01—Abstract
Summary
Summary of the 10-K filed February 26, 2016. Cited figures are marked; the original filing is the authoritative source.
Freeport-McMoRan (FCX) enters 2016 in a financially stressed position after a sharp commodity downturn in 2015.
The company reported an operating loss of $13.4 billiona and a net loss attributable to common stockholders of $12.2 billion (diluted EPS of -$11.31), driven primarily by $13.1 billion of full-cost ceiling-test impairments on U.S. oil and gas properties, $338 million of copper and molybdenum inventory adjustments, and a $3.3 billion tax valuation allowance. Revenue fell 26% to $15.9 billion as realized copper prices declined 22% to $2.42/lb and oil prices fell roughly 51%. Total debt stood at $20.4 billion against only $224 million of cash, and stockholders' equity dropped to $7.8 billion from $18.3 billion.
Management's response centers on deleveraging. The company cut capital spending, curtailed production at several North and South America mines (Miami, Sierrita, Tyrone, El Abra, Henderson), suspended its common dividend in December 2015, and raised roughly $2 billionb of equity through at-the-market programs at an average of about $9.47 per share. In February 2016 it agreed to sell a 13% interest in the Morenci joint venture to Sumitomo Metal Mining for $1.0 billion, and it is conducting a strategic review of its oil and gas business (FM O&G).
Lenders amended the revolving credit facility and term loan, reducing commitments to $3.5 billionc and loosening leverage covenants, but added a springing collateral and guarantee trigger if $3.0 billion of asset sales are not agreed by June 30, 2016. Credit ratings were cut to below investment grade by S&P and Moody's. For investors, the key issues are the sustainability of the balance sheet, the timing and value of asset sales, and the outlook for copper prices.
Management expects 2016 copper sales of about 5.1 billion pounds, with unit net cash costs falling to about $1.10d/lb, and projects roughly $3.4 billion of operating cash flow at assumed prices of $2.00/lb copper and $34/bbl Brent. Major risks include further impairments if prices stay low, Indonesian contract-of-work negotiations and export duties, and water-rights litigation in Arizona.
02—Key points
Key Highlights
- Operating loss of $13.4 billion and net loss to common of $12.2 billion (-$11.31 per diluted share), driven mainly by $13.1 billion of oil and gas impairments
- Revenue declined 26% to $15.9 billion; realized copper price fell 22% to $2.42/lb, molybdenum fell 32%, and oil realizations fell about 51%
- Total debt of $20.4 billion versus $224 million of cash at year-end 2015; credit ratings cut to below investment grade by S&P and Moody's
- Dividend suspended in December 2015 after being cut to $0.20 annually in March; roughly $2 billion of equity raised via at-the-market programs
- Agreed to sell a 13% Morenci interest to Sumitomo Metal Mining for $1.0 billion (expected close mid-2016, roughly $550 million expected gain); strategic review of FM O&G underway
- Revolving credit facility reduced to $3.5 billion; springing collateral trigger if $3.0 billion of asset sales are not agreed by June 30, 2016
- Indonesia's PT-FI still operates under a COW expiring 2021, with a 5% export duty and a planned 20.64% divestment; Grasberg open pit transitions to underground around late 2017
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2015, Freeport-McMoRan Inc lost $0.77.
- Revenue$15.88B100.0%
- Cost of revenue−$28.52B179.7%
- Gross profit−$12.65B79.7%
- Operating costs−$865.0M5.4%
- Operating income−$13.51B85.1%
- Interest, other & tax$1.28B8.0%
- Net income−$12.24B77.1%
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 26, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $15.88B$21.44B | −25.9% |
| Cost of Revenue | $28.52B$19.50B | +46.2% |
| Gross Profit | -$12.65B$1.93B | −753.9% |
| SG&A Expenses | $558.00M$580.00M | −3.8% |
| Operating Expenses | $28.12B$20.30B | +38.5% |
| Operating Income | -$13.51B-$298.00M | −4434.2% |
| Net Income | -$12.24B-$1.31B | −835.5% |
| EPS (Basic) | $-11.31$-1.26 | −797.6% |
| EPS (Diluted) | $-11.31$-1.26 | −797.6% |
| Shares Outstanding (Basic) | 1.08B1.04B | +4.1% |
| Shares Outstanding (Diluted) | 1.08B1.04B | +4.1% |
05—Questions
Frequently Asked Questions
Why did FCX report such a large net loss in 2015?
The loss was driven primarily by $13.1 billion of non-cash impairments of U.S. oil and gas properties under full cost accounting, triggered by the drop in the twelve-month average WTI price to $50.28/bbl. Additional charges included $338 million of copper and molybdenum inventory write-downs, $3.3 billion of tax valuation allowances against U.S. deferred tax assets, and $188 million of other oil and gas charges. Much of the loss is non-cash, but it reduces equity and signals that further write-downs are possible if prices stay low.
Is FCX at risk of a liquidity crisis?
The company faces significant near-term leverage pressure: $20.4 billion of debt, only $224 million of cash, and covenant relief that tightens over 2016 (maximum leverage of 8.0x through mid-2016, stepping to 6.0x by year-end). Management expects 2016 operating cash flow of about $3.4 billion after $0.6 billion of idle rig costs, and it has committed to asset sales and ATM equity. Investors should monitor whether the $3.0 billion asset-sale target is met by June 30, 2016, since failure triggers secured lending requirements.
What is the outlook for copper production and costs in 2016?
Projected 2016 consolidated copper sales are about 5.13 billion pounds, up from 4.07 billion in 2015, mainly reflecting higher Grasberg grades in the second half and the Cerro Verde expansion. Unit net cash costs for copper mines are expected to fall to about $1.10/lb from $1.53/lb, assuming gold at $1,100/oz and molybdenum at $4.50/lb. Sensitivity is material: each $0.10/lb change in copper price moves operating cash flow by about $440 million.
What are the main Indonesian risks to the investment case?
PT Freeport Indonesia's Contract of Work runs to 2021 with two 10-year extensions subject to government approval, and the extension terms are still under negotiation. The company has agreed in principle to build new smelter capacity, divest an additional 20.64%, and pay higher royalties. Export duties of 5% apply under permits renewed only for six-month periods, with the current permit running to August 8, 2016. Concentrate exports are restricted after January 2017, making the smelter and COW outcomes critical to Grasberg economics.
06—Continue