Freeport-McMoRan Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. The interim financial statements were reviewed by Ernst & Young LLP, not audited.
Business context and financial performance
FCX is a global copper, gold and molybdenum miner. Results were heavily affected by the planned transition at PT Freeport Indonesia (PT-FI) from Grasberg open-pit mining to underground operations, which reduced production and sales of copper and gold.
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $3.792 billion | $4.868 billion |
| Operating income | $321 million | $1.459 billion |
| Net income attributable to common stockholders | $31 million | $692 million |
| Diluted earnings per share | $0.02 | $0.47 |
| Operating cash flow | $534 million | $1.369 billion |
| Capital expenditures | $622 million | $402 million |
Operating margin was approximately 8.5%, compared with 30.0% in Q1 2018, calculated from reported revenue and operating income. The income tax provision was $105 million; the reported effective tax rate was 57%, affected by jurisdictional income mix and U.S. losses that did not generate a recognized tax benefit.
At March 31, cash and cash equivalents were $2.833 billion and total debt was $9.905 billion, down from $11.141 billion at December 31, 2018. FCX reported $3.5 billion available under its revolving credit facility, with no borrowings outstanding. Current assets were $9.045 billion and current liabilities were $3.247 billion. Cash, cash equivalents and restricted cash fell by $1.343 billion during the quarter.
Copper production was 780 million pounds and sales were 784 million pounds; gold production was 166,000 ounces and sales were 242,000 ounces. Average realized prices were $2.90 per pound for copper and $1,291 per ounce for gold. Consolidated copper-mine unit net cash costs were $1.78 per pound, versus $0.98 a year earlier.
Material changes and unusual items
- Revenue fell about 22%, principally due to lower copper and gold sales volumes from Indonesia’s transition, as well as a 7% decline in realized copper prices. Copper sales volumes fell to 784 million pounds from 993 million; gold sales fell to 242,000 ounces from 610,000.
- FCX reported $114 million of identified charges affecting operating income: $57 million for cobalt inventory adjustments, $35 million for environmental obligations and related litigation reserves, and $22 million of other charges, including weather-related impacts and non-recurring employee costs. A $33 million net gain on asset sales partly offset expenses.
- FCX redeemed $1.0 billion of 3.100% notes due 2020 and Cerro Verde prepaid $200 million of its credit facility. Early debt extinguishment losses totaled $6 million.
- Q1 operating cash flow was below capital spending. Capital expenditures included $370 million for major mining projects; FCX received $84 million from oil and gas property sales, including $50 million in contingent consideration.
- FCX adopted lease accounting effective January 1, 2019, recognizing $243 million of lease right-of-use assets and liabilities at adoption. At quarter-end, lease liabilities totaled $256 million.
Outlook, management commentary and risks
- For 2019, FCX projected sales of 3.25 billion pounds of copper, 832,000 ounces of gold and 94 million pounds of molybdenum. Q2 2019 sales were expected to approximate 800 million pounds of copper, 265,000 ounces of gold and 25 million pounds of molybdenum.
- Assuming specified commodity prices and current volume and cost estimates, management forecast 2019 operating cash flow of approximately $2.3 billion, capital expenditures of approximately $2.5 billion, and consolidated copper-mine unit net cash costs of $1.75 per pound. These are estimates, not guarantees.
- PT-FI production was expected to remain significantly lower in 2019 and 2020 during the transition, with significant improvement anticipated by 2021 after underground ramp-up. The Grasberg Block Cave ramp-up was underway; the DMLZ ramp-up was expected by mid-2019. Development spending and schedules remain subject to change.
- Management described long-term copper fundamentals positively but emphasized exposure to volatile commodity prices, sales volumes, costs, taxes and working capital. Forecast cash flow assumes average remaining-2019 prices of $3.00/lb copper, $1,300/oz gold and $13.00/lb molybdenum.
- PT-FI’s export license was extended through March 8, 2020; its export quota and any increase remained subject to Indonesian government approval. PT-FI also committed to construct a new Indonesian smelter by December 2023; preliminary project cost was about $3 billion, with financing and partner arrangements to be pursued.
- Heavy rain and electrical storms suspended El Abra leach stacking for about 35 days; FCX estimated a 30-million-pound impact to 2019 consolidated copper production. The filing also highlights underground-mining, political, regulatory, environmental, labor, weather and commodity-price risks.
- Imerys’s February 2019 bankruptcy interrupted its defense of talc-related lawsuits against FCX subsidiaries. FCX said it could not estimate possible losses, although it did not then believe them material; access to legacy insurance was being contested in bankruptcy court.
Most important facts for investors to verify
- Actual Grasberg underground ramp-up, grades, recoveries, production and sales versus the transition-year forecasts.
- Indonesian export quota approvals and the status, financing, cost and schedule of the required smelter.
- Whether 2019 operating cash flow and capital-spending assumptions remain achievable at prevailing commodity prices.
- Debt reduction, liquidity availability and cash needs for underground development, dividends and noncontrolling-interest distributions.
- Developments in the talc litigation and insurance-access proceedings, plus any changes to environmental or other contingencies.