FCX

Business Context and Reporting Period

Company: Freeport-McMoRan Copper & Gold Inc. (FCX), a Delaware corporation and subsidiary of Freeport-McMoRan Inc. (FTX).

Reporting Period: Fiscal year ended December 31, 1993.

Operations: FCX's principal operating subsidiary is P.T. Freeport Indonesia Company (PT-FI), which operates the Grasberg and Ertsberg East mines in Indonesia. FCX also owns a 65% interest in Rio Tinto Minera, S.A. (RTM), a copper smelter in Spain, acquired in March 1993. The company is one of the world's lowest-cost copper producers.

Key Financial Metrics

Production Highlights: Record copper production of 658.4 million pounds (up 6%) and record gold production of 786,700 ounces (up 23%).

Material Changes vs. Prior Period

• Net Income Decline: Net income dropped significantly from $122.9 million in 1992 to $21.9 million in 1993. This was driven by a $15.7 million loss from the newly acquired RTM, $52.6 million in restructuring and accounting charges (of which $28.3 million was non-cash), and lower copper price realizations.
• Revenue Increase: Total revenues rose to $925.9 million, primarily due to the inclusion of RTM sales ($288.4 million). Excluding RTM, revenues declined 4% due to lower copper prices.
• Reserve Growth: Proved and probable reserves increased significantly, with copper reserves up 28% and gold reserves up 22% compared to year-end 1992, largely due to drilling at the Grasberg deposit.
• Cost Structure: Unit cash production costs fell to 31.1 cents/lb from 40.7 cents/lb, aided by higher gold/silver credits and lower treatment charges, despite higher exploration expenses ($31.7 million vs. $12.2 million).

Guidance, Outlook, and Risks

Outlook and Guidance

• Expansion: FCX is expanding mining and milling capacity from 66,000 to 115,000 metric tons per day (MTPD), expected to be completed by year-end 1995. This aims to reach 1.1 billion pounds of copper and 1.5 million ounces of gold annually.
• 1994 Estimates: Projected production is approximately 700 million pounds of copper and 780,000 ounces of gold from PT-FI. Capital expenditures for 1994-1995 are estimated between $850 million and $950 million.
• Dividends: Management anticipates maintaining the annual cash dividend of 60 cents per share through 1995, subject to commodity prices and capital needs.

Risks and Contingencies

• Commodity Prices: Copper prices dropped to 1987 lows in 1993. FCX has a price protection program for 1994 sales with a floor of $0.90/lb.
• Operational Disruptions: A mill ore pass blockage in June 1993 limited throughput for eight weeks, though insurance is expected to cover losses.
• Regulatory/Political: Operations in Indonesia are subject to the "New COW" (Contract of Work) and potential changes in environmental laws or tax regulations. The company maintains political risk insurance.
• Financing: Future capital expenditures exceed cash flow from operations through 1995, requiring reliance on asset sales (infrastructure joint ventures) and external financing.

Investor Verification Checklist

• Reserve Accuracy: Verify the 28% increase in copper and 22% increase in gold reserves reported for 1993, specifically the impact of the Grasberg drilling program.
• Restructuring Charges: Review the $52.6 million in charges (including $10.7 million allocated from parent company FTX) to understand the non-recurring nature of the 1993 earnings decline.
• RTM Performance: Monitor the $15.7 million loss from Rio Tinto Minera, S.A. and its ability to achieve projected smelter expansion and profitability.
• Expansion Funding: Assess the progress of the $850-$950 million capital program and the execution of infrastructure asset sales (e.g., ALatieF and Power Joint Ventures) to fund the 115,000 MTPD expansion.
• Price Protection: Confirm the effectiveness of the $0.90/lb copper price floor for 1994 sales against prevailing market rates.