FREEPORT-MCMORAN INC quarterly report, Q1 FY1999

Business Context and Reporting Period

Company: Freeport-McMoRan Copper & Gold Inc. (FCX)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 1999
Operations: FCX operates primarily through its majority-owned subsidiary, P.T. Freeport Indonesia Company (PT-FI), which mines copper, gold, and silver in Irian Jaya, Indonesia, and Atlantic Copper, S.A., which smelts and refines copper in Spain. The company also holds a 25% equity interest in P.T. Smelting Co. (PT-SC) in Indonesia.

Key Financial Metrics

Metric (in thousands) Q1 1999 Q1 1998
Revenues $415,836 $396,132
Operating Income $129,080 $129,804
Net Income $26,444 $35,627
Net Income Applicable to Common Stock $17,710 $26,592
Diluted EPS $0.11 $0.15
Operating Cash Flow $155,370 $91,052
Capital Expenditures $(34,973) $(99,588)
Total Debt (Current + Long-term) $1,664,561 $1,820,293
Cash and Equivalents $5,357 $11,850

Note: Debt figures include current portion of long-term debt, short-term borrowings, and all long-term debt categories listed on the balance sheet.

Material Changes vs. Prior Period

  • Revenue Growth: Revenues increased 5.0% to $415.8 million, driven by a 20% increase in copper sales volumes and a 43% increase in gold sales volumes. This was partially offset by an 18% decline in copper price realizations.
  • Profitability Decline: Net income applicable to common stock decreased 33.4% to $17.7 million. Diluted EPS fell from $0.15 to $0.11.
  • Cost Increases: Total cost of sales rose to $260.6 million (from $243.7 million), primarily due to higher depreciation and amortization ($70.7 million vs. $58.3 million) associated with the fourth concentrator mill expansion and higher sales volumes.
  • Equity Losses: Equity in PT-SC losses increased significantly to $7.5 million (from $0.5 million) as the new smelter began start-up operations and incurred initial operating losses.
  • Cash Flow Improvement: Operating cash flow surged 70.6% to $155.4 million, largely due to a $82.9 million decrease in accounts receivable, offsetting lower net income.
  • Debt Reduction: Total debt decreased by approximately $156 million, driven by net repayments to Rio Tinto ($69.6 million) and other debt repayments.

Guidance, Outlook, and Risks

Outlook and Guidance

  • Production Volumes: PT-FI projects 1999 sales of approximately 1.4 billion pounds of copper and 2.1 million ounces of gold. Second-quarter 1999 sales are projected at 340 million pounds of copper and 525,000 ounces of gold.
  • Capital Expenditures: PT-FI expects 1999 capital expenditures to approximate $185 million, funded by operating cash flow and credit facilities.
  • Price Sensitivity: A $0.01 per pound change in copper price impacts revenues by ~$14 million and net income by ~$7 million. A $10/oz change in gold price impacts revenues by ~$21 million and net income by ~$10 million.
  • Dividends: The company suspended the regular quarterly cash dividend on common stock (announced Dec 1998) to preserve financial flexibility.

Risks and Contingencies

  • Indonesia Political/Economic Risk: Operations face risks from civil unrest, devalued currency (Indonesian Rupiah), and upcoming national elections. The company notes that capital availability is limited and costs are high due to these conditions.
  • Commodity Prices: Results are highly sensitive to fluctuations in copper and gold prices. The company currently has no price protection contracts for mine production.
  • Currency Exposure: While revenues are in USD, costs are partially in Rupiah, Australian Dollars, and Spanish Pesetas. A weaker USD generally benefits results, though hedging programs are in place for a portion of anticipated outflows.
  • Year 2000 (Y2K) Compliance: The company estimates incremental Y2K compliance costs will not exceed $3 million. Risks include potential temporary disruptions in third-party materials and services.
  • PT-SC Start-up: The new smelter is expected to continue incurring operating losses as it ramps up to design capacity over two years.

Investor Verification Checklist

  • Open Sales Pricing: Verify the final pricing of 199.4 million pounds of copper sales recorded at provisional prices ($0.63/lb), as a 1-cent movement impacts net income by ~$1.0 million.
  • Rio Tinto Cash Flow Sharing: Confirm the status of incremental cash flow payments to Rio Tinto ($262.1 million paid to date) and the remaining obligation ($11.3 million due Q2 1999).
  • PT-SC Losses: Monitor the trajectory of PT-SC operating losses and the timeline for reaching design capacity (200,000 metric tons/year).
  • Debt Covenants: Review the $336 million credit facility commitment for PT-FI and ensure compliance with debt covenants given the high leverage and volatile commodity environment.
  • Indonesia Regulatory Environment: Assess the impact of the new voluntary additional royalties (effective Jan 1, 1999) and potential changes in the Contract of Work (COW) due to political instability.