Freeport-McMoRan Copper & Gold Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The company mines copper, gold and molybdenum across North and South America, Indonesia and Africa, and operates copper smelting and refining businesses. Financial statements are unaudited; the independent accountant performed an interim review, not an audit.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $5.814 billion | $3.864 billion | $11.523 billion | $8.227 billion |
| Operating income | $2.757 billion | $1.424 billion | $5.693 billion | $3.472 billion |
| Net income attributable to FCX common stockholders | $1.368 billion | $649 million | $2.867 billion | $1.546 billion |
| Diluted EPS | $1.43 | $0.70 | $3.00 | $1.70 |
| Operating margin | 47.4% | 36.9% | 49.4% | 42.2% |
Revenue growth primarily reflected higher realized copper and gold prices and higher sales volumes. Q2 realized prices were $4.22 per pound for copper and $1,509 per ounce for gold, versus $3.06 and $1,234, respectively, a year earlier. Q2 copper sales were 1.002 billion pounds, gold sales 356,000 ounces and molybdenum sales 21 million pounds. Higher mining and milling activity and input costs lifted production and delivery costs; copper-mine site costs averaged $1.63 per pound in Q2 versus $1.41 a year earlier. Six-month consolidated effective tax rate was 35%.
Operating cash flow was $4.039 billion for the first half, versus $2.882 billion; it included $382 million of working-capital uses, compared with $107 million of working-capital sources in 2010. Investing cash outflow was $1.013 billion, including $1.032 billion of capital expenditures in the segment disclosure. Financing cash outflow was $2.386 billion, including $949 million of common dividends and $1.288 billion of debt repayments. Cash increased to $4.378 billion from $3.738 billion at year-end.
At June 30, cash was $4.378 billion and total debt was approximately $3.542 billion, down from $4.755 billion at December 31, 2010. Current assets were $10.173 billion and current liabilities $3.106 billion. The company reported approximately $1.5 billion available under its revolving facility, with no borrowings and $43 million of letters of credit outstanding. Management estimated net cash available to FCX, after noncontrolling interests, withholding taxes and other adjustments, at $3.4 billion.
Changes, outlook and material items
- First-half revenue rose 40% and common-stockholder net income rose 85% year over year. Management attributed the improvement mainly to stronger copper and gold prices and higher sales volumes.
- FCX redeemed $1.1 billion of 8.25% notes and purchased $35 million of 9.5% notes in Q2; it also repaid $85 million of notes at maturity. Early debt extinguishment losses were $61 million in Q2 and $68 million for the first half. The company reported no significant debt maturities through 2016 and said it may consider further early repayments.
- Q2 included $60 million of environmental obligations and shutdown costs, primarily accrual adjustments for future shutdown costs. Atlantic Copper’s scheduled maintenance turnaround added $25 million to Q2 costs; its Q2 operating loss was $46 million.
- For 2011, management forecast mine sales of approximately 3.9 billion pounds of copper, 1.6 million ounces of gold and 77 million pounds of molybdenum. It estimated copper-mine unit net cash costs of about $1.01 per pound for the year, assuming specified second-half gold and molybdenum prices and current volume and cost estimates.
- Management forecast 2011 operating cash flow above $8 billion, net of an estimated $300 million of working-capital requirements, assuming second-half prices of $4.25 per pound copper, $1,500 per ounce gold and $15 per pound molybdenum. Estimated taxes were $3.7 billion; expected capital expenditures were approximately $2.6 billion. These projections are subject to commodity prices, operating performance and other factors.
- A July 2011 eight-day strike at PT Freeport Indonesia temporarily suspended mining, milling and shipments. Operations resumed after an agreement; the company estimated a 2011 production impact of about 35 million pounds of copper and 60,000 ounces of gold. Labor agreement negotiations were due for renewal in October.
- Risks include volatile metal prices, mine sequencing and production, labor disputes, security and access risks at Grasberg, regulatory and political uncertainty, environmental obligations, and foreign-exchange exposure. Two April 2011 security incidents in Indonesia resulted in two fatalities and two injuries; the filing says operations were not interrupted, but prolonged road-access restrictions could adversely affect them.
- Contingencies include Peruvian mining-royalty assessments against Cerro Verde of approximately $180 million, including interest and penalties, which the company is contesting; and Indonesian tax matters, including a 2005 assessment of about $158 million in taxes and interest. The filing does not state a probable loss estimate for these matters. A July court order granted class certification in the Blackwell, Oklahoma litigation.
Investor verification priorities
- Check realized metal prices, provisional-price adjustments and open copper sales: 435 million pounds remained provisionally priced at an average $4.27 per pound at quarter-end.
- Track delivery against 2011 sales, unit-cost, operating-cash-flow and capital-spending assumptions, including the disclosed sensitivity of cash flow to metal prices.
- Verify the duration and production effects of Indonesia labor negotiations, security conditions and the estimated strike impact.
- Monitor outcomes and potential additional accruals for Cerro Verde royalties, Indonesian tax matters, and other legal and environmental proceedings.
- Assess debt reduction, dividend sustainability and cash actually available to FCX, considering noncontrolling interests and restrictions on international cash.