Business Context and Reporting Period
Company: Freeport-McMoRan Copper & Gold Inc. (FCX)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Overview: FCX is a global leader in copper, gold, and molybdenum mining. The reporting period includes the full six months of operations following the March 2007 acquisition of Phelps Dodge. The company operates major assets in North America (Morenci, Safford, Henderson), South America (Cerro Verde, Candelaria), and Indonesia (Grasberg). The company sold its international wire and cable business (PDIC) in October 2007, reporting those results as discontinued operations.
Key Financial Metrics (Six Months Ended June 30, 2008)
| Metric | Value (in Millions) |
|---|---|
| Revenues | $11,113 |
| Operating Income | $4,449 |
| Net Income | $2,196 |
| Net Income Applicable to Common Stock | $2,069 |
| Diluted EPS (Common) | $4.89 |
| Operating Cash Flow | $1,624 |
| Capital Expenditures | $1,163 |
| Total Debt | $7,364 |
| Cash and Cash Equivalents | $1,648 |
| Total Assets | $42,348 |
Material Changes vs. Prior Comparable Period
- Revenue Growth: Revenues increased 44.5% to $11.1 billion from $7.7 billion in the prior year period. This was driven by higher copper, gold, and molybdenum prices and a full six months of Phelps Dodge operations in 2008 (compared to only partial inclusion in 2007).
- Profitability: Net income applicable to common stock rose 31% to $2.1 billion. Operating income increased 26% to $4.4 billion.
- Cost Pressures: Production and delivery costs increased significantly ($2.0 billion higher than 2007) due to higher energy costs, increased input costs, and higher concentrate purchase costs at Atlantic Copper. Unit net cash costs for copper rose to $1.16/lb from $0.47/lb in 2007.
- Indonesia Volume Decline: Sales volumes at the Grasberg mine in Indonesia decreased due to mining lower-grade ore in the open pit. Copper sales dropped to 436 million pounds (6 months) from 751 million pounds in 2007.
- Working Capital: Operating cash flow decreased to $1.6 billion from $2.8 billion in 2007, primarily due to a $2.1 billion use of cash for working capital requirements, including a $598 million settlement of the 2007 copper price protection program.
Guidance, Outlook, and Risks
- 2008 Sales Guidance: Projected consolidated sales volumes for the full year 2008 are estimated at 4.1 billion pounds of copper, 1.4 million ounces of gold, and 75 million pounds of molybdenum. Second-half production is expected to be higher than the first half due to mine sequencing at Grasberg and the ramp-up of the Safford mine.
- Cost Outlook: Consolidated unit net cash costs for 2008 are estimated at approximately $1.10 per pound of copper, higher than previous estimates due to rising energy and input costs. Energy is expected to comprise 30% of consolidated copper production costs.
- Capital Expenditures: Total capital expenditures for 2008 are projected to approximate $3.0 billion, with $1.8 billion allocated to major development projects (Tenke Fungurume, Climax restart, Grasberg Block Cave).
- Dividends: The Board increased the annual common stock dividend to $2.00 per share (quarterly rate of $0.50), effective November 1, 2008.
- Risks and Contingencies:
- Commodity Prices: Results are highly sensitive to fluctuations in copper, gold, and molybdenum prices. Copper prices averaged $3.83/lb in Q2 2008 but showed volatility in early August 2008.
- Indonesia Operations: Risks include political stability, labor relations, and the requirement to sell shares of PT Indocopper Investama to Indonesian nationals.
- Development Projects: Capital cost estimates for major projects (e.g., Tenke Fungurume, Grasberg Block Cave) are subject to escalation due to rising equipment, labor, and material costs.
- Provisional Pricing: Approximately 369 million pounds of copper sales at June 30, 2008, were provisionally priced and subject to final pricing adjustments in future periods.
Investor Verification Checklist
- Indonesia Ore Grades: Verify the impact of lower-grade ore mining at Grasberg on Q2/Q3 2008 volumes and the timeline for returning to higher-grade sections in H2 2008.
- Energy Cost Exposure: Assess the sensitivity of unit costs to further increases in diesel, coal, and electricity prices, which are projected to be 30% of production costs.
- Provisional Pricing Adjustments: Monitor the final settlement of the 369 million pounds of copper sold at provisional prices ($3.88/lb) to determine potential revenue adjustments in Q3/Q4 2008.
- Capital Project Escalation: Review updates on the Tenke Fungurume ($1.75B estimate) and Grasberg Block Cave ($3.1B estimate) projects for potential cost overruns.
- Working Capital Requirements: Evaluate the $1.8 billion estimated working capital requirement for the remainder of 2008 and its impact on free cash flow.