Freeport-McMoRan Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparative periods are the corresponding 2015 periods. Amounts are in U.S. dollars unless stated otherwise. The interim financial statements were reviewed by the independent auditor, which reported no material modifications identified; this was not an audit opinion.
Business context
FCX operates copper, gold and molybdenum mines and U.S. oil and gas assets. Management focused on cost and capital reductions, asset sales and debt reduction. Tenke was classified as discontinued operations after FCX agreed to sell its interest in TF Holdings Limited.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $3.334B | $3.938B | $6.576B | $7.709B |
| Operating income (loss) | $18M | $(2.421)B | $(3.854)B | $(5.451)B |
| Net loss attributable to common stockholders | $(479)M | $(1.851)B | $(4.663)B | $(4.325)B |
| Diluted loss per share | $(0.38) | $(1.78) | $(3.70) | $(4.16) |
| Operating cash flow | $874M | $1.069B | $1.614B | $1.786B |
| Capital expenditures | $833M | $1.661B | $1.815B | $3.528B |
- At June 30, cash and cash equivalents were $352M and total debt was $19.319B. FCX reported no revolving-facility borrowings and approximately $3.5B available under its $3.5B facility.
- Total debt was down from $20.428B at December 31, 2015. Current assets were $10.7B and current liabilities $4.54B; these include $4.666B of assets and $824M of liabilities held for sale.
- Q2 copper sales were 987M pounds, with an average realized price of $2.19/lb versus $2.72/lb a year earlier. Copper unit net cash costs were $1.33/lb excluding Tenke. Six-month copper sales were 1.987B pounds.
- No common-stock dividend was declared in the first half of 2016; credit agreements prohibited common dividends through March 31, 2017.
Material changes versus prior periods
- Revenue declined 15% in Q2 and 15% in the first half, principally reflecting lower copper and oil prices. Higher copper volumes, especially from Cerro Verde’s expansion, partly offset the price decline.
- Q2 operating results included $749M in asset-sale gains, mainly Morenci and Timok, while the first half included $4.078B of oil and gas property impairment charges. The impairment was lower than the $5.790B recorded in the first half of 2015.
- Q2 included approximately $639M of oil and gas drillship settlement and idle-rig charges. FCX settled contracts with $1.1B of aggregate obligations for $755M in cash and stock, plus contingent payments of up to $105M.
- FCX completed the $1.0B sale of a 13% Morenci interest and the $135M Timok interest sale in Q2. It agreed to sell its 70% TFHL interest for $2.65B cash plus up to $120M contingent consideration; closing was expected in Q4 2016, subject to approvals and other conditions.
- Capital expenditures fell to $1.815B in the first half from $3.528B, reflecting lower project spending and reduced oil and gas activity. Six-month operating cash flow also declined, despite $466M of working-capital sources and other tax-payment changes.
Outlook, commentary and risks
- For 2016, FCX projected continuing-operations copper sales of 4.510B pounds, gold sales of 1.7M ounces, molybdenum sales of 76M pounds and oil-equivalent sales of 47.4M BOE. Third-quarter estimates were approximately 1.2B pounds of copper, 410,000 ounces of gold, 20M pounds of molybdenum and 11.4M BOE, excluding Tenke copper.
- Management estimated 2016 operating cash flow of approximately $4.5B, assuming second-half average prices of $2.25/lb copper, $1,300/oz gold, $6/lb molybdenum and $48/bbl Brent. The estimate included $700M of working-capital sources and other tax-payment effects. Projected capital expenditures were approximately $3.1B.
- Projected 2016 copper-mine unit net cash costs were $1.03/lb excluding Tenke and $1.06/lb including Tenke. Oil and gas cash production costs were projected at $15.50/BOE. Management expected higher Grasberg ore grades to concentrate a substantial share of annual copper and gold sales in Q4.
- FCX expected the TFHL sale proceeds, asset sales, operating cash flow and equity offerings to support debt reduction. It launched a new at-the-market offering of up to $1.5B in July; by August 4 it had sold 13M shares for $167M gross proceeds. Through that date, it had also exchanged $369M of senior notes for 28M shares, expecting to reduce annual interest expense by $17M.
- Key risks include commodity-price volatility; possible further oil and gas impairments; completion and approval of pending divestitures; and Indonesian export-permit renewal and negotiations over PT-FI’s long-term mining rights. FCX’s projections assume PT-FI’s export permit is renewed after August 8, 2016 and a resolution of concentrate-export restrictions effective after January 12, 2017.
- Contingencies include Cerro Verde royalty assessments estimated at $474M through 2013 and Indonesian surface-water tax assessments of $220M, both contested and unaccrued. FCX cited its contractual defenses; outcomes remain uncertain. A third-party gas-processing plant fire temporarily constrained production from certain Gulf of Mexico platforms, with management not expecting a long-term impact.
Important facts for investors to verify
- Whether the TFHL sale closes as expected, the final proceeds and contingent consideration, and the required Term Loan prepayment.
- PT-FI’s export-permit renewal, the post-January 2017 export regime, and progress on Indonesian mining-rights and smelter discussions.
- Actual commodity prices, production volumes, Grasberg grades and costs compared with management’s assumptions underlying cash-flow and sales guidance.
- Further oil and gas impairment exposure, including the effect of oil prices and evaluation of $1.7B of unevaluated properties.
- Debt reduction and liquidity progress, including equity issuance and dilution, asset-sale proceeds, debt maturities and the availability of credit facilities.
- Developments in the contested Peru royalty and Indonesian tax matters, and any resulting accruals or cash payments.