Freeport-McMoRan Inc. (FCX) — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. FCX is a global copper, gold and molybdenum mining company, with major operations in Indonesia, North America and South America. The interim financial statements were reviewed by Ernst & Young, not audited.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $3.851B | $3.153B | $9.703B | $10.491B |
| Operating income (loss) | $880M | $(38)M | $728M | $316M |
| Net income (loss) attributable to common stockholders | $329M | $(207)M | $(109)M | $(248)M |
| Diluted EPS | $0.22 | $(0.15) | $(0.08) | $(0.17) |
| Operating cash flow | $1.237B | $224M | $1.690B | $1.312B |
- Q3 operating margin was approximately 22.9%, versus a loss-making quarter in 2019; nine-month operating margin was approximately 7.5%, versus 3.0%.
- Q3 consolidated net income was $432M; $103M was attributable to noncontrolling interests, leaving $329M attributable to common stockholders. Nine-month consolidated net income was $7M, while common stockholders had a $109M loss.
- Q3 copper sales were 848M pounds at an average realized price of $3.01/lb; gold sales were 234,000 ounces at $1,902/oz. For the first nine months, copper sales were 2.336B pounds at $2.73/lb, and gold sales were 562,000 ounces at $1,810/oz.
- Copper unit net cash costs were $1.32/lb in Q3 and $1.55/lb for the first nine months, compared with $1.59/lb and $1.76/lb, respectively, in 2019. These are non-GAAP operating measures.
- Cash and cash equivalents were $2.403B at September 30, up from $2.020B at year-end 2019. Total debt was $10.030B, versus $9.826B at year-end; reported liquidity was $5.9B, including $3.5B available on the revolver. The company reported no revolver borrowings and no senior-note maturities until 2022.
- Nine-month capital expenditures were $1.573B, down from $1.917B. Operating cash flow exceeded capital expenditures by $117M for the period. Current liabilities were $3.096B and current assets were $8.071B.
Material changes versus comparable periods
- Q3 revenue rose 22% year over year, led by higher copper and gold prices, higher copper sales volumes and favorable prior-period provisional copper pricing adjustments. Operating income improved from a $38M loss to $880M.
- Nine-month revenue declined 8%, mainly reflecting lower copper, gold and molybdenum sales volumes, lower molybdenum prices, and lower cobalt and purchased-copper revenues. Higher gold prices and reduced production costs partly offset the decline.
- Q3 production and delivery costs fell to $2.465B from $2.670B; nine-month costs fell to $7.404B from $8.599B. Lower operating rates and cost-reduction actions contributed, while DD&A increased with Grasberg underground assets entering service.
- Nine-month operating cash flow increased despite lower revenue. Investing cash use narrowed to $1.433B from $1.825B; capital expenditures declined. Financing cash flow was positive $120M, compared with a $1.430B outflow in 2019.
Outlook, management commentary and notable items
- 2020 projected consolidated sales: 3.175B pounds of copper, 0.8M ounces of gold and 80M pounds of molybdenum. Q4 sales were expected to approximate 840M pounds of copper, 270,000 ounces of gold and 21M pounds of molybdenum.
- Management projected 2020 copper-mine unit net cash costs of $1.49/lb, operating cash flow of approximately $2.9B and capital expenditures of approximately $2.0B, assuming specified Q4 commodity prices and achievement of operating estimates. Management expected 2021 sales and operating cash flows to increase significantly as Grasberg underground production ramps up and unit costs decline.
- Grasberg underground ramp-up was described as on schedule, though Q3 production was below the July estimate due to unplanned downtime and a brief labor-related stoppage. Cerro Verde was operating at about 90% of its 2019 average rate in Q3. Lone Star was ramping up, with approximately 200M pounds of annual copper production expected; Chino was expected to restart at a reduced rate in 2021.
- COVID-19 and revised-plan charges totaled $34M in Q3 and $258M for the first nine months. Cost actions included furloughs, employee separations and reductions in administrative and vendor spending; annual employee-separation savings were expected to exceed $100M.
- Debt refinancing in March and July issued $2.8B of new notes due 2028 and 2030 and funded purchases or redemptions of nearer-term debt. Early-extinguishment losses were $59M in Q3 and $100M for the first nine months.
- The company suspended its quarterly common dividend; management did not expect a 2020 dividend and anticipated recommending a possible resumption in 2021. The amended credit facility restricts dividends through December 31, 2021, subject to an option to revert to prior covenants. FCX reported covenant compliance at quarter-end.
- The 2020 effective tax rate was unusually high: the nine-month provision was $333M on $328M of pretax income, reflecting jurisdictional mix and the lack of a recognized tax benefit on U.S. losses. The company collected $221M of U.S. alternative minimum tax refunds in July and $24M in October.
- Risks include COVID-19 impacts, commodity-price volatility, operating and labor disruptions, underground-mine ramp-up execution, Indonesian export-license and smelter timing, political/security conditions in Papua, and legal and environmental matters. The Indonesian smelter schedule was delayed by pandemic-related disruptions; PT-FI’s export license had been extended through March 15, 2021.
- Talc litigation remains uncertain following Imerys’ bankruptcy and disputes over legacy insurance and indemnity rights. FCX said a loss was reasonably possible but could not estimate a loss range; a potential global settlement could result in material charges. Louisiana coastal-erosion settlement execution was delayed by COVID-19. FCX also began a multi-year review of tailings facilities against a new industry standard; compliance costs were still being assessed.
Investor verification priorities
- Confirm subsequent copper, gold and molybdenum prices, provisional-price settlements, and their effect on revenue and cash flow.
- Track actual sales volumes, unit costs, Cerro Verde recovery and Grasberg ramp-up against the 2020 and 2021 outlook.
- Assess liquidity, debt refinancing and covenant terms, including the dividend restriction and management’s conditional 2021 dividend expectations.
- Monitor COVID-19 operating effects, Indonesian export-license renewal and smelter schedule, and potential PT-FI labor or security interruptions.
- Follow talc claims, insurance-access proceedings, possible settlement exposure, and tailings-standard compliance costs.