01—Abstract
Summary
Summary of the 10-K filed February 24, 2017. Cited figures are marked; the original filing is the authoritative source.
Freeport-McMoRan (FCX) enters 2017 in a sharply repaired balance sheet after a difficult 2015-2016 cycle.
In 2016 the company completed $6.6 billiona of asset sales (TFHL/Tenke interest, an additional 13% of Morenci, and Deepwater GOM, onshore California and Haynesville oil and gas assets) and raised $1.5 billion through an at-the-market equity offering. Total debt fell from $20.3 billion to $16.0 billion and cash rose to $4.2 billion, though the company still reported a net loss attributable to common stock of $4.2 billion, driven largely by a $4.3 billion full-cost impairment of oil and gas properties. Consolidated copper production rose to 4.2 billion pounds, supported by the Cerro Verde expansion and Morenci mill expansion, while realized copper prices fell 6% to $2.28 per pound.
The dominant investor concern is Indonesia. As of February 24, 2017, PT Freeport Indonesia (Grasberg, the largest contributor to gold and a major copper source) had no approval to export copper concentrate. Indonesian regulations from January and February 2017 require conversion of PT-FI's Contract of Work to a special operating license (IUPK), a smelter commitment, and export duties, and PT Smelting's anode slimes export license and operations are also suspended.
PT-FI has suspended production at its concentrate capacity, is reducing output by roughly 60%b from normal levels, is cutting costs and workforce, and has suspended underground development spending. PT-FI has issued formal notice of dispute under the COW, with arbitration possible after June 17, 2017. Management's 2017 outlook assumed exports would resume in February 2017, so it does not reflect the current disruption.
Debt reduction is the stated priority, with management expecting positive cash flow in 2017 at favorable commodity prices. However, the outcome of the Indonesia dispute, potential impairments or reserve reductions, and covenant pressure under the revolving credit facility (leverage limit 4.25xc in 2017, with dividends suspended through March 31, 2017) are key risks. Credit ratings are below investment grade at S&P and Moody's.
02—Key points
Key Highlights
- Completed $6.6 billion in asset sales in 2016 and $1.5 billion of common equity issuance; total debt reduced to $16.0 billion from $20.3 billion, and cash rose to $4.2 billion.
- Net loss attributable to common stock of $4.2 billion ($3.16 per share), mainly from a $4.3 billion impairment of U.S. oil and gas properties under full-cost accounting; operating loss of $2.8 billion.
- Revenues rose 1.5% to $14.8 billion, with copper providing about 70% of revenue; copper sales volumes rose to 4.2 billion pounds, but the average realized copper price fell to $2.28 per pound from $2.42.
- PT-FI production in Indonesia is suspended as of February 24, 2017, because copper concentrate export approval has not been granted; PT-FI estimates it will reduce output about 60% from normal levels and cut costs and workforce.
- Each month of delayed export approval is projected to reduce PT-FI's share of production by about 70 million pounds of copper and 70 thousand ounces of gold.
- PT-FI issued formal notice of dispute under the Contract of Work on February 17, 2017; arbitration under UNCITRAL rules may begin if unresolved by June 17, 2017.
- Dividends on common stock were suspended (none paid in 2016) and cannot be paid on or before March 31, 2017 under revolving credit facility terms; credit ratings are below investment grade at S&P and Moody's.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2016, Freeport-McMoRan Inc lost $0.28.
- Revenue$14.83B100.0%
- Cost of revenue−$17.53B118.2%
- Gross profit−$2.70B18.2%
- Operating costs−$25.0M0.2%
- Operating income−$2.73B18.4%
- Interest, other & tax−$1.43B9.6%
- Net income−$4.15B28.0%
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 24, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $14.83B$15.88B | −6.6% |
| Cost of Revenue | $17.53B$28.52B | −38.5% |
| Gross Profit | -$2.70B-$12.65B | +78.6% |
| SG&A Expenses | $597.00M$558.00M | +7.0% |
| Operating Expenses | $17.56B$28.12B | −37.6% |
| Operating Income | -$2.73B-$13.51B | +79.8% |
| Net Income | -$4.15B-$12.24B | +66.1% |
| EPS (Basic) | $-3.16$-11.31 | +72.1% |
| EPS (Diluted) | $-3.16$-11.31 | +72.1% |
| Shares Outstanding (Basic) | 1.32B1.08B | +21.8% |
| Shares Outstanding (Diluted) | 1.32B1.08B | +21.8% |
05—Questions
Frequently Asked Questions
Why is Freeport's Indonesian operation suspended, and when could it resume?
New Indonesian regulations issued in January and February 2017 require PT-FI to convert its Contract of Work to a special operating license (IUPK), commit to building a smelter within five years, and pay export duties set by the Ministry of Finance. PT-FI has not received approval to export copper concentrate, and PT Smelting's anode slimes export license and operations are also halted. The company cannot predict when exports will resume, and each month of delay reduces projected output.
How much debt does Freeport have and how is it being reduced?
Total consolidated debt was $16.0 billion at year-end 2016, down from $20.3 billion. The reduction came from repaying the $3.0 billion term loan with asset sale proceeds, repurchasing or exchanging $369 million in senior notes for 27.7 million shares, and open-market note purchases. Management expects further debt reduction in 2017 from operating cash flow, subject to commodity prices and Indonesian operations.
Why did Freeport report a large net loss in 2016 despite higher copper volumes?
The net loss of $4.2 billion was driven mainly by $4.3 billion of full-cost ceiling impairments on U.S. oil and gas properties, reflecting lower reference oil prices and reserve revisions. Other charges included $926 million for drillship settlements and idle rig costs. These were partly offset by $649 million of net gains on asset sales, including the Morenci and Timok transactions, and a $199 million gain on redemption of a noncontrolling interest.
What is the outlook for Freeport's dividend and equity issuance?
The common stock dividend was suspended in December 2015 and no dividends were paid in 2016. The revolving credit facility, as amended in February 2016, prohibits dividends on common stock through March 31, 2017. Management notes that additional equity issuance could dilute existing shareholders, and the company issued shares in 2016 both in the market and to settle drilling rig contracts.
What are the main risks to Freeport's copper, gold and molybdenum reserves?
Reserves at December 31, 2016 totaled 86.8 billion pounds of copper, 26.1 million ounces of gold and 2.95 billion pounds of molybdenum on a consolidated basis. The Indonesian reserves assume the Contract of Work is extended beyond 2021; if PT-FI cannot reach agreement on long-term mining rights, reserves could be significantly reduced. Only about 17% of aggregate Indonesian reserves are expected to be mined before the initial COW term ends in 2021.
06—Continue