Business context and reporting period
Freeport-McMoRan Copper & Gold Inc. (FCX) filed this Form 10-K for the fiscal year ended December 31, 2011. The company is a diversified copper, gold and molybdenum miner, with operations in North and South America, Indonesia and the Democratic Republic of Congo (DRC), as well as smelting and refining operations. The filing also provides unaudited quarterly results, including fourth-quarter 2011.
Financial and operating highlights
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $20.880 billion | $18.982 billion |
| Operating income | $9.140 billion | $9.068 billion |
| Net income attributable to FCX common stockholders | $4.560 billion | $4.273 billion |
| Diluted earnings per share | $4.78 | $4.57 |
| Cash from operating activities | $6.620 billion | $6.273 billion |
| Capital expenditures | $2.535 billion | $1.412 billion |
| Cash and cash equivalents at year-end | $4.822 billion | $3.738 billion |
| Total debt at year-end | $3.537 billion | $4.755 billion |
| Current assets / current liabilities | $10.047 billion / $2.940 billion | $9.851 billion / $3.763 billion |
Revenue increased about 10%, while operating income rose less than 1%; operating margin was approximately 43.8% versus 47.8% in 2010. Net income attributable to FCX common stockholders was approximately 21.8% of revenue, compared with 22.5%. Operating cash flow less capital expenditures was approximately $4.085 billion in 2011 and $4.404 billion in 2010; this is a simple calculation, not a company-reported free-cash-flow measure. Cash exceeded reported debt at year-end, though some cash was attributable to noncontrolling interests or subject to other limitations. The $1.5 billion revolving credit facility was undrawn, with $44 million of letters of credit outstanding.
Annual production was 3.691 billion pounds of copper, 1.383 million ounces of gold and 83 million pounds of molybdenum. Realized prices were $3.86 per pound of copper, $1,583 per ounce of gold and $16.98 per pound of molybdenum. Copper unit net cash costs, net of by-product credits, were $1.01 per pound, versus $0.79 in 2010. The filing reports energy at approximately 21% of 2011 consolidated copper production costs.
Fourth-quarter 2011 revenue was $4.162 billion, operating income $1.297 billion, net income attributable to FCX common stockholders $640 million, and diluted EPS $0.67. In fourth-quarter 2010, the corresponding figures were $5.603 billion, $3.097 billion, $1.549 billion and $1.63.
Material changes versus the prior comparable period
- Higher realized copper and gold prices supported revenue growth, but copper sales declined to 3.698 billion pounds from 3.896 billion and gold sales to 1.378 million ounces from 1.863 million. Molybdenum sales increased to 79 million pounds from 67 million.
- Indonesia labor disruptions and damage to concentrate and fuel pipelines reduced 2011 sales by an estimated 235 million pounds of copper and 275,000 ounces of gold. Production and sales volumes were also affected by mine sequencing.
- Production and delivery costs increased to $9.898 billion from $8.335 billion, reflecting increased activity, higher input costs and more expensive purchases. Exploration and research expense increased to $271 million from $143 million.
- Cash from operations increased, but higher capital spending and dividends contributed to financing cash outflows. FCX repaid $1.2 billion of debt during 2011 and paid $1.4 billion in common dividends, including supplemental dividends.
Outlook, commentary, risks and contingencies
Management described the long-term outlook as positive, citing copper’s economic role, supply constraints and development opportunities. For 2012, FCX projected copper sales of 3.815 billion pounds, gold sales of 1.235 million ounces and molybdenum sales of 80 million pounds. The Indonesia projections—930 million pounds of copper and 1.1 million ounces of gold—were under review following further work interruptions and a temporary suspension of operations announced in February 2012.
Assuming average 2012 prices of $3.50 per pound for copper, $1,600 per ounce for gold and $13 per pound for molybdenum, and achievement of planned volumes and costs, management estimated operating cash flow of approximately $4.7 billion, including an estimated $0.8 billion working-capital requirement and $2.1 billion of taxes. It forecast consolidated copper unit net cash costs of about $1.38 per pound and capital expenditures of approximately $4.0 billion. These are assumptions-based projections, not guarantees. The Board increased the annualized common dividend to $1.25 per share in February 2012.
Major growth plans included a roughly $4 billion Cerro Verde concentrator expansion targeting additional annual output of about 600 million pounds of copper from 2016; a roughly $850 million Tenke expansion targeting about 150 million additional pounds annually by 2013; and extensive Grasberg underground development. Actual project costs and timing may differ materially. Climax was expected to begin molybdenum production in 2012.
- Indonesia: Labor unrest, violence, pipeline damage and security incidents threaten operations and the 2012 outlook. The company reported 32 shooting incidents near Grasberg between July 2009 and February 2012, resulting in 15 fatalities and 56 injuries. The Contract of Work’s initial term expires in 2021; extensions are subject to government approval, amid regulatory review and proposed domestic-processing rules.
- Other operating and regulatory risks: Water availability and contested water rights, energy and labor costs, weather and seismic events, permitting, ore grades, mine development execution and political conditions in Indonesia and the DRC could affect production, costs and expansion plans.
- Environmental and closure obligations: Recorded environmental obligations were $1.453 billion and asset retirement obligations were $921 million at year-end. Environmental capital and other environmental costs were $387 million in 2011; approximately $636 million was forecast for 2012. New Chilean closure requirements and possible changes to financial-assurance rules could increase obligations.
- Contingencies: Cerro Verde disputed Peruvian royalty assessments totaling $190 million, including interest and penalties. PT Freeport Indonesia disputed Indonesian tax assessments and had paid $109 million, recorded as a long-term receivable. A potential Indonesian VAT claim was described as significant, but no formal assessment had been received.
- Financing and unusual items: February 2012 senior-note issuance of $3.0 billion was intended to fund redemption of the remaining $3.0 billion of 8.375% notes; FCX expected a $168 million early-extinguishment loss. The 2011 results included $116 million of labor-agreement and employee costs, $68 million of debt-extinguishment losses, and $53 million of additional Peru mining-tax expense.
Management and Ernst & Young reported effective internal control over financial reporting as of December 31, 2011; the financial-statement audit opinion was unqualified.
Most important facts an investor should verify
- Whether Grasberg operations resumed sustainably and whether Indonesia’s projected sales, costs and cash flows were revised after the February 2012 suspension and labor disruptions.
- Actual 2012 metal prices, sales volumes, unit costs, working-capital needs, tax payments and operating cash flow versus management’s assumptions.
- Progress, funding, permitting, water supply, capital costs and schedules for the Cerro Verde, Tenke and Grasberg projects.
- Developments in Indonesia’s Contract of Work review, export and domestic-processing rules, and extension prospects beyond 2021.
- Outcomes and potential cash impact of the Peru royalty dispute, Indonesian tax and VAT matters, environmental claims, reclamation requirements and financial-assurance obligations.
- Whether dividend payments and planned capital investment remain supportable after debt refinancing and actual cash generation.