Freeport-McMoRan Copper & Gold Inc. — Q3 2012 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2012; comparisons are with Q3 and the first nine months of 2011. FCX operated copper, gold and molybdenum mines in the Americas, Indonesia and the DRC, plus a copper smelter and refinery in Spain. The interim financial statements are unaudited; the auditor conducted a review, not a full audit.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $4.417B | $5.195B | $13.497B | $16.718B |
| Operating income | $1.411B | $2.150B | $4.456B | $7.843B |
| Net income attributable to FCX common stockholders | $824M | $1.053B | $2.298B | $3.920B |
| Diluted earnings per share | $0.86 | $1.10 | $2.41 | $4.10 |
| Operating cash flow | Not separately stated | Not separately stated | $2.509B | $5.874B |
Q3 operating margin was approximately 32% versus 41% a year earlier; nine-month operating margin was approximately 33% versus 47%. Nine-month capital expenditures were $2.518B, and investing cash outflow was $2.537B. Cash and cash equivalents were $3.727B at September 30, down from $4.822B at year-end 2011. Total debt was approximately $3.523B; FCX reported about $1.5B available under its revolving credit facility and no significant debt maturities through 2014. Net cash available to FCX, after noncontrolling interests, withholding taxes and other deductions, was $2.7B.
At September 30, total assets were $34.517B, total liabilities $13.774B and total equity $20.743B. The Board’s common dividend rate was $1.25 annually, or $0.3125 quarterly.
Changes versus prior comparable periods
- Revenue declined about 15% in Q3 and 19% for the nine-month period. FCX attributed the weakness mainly to lower copper and gold sales volumes; lower copper realizations also reduced nine-month revenue.
- Q3 copper sales were 922M pounds versus 947M; gold sales were 202,000 ounces versus 409,000. Nine-month copper sales were 2.676B pounds versus 2.875B, and gold sales were 756,000 ounces versus 1.245M.
- Indonesia was the main volume pressure: lower ore grades and first-quarter work interruptions and a temporary suspension reduced output. Nine-month Indonesian copper production was 495M pounds versus 803M, and gold production was 641,000 ounces versus 1.261M.
- Consolidated copper unit net cash costs rose to $1.62 per pound in Q3 and $1.46 for nine months, from $0.80 and $0.84, respectively. Lower Indonesian volumes, higher mining/input costs and reduced by-product credits contributed.
- Nine-month operating cash flow fell by $3.365B year over year, reflecting lower sales volumes and copper prices and greater working-capital uses and tax payments, especially accounts receivable.
Outlook, management commentary and risks
- Management forecast 2012 mine sales of approximately 3.6B pounds of copper, 1.0M ounces of gold and 82M pounds of molybdenum; 2013 forecasts were 4.3B pounds, 1.4M ounces and 90M pounds, respectively. 2012 gold estimates were reduced by about 50,000 ounces from the prior quarterly forecast.
- Assuming specified fourth-quarter commodity prices and current volume and cost estimates, management expected 2012 operating cash flow of about $4.0B, net of an estimated $1.4B in working-capital uses and other tax payments. Expected 2012 capital expenditures were about $3.6B.
- Management expected 2012 consolidated copper unit net cash costs of $1.50 per pound and lower unit net cash costs in 2013, assuming increased Grasberg copper and gold volumes. These estimates depend on commodity prices, mine plans, production and cost assumptions.
- Growth spending included Morenci, Cerro Verde and Tenke expansions and Grasberg underground development. Climax began commercial molybdenum production in May 2012. FCX cited a positive long-term copper outlook but emphasized price volatility and its dependence on market conditions.
- Unusual items included a $234M gross reversal of Cerro Verde deferred tax liability ($123M net of noncontrolling interests), partly offset by $26M of additional deferred tax expense from a future Peruvian tax-rate increase. The nine-month results also included a $168M pretax loss on redeeming 8.375% notes. Q3 included an $82M net credit from environmental-obligation adjustments; Cerro Verde increased its asset-retirement obligation by $77M following a revised closure plan.
- FCX reduced estimated recoverable copper in Chino leach stockpiles by 594M pounds after revising recovery rates. Indonesia risks included mine-plan delays, a slower DOZ ramp-up, contract-extension discussions and 37 reported shooting incidents near Grasberg since July 2009, with 15 fatalities and 57 injuries. Indonesian disputed tax assessments totaled $325M; FCX had paid $158M, including $124M recorded in long-term receivables.
- Other key risks include commodity-price changes, labor and operating disruptions, political and regulatory uncertainty, environmental and reclamation obligations, and litigation. Management reported effective disclosure controls as of September 30, 2012; ERP implementation was ongoing in Indonesia.
Important facts for investors to verify
- Whether Indonesian ore grades, mine sequencing and the DOZ ramp-up support the projected recovery in 2013 sales volumes.
- Whether 2012 cash-flow, capital-spending and unit-cost forecasts remain achievable under actual commodity prices and working-capital needs.
- The sustainability and accounting effects of Cerro Verde tax adjustments, environmental credits and revised reclamation estimates.
- Progress, cost estimates, permitting and funding for the Morenci, Cerro Verde, Tenke and Grasberg projects.
- Resolution and recoverability of the Indonesian tax assessments, and developments in Grasberg security and contract discussions.