Freeport-McMoRan Copper & Gold Inc. — Q3 2010 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2010. FCX operated copper, gold, molybdenum and cobalt mines across North America, South America, Indonesia and the Democratic Republic of Congo, as well as smelting and refining businesses. The interim financial statements were reviewed, not audited.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $5.152 billion | $4.144 billion | $13.379 billion | $10.430 billion |
| Operating income | $2.499 billion | $2.084 billion | $5.971 billion | $4.264 billion |
| Net income | $1.533 billion | $1.203 billion | $3.580 billion | $2.222 billion |
| Net income attributable to FCX common stockholders | $1.178 billion | $925 million | $2.724 billion | $1.556 billion |
| Diluted EPS | $2.49 | $2.07 | $5.88 | $3.70 |
Q3 operating margin was approximately 48.5%, versus 50.3% a year earlier. For the first nine months, operating cash flow was $4.218 billion, up from $2.850 billion; capital expenditures were $877 million, implying operating cash flow less capital expenditures of approximately $3.341 billion. Cash and cash equivalents were $3.720 billion at quarter-end, compared with $2.656 billion at December 31, 2009. Total debt, including current maturities, was approximately $4.779 billion, down from $6.346 billion. FCX reported $2.9 billion of net cash available after noncontrolling interests and withholding taxes, and approximately $1.5 billion of revolving credit availability.
Current assets were $9.078 billion and current liabilities $3.272 billion, a current ratio of approximately 2.8. The filing reports total assets of $27.951 billion and total equity of $13.721 billion at September 30, 2010.
Material changes versus the prior comparable periods
- Revenue increased 24% in Q3 and 28% for the first nine months, primarily on higher realized metal prices. Q3 realized prices were $3.50 per pound of copper versus $2.75, $1,266 per ounce of gold versus $987, and $16.06 per pound of molybdenum versus $13.95.
- FCX common-stockholder income and diluted EPS rose year over year. Results also reflected higher production and delivery costs: $2.269 billion in Q3 versus $1.715 billion, and $6.239 billion for nine months versus $5.086 billion.
- Nine-month copper sales were 2.955 billion pounds versus 3.122 billion; gold sales fell to 1.273 million ounces from 2.088 million, largely reflecting lower Grasberg ore grades and mine sequencing. Molybdenum sales rose to 50 million pounds from 42 million.
- Debt reduction lowered net interest expense. FCX recorded $77 million of nine-month losses on early debt extinguishments in 2010, versus $31 million in 2009. The 6¾% mandatory convertible preferred stock converted into approximately 39 million common shares during 2010, eliminating its future dividend requirement.
- FCX resumed and increased common dividends: $0.30 per share quarterly in 2010, after no common dividend in the first nine months of 2009. The Board later authorized an increase to $0.50 quarterly, expected to begin in February 2011.
Outlook, management commentary and risks
- Management forecast 2010 mine sales of approximately 3.85 billion pounds of copper, 1.9 million ounces of gold and 65 million pounds of molybdenum. Estimated 2010 copper unit net cash costs were approximately $0.83 per pound, versus $0.55 in 2009, assuming specified fourth-quarter metal prices and planned volumes.
- FCX estimated 2010 operating cash flow of approximately $6.0 billion, net of estimated $500 million in working-capital requirements and $2.8 billion in taxes. The estimate assumed fourth-quarter prices of $3.75 per pound copper, $1,300 per ounce gold and $15 per pound molybdenum. Management estimated a 35%–36% full-year effective tax rate on those assumptions.
- Management cited commodity-price volatility as a key earnings and cash-flow risk. Other sensitivities include Grasberg mine sequencing and grades, operating costs, production rates, political and regulatory conditions, labor, weather and security. FCX reported no material change in market risks during the nine months.
- Major development activity continued, including Grasberg underground projects, El Abra sulfide development, and construction at Climax and Safford. FCX also announced a Chino mine restart, with planned incremental copper production and capital spending extending into future years.
- In October, the DRC concluded its Tenke Fungurume contract review, confirming existing contracts were in good standing. Proposed commitments include reducing FCX’s effective interest from 57.75% to 56.0%, milestone payments, additional royalties and fees, and increased government participation in management.
- FCX had agreed to invest $500 million in McMoRan Exploration preferred stock, subject to closing conditions. In October, PT Freeport Indonesia also received an additional tax assessment related to 2005 audit exceptions; the company was reviewing it.
- Cerro Verde is contesting Peruvian royalty assessments of approximately $50 million and $40 million, plus potential interest; FCX accrued no amount for this contingency. A separate Newtown Creek matter was listed on the EPA National Priorities List in September 2010. FCX also disclosed continuing security concerns in Indonesia and 188 pending Mine Safety and Health Review Commission matters.
- Management stated that disclosure controls were effective and there had been no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether metal prices, mine volumes, grades and unit costs support the 2010 cash-flow and production forecasts.
- Progress and final terms of Tenke Fungurume contract amendments, including FCX’s ownership reduction and additional obligations.
- Closing, valuation and risks of the proposed $500 million McMoRan Exploration investment.
- Outcomes and potential financial exposure from the Cerro Verde royalty disputes, Indonesian tax assessment, Newtown Creek proceedings and other legal matters.
- Debt repayment plans, cash available to FCX after noncontrolling interests and restrictions, and the sustainability of the increased dividend.