Business context and reporting period
Freeport-McMoRan Inc. (FCX) is a global mining company focused on copper, gold and molybdenum, with major operations in the Americas and Indonesia. This unaudited Form 10-Q covers the three months ended March 31, 2017; comparisons are with the first quarter of 2016 unless noted. The interim financial statements received an independent accountant’s review, not an audit.
Financial and operating results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $3.341 billion | $3.242 billion |
| Operating income (loss) | $580 million | ($3.872 billion) |
| Net income (loss) attributable to common stockholders | $228 million | ($4.184 billion) |
| Diluted earnings (loss) per share | $0.16 | ($3.35) |
| Operating cash flow | $792 million | $740 million |
| Capital expenditures | $344 million | $982 million |
- Q1 2017 operating cash flow included $178 million from working capital sources and changes in other tax payments. Cash declined by $252 million during the quarter to $4.001 billion.
- At March 31, 2017, total debt was $15.363 billion, including $2.228 billion current and $13.135 billion long-term. FCX had no revolving-credit borrowings and approximately $3.5 billion available under the facility.
- Total current assets were $9.767 billion and current liabilities were $4.842 billion. Total liabilities were $26.989 billion and total equity was $9.587 billion.
- Copper production was 851 million pounds and sales were 809 million pounds; the average realized price was $2.67 per pound. Gold sales were 182,000 ounces at $1,229 per ounce; molybdenum sales were 24 million pounds at $8.71 per pound.
- Consolidated copper unit net cash costs were $1.39 per pound. Site production and delivery costs were $1.60 per pound.
Material changes versus the prior comparable period
- Revenue rose about 3%, as higher realized copper and molybdenum prices and favorable adjustments on prior-period provisionally priced copper sales offset lower copper, gold and oil-and-gas sales volumes. Prior-period copper pricing adjustments added $91 million to Q1 2017 revenue.
- FCX returned to operating and net income from substantial losses in Q1 2016, when it recorded a $3.8 billion oil-and-gas property impairment. The 2017 comparison also benefited from lower DD&A and lower oil-and-gas costs following asset disposals.
- Copper sales fell to 809 million pounds from 1.0 billion, largely reflecting lower North American volumes and Indonesian export restrictions. Gold sales declined to 182,000 ounces from 201,000; molybdenum sales increased to 24 million pounds from 17 million.
- Debt decreased from $16.027 billion at year-end 2016 to $15.363 billion. Q1 included $658 million of net debt repayments, including repayment of $500 million principal on 2.15% senior notes.
- Capital expenditures fell from $982 million to $344 million, mainly because of lower oil-and-gas spending after asset sales and the completion of the Cerro Verde expansion.
Guidance, outlook, risks and unusual items
- For 2017, FCX projected sales of 3.865 billion pounds of copper, 1.917 million ounces of gold and 93 million pounds of molybdenum. Q2 sales were expected to be approximately 1.0 billion pounds of copper, 440,000 ounces of gold and 24 million pounds of molybdenum.
- At assumed remaining-year prices of $2.50 per pound copper, $1,250 per ounce gold and $9.00 per pound molybdenum, and assuming a return to normal Indonesian operations, management estimated 2017 operating cash flow of approximately $4.0 billion, including $1.0 billion from working capital and other tax-payment changes. The estimate included a $1.2 billion income-tax provision.
- Management projected 2017 capital expenditures of approximately $1.6 billion, including $0.9 billion for major mining projects, and consolidated copper-mine unit net cash costs of $1.08 per pound. These estimates depend on prices, volumes, costs and Indonesian operating assumptions.
- Indonesia remained a key uncertainty. Export restrictions began in January; PT-FI resumed exports under a temporary permit on April 21 and planned to ramp up production. Longer-term operating rights, conversion of the Contract of Work to an IUPK, investment-stability terms, smelter requirements and divestment remained under negotiation. The permit was time-limited, and the filing reported workforce absenteeism and a potential May strike. PT-FI slowed underground development and smelter investment; FCX said it could substantially reduce or defer underground spending if an acceptable long-term agreement is not reached.
- FCX estimated $573 million of exposure, including interest and penalties, from Peruvian Cerro Verde royalty assessments through 2013; no charge was recorded because the company believes its stability agreement provides an exemption and that payments would be recoverable. Indonesian surface-water tax assessments totaled approximately $489 million through March 2017, including penalties; no charge was recorded, and PT-FI intended to contest them.
- Other notable items included $38 million of discontinued-operations income, primarily from an increase in the fair value of contingent consideration from the Tenke sale, and a $23 million net gain on asset sales. The common-stock dividend had been suspended since December 2015.
- Management highlighted commodity-price volatility, Indonesian regulatory and labor risks, operational and weather risks, and environmental and legal contingencies. FCX also warned that proposed U.S. hard-rock mining financial-assurance rules, if adopted substantially as proposed, could materially adversely affect cash flows, results and financial condition.
Important facts for investors to verify
- Progress and terms of PT-FI’s long-term Indonesian mining-rights agreement, export permits, export duties, smelter commitments and divestment requirements.
- Whether Indonesian operations and workforce productivity return to the levels assumed in sales, cash-flow and cost guidance.
- Commodity-price assumptions, provisionally priced copper exposures and the sensitivity of cash flow to copper, gold and molybdenum prices.
- Debt maturities, ongoing repayment capacity, liquidity availability and the extent to which projected operating cash flow depends on working-capital and tax-payment changes.
- Developments in the Cerro Verde royalty dispute and Indonesian surface-water tax assessments, including possible additional assessments, appeals and ultimate cash exposure.
- Whether 2017 sales, cost and capital-spending forecasts remain achievable after operational disruptions and investment delays.