FREEPORT-MCMORAN INC annual report, FY2016

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Freeport-McMoRan Inc. — FY 2016 Form 10-K

Business context and reporting period. The filing covers the fiscal year ended December 31, 2016; quarterly figures are unaudited. FCX is a global mining company focused on copper, gold and molybdenum, with major operations in the Americas and Indonesia. It also held oil and gas assets during the year, most of which were sold in 2016. The Tenke mine was reported as discontinued operations following its sale.

Financial and operating performance

  • Revenue: $14.830 billion, up from $14.607 billion in 2015. Copper sales volumes rose to 4.227 billion pounds from 3.603 billion, while average realized copper price declined to $2.28 per pound from $2.42. Gold sales were 1.079 million ounces and molybdenum sales were 74 million pounds.
  • Profit and unusual charges: Operating loss was $2.792 billion versus $13.512 billion in 2015. Net loss attributable to common stockholders was $4.154 billion, or $3.16 per share, compared with $12.236 billion, or $11.31 per share. Results included $4.317 billion of oil and gas property impairments, $926 million of drillship settlement and idle-rig costs, and $36 million of metals inventory adjustments. Net gains on asset sales totaled $649 million.
  • Fourth quarter: Revenue was $4.377 billion; operating income was $703 million; net income attributable to common stockholders was $292 million, or $0.21 per share.
  • Cash flow and investment: Operating cash flow was $3.729 billion, up from $3.220 billion. Capital expenditures fell to $2.813 billion from $6.353 billion. The filing does not provide a single free-cash-flow measure.
  • Margins and costs: Consolidated copper-mine unit net cash costs, net of by-product credits, averaged $1.26 per pound versus $1.57. Copper site production and delivery costs averaged $1.42 per pound versus $1.81. The molybdenum mines recorded a $96 million gross loss, compared with a $72 million loss in 2015.
  • Debt and liquidity: Year-end debt was $16.027 billion, down from $20.324 billion; cash and cash equivalents were $4.245 billion, up from $177 million. FCX repaid its $3.0 billion term loan and had no revolver borrowings, with approximately $3.5 billion available under its revolving facility. Current debt maturities were $1.232 billion. The company reported compliance with debt covenants at year-end.
  • Other balance-sheet items: Total assets were $37.317 billion and stockholders’ equity was $6.051 billion. Recorded environmental obligations were $1.2 billion and asset-retirement obligations were $2.6 billion.

Material changes versus 2015

  • Revenue increased modestly as higher copper sales volumes—particularly from Cerro Verde and Indonesia—largely offset lower copper prices and reduced oil and gas revenue.
  • The net loss narrowed substantially, mainly because oil and gas impairment charges declined from $13.144 billion to $4.317 billion. The 2016 result still included significant impairment and contract-termination charges.
  • FCX completed approximately $6.6 billion of asset sales, including Tenke, an additional 13% interest in Morenci, and major U.S. oil and gas properties. It also raised $1.5 billion gross through an at-the-market share offering and issued shares in debt exchanges and drillship settlements.
  • Debt declined by $4.3 billion, while capital expenditures fell by more than half. The company suspended its common-stock dividend in December 2015; no common-stock dividends were paid in 2016.

Outlook, commentary and key risks

  • Management described long-term copper fundamentals as positive and said it expected to use cash flow for further debt reduction, subject to commodity prices and operating results.
  • January 2017 projections assumed Indonesian concentrate exports resumed in February and PT Smelting’s anode-slimes export license was renewed. Neither assumption had been met as of February 24, 2017. The projections therefore require caution: they indicated 2017 operating cash flow of $4.3 billion, copper sales of 4.105 billion pounds, and capital expenditures of approximately $1.8 billion.
  • As of February 24, 2017, PT Freeport Indonesia had not obtained approval to export concentrate and production was suspended after limited storage capacity was reached. Indonesia’s new regulations conditioned exports on a change from the Contract of Work to an IUPK, a smelter commitment, export duties and other terms disputed by FCX. PT-FI gave formal notice of an impending dispute; the outcome and timing were uncertain. Management estimated each month of export delay could reduce PT-FI’s share of production by about 70 million pounds of copper and 70,000 ounces of gold.
  • Other material risks include volatile commodity prices, high debt and refinancing requirements, Indonesian operating-rights and regulatory uncertainty, labor disruptions, water rights and availability, mine-development execution, environmental remediation and reclamation obligations, and litigation and tax disputes. A proposed U.S. hard-rock-mining financial-assurance rule could materially increase costs. A $250 million Miami smelter pollution-control program was expected through 2018.
  • FCX recorded a $372 million increase in its Indonesia overburden-stockpile asset-retirement obligation in 2016. It also disclosed a January 2017 Indonesian tax-court ruling against PT-FI involving disputed surface-water taxes; FCX estimated total exposure at $469 million and said it intended to contest the assessments.
  • Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded internal controls were effective as of year-end.

Important facts for investors to verify

  1. Whether PT-FI obtained export approvals, resolved the Contract of Work/IUPK dispute and resumed production, and the effect on actual 2017 sales and cash flow.
  2. Whether PT Smelting restarted and renewed its anode-slimes export license, and whether the January 2017 production deferrals were recovered or became permanent losses.
  3. Actual debt reduction, liquidity, covenant headroom and financing needs against the 2017 maturity schedule and the filing’s conditional cash-flow outlook.
  4. Progress and final proceeds from remaining asset sales and contingent consideration, alongside dilution from equity issuance and the status of dividend restrictions.
  5. Changes in commodity prices, unit costs, mine-development spending, environmental and reclamation estimates, and disputed Indonesian and Peruvian tax liabilities.