Freeport-McMoRan Copper & Gold Inc. — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. The financial statements are unaudited; the independent accountant performed an interim review, not an audit opinion.
Business context and reporting period
FCX is a global 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 businesses. Following the late-2008 commodity-price decline and economic downturn, the company curtailed higher-cost production, reduced costs and capital spending, deferred projects and suspended its common-stock dividend.
Financial and operating performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $3.684 billion | $5.441 billion | $6.286 billion | $11.113 billion |
| Operating income | $1.508 billion | $2.053 billion | $2.180 billion | $4.449 billion |
| Net income | $812 million | $1.284 billion | $1.019 billion | $2.789 billion |
| Net income attributable to FCX common stockholders | $588 million | $947 million | $631 million | $2.069 billion |
| Diluted earnings per share | $1.38 | $2.25 | $1.54 | $4.89 |
| Operating cash flow | Not separately stated | Not separately stated | $896 million | $1.624 billion |
Year over year, Q2 revenue fell 32%, operating income 27% and common-stockholder net income 38%. For the first half, revenue declined 43%, operating income 51% and common-stockholder net income 69%. Approximate operating margin was 41% in Q2 2009 versus 38% in Q2 2008; first-half operating margin was 35% versus 40%. Common-stockholder net margin was about 16% versus 17% in Q2, and 10% versus 19% in the first half.
The declines mainly reflected sharply lower copper and molybdenum prices, partly offset by higher copper and gold volumes, particularly from higher-grade mining at Grasberg. Q2 realized copper price was $2.22 per pound versus $3.85; molybdenum was $10.11 versus $31.59; gold was $932 per ounce versus $912. First-half realized prices were $2.03 per pound for copper, $10.65 per pound for molybdenum and $919 per ounce for gold.
Q2 copper production was 1.069 billion pounds and sales were 1.102 billion pounds; first-half production and sales were 2.110 billion and 2.122 billion pounds, respectively. First-half gold sales were 1.382 million ounces, up from 545,000 ounces; molybdenum sales were 26 million pounds, down from 40 million.
Cash, debt and liquidity
- Cash and cash equivalents were $1.319 billion at June 30, up from $872 million at year-end 2008. Current assets were $6.336 billion and current liabilities $2.989 billion, implying a current ratio of about 2.1.
- Total debt, including current maturities, was approximately $7.223 billion, versus $7.351 billion at year-end. Cash less debt was approximately negative $5.9 billion.
- Operating cash flow of $896 million was largely offset by $894 million of capital expenditures in the first half. Working capital used $973 million, mainly due to final customer settlements for prior-year provisionally priced copper sales.
- FCX had no revolving-credit borrowings and approximately $1.4 billion of availability at quarter-end. Cash available to the FCX parent, after noncontrolling interests and estimated distribution costs, was approximately $1.015 billion.
- FCX raised $740 million net by selling 26.8 million common shares in February. No common dividends were paid in the first half; preferred dividends totaled $120 million.
Material changes and management outlook
- Management forecast 2009 consolidated mine sales of approximately 3.9 billion pounds of copper, 2.4 million ounces of gold and 56 million pounds of molybdenum. Q3 estimates were 910 million pounds, 550,000 ounces and 15 million pounds, respectively.
- Assuming remainder-of-year prices of $2.25 per pound copper, $900 per ounce gold and $8 per pound molybdenum, management estimated 2009 operating cash flow of about $3.0 billion, net of an estimated $0.5 billion of working-capital requirements. Cash-flow sensitivity for the remainder of 2009 was estimated at about $200 million per $0.10/lb copper-price change, $40 million per $50/oz gold-price change and $20 million per $1/lb molybdenum-price change.
- Full-year capital spending was forecast at approximately $1.4 billion, including $0.8 billion for Tenke Fungurume and Grasberg underground development. Management estimated 2009 copper unit net cash costs, after by-product credits, of about $0.70 per pound, versus $1.16 in 2008; second-half costs were expected to rise from first-half levels as Grasberg sales volumes declined.
- Tenke Fungurume began copper production in March; commissioning of the cobalt circuit began in Q2. Management expected ramp-up to full annual capacity in the second half, while noting start-up issues were being addressed. Tenke’s 2009 copper sales forecast was approximately 100 million pounds.
- FCX announced redemption of $340 million of 6⅞% Senior Notes due 2014, scheduled for August 20, 2009, for approximately $352 million plus accrued interest. The company expected a $14 million Q3 charge and approximately $23 million in annual interest savings.
Risks, contingencies and unusual items
- Commodity prices, production volumes, mine sequencing, operating costs, taxes and provisional sales pricing materially affect results. At June 30, 434 million pounds of copper sales remained provisionally priced at an average $2.25 per pound; each $0.05 price change was estimated to affect 2009 revenue by about $29 million.
- In July, shootings and other incidents along the Grasberg access road caused fatalities and injuries and restricted movement of personnel and supplies. Production had not been affected to the filing date, but prolonged access constraints could harm operations. Two FCX executives were also injured in Jakarta hotel bombings.
- In the DRC, Tenke agreed to pay approximately $16 million in fees and penalties related to work permits and visas. Authorities also initiated an inquiry into alleged public-fund misappropriation; Tenke said it was cooperating. A provincial dispute over royalty payments temporarily delayed export customs processing; shipments had resumed, but future shipments could be affected.
- FCX recorded $19 million of first-half molybdenum inventory write-downs and $23 million net restructuring and other charges. Prior-year long-lived-asset impairment charges lowered 2009 depreciation expense.
- The estimated 2009 effective tax rate was highly sensitive to commodity prices and geographic income mix; the first-half rate was 47%, partly reflecting Indonesian income and U.S. losses for which no tax benefit was recognized.
- The DRC contract review remained unresolved. FCX stated its view that the contract was fair and enforceable without modification. The filing reported no material changes in environmental or reclamation obligations and no new material legal proceedings.
Most important facts for investors to verify
- Whether copper, gold and molybdenum prices and sales volumes support the 2009 production, cash-flow and cost forecasts.
- Whether Grasberg access and security conditions remain controlled, and whether they constrain personnel, supplies or production.
- Whether Tenke’s ramp-up, cobalt commissioning, export arrangements, DRC contract review and government inquiries affect output or cash generation.
- Whether working-capital settlements, capital spending and debt redemption leave adequate parent-level liquidity.
- The eventual pricing of provisional copper sales, the tax-rate impact of commodity prices and income mix, and dilution from preferred-stock conversion and the 2009 share issuance.