Freeport-McMoRan Copper & Gold Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports fourth-quarter results; all per-share figures reflect the February 2011 two-for-one stock split.
Business context and results
FCX is a global copper, gold and molybdenum miner, with operations in North and South America, Indonesia and the Democratic Republic of Congo (DRC). Copper was 78% of 2010 mining revenue; Grasberg in Indonesia accounted for 95% of gold production.
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Revenue | $18.982 billion | $15.040 billion |
| Operating income | $9.068 billion | $6.503 billion |
| Net income attributable to FCX common stockholders | $4.273 billion | $2.527 billion |
| Diluted EPS | $4.57 | $2.93 |
| Operating cash flow | $6.273 billion | $4.397 billion |
| Capital expenditures | $1.412 billion | $1.587 billion |
| Cash and cash equivalents at year-end | $3.738 billion | $2.656 billion |
| Total debt at year-end | $4.755 billion | $6.346 billion |
Revenue rose 26% and attributable net income rose 69%, mainly on stronger realized metal prices, partly offset by lower copper and gold sales volumes. Average realized prices increased to $3.59/lb for copper, $1,271/oz for gold and $16.47/lb for molybdenum. Copper sales were 3.896 billion lb, down from 4.111 billion; gold sales were 1.863 million oz, down from 2.639 million; molybdenum sales were 67 million lb, up from 58 million.
Operating margin was approximately 47.8% versus 43.2% in 2009; net income attributable to FCX common stockholders was approximately 22.5% of revenue versus 16.8%. Operating cash flow less reported capital expenditures was approximately $4.9 billion. At year-end, current assets were $9.851 billion and current liabilities $3.763 billion (current ratio approximately 2.6). FCX reported $3.1 billion of net cash available to FCX after noncontrolling interests and withholding taxes/other deductions.
Fourth-quarter 2010 revenue was $5.603 billion, operating income $3.097 billion, net income attributable to common stockholders $1.549 billion and diluted EPS $1.63, versus $4.610 billion, $2.239 billion, $971 million and $1.08, respectively, in fourth-quarter 2009.
Material changes and notable items
- Debt declined by about $1.6 billion during 2010; FCX had repaid approximately $2.6 billion since January 1, 2009. It redeemed $1.0 billion of floating-rate notes and repurchased $565 million of senior notes in the market.
- Production and delivery costs rose to $8.354 billion from $7.016 billion, reflecting higher input costs, mining activity and concentrate-purchase costs. Consolidated copper unit net cash costs increased to $0.79/lb from $0.55/lb.
- FCX restarted the Morenci mill, initiated Miami and Chino restarts, completed an expansion of Cerro Verde concentrator throughput, and began Big Gossan production. Tenke Fungurume copper production increased as the mine moved into a full year of operations.
- FCX invested $500 million in McMoRan Exploration convertible preferred stock. Its 2010 common dividends paid totaled $885 million, including a supplemental $0.50/share dividend; the regular annualized dividend rate reached $1.00/share in October.
- No 2010 impairment or lower-of-cost-or-market inventory charge was reported. The filing cites 2008 impairments of $16.9 billion, including goodwill, as historical context. In fourth-quarter 2010, revised El Abra recovery estimates reduced reported leach-stockpile copper by 163 million lb.
Outlook, risks and contingencies
For 2011, FCX projected sales of approximately 3.85 billion lb copper, 1.4 million oz gold and 70 million lb molybdenum. Lower Indonesian volumes from lower Grasberg grades were expected to be partly offset by increased North American output, particularly at Morenci.
At assumed average prices of $4.25/lb copper, $1,350/oz gold and $15/lb molybdenum, management estimated 2011 operating cash flow of approximately $8 billion, net of about $100 million of working-capital needs and $3.5 billion of taxes; projected capital expenditures were approximately $2.5 billion. Estimated consolidated copper unit net cash cost was $1.10/lb, assuming the stated gold and molybdenum prices. These estimates depend on prices, volumes, costs and operating conditions. Management described the long-term outlook positively but emphasized commodity-price volatility.
- Major risks include metal-price swings, mine sequencing and operating performance, higher energy and other input costs, water availability and contested water rights, environmental requirements and remediation, and development-project execution.
- Geopolitical, contract and security risks remain significant in Indonesia and the DRC. FCX’s Indonesian Contract of Work has an initial term through 2021, with two extensions subject to government approval. DRC contract amendments were signed but still pending a Presidential Decree; FCX’s effective Tenke interest was expected to decline from 57.75% to 56.0% upon required approvals.
- Environmental obligations recorded at year-end were $1.422 billion; asset-retirement obligations were $856 million. FCX estimated undiscounted environmental obligations of $1.9–$3.3 billion and expected 2011 environmental spending of about $460 million.
- Contingencies include Indonesian tax assessments of approximately $106 million plus $52 million interest, and Peruvian mining-royalty assessments with interest of approximately $57 million and $61 million for the respective periods. FCX disputes these claims; no accrual was recorded for the Cerro Verde royalty contingency. Other matters include Newtown Creek and Gilt Edge environmental proceedings and Blackwell, Oklahoma litigation; some potential losses could not be estimated.
- FCX announced after year-end its intent to redeem the remaining $1.1 billion of 8.25% Senior Notes in April 2011, expecting an approximately $56 million extinguishment loss. Debt covenants, ratings and the ability to access subsidiary cash may constrain financial flexibility and distributions.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether 2011 sales volumes, unit costs, operating cash flow and capital-spending projections were achieved, and how sensitive results were to realized commodity prices.
- Progress, cost and schedule for Grasberg underground development, El Abra sulfide, Climax and other growth projects.
- Debt repayment and redemption execution, available liquidity, dividend sustainability and compliance with debt covenants.
- Resolution and financial exposure from Indonesian and Peruvian tax and royalty disputes, DRC contract approvals, and environmental and water-rights proceedings.
- Reliability of reserve and stockpile recovery estimates, including the El Abra revision, and the effect of assumptions on future depreciation and asset values.