Freeport-McMoRan Copper & Gold Inc. (FCX) — Q1 2011 Form 10-Q
Business context and period. The filing covers the unaudited three months ended March 31, 2011, with comparison to Q1 2010. FCX is a global copper, gold and molybdenum miner, with operations in North and South America, Indonesia and the DRC, as well as smelting and refining businesses. The interim financial statements received an independent accountant’s review, not an audit.
Financial and operating performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $5.709 billion | $4.363 billion |
| Operating income | $2.936 billion | $2.048 billion |
| Net income | $1.861 billion | $1.215 billion |
| Net income attributable to FCX common stockholders | $1.499 billion | $897 million |
| Diluted EPS | $1.57 | $1.00 |
| Operating cash flow | $2.359 billion | $1.818 billion |
| Capital expenditures | $505 million | $231 million |
- Revenue increased approximately 31% and operating income approximately 43%. Operating margin was approximately 51.4%, versus 46.9% a year earlier.
- Management attributed stronger results principally to higher realized metal prices, partly offset by lower copper sales volumes. Realized prices were $4.31/lb copper, $1,399/oz gold and $18.10/lb molybdenum, compared with $3.42/lb, $1,110/oz and $15.09/lb, respectively.
- Copper sales fell to 926 million pounds from 960 million; gold sales were 480,000 oz versus 478,000 oz; molybdenum sales rose to 20 million pounds from 17 million. Copper production increased to 950 million pounds from 929 million.
- Production and delivery costs rose to $2.377 billion from $1.918 billion, mainly reflecting higher mining input costs and concentrate purchase costs. Copper mine site production and delivery costs increased to $1.61/lb from $1.35/lb; consolidated unit net cash costs were $0.79/lb versus $0.82/lb.
- Cash and cash equivalents were $4.090 billion at quarter-end; an additional $1.168 billion was restricted for the planned debt redemption. Total debt was approximately $4.752 billion, including $1.170 billion classified as current. Total equity was $16.091 billion. The new $1.5 billion revolving facility had no borrowings and approximately $1.5 billion available, subject to outstanding letters of credit.
- Operating cash flow included $114 million from working-capital sources, versus $280 million in Q1 2010. Cash used in investing was $505 million and cash used in financing was $1.502 billion; cash increased by $352 million to $4.090 billion.
Material changes, outlook and management commentary
- For 2011, FCX projected mine sales of approximately 3.9 billion pounds of copper, 1.6 million ounces of gold and 73 million pounds of molybdenum. Q2 sales guidance was 965 million pounds of copper, 365,000 ounces of gold and 17 million pounds of molybdenum.
- Assuming specified remainder-of-year commodity prices and current plans, management estimated 2011 operating cash flow of approximately $8.3 billion, net of $60 million of working-capital requirements, and capital expenditures of approximately $2.5 billion. Estimated 2011 taxes were $3.9 billion; the expected annual effective tax rate was approximately 35%.
- Management expected copper unit net cash costs for the remainder of 2011 to exceed Q1’s $0.79/lb and estimated a 2011 average of approximately $1.04/lb, assuming gold at $1,400/oz and molybdenum at $15/lb for the rest of the year. These estimates are sensitive to metal prices, volumes and costs.
- FCX entered into a new revolving credit facility on March 30, 2011. On April 1 it redeemed the remaining $1.1 billion of 8.25% Senior Notes due 2015, funded from restricted cash. Management expected a $56 million Q2 extinguishment loss ($49 million attributable to FCX common stockholders). After redemption, debt was expected to be approximately $3.7 billion; FCX reported no significant near-term maturities.
- The Board declared a regular $0.25/share quarterly dividend and, in April, a supplemental $0.50/share dividend payable June 1, 2011. The supplemental payment was estimated at approximately $474 million. Dividends remain subject to Board discretion.
- Growth and development activity included Morenci ramp-up, El Abra’s sulfide transition, Grasberg underground development, and construction at the Climax molybdenum mine. These projects entail substantial planned investment and execution risk. The DRC contract amendments were approved, with FCX’s effective Tenke ownership expected to decline prospectively from 57.75% to 56.0%.
Risks, contingencies and unusual items
- Commodity-price volatility, mine sequencing, production and cost performance, and dependence on global demand are key earnings and cash-flow risks. At March 31, 464 million pounds of copper sales remained provisionally priced; a $0.05/lb price change was estimated to affect 2011 revenue by about $31 million and FCX common-stockholder income by about $15 million.
- In April 2011, two shooting incidents near the Grasberg access road caused two fatalities and two employee injuries. Operations continued, but prolonged access restrictions could adversely affect the mine.
- Cerro Verde faced Peruvian mining-royalty assessments of approximately $122 million including accrued interest, which FCX contested. PT Freeport Indonesia disputed a 2005 tax assessment of approximately $106 million plus $52 million interest; a separate Indonesian VAT matter could involve significant taxes and penalties, but no assessment had been received.
- Q1 included a $7 million loss on early extinguishment of debt. Q1 2010 included a $27 million loss on debt repurchases. Atlantic Copper reported a $19 million operating loss, with Q1 costs affected by preparation for a scheduled maintenance shutdown.
- FCX reported no material changes to risk factors, market risks, contractual obligations, or environmental and reclamation obligations during the quarter. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether 2011 sales, unit-cost, operating-cash-flow and capital-spending assumptions were achieved, including the commodity-price assumptions underlying guidance.
- The post-redemption debt balance, remaining liquidity and financing costs, and the realized Q2 debt-extinguishment charge.
- Whether Grasberg security conditions affect access or operations, and the outcome and potential exposure of the Peru and Indonesia tax disputes.
- Project schedules, costs and production contributions for Morenci, El Abra, Grasberg, Tenke and Climax, including the effect of the lower prospective Tenke ownership interest.
- The effects of provisional pricing, working-capital movements, and dividends on cash available for investment and debt reduction.