Freeport-McMoRan Inc. — Q2 2018 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2018. Freeport-McMoRan (FCX) is a diversified copper, gold and molybdenum miner, with major operations in North America, South America and Indonesia, including the Grasberg district. Financial statements are unaudited; the independent accountant’s interim review identified no material modifications needed for GAAP conformity.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $5.168 billion | $3.711 billion | $10.036 billion | $7.052 billion |
| Operating income | $1.664 billion | $686 million | $3.123 billion | $1.283 billion |
| Net income attributable to common stockholders | $869 million | $268 million | $1.561 billion | $496 million |
| Diluted EPS | $0.59 | $0.18 | $1.07 | $0.34 |
| Operating cash flow | $1.309 billion | $1.037 billion | $2.678 billion | $1.829 billion |
| Capital expenditures | $482 million | $362 million | $884 million | $706 million |
- Q2 operating margin was approximately 32%, versus 18% in Q2 2017. Higher copper and gold volumes and prices drove the improvement; higher production and delivery costs and foreign income-tax expense partly offset it.
- Q2 copper sales were 989 million pounds at an average realized price of $3.08/lb; gold sales were 676,000 ounces at $1,274/oz; molybdenum sales were 24 million pounds at $12.89/lb. Indonesia’s stronger volumes were a major contributor.
- At June 30, cash and cash equivalents were $3.859 billion, total debt $11.127 billion, and total equity $12.842 billion. Net debt was approximately $7.3 billion. Current assets of $10.343 billion exceeded current liabilities of $3.799 billion (current ratio approximately 2.7).
- FCX repaid about $1.95 billion of debt in the first half, including $1.4 billion of notes at maturity and $454 million of redeemed notes. It reinstated its common dividend at $0.05/share per quarter. The $3.5 billion revolving facility had no borrowings and approximately $3.5 billion of availability at quarter-end.
Material changes versus the prior comparable period
- Q2 revenue rose approximately 39% year over year and common-stockholder net income more than tripled. Higher copper prices, higher copper and gold sales, and increased molybdenum prices contributed; production costs also increased.
- First-half copper sales increased to 1.982 billion pounds from 1.751 billion, and gold sales to 1.286 million ounces from 614,000 ounces, mainly on improved Indonesian operating rates and ore grades. First-half average realized copper price rose to $3.10/lb from $2.65/lb.
- Debt fell approximately $2.0 billion from December 31, 2017. Cash and cash equivalents declined from $4.447 billion to $3.859 billion; financing cash outflows included debt repayments and $314 million of dividends to common stockholders and noncontrolling interests.
- First-half operating cash flow increased by $849 million year over year, despite $213 million of working-capital uses and timing of other tax payments, compared with $343 million of sources in the prior-year period.
Outlook, management commentary and risks
- Management projected 2018 sales of 3.817 billion pounds of copper, 2.416 million ounces of gold and 95 million pounds of molybdenum. Q3 sales were expected to approximate 970 million pounds of copper, 700,000 ounces of gold and 24 million pounds of molybdenum.
- At assumed second-half prices of $2.75/lb copper, $1,250/oz gold and $11/lb molybdenum, FCX estimated 2018 operating cash flow of approximately $4.3 billion, including $200 million of working-capital uses and tax-payment timing. Estimated 2018 capital expenditures were approximately $2.0 billion, including $1.1 billion for major projects. Estimated consolidated copper-mine unit net cash costs averaged $1.04/lb for the year.
- FCX said copper prices declined in July amid uncertainty over international trade actions; copper was $2.82/lb on July 31, versus $3.01/lb at June 30. Management said it could adjust operating plans if prices continued to fall. Estimated operating cash flow changes by about $185 million for each $0.10/lb change in second-half copper prices.
- Indonesia remains a central execution and regulatory risk. A July non-binding agreement contemplates Inalum acquiring Rio Tinto’s joint-venture interests and FCX’s interests in PT Indocopper for aggregate consideration of $3.85 billion; FCX expects $350 million in cash. Closing, expected in the second half of 2018, depends on definitive agreements, long-term mining rights through 2041, governance arrangements and resolution of environmental matters. PT-FI’s temporary mining license had been extended only through August 31, 2018, while its export license runs through February 15, 2019.
- Indonesia’s Ministry of Environment and Forestry issued standards that PT-FI considers unattainable for its tailings system; failure to modify or delay them could adversely affect operations, including possible shutdown. PT-FI’s long-term mining rights and transaction assumptions are not assured.
- Grasberg’s open-pit operation was extended approximately six months through the first half of 2019, but the transition to underground mining is expected to reduce Indonesian production in 2019–2020. Seismic activity delayed the DMLZ ramp-up; hydraulic fracturing was planned, with large-scale mining targeted to begin in mid-2019. Underground development schedules, costs and output remain uncertain.
- FCX recorded a $44 million increase in its Cyprus Tohono environmental obligation in Q2. It estimated potential exposure of $50–$80 million in the Garcia offshore employment case if California law applies retroactively, but recorded no reserve because management did not consider a loss probable. PT-FI reported $169 million of surface-water tax assessments, including penalties, for August 2015–June 2018; no charge was recorded, and PT-FI disputed liability under its Contract of Work. The Indonesia tax court had partially reduced one earlier assessment, and the Supreme Court issued favorable decisions for earlier periods.
- Other notable items include $45 million of Q2 gains on asset sales, primarily fair-value adjustments to contingent consideration, and $59 million of Q2 environmental and shutdown costs. Provisional copper pricing also creates earnings exposure: 336 million pounds of net provisional sales were recorded at $3.01/lb at June 30; a $0.05/lb price change was estimated to affect 2018 common-stockholder net income by about $10 million.
Important facts for investors to verify
- Whether FCX and Inalum complete definitive transaction documents and secure acceptable mining rights, environmental resolutions and license extensions for PT-FI.
- Actual Indonesian production during the open-pit-to-underground transition, and progress, safety and costs at Grasberg Block Cave and DMLZ.
- Realized metal prices, provisional-sales settlements, sales volumes and unit costs versus management’s 2018 assumptions.
- Cash generation and capital spending relative to guidance, debt reduction plans and the Board’s discretionary dividend policy.
- Developments in Indonesia’s tax and environmental matters, the Garcia litigation, and contingent-consideration valuations that affect reported earnings.