Freeport-McMoRan Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. FCX operates global copper, gold, molybdenum and cobalt mines and U.S. oil and gas assets. Comparisons with 2013 are affected by the 2013 PXP and MMR acquisitions; the 2013 nine-month oil and gas results include only four months.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $5.696bn | $6.165bn | $16.203bn | $15.036bn |
| Operating income | $1.132bn | $1.707bn | $3.396bn | $3.701bn |
| Net income attributable to FCX common stockholders | $552m | $821m | $1.544bn | $1.951bn |
| Diluted EPS | $0.53 | $0.79 | $1.47 | $1.96 |
| Operating cash flow | $1.926bn | $1.878bn | $4.513bn | $3.743bn |
| Capital expenditures | $1.853bn | $1.645bn | $5.415bn | $3.623bn |
Operating margin was approximately 19.9% in Q3 versus 27.7% a year earlier, and 21.0% for the first nine months versus 24.6%. Operating cash flow less capital expenditures was negative $902m for the nine-month period. Nine-month cash flow includes $699m of working-capital uses and other tax-payment changes.
At September 30, cash was $658m (down from $1.985bn at December 31, 2013); debt was $19.737bn, including $1.762bn current. Current assets were $9.031bn and current liabilities $6.343bn. Management reported approximately $2.9bn of availability under the $4bn revolving facility, after $1.1bn of borrowings and $45m of letters of credit. Net cash available to the parent, after noncontrolling interests and estimated withholding taxes and other costs, was $456m. The quarterly common dividend remained $0.3125 per share.
Material changes and operating drivers
- Q3 revenue fell 7.6% and common-stockholder net income fell 32.8% year over year. Lower copper, gold and oil realizations and lower oil volumes weighed on results; higher copper and gold sales volumes partly offset the decline. Q3 copper sales were 1.077bn pounds and gold sales 525,000 ounces.
- For the first nine months, revenue rose 7.8%, while operating income declined 8.2% and common-stockholder net income declined 20.9%. The revenue increase chiefly reflects a full nine months of oil and gas results in 2014, versus four months in 2013. Copper and gold realized prices were lower; molybdenum prices improved.
- Average realized copper price was $3.12/lb in Q3 and $3.14/lb year to date, compared with $3.28 and $3.31. Average gold price was $1,220/oz and $1,251/oz, versus $1,329 and $1,395. Molybdenum averaged $14.71/lb and $13.01/lb, versus $11.21 and $12.12.
- FCX recorded a $308m oil and gas ceiling-test impairment, primarily reflecting higher capitalized costs and a lower reference oil-price average. Noncash oil and gas derivative mark-to-market gains were $122m in Q3 and $130m year to date; results also included a $58m Q3 gain on debt extinguishment and a $46m gain on asset sales.
- Nine-month operating cash flow increased despite lower metal realizations, supported in part by the acquired oil and gas business. Capital expenditure rose to $5.415bn, including significant spending on Cerro Verde and oil and gas projects. Debt declined from $20.706bn at year-end 2013; FCX redeemed $1.7bn of notes in Q3 and a further $400m on October 15.
Outlook, commentary and principal risks
- For 2014, management projected sales of 3.915bn pounds of copper, 1.220m ounces of gold, 95m pounds of molybdenum and 56.2m BOE. Q4 sales were expected at approximately 1.0bn pounds of copper, 350,000 ounces of gold, 21m pounds of molybdenum and 11.5m BOE.
- Management forecast 2014 copper-mine unit net cash costs of $1.52/lb, oil and gas cash production costs of about $21/BOE, operating cash flow of about $5.8bn, and capital expenditures of approximately $7.5bn. These estimates assume stated commodity prices and operating plans. FCX’s stated priority was significant debt reduction by the end of 2016, using cash flows above capital spending and other needs and potentially asset-sale proceeds.
- FCX sold Eagle Ford assets in June for $3.1bn before closing adjustments and acquired $1.4bn of Deepwater Gulf of Mexico interests. On November 3, it completed the sale of its 80% interests in Candelaria/Ojos del Salado for $1.8bn cash plus up to $200m contingent consideration; expected after-tax net proceeds were about $1.5bn, intended for debt repayment. The company expected an after-tax gain of about $450m; pro forma sale adjustments were preliminary.
- Indonesia remains a material regulatory and operating exposure. PT-FI resumed concentrate exports in August under an MOU, but must renew export permits every six months. Negotiations over a revised Contract of Work address royalties, export duties, smelting, divestment and operations after 2021; FCX warned revisions could add costs and affect investment plans. Q3 included $42m of export duties and $20m of increased royalties. A September accident killed four workers; open-pit operations temporarily paused and October output was affected by reduced attendance. A planned strike was canceled.
- Oil-price declines could prompt additional ceiling-test impairments and potentially a goodwill impairment. PT-FI had $392m of disputed Indonesian tax-assessment payments recorded in other assets; FCX believes these amounts are recoverable. The company also recorded $403m of additional Grasberg asset-retirement obligations in Q3 and expected further obligations from revised Chilean closure plans. Commodity-price volatility, mine execution, labor, permitting, political and environmental matters remain risks.
- Management reported no significant changes in previously reported litigation matters. The interim financial statements received an independent accountant’s review, not an audit opinion. Disclosure controls were reported effective at quarter-end.
Investor verification priorities
- Confirm subsequent-period effects and final sale accounting for Candelaria/Ojos del Salado, including proceeds, taxes, contingent consideration and debt repayment.
- Track debt reduction, liquidity availability, capital spending and whether projected 2014 cash flow and production were achieved.
- Monitor Indonesia Contract of Work negotiations, export-permit renewals, duties and royalties, smelter commitments, and Grasberg production and labor conditions.
- Assess sensitivity to oil-price declines, future ceiling-test impairments, derivative settlements and the assumptions underlying oil and gas reserves and carrying values.
- Reconcile reported earnings with one-time and noncash items, including the impairment, derivative mark-to-market gains, debt-extinguishment gain, asset-sale gain and provisional copper-price adjustments.