01—Abstract
Summary
Summary of the 10-K filed February 27, 2014. Cited figures are marked; the original filing is the authoritative source.
Freeport-McMoRan Copper & Gold (FCX) closed 2013 as a fundamentally transformed company.
Through the mid-2013 acquisitions of Plains Exploration & Production (PXP) and McMoRan Exploration (MMR), it added a U.S. oil and gas business (464 MMBOE proved reserves, about 80% oil) to its global copper, gold and molybdenum portfolio, and is positioned as the world's largest publicly traded copper producer. Consolidated revenues rose 16% to $20.9 billion and operating income fell to $5.4 billiona from $5.8 billion, reflecting lower metal price realizations, unrealized oil derivative losses of $312 million, and acquisition costs. Net income attributable to common stockholders was $2.66 billion ($2.64 per diluted share), down from $3.04 billion.
Total debt rose from $3.5 billion to $20.7 billionb, against $2.0 billion of cash, and management is targeting a $12 billion debt level by year-end 2016. The most important near-term risk for investors is Indonesia. In January 2014 the Indonesian government issued regulations that conflict with PT Freeport Indonesia's Contract of Work, including a progressive copper concentrate export duty of 25% in 2014 rising to 60% by mid-2016.
As of February 21, 2014, PT-FI had not received 2014 export approvals, and its milling rate had fallen to roughly half of normal. Grasberg is FCX's most important asset (about 22% of copper and 91% of gold production in 2013), and the Contract of Work's initial term expires in 2021, with extensions still under negotiation. Management expects 2014 operating cash flow of about $9 billionc and capital expenditures of about $7 billion, with the Morenci and Cerro Verde expansions and Grasberg underground development driving growth in 2015 and 2016.
Offsetting these concerns are the large growth pipeline (Morenci's expansion targeting roughly 1 billion pounds of annual copper at full rates, Cerro Verde's expansion adding about 600 million pounds from 2016), a dividend of $1.25d per share annually plus a $1.00 supplemental payment in 2013, and a long-term outlook that management describes as positive. Investors should weigh the Indonesian export dispute, rising leverage, and commodity price sensitivity against this growth profile.
02—Key points
Key Highlights
- Transformational 2013 acquisitions of PXP and MMR added a U.S. oil and gas business with 464 MMBOE of proved reserves and 38.1 MMBOE of sales for the seven months post-close, lifting 2013 revenues to $20.9 billion (up 16%).
- Operating income fell to $5.35 billion from $5.81 billion, and net income attributable to common stockholders declined to $2.66 billion ($2.64 diluted EPS) from $3.04 billion ($3.19), pressured by lower copper ($3.30/lb vs. $3.60) and gold ($1,315/oz vs. $1,665) realizations and a $312 million unrealized derivative loss.
- Total debt more than quintupled to $20.7 billion, including $10.5 billion of acquisition debt and $6.7 billion assumed from PXP; senior unsecured debt is rated BBB (negative outlook at S&P), and the company is targeting $12 billion in debt by year-end 2016.
- Indonesia export regulations issued in January 2014 impose a 25% copper concentrate export duty in 2014 rising to 60% by mid-2016; PT-FI has no 2014 export approvals and is milling at about half its normal rate, with possible force majeure declarations.
- PT-FI's Contract of Work primary term expires in 2021, and about 26% of its proven and probable reserves are expected to be mined before then; extensions to 2041 remain subject to government approval.
- Growth pipeline: Morenci's mill expansion (about 225 million lbs/yr incremental from 2014, approaching 1 billion lbs/yr in 2015) and Cerro Verde's expansion (about 600 million lbs/yr from 2016) are the main drivers of volume growth.
- 2014 guidance projects copper sales of 4.43 billion lbs, gold of 1.75 million oz, operating cash flow of about $9 billion, capital expenditures of about $7 billion, and a 2014 regular dividend of about $1.3 billion ($1.25 per share annually).
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, Freeport-McMoRan Inc kept $0.13.
