Freeport-McMoRan Inc. — Q3 2021 Form 10-Q
Business context and period. Freeport-McMoRan (FCX) is a global copper, gold and molybdenum miner, with major operations in Indonesia, North America and South America. This unaudited report covers the quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $6.083B | $3.851B | $16.681B | $9.703B |
| Operating income | $2.462B | $880M | $6.061B | $728M |
| Net income attributable to common stockholders | $1.399B | $329M | $3.200B | $(109)M |
| Diluted EPS | $0.94 | $0.22 | $2.16 | $(0.08) |
| Operating cash flow | $1.965B | $1.237B | $5.435B | $1.690B |
| Capital expenditures | $541M | $436M | $1.344B | $1.573B |
- Q3 operating margin was approximately 40.5%, compared with 22.9% in 2020; nine-month operating margin was 36.3%, compared with 7.5%.
- Q3 copper sales were 1.033 billion pounds at an average realized price of $4.20/lb; nine-month sales were 2.787 billion pounds at $4.22/lb. The nine-month 2020 realized price was $2.73/lb. Gold and copper sales volumes rose, primarily due to Grasberg underground mine ramp-up.
- At September 30, cash and cash equivalents were $7.672B; total debt was $9.665B and net debt was $1.993B, down from $6.054B at year-end 2020. Liquidity was $11.2B, including approximately $3.5B available on the revolving facility; no borrowings were outstanding under that facility.
Changes and notable items
- Revenue and earnings increased substantially year over year, driven mainly by higher copper prices and higher copper and gold sales volumes. Q3 average realized copper price rose 40% year over year; nine-month price rose 55%.
- Cash from operations rose to $5.435B for the first nine months, while capital expenditures fell to $1.344B. The 2021 operating cash flow included $367M of working-capital and other sources and reflected $421M of Cerro Verde royalty-dispute payments.
- FCX recorded a $60M gain on the sale of its remaining Freeport Cobalt business, including $34M attributable to common stockholders. A revised Morenci leach-stockpile recovery estimate increased estimated recoverable copper by 191 million pounds and raised net income by $52M, or $0.04/share.
- FCX’s consolidated effective tax rate was 29% for the first nine months of 2021. The comparable 2020 rate was 102%, affected by U.S. losses that did not generate a realized tax benefit and other period-specific factors.
Outlook, risks and contingencies
- Management forecast 2021 sales of 3.812 billion pounds of copper, 1.3 million ounces of gold and 85 million pounds of molybdenum. Q4 sales were expected to be approximately 1.025 billion pounds of copper, 375,000 ounces of gold and 22 million pounds of molybdenum.
- At assumed Q4 prices of $4.50/lb copper, $1,800/oz gold and $19/lb molybdenum, FCX estimated 2021 operating cash flow of approximately $7.5B, capital expenditures of approximately $2.3B (including $0.3B for the Indonesia smelter project), and an effective tax rate near 30%. These are estimates dependent on prices, volumes, costs and operating performance.
- Management said Grasberg underground production was on track to reach projected annualized targets by year-end 2021. It expected PT-FI to produce about 1.3 billion pounds of copper and 1.3 million ounces of gold in 2021. The new Gresik smelter contract is estimated at $2.8B, with completion expected as soon as feasible in 2024; schedule and cost remain subject to disruption and execution risks.
- On November 1, 2021, the Board authorized up to $3.0B of share repurchases and approved a 2022 variable dividend of $0.30/share, in addition to the $0.30 annual base dividend. Repurchases and dividends remain subject to Board discretion and business conditions.
- Important exposures include volatile metal prices, operating and ramp-up performance, COVID-19 impacts, Indonesian export-license and smelter requirements, labor negotiations at Cerro Verde, and regulatory, political, environmental and litigation risks. PT-FI’s export license then ran through March 15, 2022.
- In October 2021, FCX reported that changed positions in Indonesian tax discussions meant it could no longer conclude that all disputed tax items would be resolved at a more-likely-than-not threshold. A material Q4 2021 tax charge was possible, potentially offset by a tax benefit from releasing additional valuation allowance.
- Recorded liabilities included $313M for the Newtown Creek environmental matter and $130M for a proposed talc-litigation settlement. Remediation costs and settlement implementation remain uncertain. FCX also recorded $16M in 2021 charges related to a potential settlement of the Indonesian smelter administrative fine.
Key facts for investors to verify
- Whether Grasberg reaches planned production levels and whether the 2021 sales and cash-flow estimates are achieved.
- Final outcome and financial effect of the Indonesian tax disputes, including any Q4 charge or related valuation-allowance release.
- Progress, financing, cost and timing of the Gresik smelter, precious-metals refinery and PT Smelting expansion, including export-license and government requirements.
- Actual 2022 dividend payments and share repurchases, and how capital returns affect FCX’s net-debt target of $3B–$4B, which excludes Indonesia smelter project debt.
- Commodity prices, unit costs, Cerro Verde labor negotiations, Newtown Creek and talc liabilities, and the eventual resolution of Cerro Verde’s royalty arbitration.