Freeport-McMoRan Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a quarterly filing; quarterly information is included for context. FCX is a global mining company focused primarily on copper, with significant gold and molybdenum production. It reported under U.S. GAAP, and the auditor issued an unqualified opinion on the financial statements.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $16.403 billion | $14.830 billion |
| Operating income (loss) | $3.633 billion | $(2.792) billion |
| Net income (loss) attributable to common stockholders | $1.817 billion | $(4.154) billion |
| Diluted earnings (loss) per share | $1.25 | $(3.16) |
| Operating cash flow | $4.682 billion | $3.729 billion |
| Capital expenditures | $1.410 billion | $2.813 billion |
| Cash and cash equivalents at year-end | $4.447 billion | $4.245 billion |
| Total debt at year-end | $13.117 billion | $16.027 billion |
- Revenue growth primarily reflected higher copper prices and stronger gold sales; copper averaged $2.93/lb realized versus $2.28/lb in 2016. Gold and molybdenum realized prices were $1,268/oz and $9.33/lb, respectively.
- Production was 3.737 billion pounds of copper, 1.577 million ounces of gold and 92 million pounds of molybdenum. Copper production declined from 4.222 billion pounds in 2016, while gold production increased from 1.088 million ounces.
- Consolidated copper unit net cash costs were $1.20/lb, compared with $1.26/lb in 2016; site production and delivery costs rose to $1.61/lb from $1.42/lb, primarily due to lower volumes and higher South American costs.
- Year-end current assets were $10.779 billion and current liabilities were $5.038 billion. FCX reported $3.5 billion available under its revolving credit facility, with no borrowings outstanding. Total debt carried a 4.3% weighted-average interest rate; approximately 10% was variable-rate.
- Debt fell by $2.9 billion in 2017. Operating cash flow included $0.6 billion of working-capital sources and timing of other tax payments.
- FCX recorded $251 million of environmental obligation and shutdown costs, including substantial revisions to environmental estimates. It also recorded $8 million of metals inventory adjustments.
Material changes and unusual items
- FCX returned to profitability after large losses in 2016 and 2015, which included oil-and-gas property impairment charges of $4.3 billion and $13.1 billion, respectively. Substantially all oil and gas properties had been sold by 2017; 2017 oil and gas sales were not material.
- Higher copper prices were a major earnings driver; higher gold grades at Grasberg increased gold volumes. Copper sales volumes fell year over year, especially in North America, primarily due to lower ore grades, and in Indonesia due partly to export restrictions early in 2017.
- A Peruvian Supreme Court ruling on Cerro Verde royalties led to $348 million of pretax charges, including $203 million in production costs and $145 million in interest expense. FCX did not accrue a further $385 million of potential penalties and interest, citing its view that a waiver was obtainable and a loss was not probable.
- PT-FI recorded $125 million of workforce-reduction costs. The 2017 tax provision included $393 million of provisional credits related to U.S. tax reform. Net income also included $66 million from discontinued operations, primarily fair-value adjustments to contingent consideration from the 2016 Tenke sale.
- FCX incurred $0.5 billion of environmental capital expenditures and other environmental costs in 2017; it recorded $1.4 billion of environmental obligations and $2.6 billion of asset retirement obligations at year-end.
Outlook, commentary and principal risks
- Management forecast 2018 sales of 3.930 billion pounds of copper, 2.440 million ounces of gold and 91 million pounds of molybdenum. First-quarter 2018 sales were expected to be about 1.0 billion pounds of copper, 675,000 ounces of gold and 24 million pounds of molybdenum.
- At assumed average 2018 prices of $3.15/lb copper, $1,300/oz gold and $10/lb molybdenum, management estimated operating cash flow above $5.8 billion, including $0.3 billion from working capital and timing of tax payments. The estimate included a projected $2.2 billion income-tax provision. Cash flow sensitivity was estimated at about $360 million for each $0.10/lb change in copper, $115 million for each $50/oz change in gold and $130 million for each $2/lb change in molybdenum.
- Expected 2018 capital expenditures were approximately $2.1 billion, including $1.2 billion for major mining projects. Management estimated consolidated copper unit net cash costs of $0.97/lb, subject to its stated price and operating assumptions. Environmental costs were expected to be about $0.5 billion.
- Indonesia: Negotiations remained unresolved over PT-FI’s long-term mining rights, a special mining license and investment-stability assurances through 2041, construction of a smelter within five years of a definitive agreement, and divestment of 51% of project-area interests to Indonesian participants. The temporary IUPK was extended through June 30, 2018; an export-license extension through February 15, 2019 was received in February 2018. Failure to reach an acceptable agreement could lead to reduced or deferred underground investment, lower future production and potential impairments or reserve reductions.
- Other material risks include volatile metal prices, execution and cost risks in major underground projects, mining-induced seismic activity at DMLZ, labor disruption, security incidents in Papua, water-rights litigation and availability, environmental and reclamation liabilities, and tax disputes in Peru and Indonesia. Management cautioned that projections depend on commodity prices, operating performance and regulatory outcomes.
- The Board reinstated a quarterly dividend of $0.05 per share in February 2018, with the initial payment expected May 1, 2018; future declarations remain discretionary.
Investor verification priorities
- Track completion and terms of the Indonesian long-term mining-rights, divestment and smelter agreements, including the license and export permissions applicable after the disclosed extensions.
- Test the 2018 production, cost, capital-spending and operating-cash-flow outlook against actual results and realized commodity prices.
- Review Cerro Verde’s royalty dispute, potential penalties and interest, and the status and recoverability of disputed tax assessments and receivables in Peru and Indonesia.
- Assess the planned Grasberg Block Cave and DMLZ ramp-ups, seismic impacts, remaining project capital and associated production assumptions.
- Monitor debt maturities, covenant headroom, liquidity, and the company’s ability to reduce debt while funding development, environmental obligations and dividends.
- Evaluate the sensitivity of reported earnings and cash flow to commodity prices, provisional copper pricing, tax items, and environmental and reclamation estimate changes.