Freeport-McMoRan Inc. (FCX) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. FCX is an international copper, gold and molybdenum miner with major operations in North America, South America and Indonesia. Results reflect COVID-19 disruptions and revised operating plans.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $3.054bn | $3.546bn | $5.852bn | $7.338bn |
| Operating income (loss) | $321m | $33m | $(152)m | $354m |
| Net income (loss) attributable to common stockholders | $53m | $(72)m | $(438)m | $(41)m |
| Diluted earnings (loss) per share | $0.03 | $(0.05) | $(0.30) | $(0.03) |
| Operating cash flow | $491m | $554m | $453m | $1.088bn |
| Capital expenditures | $527m | $629m | $1.137bn | $1.251bn |
Q2 operating margin was approximately 10.5%; common-stockholder net margin was approximately 1.7%. For the six-month period, operating margin was approximately negative 2.6% and common-stockholder net margin approximately negative 7.5%.
- Q2 copper production was 767m lb and sales 759m lb; average realized price was $2.55/lb. Gold sales were 184,000 oz at $1,749/oz; molybdenum sales were 18m lb at $10.53/lb.
- At June 30, cash and cash equivalents were $1.465bn, total debt $9.914bn, and total equity $17.155bn. FCX reported $3.5bn available under its revolving credit facility, with no borrowings outstanding. Net debt was approximately $8.45bn.
- Current assets were $7.155bn and current liabilities $2.906bn. Six-month cash flow from operations was below the prior-year period; cash and cash equivalents declined from $2.020bn at year-end 2019.
Changes versus comparable periods
- Q2 revenue declined about 14% year over year; first-half revenue declined about 20%. Lower copper sales volumes and prices, lower molybdenum sales and reduced purchased-copper and cobalt revenues contributed. Q2 gold prices were higher year over year but did not offset these pressures.
- Q2 returned to operating and common-stockholder profitability from a year-earlier quarter, helped by lower unit costs and a $139m favorable metals-inventory adjustment. For the first half, FCX recorded an operating loss and a larger common-stockholder loss than in 2019.
- First-half copper sales were 1.488bn lb versus 1.591bn lb; average realized copper price was $2.53/lb versus $2.78/lb. South American volumes were particularly affected by Cerro Verde restrictions and lower operating rates.
- FCX recorded $196m of COVID-19 and revised-plan charges in Q2 and $224m in the first half. First-half results also included $83m of net unfavorable metals-inventory adjustments, despite the Q2 reversal benefit.
Outlook, management commentary and risks
- Management’s 2020 estimates were consolidated sales of 3.15bn lb copper, 0.8m oz gold and 77m lb molybdenum; copper unit net cash costs of $1.53/lb; operating cash flow of approximately $2.6bn; and capital expenditures of approximately $2.0bn. Cash-flow estimates assume second-half average prices of $2.85/lb copper, $1,800/oz gold and $7.00/lb molybdenum.
- FCX expected Q3 2020 sales of approximately 790m lb copper, 220,000 oz gold and 18m lb molybdenum. Management expected 2021 sales to rise to 3.8bn lb copper and 1.4m oz gold as Grasberg underground production ramps up; Lone Star was expected to produce about 200m lb copper annually beginning in H2 2020.
- Management cited progress restoring Cerro Verde, with second-half 2020 operations expected to average about 350,000 metric tons of ore per day. Grasberg’s underground ramp-up was reported on schedule. The Indonesian smelter project faced COVID-related delays, and FCX notified the government that the December 2023 completion timeline would be delayed.
- FCX amended its revolving-credit covenants in June, including a $1bn minimum-liquidity covenant through June 2021 and restrictions on common dividends through December 2021. The Board did not expect to declare common dividends during 2020. FCX reported covenant compliance at June 30.
- COVID-19 effects, commodity-price volatility, operating interruptions, Cerro Verde recovery, Grasberg execution and security conditions in Papua remain significant risks. FCX also flagged potential incremental costs to implement the Global Industry Standard on Tailings Management.
- Unusual or contingent items include a $41m first-half loss on early debt extinguishment; a $24m loss on temporary copper forward sales; Cerro Verde royalty arbitration; unresolved asbestos/talc litigation for which FCX said it could not estimate a possible loss range; and a Louisiana coastal-erosion settlement awaiting execution by all parties.
Important facts for investors to verify
- Whether projected 2020 sales, unit costs, operating cash flow and capital spending are achieved, and how sensitive cash flow is to copper and by-product prices.
- Progress and cost of the Grasberg underground ramp-up, Lone Star commissioning, and Cerro Verde’s return to expected operating rates.
- Final terms and effects of the July 2020 $1.5bn note offering and debt tenders, including the expected early-extinguishment charge and maturity profile.
- Compliance with minimum-liquidity and other credit covenants, and the timing and conditions for any future dividend resumption.
- Developments in the Indonesian smelter schedule, export-license renewals, Cerro Verde arbitration, talc litigation and tailings-standard implementation.