Freeport-McMoRan Copper & Gold Inc. — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009; the filing also reports fourth-quarter results. The company mines and processes copper, gold and molybdenum, with operations in the Americas, Indonesia and the Democratic Republic of Congo (DRC). Tenke Fungurume began copper production in March 2009. Financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Financial and operating performance
| Metric | 2009 | 2008 |
|---|---|---|
| Revenue | $15.040 billion | $17.796 billion |
| Operating income (loss) | $6.503 billion | $(12.710) billion |
| Net income (loss) attributable to FCX common stockholders | $2.527 billion | $(11.341) billion |
| Diluted earnings (loss) per share | $5.86 | $(29.72) |
| Operating cash flow | $4.397 billion | $3.370 billion |
| Capital expenditures | $1.601 billion | $2.318 billion cash-flow statement outflow |
| Cash and cash equivalents at year-end | $2.656 billion | $0.872 billion |
| Total debt at year-end | $6.346 billion | $7.351 billion |
| FCX stockholders’ equity at year-end | $9.119 billion | $5.773 billion |
Operating income in 2008 included $10.867 billion of long-lived asset impairments and other charges and $5.987 billion of goodwill impairment. The 2009 comparison therefore reflects a substantial rebound from unusually large non-cash charges, alongside improved operations.
Consolidated production was 4.103 billion pounds of copper, 2.664 million ounces of gold and 54 million pounds of molybdenum. Sales were 4.277 billion pounds of copper, including purchases, 2.640 million ounces of gold and 64 million pounds of molybdenum. Average realized prices were $2.60 per pound for copper, $993 per ounce for gold and $12.36 per pound for molybdenum. Copper and gold sales volumes rose slightly and sharply, respectively, versus 2008; molybdenum sales volume and realized price fell.
Consolidated production and delivery costs were $7.016 billion, down from $10.416 billion. Depreciation, depletion and amortization was $1.014 billion, versus $1.782 billion, partly reflecting the 2008 impairment charges. Management’s non-GAAP consolidated copper unit net cash cost was $0.55 per pound, compared with $1.16 in 2008; this measure excludes Africa mining and specified noncash and nonrecurring costs.
Fourth-quarter 2009 revenue was $4.610 billion, operating income $2.239 billion, net income attributable to FCX common stockholders $971 million and diluted EPS $2.15.
Material changes and liquidity
- Revenue fell about 15% year over year, mainly reflecting lower molybdenum prices and lower copper price realizations, partly offset by higher gold sales volumes and prices and new Tenke sales.
- Operating cash flow increased to $4.397 billion, despite $770 million used for working capital; management cited lower operating costs and higher gold prices and volumes.
- Cash increased to $2.656 billion, including $2.185 billion stated as net cash available to FCX after noncontrolling interests, withholding taxes and other deductions. The company reported no revolving-credit borrowings, $39 million of letters of credit and approximately $1.5 billion of facility availability.
- FCX repaid $1.0 billion of debt during 2009 and reported $6.346 billion total debt at year-end. Debt maturities were limited in the near term; substantially all senior-note principal was due thereafter. Approximately 19% of debt was variable-rate.
- Common dividends were suspended in December 2008, so none were paid during 2009. In October 2009, the board reinstated an annual $0.60-per-share dividend; the first $0.15 quarterly payment was made in February 2010. The 6¾% mandatory convertible preferred stock was scheduled to convert on May 1, 2010, into approximately 39–47 million common shares, depending on the share price.
Outlook, commentary and principal risks
Management projected 2010 sales of approximately 3.8 billion pounds of copper, 1.8 million ounces of gold and 60 million pounds of molybdenum. Lower copper and gold volumes were expected principally because of a transition to lower-grade Grasberg ore and the effects of reduced North American mining in 2009. Using assumed average prices of $3.25 per pound copper, $1,100 per ounce gold and $12 per pound molybdenum, management estimated 2010 operating cash flow of about $5.3 billion, net of $0.4 billion of working-capital requirements, and capital expenditures of about $1.7 billion. These are assumptions-based projections, not guarantees.
Management expected consolidated copper unit net cash costs, excluding Africa, to average about $0.86 per pound in 2010 versus $0.55 in 2009, mainly due to lower projected Grasberg volumes and higher input costs and exchange rates. It also planned to resume selected deferred projects: Miami restart work; Morenci mill restart; Cerro Verde throughput optimization; and El Abra sulfide development. Tenke’s cobalt circuit remained in startup and quality remediation, with sustained target rates expected in 2010. Major future Grasberg underground development was expected to require substantial capital; estimates and schedules remain subject to change.
- Commodity and operating exposure: Earnings and cash flow are highly sensitive to copper, gold and molybdenum prices, ore grades, recovery rates, production volumes and input costs. Provisionally priced sales expose revenue to price movements until final settlement.
- Geopolitical and security risks: Indonesia’s Contract of Work expires in 2021, with two extensions requiring government approval; new mining-law rules raise uncertainty about extension terms. Shooting incidents near Grasberg since July 2009 caused three fatalities and injuries; operations continued, but access restrictions could disrupt them. The DRC was reviewing Tenke contract terms, with no predictable outcome.
- Water, environmental and closure obligations: Water-rights proceedings affect Arizona mines, and depletion of the Copiapó aquifer raises supply concerns for Candelaria and Ojos del Salado. Year-end environmental obligations were $1.464 billion and asset-retirement obligations were $731 million. Financial assurance for closure and reclamation totaled about $710 million.
- Legal and tax contingencies: Cerro Verde was contesting an approximately $50 million Peruvian royalty and fine assessment. PT Freeport Indonesia disputed Indonesian VAT claims on certain imports; the filing says the potential taxes and penalties would be significant but gives no clear amount. Blackwell litigation settlements and the Pinal Creek groundwater settlement involved payments of $54 million and $40 million, respectively, in 2010; the Blackwell settlement leaves specified future-damage claims unresolved.
- Other financial risks: Debt covenants may constrain financing and distributions; a downgrade below investment grade could reinstate certain note restrictions. Environmental remediation estimates, reserves, stockpile recoveries, taxes and project costs depend on significant assumptions and may change.
Investor facts to verify
- Whether 2010 production, cost and operating-cash-flow projections were achieved, and how actual metal prices compared with management’s assumptions.
- Progress, total spending and schedule for Grasberg underground development, El Abra, Cerro Verde, Miami, Morenci and Tenke, including Tenke cobalt performance.
- Available liquidity, debt reduction and refinancing needs, covenant headroom, and the impact of the preferred-stock conversion and dividend policy.
- Developments in Indonesian contract extensions and VAT claims, the DRC contract review, Peruvian royalties and unresolved Blackwell claims.
- Changes in water access, environmental and reclamation estimates, financial-assurance requirements, and reserve or stockpile recovery assumptions.