Freeport-McMoRan Inc. (FCX) — Q2 2019 Form 10-Q
Business context and reporting period
FCX is a global copper, gold and molybdenum miner. This unaudited quarterly report covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. The principal operating transition is PT Freeport Indonesia’s shift from Grasberg’s open pit to underground mines.
Financial and operating highlights
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $3.546 billion | $5.168 billion | $7.338 billion | $10.036 billion |
| Operating income | $33 million | $1.664 billion | $354 million | $3.123 billion |
| Net income (loss) attributable to common stockholders | $(72) million | $869 million | $(41) million | $1.561 billion |
| Diluted EPS | $(0.05) | $0.59 | $(0.03) | $1.07 |
| Operating cash flow | $554 million | $1.309 billion | $1.088 billion | $2.678 billion |
| Capital expenditures | $629 million | $482 million | $1.251 billion | $884 million |
Q2 copper production was 776 million pounds and sales were 807 million pounds; average realized copper price was $2.75 per pound, versus $3.08 in Q2 2018. Gold production was 160,000 ounces and sales 189,000 ounces, compared with 746,000 and 676,000, respectively, a year earlier. Molybdenum sales were 24 million pounds.
At June 30, 2019, cash and cash equivalents were $2.623 billion, total debt was $9.916 billion, current assets were $8.730 billion and current liabilities were $3.286 billion. Debt less cash was approximately $7.3 billion. The $3.5 billion revolving credit facility had no borrowings and approximately $3.5 billion available. Six-month operating cash flow less capital expenditures was approximately negative $163 million.
Material changes versus the prior comparable period
- Q2 revenue fell about 31% year over year; first-half revenue fell about 27%. Management attributed the declines mainly to lower copper and gold sales volumes during the Indonesia transition and lower copper prices.
- Q2 copper sales were 807 million pounds versus 989 million; gold sales were 189,000 ounces versus 676,000. First-half copper and gold sales were 1.591 billion pounds and 431,000 ounces, versus 1.982 billion pounds and 1.286 million ounces.
- First-half copper realized price declined to $2.78 per pound from $3.10. Copper unit net cash costs rose to $1.85 per pound from $0.97, primarily because lower Indonesian volumes spread largely fixed costs over less production.
- First-half operating cash flow declined by $1.590 billion year over year. Capital spending increased, particularly for Grasberg underground development and the Lone Star copper project.
- Total debt decreased from $11.141 billion at December 31, 2018, to $9.916 billion at June 30, following debt repayments of approximately $1.2 billion.
Outlook, commentary, risks and unusual items
- 2019 outlook: FCX projected copper sales of 3.261 billion pounds, gold sales of 841,000 ounces and molybdenum sales of 94 million pounds. Q3 sales were expected to be about 830 million pounds of copper, 230,000 ounces of gold and 25 million pounds of molybdenum.
- For 2019, consolidated copper unit net cash costs were projected at $1.75 per pound, assuming second-half gold at $1,400 per ounce and molybdenum at $12 per pound. Operating cash flow was estimated at approximately $1.9 billion, including $0.3 billion of working-capital sources and tax-payment timing, assuming second-half copper at $2.75 per pound, gold at $1,400 per ounce and molybdenum at $12 per pound. Estimated capital expenditures were $2.6 billion, including $1.6 billion for major projects and excluding the new Indonesian smelter.
- Management expects Indonesia production to improve by 2021. Grasberg Block Cave and DMLZ underground mines had begun extracting ore; ramp-up depends on mine development and geotechnical conditions. PT-FI’s 2019 sales outlook was 630 million pounds of copper and 830,000 ounces of gold.
- The Indonesian smelter is a commitment tied to PT-FI’s mining rights extension. Construction was expected to begin in 2020; preliminary project cost was approximately $3 billion, with completion required by December 2023. Financing and potential partner arrangements were being pursued.
- In May, PT-FI agreed to settle historical Papua surface-water tax disputes for 1.394 trillion rupiah (about $99 million) payable over three years. A $28 million additional charge was recorded in Q2; PT-FI also owes about $15 million annually in surface-water taxes beginning in 2019.
- PT-FI’s export license was extended through March 8, 2020. It had used its approved export quota and requested an increase; management expected a decision in Q3. Cerro Verde had limited operating impacts to date from protests restricting access to certain roads and areas in Peru.
- FCX agreed to sell its Kokkola cobalt refinery and related precursor business for approximately $150 million plus working capital, subject to closing conditions and expected by year-end 2019. A noncontrolling-interest partner is entitled to 30% of proceeds.
- After quarter-end, FCX agreed to issue $1.2 billion of senior notes, with net proceeds of $1.187 billion, to fund redemption and tender offers for existing notes. FCX expected an approximately $15 million early-extinguishment loss in Q3.
- Asbestos-related talc litigation remains a contingency following Imerys’ bankruptcy and its cessation of defense and dispute over access to legacy insurance. FCX said it could not estimate possible losses and did not then believe they were material; the insurance-access proceeding was scheduled for October 2019.
- FCX cited commodity-price volatility, underground-mine execution, export approvals and quotas, political and social conditions, weather, environmental matters and litigation among forward-looking risks. Management said 2019 cash, credit availability and expected cash flow should fund planned spending and other cash needs, subject to commodity prices and operating assumptions.
Investor verification priorities
- Track Grasberg open-pit transition, underground ramp-up, grades, recovery and delivery against 2019 sales and cost assumptions.
- Confirm the export-quota increase, license status beyond March 2020 and progress, financing and cost estimates for the Indonesian smelter.
- Compare actual operating cash flow, working-capital contribution and capital spending with the $1.9 billion and $2.6 billion full-year estimates.
- Monitor copper, gold and molybdenum prices and their effects on provisional sales, cash flow and the projected tax rate.
- Review completion and net proceeds of the cobalt-business sale and the post-quarter debt refinancing, including the expected extinguishment loss.
- Follow the talc-insurance dispute, related litigation exposure, Papua tax settlement payments and Cerro Verde access conditions.