Freeport-McMoRan Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. FCX is a global copper, gold and molybdenum miner, with major operations in the Americas and Indonesia. The sold Tenke interest is reported as discontinued operations.
Financial and operating performance
- Q2 revenue: $3.711 billion, up 11% from $3.334 billion. Revenue growth reflected higher realized copper prices and gold sales, partly offset by lower copper volumes. Copper averaged $2.65/lb realized, versus $2.19; gold sales rose to 432,000 oz from 156,000 oz.
- Q2 earnings: Operating income was $669 million, versus $18 million; net income attributable to common stockholders was $268 million, versus a $479 million loss. Diluted EPS was $0.18, versus a $0.38 loss. The approximate operating margin was 18%, compared with less than 1%.
- First-half results: Revenue was $7.052 billion, versus $6.576 billion; operating income was $1.249 billion, compared with an operating loss of $3.854 billion. Common-stockholder net income was $496 million, versus a $4.663 billion loss; diluted EPS was $0.34, versus a $3.70 loss. The 2016 comparison was heavily affected by a $4.1 billion oil-and-gas impairment.
- Production and costs: First-half copper sales were 1.751 billion lb, down from 1.987 billion lb; gold sales were 614,000 oz, up from 357,000 oz; and molybdenum sales were 49 million lb, up from 36 million lb. First-half average realized prices were $2.65/lb copper, $1,242/oz gold and $9.16/lb molybdenum. Consolidated copper-mine unit net cash costs were $1.29/lb, versus $1.36/lb.
- Cash flow and investment: First-half operating cash flow was $1.829 billion, including $322 million from working capital sources and tax-payment changes. Capital expenditures were $706 million; operating cash flow less capex was approximately $1.123 billion. Cash increased to $4.667 billion from $4.245 billion at year-end 2016.
- Debt and liquidity: Total debt was $15.354 billion, down from $16.027 billion at year-end 2016 and $19.220 billion a year earlier. Current debt was $2.216 billion. FCX reported no revolver borrowings, $3.5 billion available under its revolving facility, and approximately $4.4 billion of net cash available after noncontrolling interests, withholding taxes and other costs.
- Balance sheet: Total assets were $37.043 billion and total equity was $9.993 billion at June 30. Current assets were $10.417 billion and current liabilities $4.944 billion.
Material changes and unusual items
- Results improved year over year with higher copper prices, substantially higher Indonesia gold sales and lower oil-and-gas costs following asset sales. Copper volumes were lower, reflecting lower ore grades and other operating factors.
- PT Freeport Indonesia recorded $104 million of severance and related workforce-reduction costs in the first half, including $83 million in Q2, following furloughs and a worker strike/absenteeism. The lower workforce also triggered a pension remeasurement; the plan was reported as a $34 million net asset at June 30.
- A $41 million credit to operating income followed court approval of the environmental remediation agreement for 94 former uranium mine sites. FCX also recorded a $13 million favorable held-for-sale valuation adjustment in Q2.
- FCX received $47 million of first-half discontinued-operations income, primarily from revaluing contingent consideration related to the Tenke sale. A July 31, 2017 sale of Gulf of Mexico Shelf interests for $62 million was expected to produce a gain in Q3.
Outlook, commentary and risks
- Management projected 2017 sales of 3.710 billion lb copper, 1.6 million oz gold and 93 million lb molybdenum. Q3 sales were expected to be approximately 940 million lb copper, 375,000 oz gold and 22 million lb molybdenum.
- Based on stated second-half commodity-price assumptions, FCX estimated 2017 operating cash flow of approximately $3.8 billion, including $600 million of working-capital sources and tax-payment changes; capital expenditures were expected to be approximately $1.6 billion. Estimated 2017 consolidated copper-mine unit net cash costs were $1.19/lb and the continuing-operations effective tax rate approximately 43%.
- These projections assume planned PT-FI operating rates in the second half and a long-term agreement with Indonesia by October 10, 2017. PT-FI’s temporary export permission and IUPK arrangements, negotiations over long-term rights and investment protections, proposed smelter requirements, export duties and divestment demands remain major uncertainties. Failure to reach agreement could lead FCX to defer underground investment and pursue arbitration.
- Additional operating risks include PT-FI workforce disruption and delayed underground development; mining-induced seismic activity slowed the DMLZ ramp-up. Cerro Verde faced rainfall and strike-related impacts. Commodity-price volatility, ore grades, production rates, labor, weather, environmental matters and tax disputes could affect results.
- FCX estimated exposure of approximately $582 million for Cerro Verde royalty assessments and $506 million for Indonesian surface-water tax assessments; no charges had been recorded for these disputed matters at June 30. FCX stated that it intends to contest the Indonesian assessments. The common dividend remained suspended.
Important facts for investors to verify
- Whether FCX and the Indonesian government reached a durable long-term mining-rights and investment-stability agreement, and the status of export permits, smelter commitments and divestment terms.
- Whether Grasberg workforce levels, production and underground development meet the assumptions underpinning full-year volume, cost and cash-flow guidance.
- How the Cerro Verde royalty and Indonesian surface-water tax disputes progress, including potential additional assessments, interest and penalties.
- Whether commodity prices, working capital, taxes and capital spending track the assumptions behind the $3.8 billion operating-cash-flow and $1.6 billion capex estimates.
- The timing and proceeds from remaining asset sales and contingent consideration, and the effect of those items on reported earnings and liquidity.