FCX

Freeport-McMoRan Copper & Gold Inc. (FCX) - 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1997, and the nine-month period ended on that date. FCX operates primarily through its majority-owned subsidiary, P.T. Freeport Indonesia Company (PT-FI), which mines copper, gold, and silver in Irian Jaya, Indonesia, and Atlantic Copper Holding, S.A., which smelts and refines copper in Spain. The company's revenues are highly sensitive to market fluctuations in copper and gold prices.

Key Financial Metrics (Nine Months Ended Sept 30, 1997)

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 23% year-over-year, driven by higher sales volumes at PT-FI and Atlantic, partially offset by lower gold realizations. Hedging activities contributed $80.2 million to nine-month revenues.
• Profitability: Net income applicable to common stock rose 73% to $168.9 million. This was aided by a $39.1 million benefit from hedging contracts and lower general and administrative expenses compared to 1996 stock appreciation right charges.
• Cost Structure: Cost of sales increased due to higher volumes and an increased depreciation rate at PT-FI (15.0 cents/lb in 1997 vs. 13.0 cents/lb in 1996) related to the Enhanced Infrastructure Program (EIP).
• Debt Levels: Total debt increased significantly due to borrowings for the "fourth concentrator mill expansion" at PT-FI and share repurchase programs. Net interest expense rose to $112.3 million from $81.6 million.
• Exploration: Exploration expenses were $14.0 million in 1997 compared to zero in 1996, as Rio Tinto no longer reimbursed all costs for specific blocks.

Guidance, Outlook, and Risks

• Production Outlook: PT-FI projects fourth-quarter 1997 sales of approximately 285 million pounds of copper and 500,000 ounces of gold. The "fourth concentrator mill expansion" is expected to be completed in Q1 1998, increasing capacity to 190,000-200,000 metric tons per day.
• Hedging Status: PT-FI has suspended its forward gold sales program; future gold sales will be at market prices. The company has no price protection on future copper sales after selling put options in 1996.
• Open Sales Risk: As of September 30, 1997, 335.4 million pounds of copper sales remained to be finally priced at an average of $0.95/lb. A one-cent movement in the final price could impact 1997 net income by approximately $1.5 million.
• Contingencies: FCX has agreed to purchase stock or lender interests in PT-II (a 49% owned subsidiary) if its majority shareholder, Nusamba, defaults on a $254 million loan. As of Sept 30, $5.6 million was due from Nusamba for interest shortfalls.
• Share Repurchases: FCX announced an additional 20 million shares for repurchase, bringing the total program to 40 million shares. 9.1 million shares were purchased in the first nine months of 1997 for $252.7 million.

Investor Verification Checklist

• Final Pricing of Open Sales: Verify the final settlement price for the 335.4 million pounds of copper currently recorded at provisional prices, as this directly impacts Q4 1997 and Q1 1998 earnings.
• Expansion Costs: Monitor the $960 million cost estimate for the PT-FI mill expansion and the $625 million Gresik smelter project for potential overruns.
• Commodity Prices: Assess exposure to copper and gold price volatility given the suspension of forward hedging programs.
• Debt Servicing: Review the impact of increased debt levels ($2.1 billion total) on interest expense and liquidity, particularly with the shift from capitalized to expensed interest.
• PT-II Contingency: Track the financial health of Nusamba and the status of the $254 million loan to evaluate the risk of FCX assuming the debt.