01—Abstract
Summary
Summary of the 10-K filed March 31, 1994. Cited figures are marked; the original filing is the authoritative source.
Freeport-McMoRan Copper & Gold Inc. (FCX) reported 1993 net income applicable to common stock of $21.9 milliona ($0.11 per share), down sharply from $122.9 million ($0.66 per share) in 1992.
The decline reflected lower copper realizations (down 12% year over year, with the $0.90b/lb price protection floor cushioning prices), higher exploration and G&A costs, a $15.7 million loss at the newly acquired Rio Tinto Minera smelter, $52.6 million in restructuring and other charges, and a 52% effective tax rate. Revenues rose to $925.9 million, largely due to the RTM acquisition; excluding RTM, revenues fell about 4%. The operating story is far more positive.
PT Freeport Indonesia's Grasberg deposit drove proved and probable reserves up 28% in copper (to 26.8 billion pounds) and 22% in gold (to 39.1 million ounces) net of production. Copper production hit a record 658.4 million pounds and gold a record 786,700 ounces. The mill was expanded to 66,000 metric tons per day, with a further expansion to 115,000 MTPD targeted for year-end 1995 and an estimated cost of about $685 millionc excluding infrastructure.
Management guides to 1994 output of roughly 700 million pounds of copper and 780,000 ounces of gold at PT-FI. The main investor consideration is funding. Capital spending for 1994 through 1995 is estimated at $850 million to $950 milliond, which exceeds operating cash flow through 1995.
Cash flow from operations fell to $158.5 million from $252.6 million. Management plans to fund the gap through asset sales to joint ventures (ALatieF, Duke Energy/PowerLink power, and airport and port assets), bank facilities, and securities issuance, including the January 1994 $158.5 million Gold-Denominated Preferred Stock Series II. The company maintained its $0.60 annual common dividend, subject to quarterly Board review.
02—Key points
Key Highlights
- Net income applicable to common stock fell to $21.9 million ($0.11/share) from $122.9 million ($0.66/share) in 1992, reflecting lower copper prices, RTM losses, and restructuring and other charges.
- Revenues rose 30% to $925.9 million, driven by the March 1993 acquisition of Rio Tinto Minera (RTM); excluding RTM, revenues declined about 4%.
- PT-FI copper reserves grew 28% to 26.8 billion pounds and gold reserves grew 22% to 39.1 million ounces, net of production, primarily from the Grasberg deposit.
- Record 1993 production of 658.4 million pounds of copper and 786,700 ounces of gold, with the mill expanded to 66,000 MTPD.
- Expansion to 115,000 MTPD is underway, with completion targeted for year-end 1995 at an estimated cost of about $685 million excluding infrastructure.
- Copper price protection at a $0.90/lb floor covers virtually all estimated 1994 copper sales; the LME price was $0.84/lb on February 1, 1994.
- Capital expenditures of $850-950 million are expected in 1994-1995, exceeding operating cash flow, which fell to $158.5 million from $252.6 million in 1992.
03—Questions
Frequently Asked Questions
Why did FCX's earnings fall so sharply in 1993 despite record production?
Copper realizations fell about 12% year over year as LME prices dropped to their lowest since 1987. Earnings were also hit by a $15.7 million loss at the newly acquired RTM smelter, $52.6 million in restructuring and other charges, higher exploration and G&A expenses, and a 52% effective tax rate caused by Indonesian withholding taxes and the nondeductible RTM loss. Net income per share fell to $0.11 from $0.66.
How is FCX protected from further copper price declines?
PT-FI has a price protection program that sets a $0.90/lb floor on virtually all estimated 1994 copper sales while preserving full upside above that level. Its cost of $6 million is included in inventories and amortized in 1994. Management estimates that each 1 cent per pound above $0.90 would affect pretax income by about $6 million on projected sales of 720 million pounds.
How will FCX fund its large expansion program?
Management plans to use operating cash flow, proceeds from selling infrastructure assets to joint ventures (the ALatieF venture, a power joint venture with Duke Energy and PowerLink, and airport and port ventures, which are non-binding letters of intent), PT-FI's $550 million credit facility with $425 million available as of February 1, 1994, and securities issuance, including the January 1994 $158.5 million Gold-Denominated Preferred Stock Series II offering. The 1994-1995 capital budget is $850-950 million.
Is the $0.60 annual dividend at risk?
Management expects the $0.60 annual dividend ($0.15 per quarter) to continue through completion of the 115,000 MTPD expansion in 1995, absent significant changes in copper and gold prices. The dividend is set quarterly by the Board of Directors, and dividends depend on PT-FI's ability to upstream cash, which in turn depends on its profitability, capital needs, and debt service.
What are the main risks to the Indonesian operations?
Key risks include copper and gold price volatility; Indonesian tax and withholding obligations, which raised the effective tax rate to 52%; dependence on the Grasberg deposit and on reserve delineation below the 3,100-meter level, which has no assurance of commercial results; the need for government approvals for expansion beyond 66,000 MTPD; and PT-FI's ability to close the asset sales that help fund expansion. Political risk is partly mitigated by the New COW's non-nationalization provisions and political risk insurance from OPIC and MIGA.
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