Business Context and Reporting Period
Company: Freeport-McMoRan Copper & Gold Inc. (FCX)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: FCX is a major global producer of copper, gold, and molybdenum. Operations include significant assets in North America, South America, and Indonesia (Grasberg mine). The company acquired Phelps Dodge in March 2007, and results for the nine months ended September 30, 2007, include Phelps Dodge operations from March 20, 2007. The international wire and cable business (PDIC) was sold in October 2007 and is reported as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Revenues | $4,616 million | $15,729 million | $12,755 million |
| Operating Income | $1,133 million | $5,582 million | $5,403 million |
| Net Income (Applicable to Common Stock) | $523 million | $2,592 million | $2,355 million |
| Diluted EPS (Common Stock) | $1.31 | $6.20 | $6.58 |
| Cash and Cash Equivalents | $1,202 million | $1,202 million (Sep 30, 2008) | $1,626 million (Dec 31, 2007) |
| Total Debt | $7,209 million | $7,209 million | $7,211 million |
| Operating Cash Flow | N/A | $3,169 million | $4,927 million |
| Capital Expenditures | N/A | $1,871 million | $1,138 million |
Note: Total debt includes current portion of long-term debt ($23 million) and long-term debt ($7,186 million).
Material Changes vs. Prior Period
- Revenue Decline (Q3): Third-quarter revenues decreased 9% to $4.6 billion from $5.1 billion in Q3 2007, primarily due to lower copper price realizations and adjustments to prior period sales.
- Operating Income Decline (Q3): Operating income fell 40% to $1.1 billion from $1.9 billion in Q3 2007. This was driven by lower realized prices, higher production costs (energy, sulfuric acid), and purchase accounting impacts from the Phelps Dodge acquisition.
- Net Income Decline (Q3): Net income applicable to common stock dropped 32% to $523 million from $775 million in Q3 2007.
- Year-to-Date Growth: Despite the Q3 decline, nine-month revenues increased 23% and net income increased 10% compared to the prior year, largely due to the inclusion of a full nine months of Phelps Dodge operations in 2008 versus only seven months in 2007.
- Cost Increases: Consolidated unit net cash costs for copper rose to $1.29/lb in Q3 2008 from $1.05/lb in Q3 2007, reflecting higher commodity-based input costs.
Guidance, Outlook, and Risks
Management Commentary and Outlook
Management reports a dramatic shift in global economic conditions in September and October 2008, resulting in a sharp decline in commodity prices. Copper prices fell from $3.98/lb (June 30) to $2.91/lb (Sep 30) and further to $1.81/lb (Oct 31). In response, FCX is revising its near-term strategy to protect liquidity:
- Capital Reductions: Announced $500 million in capital cost reductions for 2008 and 2009, deferring expansion projects at Sierrita, Bagdad, and the Miami mine restart.
- Project Suspensions: Suspended construction on the Climax molybdenum mine restart (previously expected in 2010) and is reviewing the timing of the El Abra sulfide project.
- Share Repurchases: Suspended the share purchase program in mid-September 2008 due to market turmoil.
- Dividends: The Board reviews the dividend policy ($2.00/share annually) on an ongoing basis considering the price decline.
Risks and Contingencies
- Inventory Impairment: FCX recorded $22 million in lower-of-cost-or-market (LCM) inventory adjustments for the nine months ended Sep 30, 2008. Additional charges are likely in Q4 2008 if weak economic conditions persist.
- Goodwill Impairment: The company holds approximately $6.0 billion in goodwill from the Phelps Dodge acquisition. An annual impairment test is scheduled for Q4 2008. Significant impairments may be required if forward metal prices do not improve or input costs do not decrease.
- Provisional Pricing: Approximately 467 million pounds of copper sales were provisionally priced at $2.89/lb as of Sep 30. A decline in final pricing could significantly reduce Q4 revenues (estimated $560 million reduction if prices drop to $1.98/lb).
- Legal Proceedings: Ongoing environmental litigation regarding Pinal Creek; sanctions against an affiliate are being appealed.
Investor Verification Checklist
- Q4 Impairment Charges: Verify the magnitude of potential goodwill and inventory write-downs in the upcoming Q4 2008 filing, given the sharp drop in copper prices below $2.00/lb.
- Provisional Pricing Impact: Monitor the final settlement of provisional copper sales recorded in Q3 to assess the actual revenue impact on Q4 earnings.
- Liquidity Position: Confirm the utilization of the $1.5 billion revolving credit facility and the status of the suspended share repurchase program.
- Capital Expenditure Revisions: Track the execution of the announced $500 million capital cost reduction and the status of the Tenke Fungurume project in the DRC amidst regional instability.
- Input Cost Trends: Verify if the decline in energy and sulfuric acid prices translates to lower unit net cash costs in Q4 as projected by management.