Freeport-McMoRan Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The company operates global copper, gold, molybdenum and oil and gas businesses. Amounts below are U.S. dollars unless noted.
Financial highlights
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $4.248 billion | $5.522 billion | $8.401 billion | $10.507 billion |
| Operating income (loss) | $(2.374) billion | $1.153 billion | $(5.337) billion | $2.264 billion |
| Net income (loss) attributable to common stockholders | $(1.851) billion | $482 million | $(4.325) billion | $992 million |
| Diluted EPS | $(1.78) | $0.46 | $(4.16) | $0.95 |
| Operating cash flow | $1.069 billion | $1.386 billion | $1.786 billion | $2.587 billion |
| Capital expenditures | $1.661 billion | $1.950 billion | $3.528 billion | $3.562 billion |
- Impairment and unusual items: Oil and gas property ceiling-test impairments were $2.686 billion in Q2 and $5.790 billion for the first half, reflecting lower reference oil prices and higher capitalized costs. Related tax charges included a $763 million valuation allowance for the first half. Q2 also included a $92 million gain from insurance and third-party proceeds related to settled shareholder litigation.
- Cash, debt and liquidity: Cash and equivalents were $466 million at June 30, versus $464 million at year-end 2014. Total debt was $20.9 billion, up from $19.0 billion; reported fair value was $20.2 billion. The company reported approximately $3.0 billion available on its revolving credit facility. Net cash available to the parent, after noncontrolling interests and estimated taxes and other costs, was $328 million.
- Balance sheet: Total assets were $54.0 billion, down from $58.7 billion at year-end; total liabilities were $35.2 billion. Stockholders’ equity declined to $13.8 billion from $18.3 billion, with accumulated deficit of $4.4 billion.
- Operating indicators: Q2 copper sales were 964 million pounds, approximately flat year over year; average realized copper price fell to $2.71/lb from $3.16. Gold sales rose to 352,000 oz from 159,000 oz, while realized price declined to $1,174/oz from $1,296. Molybdenum sales were 23 million pounds versus 25 million, at $9.51/lb versus $13.43. Oil-equivalent sales declined to 13.1 MMBOE from 16.0 MMBOE, partly reflecting the Eagle Ford sale; oil cash operating margin was $31.00/BOE versus $57.96.
- Mining costs: Consolidated copper-mine unit net cash costs, a company-defined non-GAAP measure, were $1.50/lb in Q2 and $1.57/lb for the first half, compared with $1.72 and $1.64, respectively, in 2014.
Changes versus comparable periods
- Revenue fell 23% in Q2 and 20% for the first half, mainly due to lower realized commodity prices and lower oil sales volumes. Lower oil prices, weaker copper and molybdenum realizations, and unfavorable provisional copper pricing adjustments pressured results.
- The company shifted from profit to substantial losses, primarily because of the oil and gas impairments. First-half operating cash flow also declined, from $2.587 billion to $1.786 billion.
- Mining production was mixed: higher North American and Indonesian copper output and higher Indonesian gold sales were offset by lower South American copper production and the absence of mines sold in 2014. Oil sales volumes and realized prices were lower.
Outlook, commentary and risks
- Management’s 2015 estimates, subject to its announced operating-plan review, were sales of 4.18 billion lb copper, 1.3 million oz gold, 93 million lb molybdenum and 52.9 MMBOE. Estimated operating cash flow was approximately $3.6 billion, assuming second-half prices of $2.50/lb copper, $1,150/oz gold, $6/lb molybdenum and $56/bbl Brent. Estimated 2015 capital expenditures were approximately $6.3 billion.
- Management was reviewing mining and oil and gas plans to reduce capital, operating and administrative costs; it said production at some challenged mining operations could be curtailed. It expected to report revised mining plans in Q3. Separately, announced oil and gas project deferrals were expected to reduce projected capital spending by $0.9 billion in each of 2016 and 2017.
- Management warned that lower oil prices could trigger further ceiling-test impairments; a hypothetical lower-price scenario in the filing implied an additional $1.8 billion pre-tax impairment. Lower copper and molybdenum prices could also drive inventory adjustments or mining-asset impairments.
- Indonesia: The MOU with the government expired July 25, 2015, while higher royalties, export duties and the smelter assurance bond remained in effect. PT-FI’s export permit was renewed through January 28, 2016, with the export duty reduced to 5%. Long-term mining rights and Contract of Work terms remained under discussion. PT-FI also faced $190 million of water-rights tax and penalty assessments that it had not accrued and was contesting.
- Other execution risks included PT Smelting’s temporary July shutdown, with repairs then expected to finish in September, and renewal of PT-FI’s labor agreement due in September. The filing also identifies commodity-price volatility, debt covenants and the possibility of seeking covenant amendments as important risks.
- The board reduced the regular annual common dividend rate to $0.20/share in March 2015. The Q2 dividend declaration was $0.05/share regular plus a one-time $0.1105/share special dividend associated with the litigation settlement.
Investor verification priorities
- Track subsequent oil and gas ceiling-test results, valuation-allowance effects and any additional impairments.
- Verify cash generation, capital spending, debt balances, covenant headroom and availability under credit facilities as commodity prices and operating plans change.
- Check whether management’s revised mining plans, cost reductions and potential production curtailments were implemented as expected.
- Monitor PT-FI’s long-term operating-rights negotiations, export-permit renewals, export duties, tax assessments and labor agreement; also confirm PT Smelting’s restart timing.
- Compare actual commodity prices and sales volumes with the assumptions underlying 2015 cash-flow and production estimates.