Business Context and Reporting Period
Company: Freeport-McMoRan Copper & Gold Inc. (FCX)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Operations: FCX operates primarily through its majority-owned subsidiary, PT Freeport Indonesia (mining copper and gold in Indonesia), and its wholly-owned subsidiary, Atlantic Copper (smelting and refining in Spain). The company also holds a 25% equity interest in PT Smelting (Indonesia) and acquired an 85.7% interest in PT Puncakjaya Power (PJP) in July 2003 to supply power to its Indonesian operations.
Key Financial Metrics (Nine Months Ended Sept 30, 2003)
| Metric | 2003 (9 Months) | 2002 (9 Months) |
|---|---|---|
| Revenues | $1,766.0 million | $1,339.4 million |
| Operating Income | $718.8 million | $416.0 million |
| Net Income (Applicable to Common) | $154.0 million | $63.0 million |
| Diluted EPS (Common) | $0.98 | $0.43 |
| Operating Cash Flow | $469.8 million | $304.3 million |
| Cash and Equivalents (End of Period) | $528.6 million | $38.0 million |
| Total Debt (Including Preferred) | $2.83 billion* | $2.74 billion* |
*Note: Debt figures include mandatorily redeemable preferred stock reclassified as debt under SFAS No. 150 effective July 1, 2003. Total long-term debt less current portion was $2.15 billion; current debt was $175.5 million; redeemable preferred stock was $192.4 million.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 32% year-over-year, driven by higher copper and gold prices and increased sales volumes (particularly gold) in the first nine months of 2003.
- Profitability: Operating income increased 73% to $718.8 million. Net income applicable to common stock more than doubled to $154.0 million.
- Accounting Changes:
- SFAS No. 150: Effective July 1, 2003, $450 million of mandatorily redeemable preferred stock was reclassified from equity to debt. This resulted in a $24.7 million cumulative effect charge to net income.
- SFAS No. 143: Adopted Jan 1, 2003, for asset retirement obligations, resulting in a $9.1 million cumulative effect gain.
- Debt Restructuring: The company issued $1.075 billion in new senior notes (10 3/8% due 2010 and 7% Convertible due 2011) in Q1 2003. It also redeemed $210.5 million of Gold-Denominated Preferred Stock and converted $311.1 million of 8 1/4% Convertible Senior Notes in Q3 2003.
- Acquisition: Acquired PT Puncakjaya Power (PJP) for $78 million cash in July 2003, consolidating power generation assets previously held by a third party.
Guidance, Outlook, Risks, and Unusual Items
- Grasberg Pit Slippage (Unusual Item): On October 9, 2003, a material slippage occurred in the Grasberg open pit, resulting in fatalities and production delays. Management expects a negative impact on Q4 2003 revenues and earnings, including an estimated $10 million charge for lost equipment. Production in the affected area (approx. 5% of the pit) is deferred to future periods.
- Outlook:
- Projected 2003 sales: 1.33 billion pounds of copper and 2.45 million ounces of gold (net of Rio Tinto interest).
- Capital expenditures for 2003 are expected to total approximately $160 million.
- Gold credits are expected to essentially offset cash production costs per pound of copper for the full year 2003.
- Dividends and Buybacks: In October 2003, the Board increased the annual common stock dividend from $0.36 to $0.80 per share and authorized a new share repurchase program for up to 20 million shares.
- Risks:
- Commodity Prices: Revenues and net income are highly sensitive to copper and gold prices.
- Currency: Results are adversely affected by a weaker U.S. dollar against the Indonesian Rupiah and Euro (Atlantic Copper costs).
- Legal/Regulatory: PT Freeport Indonesia is cooperating with a U.S. federal grand jury subpoena regarding an anti-trust investigation of the copper concentrate industry. Exploration activities outside Block A are suspended due to safety/security issues and Indonesian law.
Investor Verification Checklist
- Impact of October 9 Slippage: Verify the final cost of the Grasberg pit slippage, the timeline for production recovery, and the extent of insurance coverage (deductible expected up to $40 million).
- Debt Maturities: Review the debt maturity schedule, noting significant repayments due in 2006 (Gold-Denominated Preferred Stock and Senior Notes) and the convertibility of the 7% and 8 1/4% notes.
- Atlantic Copper Restructuring: Monitor management's plans to restructure Atlantic Copper's debt and the impact of the planned 45-day maintenance turnaround in Q2 2004.
- Commodity Price Sensitivity: Assess the impact of potential declines in copper and gold prices on the company's ability to service its increased debt load.
- Exploration Resumption: Track the status of suspended exploration activities in Block B and Eastern Minerals, which are critical for long-term reserve replacement.