Freeport-McMoRan Copper & Gold Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Financial statements are unaudited and were reviewed, not audited, by Ernst & Young. The company operates copper, gold and molybdenum mines in North and South America, Indonesia and Africa, as well as smelting and refining businesses.
Financial performance and position
Amounts are in U.S. dollars; income and cash-flow figures below are in millions unless stated otherwise.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $5,195 | $5,152 | $16,718 | $13,379 |
| Operating income | $2,150 | $2,499 | $7,843 | $5,971 |
| Net income | $1,294 | $1,533 | $4,881 | $3,580 |
| Net income attributable to FCX common stockholders | $1,053 | $1,178 | $3,920 | $2,724 |
| Diluted EPS | $1.10 | $1.24 | $4.10 | $2.94 |
| Operating margin | 41.4% | 48.5% | 46.9% | 44.6% |
- Q3 revenue was nearly flat year over year, but operating income and FCX-attributable earnings declined. Nine-month revenue increased 25%, and attributable earnings increased 44%.
- Higher realized copper and gold prices supported nine-month results; lower copper and gold sales volumes, higher production costs and unfavorable provisional-price adjustments weighed on Q3. Q3 provisional-price adjustments reduced revenue by $368 million.
- Average realized copper and gold prices were $3.60 per pound and $1,693 per ounce in Q3, respectively, versus $3.50 and $1,266 a year earlier. Q3 copper sales were 947 million pounds versus 1,081 million; gold sales were 409,000 ounces versus 497,000.
- Q3 production and delivery costs were $2,570 million, up from $2,266 million. Consolidated copper site production and delivery costs rose to $1.71 per pound from $1.38; unit net cash costs were $0.80 versus $0.82 per pound.
- Operating cash flow for the first nine months was $5,874 million, compared with $4,218 million. Investing cash outflow was $1,725 million, including $1,749 million of segment capital expenditures; financing cash outflow was $2,759 million. Cash increased $1,390 million to $5,128 million.
- At September 30, cash was $5,128 million and total debt was approximately $3,535 million, leaving roughly $1,593 million of cash in excess of debt. The company reported approximately $4.2 billion of net cash available to FCX after noncontrolling interests and withholding taxes. Current assets were $10,708 million and current liabilities $3,181 million.
- Dividends paid on common stock totaled $1,186 million in the first nine months. The regular quarterly dividend was $0.25 per share. FCX reported no significant debt maturities through 2016 and about $1.5 billion available under its revolving credit facility.
Material changes versus the prior comparable period
- For the first nine months, higher copper and gold price realizations increased revenue, while lower copper and gold sales volumes partly offset the gain. Molybdenum sales volumes also increased.
- Q3 operating income declined despite slightly higher revenue, reflecting lower volumes, higher input costs and $368 million of unfavorable provisional-price adjustments. Nine-month operating income rose 31%.
- Nine-month capital expenditures increased to $1,749 million from $877 million, primarily for Grasberg underground development, the Climax molybdenum project and mine restarts and expansions.
- Total debt declined from $4,755 million at December 31, 2010 to $3,535 million at September 30, 2011. FCX redeemed $1.1 billion of 8.25% notes in April and recorded $68 million of nine-month losses on early debt extinguishment.
- Environmental obligations and shutdown costs were $98 million for the first nine months, versus $5 million a year earlier; the filing attributes the increase mainly to updated environmental estimates and shutdown-cost accrual adjustments.
Outlook, commentary and key risks
- Management described the near-term economic outlook as uncertain, citing copper-price declines, but viewed long-term copper fundamentals positively because of supply constraints and demand. Commodity prices, volumes and costs remain major determinants of results.
- At the October 19, 2011 outlook date, FCX projected 2011 mine sales of approximately 3.8 billion pounds of copper, 1.6 million ounces of gold and 78 million pounds of molybdenum. It estimated 2011 copper-mine unit net cash costs of about $0.95 per pound and operating cash flow of about $7 billion, assuming specified Q4 metal prices and operating plans.
- Those production and cash-flow estimates were exposed to significant uncertainty: the Indonesia labor strike was ongoing, the union had indicated it intended to extend it through December 15, and milling was suspended from October 22 while damaged concentrate pipelines awaited repair. October throughput was below the outlook assumption. FCX said it would update Q4 estimates after access and repairs were restored.
- FCX estimated the strike’s 2011 impact at about 100 million pounds of copper and 100,000 ounces of gold, subject to operating rates and timing of a return to normal operations. PT Freeport Indonesia declared force majeure on certain concentrate sales contracts.
- Other operating and political risks include security incidents around Grasberg: October 2011 shootings resulted in six fatalities and several injuries. The company warned that prolonged access restrictions could adversely affect operations. Cerro Verde also experienced labor actions, though production was not materially affected.
- Contingencies include approximately $184 million of Peruvian mining-royalty assessments, interest and penalties at Cerro Verde, which the company is contesting; Indonesian tax assessments for 2005 and 2006; and a potential Indonesian VAT dispute for which no assessment had been received. The filing does not provide a clear quantified estimate for the potential VAT exposure.
- Peru’s new mining tax and royalty regime resulted in $57 million of additional current and deferred tax expense at Cerro Verde in Q3 ($50 million net of noncontrolling interests). FCX estimated a 36% consolidated effective tax rate for 2011 under its stated assumptions.
- FCX recorded a $31 million net Q3 charge from revisions to environmental obligations. Development projects carry execution, cost and timing risks; for example, Grasberg underground-project spending was expected to average $635 million annually over five years, with actual costs potentially differing materially.
Important facts for investors to verify
- Whether the Indonesia strike ended, pipeline repairs and road access were restored, and Q4 production, sales and cash-flow estimates were revised accordingly.
- Actual copper, gold and molybdenum prices, sales volumes, production costs and provisional-price settlements, including the 406 million pounds of provisionally priced copper sales outstanding at quarter-end.
- Whether the company achieved its 2011 operating cash-flow, capital-expenditure and unit-cost outlook, and how much cash was practically available after subsidiary needs and noncontrolling interests.
- Progress and final outcomes in Cerro Verde’s royalty dispute and Indonesian tax/VAT matters, plus any changes in environmental and reclamation obligations.
- Capital spending, schedules and expected returns for major growth projects, particularly Grasberg underground development, Cerro Verde expansion, El Abra sulfide and Climax.
- Whether labor unrest, security events, commodity-price volatility or other international risks materially affected subsequent operations or the company’s dividend and debt plans.