01—Abstract
Summary
Summary of the 10-K filed February 20, 2018. Cited figures are marked; the original filing is the authoritative source.
Freeport-McMoRan (FCX) closed 2017 with a substantial earnings and balance sheet recovery.
Operating income rose to $3.6 billiona from a $2.8 billion loss in 2016, and net income attributable to common stockholders was $1.8 billion ($1.25 per diluted share), versus a $4.2 billion loss in 2016. Revenue grew 11% to $16.4 billion, driven by copper realized prices up 29% to $2.93/lb and higher gold volumes. Total debt fell to $13.1 billion (down $2.9 billion in 2017 and $4.3 billion in 2016), and consolidated cash rose to $4.4 billion, positioning the company for further deleveraging in 2018.
The company also reinstated a quarterly dividend of $0.05b per share in February 2018. The most important risk for investors is the unresolved status of PT Freeport Indonesia (PT-FI), which operates the Grasberg district, one of the world's largest copper and gold deposits. Indonesia's 2017 regulations conflicted with PT-FI's Contract of Work (COW), which expires in 2021.
Negotiations toward a special mining license (IUPK) running through 2041 are ongoing, with a 51%c divestment to Indonesian participants and a smelter commitment. The parties target completion in the first half of 2018, and PT-FI's temporary IUPK expires June 30, 2018. Failure to reach a definitive agreement would lead the company to reduce or defer significant underground development investment and could trigger arbitration, impairments, and reserve reductions.
Additional exposures include a $348 milliond Cerro Verde royalty charge, roughly $530 million of contested Indonesian surface water tax assessments, and $1.4 billion of environmental obligations. Operationally, 2017 copper production was 3.7 billion pounds, with sales volumes down from 2016 due to lower North America ore grades.
Management expects 2018 copper sales of about 3.9 billion pounds, gold sales of 2.4 million ounces, and consolidated capital expenditures of about $2.1 billion, including $1.2 billion for major projects such as Grasberg underground development and the Lone Star oxide project. Unit net cash costs are guided to $0.97/lb for 2018, and operating cash flow is projected to exceed $5.8 billion at the assumed $3.15/lb copper price.
02—Key points
Key Highlights
- Operating income of $3.6B in 2017 versus a $2.8B loss in 2016; net income attributable to common stock of $1.8B ($1.25/diluted share) versus a $4.2B loss in 2016.
- Revenue rose 11% to $16.4B, with average realized copper price up 29% to $2.93/lb and gold sales volume up 45% to 1.56 million ounces.
- Total debt reduced to $13.1B (net reductions of $2.9B in 2017 and $4.3B in 2016); consolidated cash of $4.4B at year-end 2017.
- Operating cash flow of $4.7B in 2017 and projected above $5.8B in 2018 at $3.15/lb copper; 2018 capex guided to about $2.1B.
- PT-FI's long-term rights remain unresolved: IUPK negotiations target completion in 1H 2018, the temporary IUPK expires June 30, 2018, and the COW expires in 2021.
- Material contingent liabilities include Cerro Verde royalty charges ($348M pre-tax in 2017), roughly $530M in disputed Indonesian surface water tax exposure, and $1.4B in environmental obligations.
- Dividend reinstated in February 2018 at $0.05 per quarter; FCX is the world's largest publicly traded copper producer with 2017 copper production of 3.7 billion pounds.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Freeport-McMoRan Inc kept $0.11.
- Revenue$16.40B100.0%
- Cost of revenue−$11.98B73.0%
- Gross profit$4.42B27.0%
- Operating costs−$733.0M4.5%
- Operating income$3.69B22.5%
- Interest, other & tax−$1.87B11.4%
- Net income$1.82B11.1%
Where FY2017 revenue went
$16.40B- Cost of revenue: $11.98B, 73% of revenue
- Net income: $1.82B, 11% of revenue
- SG&A: $477.0M, 2.9% of revenue
- Other operating costs: $256.0M, 1.6% of revenue
- Interest, other & tax: $1.87B, 11% of revenue
Kept 11% as net incomeNet income $1.82B · 11%Other operating costs $256.0M · 1.6%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 20, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $16.40B$14.83B | +10.6% |
| Cost of Revenue | $11.98B$17.53B | −31.7% |
| Gross Profit | $4.42B-$2.70B | +263.6% |
| SG&A Expenses | $477.00M$597.00M | −20.1% |
| Operating Expenses | $12.71B$17.56B | −27.6% |
| Operating Income | $3.69B-$2.73B | +235.2% |
| Net Income | $1.82B-$4.15B | +143.7% |
| EPS (Basic) | $1.25$-3.16 | +139.6% |
| EPS (Diluted) | $1.25$-3.16 | +139.6% |
| Shares Outstanding (Basic) | 1.45B1.32B | +9.8% |
| Shares Outstanding (Diluted) | 1.45B1.32B | +10.3% |
05—Questions
Frequently Asked Questions
What is the biggest risk to FCX's long-term value?
The unresolved negotiation over PT-FI's long-term mining rights in Indonesia. The COW expires in 2021, and the government has imposed export restrictions, higher royalties, export duties, and divestment and smelter requirements. If a definitive agreement is not reached, management intends to significantly reduce or defer underground development investment, which could cause asset impairments, inventory write-downs, covenant pressure, and a significant reduction in reported reserves. Grasberg is among the company's most important assets and a major share of its 2018 copper and gold growth.
Is FCX's balance sheet materially healthier than it was a year earlier?
Yes. Total debt fell from $16.0B at year-end 2016 to $13.1B at year-end 2017, and stockholders' equity rose from $6.1B to $8.0B. Cash increased to $4.4B, and the company had no revolver borrowings and $3.5B of availability. Management expects further debt reduction in 2018 from operating cash flow. Only about $4.0B of cash is net of noncontrolling interests, and the company's cash is concentrated in U.S. domestic accounts.
What drove the swing from a 2016 loss to 2017 profit?
The largest driver was the absence of 2016's $4.3B oil and gas impairment and the 2016 drillship and idle-rig charges, plus the sale of substantially all oil and gas assets. Higher copper prices (up 29%) and higher gold volumes from PT-FI added to operating results. Partly offsetting these were Cerro Verde royalty charges and PT-FI workforce reduction costs. Net income also benefited from $438M of net tax credits, including $393M of provisional U.S. tax reform benefits.
What does FCX expect for 2018 operating performance?
Management projects 2018 copper sales of about 3.93 billion pounds (including 1.2 billion pounds from Indonesia), gold sales of 2.44 million ounces, and molybdenum sales of 91 million pounds. Consolidated unit net cash costs for copper are expected to average $0.97/lb, and the effective tax rate is projected at about 37% at $3.15/lb copper. Results depend on PT-FI resolving its regulatory matters and continuing to operate after June 30, 2018.
What are the main legal and environmental exposures?
Key exposures include the Cerro Verde royalty dispute (a $348M pre-tax charge in 2017, with additional penalties and interest of about $385M not accrued), roughly $530M in Indonesian surface water tax assessments that PT-FI contests and has not paid, and the Newtown Creek Superfund site in New York, where costs could be material. Environmental obligations total $1.4B on the balance sheet, and EPA withdrew its hard-rock financial assurance rule in December 2017, which reduces near-term risk of added bonding requirements. Water rights litigation in Arizona could also constrain groundwater pumping at Morenci, Safford and Sierrita.
06—Continue