Freeport-McMoRan Inc. — FY 2018 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2018; quarterly figures below are unaudited. Freeport-McMoRan (FCX) is a global copper producer, with significant copper, gold and molybdenum operations in North America, South America and Indonesia. Copper represented approximately 75% of 2018 revenue, gold 17% and molybdenum 6%.
Financial and operating results
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $18.63 billion | $16.40 billion | +13.6% |
| Operating income | $4.75 billion | $3.69 billion | +28.8% |
| Net income attributable to common stockholders | $2.60 billion | $1.82 billion | +43.2% |
| Diluted EPS | $1.78 | $1.25 | +$0.53 |
| Cash from operations | $3.86 billion | $4.67 billion | −17.2% |
| Capital expenditures | $1.97 billion | $1.41 billion | +39.8% |
| Cash and cash equivalents, year-end | $4.22 billion | $4.53 billion | −$0.31 billion |
| Total debt, year-end | $11.14 billion | $13.23 billion | −$2.09 billion |
- Operating margin was approximately 25.5% in 2018 versus 22.5% in 2017; net income attributable to common stockholders was approximately 14.0% of revenue versus 11.1%. These percentages are calculated from reported figures.
- Cash from operations less capital expenditures was approximately $1.89 billion. Operating cash flow included $0.6 billion of working-capital uses and timing of other tax payments, versus $0.6 billion of sources in 2017.
- Year-end current assets were $10.72 billion and current liabilities $3.33 billion, a current ratio of approximately 3.2. FCX reported no revolver borrowings and approximately $3.5 billion available under its revolving credit facility. Net debt, using cash and cash equivalents, was approximately $6.92 billion.
- Reported copper production was 3.81 billion pounds, gold production 2.44 million ounces and molybdenum production 95 million pounds. Average realized prices were $2.91 per pound of copper, $1,254 per ounce of gold and $12.50 per pound of molybdenum.
- FCX declared $0.20 per common share in dividends for 2018 and paid $218 million in common dividends. The Board reinstated the dividend in February 2018; future dividends remain discretionary.
Material changes and unusual items
- Revenue rose mainly on higher copper and gold sales volumes and higher molybdenum prices. Copper sales increased to 3.81 billion pounds from 3.70 billion; gold sales rose to 2.39 million ounces from 1.56 million. Average realized copper and gold prices were each about 1% lower year over year, while molybdenum’s average realized price increased 34%.
- Cash from operations declined despite higher earnings, principally reflecting the swing to working-capital uses and the timing of international tax payments. Capital expenditures increased, primarily with Lone Star development.
- In December 2018, FCX completed the Indonesian ownership and mining-rights transaction. It received $350 million for its interests in PTI and $107 million from Rio Tinto for its share of 2018 joint-venture cash flows; PT-FI acquired Rio Tinto’s joint-venture interests for $3.5 billion. FCX’s PT-FI share ownership became 48.76%, but FCX retained operational control and continued consolidating PT-FI. Its expected economic interest is approximately 81% for 2019–2022.
- 2018 results included $208 million of gains on asset sales and other asset-related adjustments, $223 million of PT-FI charges, and $69 million for Cerro Verde’s labor agreement. The year also included $632 million of net tax credits, mainly from PT-FI’s new tax rates and U.S. tax reform. Cerro Verde royalty-dispute charges reduced income attributable to common stockholders by $195 million.
- Fourth-quarter revenue was $3.68 billion and operating income $316 million, versus $4.91 billion and $1.32 billion in the third quarter. Fourth-quarter net income attributable to common stockholders was $485 million, compared with $556 million in the third quarter and $1.04 billion in fourth-quarter 2017. The fourth quarter included significant PT-FI charges and most of the Cerro Verde royalty-dispute charges and tax credits.
- FCX reported $1.5 billion of environmental obligations and $2.5 billion of asset-retirement obligations. These estimates and payment timing may change; environmental and reclamation spending is a material ongoing cost.
Guidance, outlook and key risks
- Management described the long-term copper outlook positively, while emphasizing commodity-price volatility and the importance of sales volumes, unit costs, operating cash flow and capital discipline.
- For 2019, FCX projected sales of 3.285 billion pounds of copper, 785,000 ounces of gold and 94 million pounds of molybdenum. The projections reflect a transition year at Grasberg: Indonesia sales were projected at 615 million pounds of copper and 785,000 ounces of gold, with production expected to be significantly lower in 2019 and 2020 than in 2018 and to improve substantially by 2021.
- At assumed 2019 average prices of $2.75 per pound of copper, $1,300 per ounce of gold and $12 per pound of molybdenum, management estimated operating cash flow of approximately $1.8 billion, after $0.2 billion of working-capital uses and timing of other tax payments, and a consolidated copper-mine unit net cash cost of $1.73 per pound. Projected capital expenditures were approximately $2.4 billion, including $1.5 billion for major mining projects.
- Grasberg’s underground transition is a major execution risk. The Grasberg Block Cave was scheduled to begin cave production in the first half of 2019 and ramp toward 130,000 metric tons per day over five years. DMLZ ramp-up timing remained subject to review following mining-induced seismic activity; full production of 80,000 metric tons per day was expected in 2022.
- The Indonesian IUPK grants mining rights through 2031, with an extension through 2041 conditional, among other requirements, on completing a new smelter by December 21, 2023 and meeting fiscal obligations. The smelter’s preliminary estimated capital cost was approximately $3 billion. At filing, PT-FI’s export license was due to expire February 16, 2019, and a one-year extension had been requested.
- After year-end, severe weather suspended El Abra operations beginning February 4, 2019. FCX estimated an 8-million-pound copper production impact through mid-February and approximately 600,000 pounds per day of additional impact until normal operations resumed; timing and damage were not yet clear.
- Other material risks include volatile metal prices and trade conditions; labor negotiations and potential stoppages; water-rights disputes affecting Arizona operations; Indonesian political, regulatory, security and environmental risks; underground mining, seismic and tailings-facility hazards; development cost and schedule overruns; and substantial environmental, reclamation and tax contingencies. A talc-case indemnitor filed for bankruptcy protection in February 2019, and FCX was evaluating potential implications.
Most important facts for investors to verify
- Whether Grasberg’s underground ramp-up, production volumes and unit costs track the 2019–2021 outlook, and whether export-license renewals are secured.
- Progress, financing and cost exposure for the Indonesian smelter, and FCX’s compliance with IUPK fiscal and other conditions for rights beyond 2031.
- El Abra’s restart, damage assessment and resulting production and cost effects, alongside other operational or labor disruptions.
- Cash generation and capital spending versus guidance, debt repayment progress, and the sustainability of dividends under changing copper, gold and molybdenum prices.
- Developments in Cerro Verde royalty proceedings and Indonesian tax disputes, including the collectability of disputed-tax receivables and the adequacy of recorded liabilities.
- Changes in environmental, reclamation and asset-retirement estimates, water-rights outcomes, and potential exposure following the indemnitor’s bankruptcy filing.
Ernst & Young issued an unqualified opinion on the consolidated financial statements and an unqualified opinion on internal control over financial reporting as of December 31, 2018.