- Revenue$20.92B100.0%
- Cost of revenue−$14.64B70.0%
- Gross profit$6.28B30.0%
- Operating costs−$933.0M4.5%
- Operating income$5.35B25.6%
- Interest, other & tax−$2.69B12.9%
- Net income$2.66B12.7%
Where FY2013 revenue went
$20.92B- Cost of revenue: $14.64B, 70% of revenue
- Interest, other & tax: $2.69B, 13% of revenue
- Net income: $2.66B, 13% of revenue
- SG&A: $657.0M, 3.1% of revenue
- Other operating costs: $276.0M, 1.3% of revenue
Kept 13% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 27, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $20.92B$18.01B | +16.2% |
| Cost of Revenue | $14.64B$11.56B | +26.6% |
| Gross Profit | $6.28B$6.45B | −2.6% |
| SG&A Expenses | $657.00M$431.00M | +52.4% |
| Operating Expenses | $15.57B$12.20B | +27.7% |
| Operating Income | $5.35B$5.81B | −8.0% |
| Net Income | $2.66B$3.04B | −12.6% |
| EPS (Basic) | $2.65$3.20 | −17.2% |
| EPS (Diluted) | $2.64$3.19 | −17.2% |
| Shares Outstanding (Basic) | 1.00B949.00M | +5.6% |
| Shares Outstanding (Diluted) | 1.01B954.00M | +5.5% |
05—Questions
Frequently Asked Questions
What drove the change in FCX's financial performance in 2013?
Revenue rose to $20.9 billion from $18.0 billion, mainly because of the oil and gas business acquired in June 2013 (about $2.9 billion of oil and gas revenue) and higher copper and gold sales volumes. Those gains were offset by lower metal prices (copper realized $3.30/lb versus $3.60; gold $1,315/oz versus $1,665), acquisition-related costs, and $312 million of unrealized losses on crude oil derivatives. Net income attributable to common stockholders fell about 13% to $2.66 billion.
How significant is the Indonesian export dispute for FCX?
It is potentially the most important near-term issue. Indonesia's January 2014 regulations conflict with PT-FI's Contract of Work and impose escalating export duties on copper concentrate. PT-FI had no 2014 export approvals as of February 21, 2014, and its milling rate was about half of normal. Management estimates deferred output of roughly 40 million lbs of copper and 80,000 oz of gold per month while the matter is unresolved. Grasberg supplied about 22% of FCX's 2013 copper and 91% of its gold, so a prolonged disruption would materially affect results.
How leveraged is FCX after the acquisitions, and what are the debt plans?
Total debt was $20.7 billion at year-end 2013, against $2.0 billion of consolidated cash, and the weighted-average interest rate was 4.2%. Of the debt, $10.5 billion is acquisition-related and $6.7 billion was assumed from PXP. Management is targeting $12 billion of total debt by year-end 2016, to be funded by operating cash flow, possible asset sales, joint ventures, or reduced capital spending. Financial assurance obligations of about $2.4 billion could require additional collateral if the credit rating were downgraded.
What are the main growth projects, and when should they contribute?
Morenci's mill expansion targets about 225 million lbs of incremental annual copper starting in 2014, with first production expected in the first half of 2014 and output approaching 1 billion lbs in 2015. Cerro Verde's expansion, expected to add about 600 million lbs of copper and 15 million lbs of molybdenum from 2016, was more than 90% engineered at year-end. Grasberg underground development (DMLZ from 2015, Block Cave from 2017) is designed to sustain output as the open pit winds down around 2017. Capital expenditures are projected at about $7 billion for 2014.
How does the dividend policy look after the acquisitions?
FCX declared $2.25 per share in 2013, including a $1.00 supplemental dividend paid in July 2013. The regular annual rate is $1.25 per share ($0.3125 quarterly), which management estimates will cost about $1.3 billion in 2014. Dividend declarations remain at the Board's discretion and depend on financial results, cash requirements and the outlook, and management has said it will continue to review the financial policy as deleveraging progresses.
06—Continue