01—Abstract
Summary
Summary of the 10-K filed March 16, 2005. Cited figures are marked; the original filing is the authoritative source.
Freeport-McMoRan Copper & Gold (FCX) reported 2004 revenues of $2.37 billiona (up from $2.21 billion in 2003) and operating income of $704 million (down from $823 million), with net income applicable to common stock of $156.8 million, or $0.85 per diluted share.
The year was dominated by the aftermath of the fourth-quarter 2003 Grasberg open-pit slippage and debris flow, which cut mill throughput to 185,100 metric tons per day and reduced copper sales to about 1.0 billion pounds (down 23%) and gold sales to 1.44 million ounces (down 42%). Average realized copper prices rose to $1.37b per pound from $0.82, and net cash production costs rose to $0.40 per pound from a net credit of $(0.02). Atlantic Copper's 51-day smelter turnaround and its operating losses further weighed on results, and the company recorded a $48.8 million net gain from the settlement of its insurance claims.
Balance sheet and cash flow shifted significantly. Operating cash flow fell to $341 millionc from $572 million, and the company completed a $1.1 billion sale of 5½% convertible perpetual preferred stock, used in part to repurchase 23.9 million shares from Rio Tinto for $882 million. All 8¼% convertible notes were converted into common stock, and stockholders' equity rose to $1.16 billion from $776 million.
Management guided to 2005 sales of about 1.5 billion pounds of copper and 2.9 million ounces of gold, with operating cash flow above $1.1 billiond at $1.35 per pound copper and $420 per ounce gold, and it declared a $0.50 per share supplemental dividend in February 2005. The primary investor considerations are the concentration of reserves in Indonesia (Block A, under a Contract of Work expiring in 2021 with extensions to 2041 assumed), political and security risks in Papua, and dependence on the Grasberg mine, which accounts for most reserves and output. The filing also highlights that proven and probable reserves are 56.2 billion pounds of copper and 61.0 million ounces of gold (FCX equity share 36.7 billion pounds and 42.1 million ounces), that the company expects a return to higher ore grades in 2005, and that metals prices and treatment charges remain key sensitivities.
02—Key points
Key Highlights
- Revenues rose 7% to $2.37 billion, driven by higher copper ($1.37/lb vs. $0.82/lb) and gold ($412/oz vs. $367/oz) prices, partly offset by lower volumes.
- Operating income fell 15% to $704 million, reflecting lower sales volumes, higher unit production costs, and Atlantic Copper's operating losses, partly offset by the $87 million business interruption insurance gain.
- Net income applicable to common stock was $156.8 million ($0.85 diluted EPS), compared with $154.2 million ($0.97 diluted) in 2003, which included a cumulative accounting charge.
- Copper sales fell 23% to about 1.0 billion pounds and gold sales fell 42% to 1.44 million ounces after the Grasberg slippage reduced mill throughput to 185,100 tons/day.
- Operating cash flow fell to $341 million from $572 million; cash and equivalents ended at $551 million, supported by the $1.07 billion net proceeds from the convertible preferred stock sale.
- Shareholder returns increased: the company repurchased 23.9 million shares from Rio Tinto for $882 million, raised the annual common dividend to $1.00, and paid a $0.25 supplemental dividend in December 2004, with another $0.50 declared for March 2005.
- Management guides to 2005 sales of about 1.5 billion pounds of copper and 2.9 million ounces of gold, and operating cash flow exceeding $1.1 billion at assumed prices of $1.35/lb copper and $420/oz gold.
03—Questions
Frequently Asked Questions
Why did FCX's copper and gold sales fall so sharply in 2004?
The October 2003 slippage and December 2003 debris flow in the Grasberg open pit forced PT Freeport Indonesia to accelerate overburden removal and mine lower-grade ore until safe access to higher-grade areas was restored in April 2004. Normal milling rates resumed only in June 2004. As a result, mill throughput averaged 185,100 tons per day versus 203,000 in 2003, copper production fell 23%, and gold production fell 41%. Management expects higher ore grades and volumes in 2005, with sales projected to rise about 50% for copper and 100% for gold.
How sensitive are FCX's earnings to copper and gold prices?
The filing estimates that each $0.10 per pound change in copper prices would affect 2005 consolidated net income by about $75 million, and each $25 per ounce change in gold prices would affect it by about $36 million, based on expected 2005 sales of 1.5 billion pounds of copper and 2.9 million ounces of gold. Copper prices ranged from $1.06 to $1.49 per pound in 2004, versus $0.70 to $1.05 in 2003, so price exposure is large relative to earnings.
What are the main political and operational risks to the Indonesian operations?
Substantially all of FCX's reserves and mining operations are in Papua, Indonesia, under a Contract of Work whose initial term expires in 2021. Extensions to 2041 require government approval, which the company expects but cannot guarantee. The filing cites separatist activity, sporadic attacks, terrorist bombings in Indonesia (including a September 2004 car bomb in Jakarta), and the risk that government officials could question contract validity. Exploration outside Block A remains suspended, and the Grasberg open pit's slippage history highlights geotechnical risk.
How did the 2004 capital structure and share count change?
FCX sold $1.1 billion of 5½% convertible perpetual preferred stock in March 2004, which funded the $882 million purchase of Rio Tinto's 23.9 million FCX shares, which ended Rio Tinto's equity stake. All $603.8 million of 8¼% convertible notes were converted into 42.2 million common shares by July 2004. Stockholders' equity rose to $1.16 billion from $776 million, and total debt fell to $1.95 billion from $2.23 billion. Basic weighted shares rose to 182.3 million from 155.8 million.
04—Continue