Business Context and Reporting Period
Company: Freeport-McMoRan Copper & Gold Inc. (FCX)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter ended March 31, 1998
Operations: FCX operates primarily through its majority-owned subsidiary PT Freeport Indonesia (PT-FI) in Irian Jaya, Indonesia, and its wholly-owned subsidiary Atlantic Copper, S.A. in Spain. Operations include mining, milling, smelting, and refining of copper, gold, and silver.
Key Financial Metrics
| Metric (in thousands) | Q1 1998 | Q1 1997 |
|---|---|---|
| Revenues | $396,132 | $523,780 |
| Operating Income | $129,804 | $197,608 |
| Net Income | $35,627 | $71,821 |
| Net Income Applicable to Common Stock | $26,592 | $62,451 |
| Diluted EPS | $0.15 | $0.31 |
| Operating Cash Flow | $91,052 | $74,127 |
| Capital Expenditures | $(99,588) | $(135,448) |
| Cash and Equivalents (Ending) | $11,850 | $25,064 |
| Total Debt (Current + Long-term) | $1,033,750 | $1,034,982 |
Note: Total Debt calculated as sum of current portion of long-term debt/short-term borrowings and long-term debt less current portion.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 24% to $396.1 million, primarily due to a 31% decline in copper realizations and a 26% decline in gold realizations. This was partially offset by a 13% increase in copper sales volumes and a 12% increase in gold sales volumes.
- Profitability: Net income applicable to common stock fell 57% to $26.6 million. Operating income dropped 34% to $129.8 million.
- Cost Reductions: Total cost of sales decreased $52.6 million. Unit site production costs at PT-FI dropped 40% to $0.36/lb due to the devaluation of the Indonesian rupiah (lower labor costs) and economies of scale from the fourth concentrator mill expansion.
- Interest Expense: Net interest expense increased to $48.6 million from $33.1 million due to higher average debt levels associated with expansion projects and share repurchases.
- Segment Performance:
- Mining & Exploration: Operating income decreased to $121.0 million from $183.0 million.
- Smelting & Refining: Operating income increased to $11.4 million from $3.7 million, driven by record volumes and lower unit costs at Atlantic Copper.
Outlook, Risks, and Management Commentary
- Price Sensitivity: Management notes significant sensitivity to commodity prices. A $0.01/lb change in copper price impacts revenue by ~$14 million; a $10/oz change in gold price impacts revenue by ~$22 million.
- Production Outlook: PT-FI projects 1998 sales of approximately 1.4 billion pounds of copper and 2.2 million ounces of gold. The fourth concentrator mill expansion is in the start-up phase.
- Hedging Status: FCX currently has no copper or gold price protection contracts relating to mine production. The forward gold sales program is suspended. PT-FI has initiated a currency hedging program for Indonesian rupiah and Australian dollar exposures.
- Capital Projects:
- PT Smelting: Construction of the Gresik smelter/refinery is on schedule for mid-1998 completion. First production expected in Q4 1998.
- Capital Expenditures: Remaining 1998 capex for PT-FI is expected to be $200-$250 million.
- Share Repurchases: FCX purchased 3.4 million shares for $49.5 million in Q1 1998. Approximately 6.5 million shares remain available under the program.
- Risks: Key risks include fluctuations in copper and gold prices, unanticipated declines in ore grades, milling problems, and foreign currency exchange rate volatility (specifically the Indonesian rupiah).
Investor Verification Checklist
- Commodity Pricing: Verify current London Metal Exchange (LME) copper prices and London Bullion Market Association (LBMA) gold prices against the $0.78/lb and $290.12/oz realizations reported.
- Open Sales Pricing: Confirm the final pricing of the 214.3 million pounds of copper sales recorded at provisional prices ($0.78/lb) as these will impact Q2/Q3 1998 earnings.
- Currency Exposure: Monitor the Indonesian rupiah exchange rate, as a 1,000 rupiah change could impact costs by approximately $6-$8 million.
- PT Smelting Timeline: Track the progress of the Gresik smelter/refinery to ensure the projected Q4 1998 start-up and subsequent ramp-up occur as planned.
- Debt Covenants: Review the borrowing base availability on the $612.0 million PT-FI credit facility to ensure liquidity remains sufficient for the projected $200-$250 million in remaining capex.