FREEPORT-MCMORAN INC quarterly report, Q1 FY2009

Business context and reporting period

Freeport-McMoRan Copper & Gold Inc. (FCX) filed this unaudited Form 10-Q for the three months ended March 31, 2009. FCX mines copper, gold and molybdenum, with operations in North and South America, Indonesia and Africa, as well as smelting and refining businesses. The quarter was marked by sharply lower metal prices and cost and investment reductions following the late-2008 downturn.

Financial and operating highlights

Metric	Q1 2009	Q1 2008
Revenue	$2.602 billion	$5.672 billion
Operating income	$672 million	$2.396 billion
Net income	$207 million	$1.505 billion
Net income applicable to common stock	$43 million	$1.122 billion
Diluted earnings per share	$0.11	$2.64
Net cash from operating activities	$(258) million	$615 million
Capital expenditures	$519 million	$508 million

• Revenue declined about 54% year over year, primarily due to lower copper and molybdenum prices. Average realized prices were $1.72/lb for copper versus $3.69, $904/oz for gold versus $933, and $11.52/lb for molybdenum versus $31.67.
• Operating margin was approximately 25.8%, compared with 42.2% a year earlier; consolidated net income margin was approximately 8.0%, compared with 26.5%.
• Mining sales volumes were 1.020 billion lb copper, 545,000 oz gold and 10 million lb molybdenum. Copper and gold volumes rose mainly on higher Grasberg ore grades; molybdenum sales fell with weaker demand.
• Consolidated copper unit net cash costs, after by-product credits, were $0.66/lb versus $1.06/lb. Lower input costs and higher Grasberg grades helped, while North America operations were curtailed.
• Operating cash use included $919 million of working-capital requirements, chiefly $573 million to settle final pricing on prior-year provisional copper sales. Investing cash use was $516 million; financing provided $546 million, including net common-stock offering proceeds of $740 million. Cash fell $228 million to $644 million.
• At March 31, total debt was approximately $7.2 billion versus $7.4 billion at year-end 2008. Cash was $644 million, of which $445 million was available to FCX’s parent. The $1.5 billion revolving facilities had no borrowings, $74 million of letters of credit and approximately $1.4 billion available.
• Current assets were $5.4 billion and current liabilities $2.648 billion. FCX reported total liabilities of $15.626 billion and equity of $8.082 billion.

Material changes versus the prior comparable period

• Operating income, net income and common-stock earnings fell substantially as lower realized metal prices outweighed higher copper and gold sales volumes.
• Operating cash flow moved from $615 million provided to $258 million used, largely reflecting working-capital settlements; the filing notes working-capital use was also significant in Q1 2008.
• FCX issued 26.8 million common shares in February at an average $28 per share, receiving $740 million net. Common dividends were suspended; no common dividend was paid in Q1 2009 versus $169 million in Q1 2008. Preferred dividends were $60 million.
• Q1 2009 included $25 million of net restructuring and other charges, $19 million of molybdenum inventory write-downs and $31 million of environmental-obligation adjustments. These reduced common earnings by approximately $0.05, $0.05 and $0.08 per share, respectively, as presented in the filing.
• Production curtailments and lower prices drove a major change in segment performance: North America copper mines reported a $32 million operating loss versus $666 million income a year earlier; Indonesia operating income rose to $689 million from $571 million, supported by higher Grasberg grades and volumes.

Outlook, management commentary and risks

• Management forecast 2009 mine sales of approximately 3.9 billion lb copper, 2.3 million oz gold and 50 million lb molybdenum, including Q2 estimates of 955 million lb copper, 650,000 oz gold and 11 million lb molybdenum. These targets depend on mine rates, facilities, weather and other factors.
• Assuming remainder-of-year prices of $2.00/lb copper, $900/oz gold and $8/lb molybdenum, management estimated 2009 operating cash flow of about $2.5 billion, net of $0.6 billion of working-capital requirements, and copper unit net cash costs of about $0.70/lb. Estimated cash-flow sensitivity: approximately $240 million per $0.10/lb copper-price change, $75 million per $50/oz gold-price change and $30 million per $1/lb molybdenum-price change.
• FCX expected 2009 capital expenditures of approximately $1.3 billion, down from $2.7 billion in 2008. Most expansion projects were deferred; Grasberg underground development and Tenke Fungurume remained major projects. Tenke produced its first cathode in late March and was expected to ramp toward capacity in the second half of 2009; approximately $1.6 billion of its $1.75 billion budget had been incurred by quarter-end.
• FCX reduced or suspended activity at higher-cost North America mines, cut Henderson molybdenum production, reduced spending and workforce, and suspended the common dividend. Management said it would continue to adjust operations to market conditions and viewed long-term copper fundamentals positively, while emphasizing near-term uncertainty.
• Key risks include volatile copper, gold and molybdenum prices; mine sequencing, operating rates and costs; a high and commodity-sensitive effective tax rate (63% in Q1); provisional copper pricing; political, regulatory, labor, environmental and weather risks. FCX had 407 million lb of provisional copper sales outstanding at an average recorded price of $1.83/lb at March 31; it subsequently locked in prices averaging $1.86/lb on 355 million lb of PT Freeport Indonesia sales. The company stated this was not a change in its policy of not hedging future copper production.
• The DRC government had sought proposed modifications to the Tenke Fungurume contracts; FCX said discussions continued and the review had not affected the project schedule. Two environmental matters were settled in April 2009, with penalties of $45,000 and $276,000, plus required environmental actions in the latter matter.
• The independent accountant performed an interim review, not an audit, and reported no material modifications were needed to the interim statements. Management reported disclosure controls were effective and no material change in internal control during the quarter.

Important facts for investors to verify

1. Actual realized metal prices, sales volumes and provisional-price settlements against management’s 2009 assumptions and sensitivities.
2. Whether operating cash flow, working-capital needs, capital spending and project funding remain consistent with the liquidity outlook.
3. Progress and cost to complete Tenke Fungurume and Grasberg development, including ramp-up timing and the DRC contract review.
4. Effects of workforce and production cuts, deferred projects and lower 2010 output expected at North America and South America mines.
5. Debt, revolving-credit availability, preferred-dividend obligations and potential dilution from conversion of preferred stock; common dividends remained suspended.