the consolidated financial statements and internal control over financial reporting; management also concluded that internal controls were effective as of December 31, 2014.