Freeport-McMoRan Copper & Gold Inc. — Q2 2012 Form 10-Q
Business context and reporting period. The company is a global copper, gold and molybdenum miner, with operations in the Americas, Indonesia and the Democratic Republic of Congo, plus copper smelting and refining. This unaudited quarterly filing covers the three and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. The interim financial statements received an independent accountant’s review, not an audit.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $4.475 billion | $5.814 billion | $9.080 billion | $11.523 billion |
| Operating income | $1.311 billion | $2.757 billion | $3.045 billion | $5.693 billion |
| Net income attributable to FCX common stockholders | $710 million | $1.368 billion | $1.474 billion | $2.867 billion |
| Diluted EPS | $0.74 | $1.43 | $1.55 | $3.00 |
Approximate operating margin was 29% in Q2 2012 versus 47% in Q2 2011, and 34% versus 49% for the six-month periods. The declines reflected lower copper and gold sales volumes and lower realized copper prices, along with higher unit production costs. Q2 realized copper price was $3.53 per pound versus $4.22; copper sales were 927 million pounds versus 1.002 billion. Gold sales were 266,000 ounces versus 356,000.
For the first six months, operating cash flow was $1.983 billion, down from $4.039 billion. Investing cash outflow was $1.551 billion, including $1.547 billion of capital expenditures; financing cash outflow was $746 million. Cash decreased by $314 million to $4.508 billion. At June 30, total debt was approximately $3.523 billion, with $3.519 billion long-term; current debt was $4 million. FCX reported $3.4 billion of net cash available to the company after noncontrolling interests’ share and withholding taxes and other deductions. Current assets were $10.176 billion and current liabilities $2.942 billion.
The company issued $3.0 billion of lower-coupon senior notes and redeemed $3.0 billion of 8.375% notes; the refinancing is expected to save approximately $160 million in annual interest. The redemption generated a $168 million pretax early-extinguishment loss in the first half. The annual common dividend was raised to $1.25 per share. First-half capital expenditures were higher than in 2011, primarily due to expansion projects.
Material changes and operating developments
- First-half revenue fell about 21%, operating income about 47%, and attributable net income about 49% year over year. Management attributed the revenue decline primarily to lower copper prices and lower copper and gold sales volumes.
- Indonesia’s Grasberg operations were recovering from work interruptions. Q2 milling averaged 179,500 metric tons per day, up from 114,800 in Q1, but below 220,000 in Q2 2011. Lower ore grades, production rates and delayed access to higher-grade ore reduced Indonesia sales.
- Consolidated copper production for Q2 was 887 million pounds versus 967 million; gold production was 251,000 ounces versus 351,000. Copper unit net cash costs rose to $1.49 per pound in Q2 from $0.93, reflecting lower sales volumes and reduced by-product credits.
- Climax began commercial molybdenum production in Q2. Atlantic Copper returned to operating income of $11 million in Q2, compared with a $46 million loss a year earlier.
Guidance, outlook, risks and contingencies
- For 2012, management forecast mine sales of approximately 3.6 billion pounds of copper, 1.1 million ounces of gold and 81 million pounds of molybdenum. Copper and gold estimates were reduced from the prior quarterly outlook, principally due to Indonesia mine sequencing and slower underground ramp-up, as well as revisions to El Abra production.
- Assuming second-half average prices of $3.50 per pound copper, $1,600 per ounce gold and $13 per pound molybdenum, management estimated 2012 operating cash flow of about $4.0 billion, net of an estimated $1.2 billion in working-capital uses and other tax payments. Estimated 2012 capital expenditures were approximately $4.0 billion; the company expected operating cash flow and available cash to cover budgeted capital spending, dividends and other cash needs.
- Management estimated 2012 copper-mine unit net cash costs of approximately $1.47 per pound, net of by-product credits, subject to its sales, cost and commodity-price assumptions. It expected 2013 costs to be lower, driven by projected higher Grasberg volumes. Commodity prices, production volumes, mine sequencing and costs make these estimates uncertain.
- Major investment plans include Grasberg underground development and expansions at Morenci, Cerro Verde and Tenke. These projects entail substantial capital commitments, permitting and execution risk. The filing reported approximately $4.0 billion of expected 2012 capital expenditures.
- Key risks include volatile metal prices; Indonesia operational, security and government-contract matters; labor and production disruptions; regulatory and political risks; weather, environmental and litigation exposures; and cybersecurity incidents. The filing reports 33 shooting incidents near Grasberg from July 2009 through April 2012, with 15 fatalities and 56 injuries; access restrictions could harm operations.
- FCX disclosed an Oklahoma lawsuit alleging legacy smelter waste was used in road and fill material; the case was at an early stage and the company could not estimate a possible loss. Indonesian tax assessments totaled $325 million, including interest, and were disputed; $158 million had been paid. Environmental revisions resulted in a $46 million net charge in the first half.
- A July 2012 Peruvian mining stability agreement raises Cerro Verde’s tax rate from 30% to 32% beginning in 2014; FCX expected approximately $50 million of additional deferred tax expense in Q3 2012. A previously recorded $240 million deferred tax liability could be partly or fully reversed depending on future reinvestment and expansion decisions.
Most important facts for investors to verify
- Whether Indonesia’s mine recovery and underground ramp-up meet the assumptions underlying revised 2012 sales guidance.
- Actual realized copper, gold and molybdenum prices, sales volumes, unit costs and operating cash flow versus management’s assumptions.
- Capital spending, timing, funding and expected returns for major development and expansion projects.
- Resolution and potential financial effects of the Indonesian tax disputes, Oklahoma litigation, environmental obligations and Indonesian government discussions.
- Whether liquidity available to FCX, dividend payments and any future share repurchases remain consistent with project funding needs and commodity-market conditions.