FCX

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 1997, for Freeport-McMoRan Copper & Gold Inc. (FCX). The company operates primarily through its majority-owned subsidiary, P.T. Freeport Indonesia (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. As of March 31, 1997, the company had 82,983,544 shares of Class A Common Stock and 117,496,048 shares of Class B Common Stock outstanding.

Key Financial Metrics

Material Changes Versus Prior Period

• Revenue Growth: Revenues increased 35% year-over-year, driven by higher sales volumes at PT-FI and Atlantic, and a net $45.0 million upward adjustment on open concentrate sales from the prior year-end.
• Profitability: Operating income nearly doubled, aided by higher gold credits, lower unit royalties, and the realization of gains from hedging instruments (put options and forward gold sales).
• Cost Structure: General and administrative expenses decreased significantly ($26.7 million vs. $42.8 million) due to the absence of $12.7 million in stock appreciation rights costs recorded in Q1 1996. However, depreciation and amortization increased due to the Enhanced Infrastructure Program (EIP) at PT-FI.
• Debt Levels: Total debt increased by approximately $230 million, reflecting borrowings to fund capital expansions and share repurchases.

Guidance, Outlook, and Risks

Outlook and Management Commentary

• Production Targets: FCX estimates 1997 sales will total at least 1.1 billion pounds of copper and 1.65 million ounces of gold. Second-quarter sales are projected to be slightly higher than Q1 levels.
• Hedging Status: PT-FI has closed its forward gold sales contracts and sold its copper put option contracts. Consequently, the company no longer has price protection on copper sales or a forward gold position, though it may reinstate these programs if conditions warrant.
• Capital Projects: Construction is underway on the "fourth concentrator mill expansion" at PT-FI (completion mid-1998, cost ~$960 million) and the Gresik smelter/refinery (completion mid-1998, cost ~$625 million).
• Share Repurchases: FCX continues its open market share purchase program, having acquired 1.7 million shares in Q1 1997.

Risks and Contingencies

• Busang Properties: FCX is conducting due diligence on the Busang II and III properties in Indonesia. Initial core analyses indicate insignificant gold amounts, contradicting previous findings by BRE-X Minerals. An independent audit is pending. FCX has agreed to acquire a 15% interest subject to confirmation of commercially viable resources.
• Legal Proceedings: The company is defending against lawsuits alleging environmental and human rights violations in Indonesia (e.g., Tom Beanal v. Freeport-McMoRan), seeking billions in damages. The company denies these allegations as baseless.
• Commodity Price Volatility: With hedging positions closed, future earnings are more exposed to fluctuations in copper and gold market prices. Approximately 317.5 million pounds of copper sales remain "open" and subject to final pricing adjustments.
• Third-Party Financing: FCX has agreed to purchase stock or lender interests if a third party (Nusamba) defaults on a loan used to acquire a stake in PT-FI.

Investor Verification Checklist

• Verify the results of the independent audit regarding the Busang properties and the viability of the gold resources.
• Monitor the final pricing of the 317.5 million pounds of "open" copper sales and the impact of current LME prices on Q2 and Q3 revenue.
• Track the progress and cost overruns of the $960 million PT-FI mill expansion and the Gresik smelter project.
• Review the status of the pending litigation regarding human rights and environmental claims in Indonesia.
• Assess the impact of the closed hedging programs on cash flow stability given current commodity price trends.