Freeport-McMoRan Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The unaudited interim financial statements were reviewed by Ernst & Young; the review was not an audit.
Business context and reporting period
FCX is a global copper producer with operations in North America, South America and Indonesia, including the Grasberg minerals district. Results reflected higher copper and gold production and sales, but lower copper prices and higher energy, labor and consumables costs. Management said near-term markets remained uncertain while long-term copper fundamentals remained favorable.
Financial and operating performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $5.00 billion | $6.08 billion | $17.02 billion | $16.68 billion |
| Operating income | $962 million | $2.46 billion | $5.51 billion | $6.06 billion |
| Net income attributable to common stockholders | $404 million | $1.40 billion | $2.77 billion | $3.20 billion |
| Diluted EPS | $0.28 | $0.94 | $1.90 | $2.16 |
| Operating cash flow | Not separately reported | Not separately reported | $4.07 billion | $5.44 billion |
| Capital expenditures | $836 million | $541 million | $2.42 billion | $1.34 billion |
- Q3 operating margin was approximately 19%, versus 40% in the prior-year quarter; nine-month margin was approximately 32%, versus 36%.
- Q3 copper production was 1.056 billion pounds and sales were 1.060 billion pounds; nine-month production and sales were 3.140 billion and 3.171 billion pounds, respectively. Q3 average realized copper price was $3.50/lb, down from $4.20/lb.
- Q3 gold production was 448,000 ounces and sales were 480,000 ounces. Nine-month gold sales were 1.365 million ounces, versus 965,000 ounces.
- Nine-month operating cash flow fell year over year, primarily from higher international tax payments and lower copper prices; higher copper and gold volumes partly offset these effects. Working capital and other uses were $1.0 billion, versus $367 million of sources in 2021.
- At September 30, cash and cash equivalents were $8.58 billion; total debt was $10.69 billion, including $1.03 billion current. Net debt was $2.1 billion, or $1.3 billion excluding Indonesia smelter-project net debt. Current assets were $15.37 billion and current liabilities $6.00 billion.
Material changes versus prior comparable periods
- Q3 revenue declined 18% and common-stockholder net income declined 71%, mainly because of lower realized copper prices, adverse adjustments on provisionally priced copper sales, and higher input costs; increased copper and gold volumes partly offset the decline.
- Nine-month revenue rose about 2%, but operating income and common-stockholder net income fell. Higher copper and gold sales volumes and higher molybdenum prices were offset by lower copper prices, cost inflation and unfavorable provisional-pricing adjustments.
- Q3 consolidated site production and delivery costs for copper mines increased to $2.35/lb from $1.88/lb. Consolidated unit net cash costs rose to $1.75/lb from $1.24/lb.
- PT-FI issued $3.0 billion of senior notes in April, repaid its term loan, and is using remaining proceeds to fund Indonesia smelter projects. FCX also repurchased $1.35 billion of treasury stock during the first nine months; no shares were repurchased after July 11.
Outlook, commentary and risks
- 2022 sales guidance: 4.191 billion pounds of copper, 1.8 million ounces of gold and 76 million pounds of molybdenum. Q4 sales were expected to approximate 1.0 billion pounds of copper, 420,000 ounces of gold and 20 million pounds of molybdenum.
- Costs and cash flow: Management projected 2022 consolidated copper unit net cash costs of $1.55/lb and operating cash flow of approximately $4.7 billion, assuming Q4 average prices of $3.50/lb copper, $1,700/oz gold and $18/lb molybdenum. Cash-flow guidance included $1.4 billion of working-capital and other uses.
- Capital spending: 2022 capital expenditures were projected at approximately $3.6 billion, including $1.8 billion for major mining projects and $0.9 billion for Indonesia smelter projects. The latter were expected to be funded with PT-FI note proceeds and credit availability.
- Copper prices declined from a March 2022 high of $4.87/lb to $3.47/lb at quarter-end; management cited global economic concerns, Chinese data, energy-market disruption, higher U.S. rates and a strong dollar. Energy, labor and consumables inflation remained significant risks.
- The new $3.0 billion, five-year unsecured revolving credit facility, entered into in October 2022, replaced the prior $3.5 billion facility. FCX reported no borrowings on its revolver at quarter-end and stated it was in compliance with facility covenants.
- PT-FI’s export license was extended through March 19, 2023. The greenfield smelter was expected to be completed in 2024, although the government commitment called for additional domestic smelting capacity by the end of 2023. PT-FI paid a $57 million administrative fine in March and said it would dispute any additional fines.
- Other matters include updated closure plans that increased Morenci and Bagdad asset-retirement obligations by $117 million and $65 million, respectively; an executed settlement of 13 Louisiana coastal-erosion cases involving a $15 million initial payment; and ongoing talc-related bankruptcy mediation, with a temporary litigation stay extended through at least January 2023.
- FCX was assessing the effects of the Inflation Reduction Act, including the corporate alternative minimum tax and 1% excise tax on net stock repurchases, effective for tax years beginning after 2022. The Board retains discretion over dividends and repurchases.
Important facts for investors to verify
- Whether copper prices, production volumes and cost inflation support the company’s 2022 operating-cash-flow and unit-cost guidance.
- Progress, cost and timing of the Indonesia smelter and PT Smelting expansion, and the implications for export duties, licensing and potential additional fines.
- Changes in cash, debt and project funding, including the use of PT-FI note proceeds and compliance with credit-facility covenants.
- Exposure from provisionally priced copper sales: 523 million pounds remained open at quarter-end at an average recorded price of $3.45/lb; FCX estimated a $16 million net-income impact for each $0.05/lb price change.
- Potential changes in environmental closure estimates and the outcomes of Louisiana and talc-related matters, as well as the effects of the new U.S. tax provisions.