Freeport-McMoRan Inc. (FCX) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited interim financial statements were reviewed by Ernst & Young; the review is not an audit. FCX is a global copper, gold and molybdenum producer, with operations in North America, South America and Indonesia.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $5.389 billion | $6.603 billion |
| Operating income | $1.601 billion | $2.809 billion |
| Operating margin | 29.7% | 42.5% |
| Net income attributable to FCX common stockholders | $663 million | $1.527 billion |
| Diluted earnings per share | $0.46 | $1.04 |
| Operating cash flow | $1.050 billion | $1.691 billion |
| Capital expenditures | $1.121 billion | $723 million |
| Cash and cash equivalents at period end | $6.852 billion | $8.146 billion at Dec. 31, 2022 |
| Total debt at period end | $9.635 billion | $10.620 billion at Dec. 31, 2022 |
Revenue and earnings declined year over year. Copper sales, excluding purchases, fell to 832 million pounds from 1.024 billion; the average realized copper price declined 12% to $4.11 per pound. Gold sales fell to 270,000 ounces from 409,000, while molybdenum sales were 19 million pounds in both periods. Average realized gold price was $1,949 per ounce and molybdenum price was $30.32 per pound.
Operating cash flow was lower, including $467 million of working-capital and other uses, versus $811 million of uses in Q1 2022. Cash declined from year-end, partly reflecting approximately $1 billion used to repay maturing notes. Net debt was $2.8 billion, or $1.3 billion excluding net debt for the Indonesia smelter projects. FCX reported $3.0 billion available under its revolving facility, with no borrowings outstanding; PT-FI and Cerro Verde also had no revolver borrowings. Cash included $1.5 billion designated for the Indonesia smelter projects. The declared quarterly dividend was $0.15 per share.
Material changes and notable items
- PT-FI’s commercial arrangement with PT Smelting changed from concentrate sales to tolling on January 1, 2023. Approximately 110 million pounds of copper and 110,000 ounces of gold from Q1 production were deferred in inventory for later sale as refined metal, affecting sales timing and working capital.
- FCX’s economic ownership interest in PT-FI became 48.76% from approximately 81%. Q1 net income included a $35 million benefit tied to sales volumes attributed at the former ownership interest.
- PT-FI operations were temporarily disrupted by heavy rainfall and landslides in February; operations recovered by March. Cerro Verde operated at reduced rates at times amid unrest in Peru, then resumed normal operations in March. North American operations faced lower mining rates, unplanned maintenance and labor constraints.
- Production and delivery costs were broadly flat at $3.165 billion, while site costs per pound of copper rose to $2.57 from $2.03, reflecting higher energy, maintenance, consumables and other input costs, partly offset by lower sales volumes. Environmental obligations and shutdown costs increased to $67 million from $16 million, including $56 million of revisions to historical environmental obligations.
- Q1 included $210 million of favorable adjustments to prior-period provisionally priced copper sales. FCX reported $94 million of net charges, primarily related to environmental obligations, contested tax matters and North American asset impairments.
Outlook, risks and contingencies
- For 2023, FCX projected sales of 4.057 billion pounds of copper, 1.8 million ounces of gold and 79 million pounds of molybdenum. Q2 sales were expected to be approximately 1.1 billion pounds of copper, 500,000 ounces of gold and 20 million pounds of molybdenum.
- Based on stated price and operating assumptions, management estimated 2023 operating cash flow of approximately $7.0 billion, including $0.3 billion of working-capital and other sources, and capital expenditures of approximately $5.1 billion. The cash-flow estimate assumes $4.00/lb copper, $2,000/oz gold and $18.00/lb molybdenum for the remainder of 2023. The capex estimate includes $1.6 billion for Indonesia smelter projects.
- Consolidated copper-mine unit net cash costs were forecast at $1.55/lb for 2023, subject to stated assumptions. FCX targeted an approximately 200-million-pound annual run rate from leach innovation initiatives by year-end 2023. These are management estimates, not guarantees.
- PT-FI’s export license extension ran through June 10, 2023; continued exports require further government approval. The Manyar smelter was approximately 60% complete at quarter-end and expected to be commissioned in 2024. PT-FI’s export duties were eliminated effective March 29, 2023, following verification of construction progress.
- Key exposures include volatile commodity prices, operating and weather disruptions, labor and supply constraints, political and social risks in Indonesia and Peru, and the timing and cost of mine and smelter projects. FCX noted uncertainty over future U.S. Treasury guidance on the corporate alternative minimum tax; it had no effect on Q1 results under the company’s interpretations.
- PT-FI said it would dispute any additional Indonesian smelter-development fines, which could be significant. In Louisiana, a parish challenged whether it was bound by a settlement involving FCX affiliates and sought to have it declared void; FCX said it was evaluating options and would defend the matter. Management did not believe reported legal proceedings would materially affect financial condition, though outcomes could affect results in a particular period.
Most important facts for investors to verify
- Whether PT-FI secures export authorization beyond June 10, 2023, and whether the stated production and sales recovery is achieved.
- How quickly deferred PT-FI metal inventory converts to sales and cash, and the resulting working-capital effects.
- Progress, cost and timing of the Manyar smelter, PT Smelting expansion and precious metals refinery, including any regulatory consequences.
- Actual commodity prices, production costs, capital spending and operating cash flow relative to management’s assumptions and guidance.
- Changes in PT-FI’s ownership-related earnings attribution, environmental estimates, legal contingencies and potential tax effects as guidance develops.