Freeport-McMoRan Copper & Gold Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; compared with the three months ended March 31, 2012. Amounts are in U.S. dollars unless noted. Interim financial statements were reviewed, not audited. The filing states Q1 results are not necessarily indicative of full-year results.
Business context and key financial metrics
FCX operated copper, gold and molybdenum mines in North and South America, Indonesia and Africa, alongside copper smelting and refining. On March 29, it acquired a Finnish cobalt refinery and related business through Freeport Cobalt, in which FCX holds an effective 56% interest. Proposed acquisitions of Plains Exploration & Production (PXP) and McMoRan Exploration (MMR) were still pending and are not reflected in the reported results.
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Revenue | $4.583 billion | $4.605 billion |
| Operating income | $1.355 billion | $1.734 billion |
| Net income attributable to FCX common stockholders | $648 million | $764 million |
| Diluted EPS | $0.68 | $0.80 |
| Operating cash flow | $831 million | $801 million |
| Capital expenditures | $805 million | $707 million |
| Cash and cash equivalents, March 31 / December 31 | $9.595 billion | $3.705 billion |
| Total debt, March 31 / December 31 | $10.092 billion | $3.527 billion |
| Total assets, March 31 / December 31 | $42.588 billion | $35.440 billion |
Operating margin was approximately 29.6%, down from 37.6%; net income attributable to FCX common stockholders was approximately 14.1% of revenue, versus 16.6%. Operating cash flow less capital expenditures was approximately $26 million. Cash and current assets were elevated by acquisition-related financing: management reported $8.5 billion of net cash available after estimated noncontrolling interests, withholding taxes and other costs, including proceeds intended to fund the pending deals. The reported current ratio was approximately 5.1.
Material changes versus the prior period
- Revenue was nearly unchanged, but lower realized prices and an unfavorable $127 million net impact from prior-period provisional-price adjustments largely offset higher copper volumes. Average realized copper, gold and molybdenum prices fell to $3.51/lb, $1,606/oz and $12.75/lb, respectively, from $3.82/lb, $1,694/oz and $15.34/lb.
- Copper sales rose to 954 million pounds from 827 million, chiefly on improved Indonesian and African production. Gold sales declined to 214,000 ounces from 288,000, primarily due to lower Indonesian ore grades; molybdenum sales increased to 25 million pounds from 21 million.
- Operating income declined 22%, while FCX-attributable net income declined 15%. Higher production and delivery costs, depreciation and lower commodity realizations weighed on results. Q1 2013 also included a $45 million debt-extinguishment loss related to terminating acquisition bridge financing; Q1 2012 included a $168 million loss from redeeming notes.
- Operating cash flow increased modestly despite $430 million of working-capital uses and changes in other tax payments, compared with $720 million of such uses in Q1 2012. Investing cash outflow was $1.112 billion, including $321 million for the cobalt business. Financing activities provided $6.171 billion, principally reflecting $6.5 billion of senior-note issuance.
- FCX issued $6.5 billion of senior notes in March and entered into an agreement for a $4.0 billion acquisition term loan, not yet available at quarter-end. The notes had maturities from 2018 to 2043. Total debt rose substantially, while reported cash also increased from financing proceeds.
Outlook, management commentary and risks
- For 2013, FCX projected sales of 4.3 billion pounds of copper, 1.375 million ounces of gold and 92 million pounds of molybdenum. Q2 mine sales were expected to be about 1.0 billion pounds of copper, 295,000 ounces of gold and 23 million pounds of molybdenum.
- Assuming copper at $3.25/lb, gold at $1,400/oz and molybdenum at $11/lb for the rest of 2013, management estimated full-year operating cash flow of approximately $5.5 billion, excluding PXP and MMR, and copper-mine unit net cash costs of $1.45/lb. It expected cash flow plus available cash to cover planned capital expenditures, dividends, noncontrolling-interest distributions and other requirements, subject to market and operating assumptions.
- Full-year capital expenditures, excluding the pending acquisitions, were estimated at approximately $4.4 billion, including $2.6 billion for major projects. Key work included the Morenci expansion, Cerro Verde expansion and Grasberg underground development. Management anticipated lower unit costs in the second half as higher-grade ore became available at Grasberg.
- Management viewed long-term copper fundamentals positively, but reported weaker recent commodity prices amid concerns about China and other global economies. Q1 copper averaged $3.60/lb and closed at $3.44/lb on March 31; it was $3.21/lb on April 30. Gold and molybdenum prices also declined after quarter-end.
- Principal uncertainties include commodity-price volatility, mine sequencing and production performance, labor and political risks, Indonesian government discussions concerning the Contract of Work, DRC regulatory and administrative matters, environmental obligations, litigation, and successful completion and financing of the PXP and MMR acquisitions.
- PXP and MMR transactions remained subject to stockholder approval and other closing conditions; each could close independently. If PXP did not close, FCX would have to redeem $5 billion of specified notes at 101% plus accrued interest. Shareholder suits challenged the transactions. FCX also reported new Indonesian tax assessments of $59 million plus $55 million interest for 2008; it had paid $190 million toward tax assessments through March 31 and disputed earlier assessments.
- The Board declared a quarterly dividend of $0.3125 per share. Future dividends remain at the Board’s discretion and depend on results, cash requirements, prospects and the impact of pending acquisitions. The filing reported effective disclosure controls as of March 31.
Most important facts for investors to verify
- Whether PXP and MMR received approvals and closed on the anticipated timetable, and the resulting acquisition funding, debt and share dilution.
- How much quarter-end cash was genuinely available for operations after excluding acquisition proceeds, noncontrolling interests and other constraints.
- Whether projected metal sales, realized prices, unit cash costs and approximately $5.5 billion of operating cash flow remained achievable.
- Progress, costs and timing for Morenci, Cerro Verde and Grasberg projects, including the expected second-half production and grade improvements.
- Developments in Indonesian tax disputes and Contract of Work discussions, DRC matters, and shareholder litigation related to the proposed acquisitions.