01—Abstract
Summary
Summary of the 10-K filed March 27, 2003. Cited figures are marked; the original filing is the authoritative source.
Freeport-McMoRan Copper & Gold (FCX) reported a solid 2002 with record copper sales of 1.52 billion pounds and record-low unit net cash production costs, driven by higher-grade copper ore from the Grasberg open pit and the Deep Ore Zone.
Revenues rose 4% to $1.91 billiona and operating income climbed 18% to $640 million, though net income applicable to common stock rose to $127 million ($0.87 diluted EPS) from $76 million, and the effective tax rate remained high at roughly 55%. Gold output fell 13% to 2.30 million ounces on lower grades, partly offsetting the copper gains. Net income was also held down by Nusamba-related charges, a $3.0 million cumulative-effect charge from a depreciation methodology change, and high tax and minority interest burdens.
The balance sheet and capital structure were the major focus at year-end and after. Management completed two senior note offerings in early 2003: $500 millionb of 10 1/8% Senior Notes due 2010 and $575 million of 7% Convertible Senior Notes due 2011. Proceeds were used to repay all $279 million of bank debt and to fund tender offers for roughly $455 million of 7.20% and 7.50% notes.
Total debt stood at about $2.04 billionc at year-end 2002, or about $2.8 billion pro forma. Interest expense is expected to rise to roughly $233 million on a pro forma basis, and the company announced its first common dividend policy of $0.36 per share annually, starting May 2003. Key risks remain concentrated in Indonesia.
The August 2002 ambush that killed three people and the October 2002 Bali bombing raised security concerns, and separatist activity in Papua is ongoing. The Contracts of Work are subject to government review and potential challenge, and the company's reserves depend on the Indonesian government granting extensions beyond 2021.
Reserves of 53.3 billion pounds of copper and 62.6 million ounces of gold (FCX equity share 35.7 billion pounds and 44.0 million ounces) were maintained at $0.85d/lb copper pricing, and the 2003 outlook calls for lower copper sales of about 1.4 billion pounds. Arthur Andersen was replaced by Ernst & Young in 2002.
02—Key points
Key Highlights
- Record 2002 copper sales of 1.52 billion pounds (up 9%), with unit net cash production costs of $0.08/lb, near record-low levels, supported by higher-grade ore at Grasberg and the Deep Ore Zone.
- Revenues rose 4% to $1.91 billion and operating income rose 18% to $640 million, while net income applicable to common stock increased to $127 million ($0.87 diluted EPS) from $76 million.
- Gold production fell 13% to 2.30 million ounces because of lower gold grades, partially offset by a higher realized gold price of $312/oz versus $269/oz in 2001.
- Early-2003 refinancing: $500M 10 1/8% Senior Notes due 2010 and $575M 7% Convertible Notes due 2011, used to repay all bank debt and fund tender offers for about $455M of higher-coupon notes; pro forma total debt is roughly $2.8B.
- First-ever common dividend policy adopted: $0.36 per share annually ($0.09 quarterly), with the first payment expected May 1, 2003, though payments are restricted by the 10 1/8% Senior Notes indenture.
- Indonesia remains the dominant risk: the August 2002 ambush and October 2002 Bali bombing, ongoing Papuan separatism, and questions about the validity of the Contract of Work, with reserve life dependent on approval of two 10-year extensions beyond 2021.
- Reserves at year-end 2002 were 53.3 billion lbs copper and 62.6 million oz gold (FCX equity share 35.7 billion lbs and 44.0 million oz), roughly flat at $0.85/lb copper pricing, and the 2003 sales outlook is about 1.4 billion lbs copper and 2.6 million oz gold.
03—Questions
Frequently Asked Questions
How profitable was FCX in 2002, and what drove the change from 2001?
Net income applicable to common stock was $127.1 million ($0.87 diluted EPS), up from $76.5 million ($0.53) in 2001. Operating income rose to $640 million from $543 million, driven by record copper volumes and higher copper and gold realizations. Net income was held back by a 55% effective tax rate, $36 million in minority interests, $171 million of interest expense, and a $3.0 million cumulative-effect charge from the depreciation methodology change.
How much debt does FCX carry, and how did the early-2003 refinancing change its position?
Total debt was about $2.04 billion at December 31, 2002. After selling $1.075 billion of new notes in January and February 2003, FCX repaid all $279 million of bank debt and began tender offers for about $455 million of 7.20% and 7.50% notes. On a pro forma basis, total indebtedness is about $2.8 billion, and pro forma interest expense would rise to $233 million from $171 million. Management expects about $300 million of cash to remain after 2003 maturities and redemptions.
Is the new dividend sustainable, and what limits it?
The board approved an annual dividend of $0.36 per share ($0.09 quarterly), starting May 1, 2003. Payments depend on financial results, cash needs, and board discretion, and the 10 1/8% Senior Notes indenture restricts common dividends. The company stated that the amount available for restricted payments was about $90 million at filing. At 145 million shares, the dividend would cost roughly $52 million per year.
What are the biggest risks to FCX's operations and long-term value?
Nearly all of FCX's proven and probable reserves lie in Block A of Papua, Indonesia, so political, security, and legal risks are concentrated there. These include separatist violence, the unresolved investigation of the August 2002 ambush, the government's compliance review, and possible challenges to the 1991 Contract of Work. The company expects to mine only about 58% of reserves before the initial term ends in 2021, so it depends on the government approving two 10-year extensions. Copper and gold price volatility and rupiah exposure also affect margins.
04—Continue