01—Abstract
Summary
Summary of the 10-K filed February 15, 2019. Cited figures are marked; the original filing is the authoritative source.
Freeport-McMoRan (FCX) reported 2018 results that rebounded sharply from 2016's loss.
Revenue rose to $18.6 billiona (from $16.4 billion in 2017), operating income reached $4.75 billion, and net income attributable to common stockholders was $2.6 billion, or $1.78 per diluted share. Results benefited from higher gold and copper sales volumes, $208 million in asset-sale gains, and a $504 million tax credit tied to PT-FI's new IUPK. Operating cash flow was $3.9 billion, and capital expenditures were $2.0 billion.
Total debt was reduced to $11.1 billionb from $13.2 billion, and cash was $4.2 billion. The most consequential development was the December 21, 2018 divestment transaction with the Indonesian government. PT-FI's ownership was restructured so that PT Inalum and PTI hold 51.24% and FCX holds 48.76%, though FCX retains operational control and continues to consolidate PT-FI.
The company expects an economic interest of about 81% from 2019 through 2022. In exchange for the restructuring, PT-FI received a new IUPK extending mining rights through 2031, with a possible extension to 2041 conditional on completing a new Indonesian smelter by December 2023 and meeting fiscal obligations. FCX also reinstated its common dividend in 2018 at $0.20c per year.
Investors should weigh a transition year ahead. Management projects 2019 copper sales of about 3.3 billion pounds, down from 3.8 billion, as Grasberg transitions from open pit to underground block cave mining, with Indonesia volumes falling to roughly 615 million pounds.
Projected 2019 capital expenditures are about $2.4 billiond. Key risks include the Indonesian regulatory environment and the 2031/2041 mining-rights conditions, Cerro Verde royalty disputes, water rights litigation in Arizona, El Abra operational disruptions in early 2019, and asbestos and talc claims at a subsidiary whose indemnitor filed for bankruptcy in February 2019.
02—Key points
Key Highlights
- Revenue of $18.6B in 2018 (up 14% from $16.4B); operating income of $4.75B; net income attributable to common stockholders of $2.6B ($1.78 diluted EPS).
- PT-FI divestment completed December 21, 2018: PT Inalum and PTI hold 51.24%, FCX 48.76%; FCX keeps operational control and consolidation, with ~81% economic interest expected 2019-2022.
- New IUPK grants PT-FI mining rights through 2031, extendable to 2041 if a new Indonesian smelter is completed by Dec 2023 and fiscal obligations are met; $504M tax credit recognized from lower PT-FI tax rates.
- Debt reduced to $11.1B from $13.2B in 2017; cash of $4.2B; $3.5B undrawn revolver; ratings BB (S&P), BB+ (Fitch), Ba2 (Moody's).
- Operating cash flow of $3.9B and capital expenditures of $2.0B in 2018; 2019 guidance calls for ~$2.4B capex and ~$1.8B operating cash flow at $2.75/lb copper.
- 2019 is a transition year: projected copper sales of 3.3B lbs (vs. 3.8B in 2018) as Grasberg moves underground, with Indonesia copper falling to ~615M lbs; metal production expected to recover significantly by 2021.
- Quarterly dividend of $0.05 per share declared; dividends paid totaled $218M in 2018. Net reserves: 119.6B lbs copper, 30.8M oz gold, 3.78B lbs molybdenum (consolidated basis).
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Freeport-McMoRan Inc kept $0.14.
- Revenue$18.63B100.0%
- Cost of revenue−$13.47B72.3%
- Gross profit$5.16B27.7%
- Operating costs−$408.0M2.2%
- Operating income$4.75B25.5%
- Interest, other & tax−$2.15B11.6%
- Net income$2.60B14.0%
Where FY2018 revenue went
$18.63B- Cost of revenue: $13.47B, 72% of revenue
- Net income: $2.60B, 14% of revenue
- SG&A: $422.0M, 2.3% of revenue
- Interest, other & tax: $2.15B, 12% of revenue
Kept 14% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 15, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $18.63B$16.40B | +13.6% |
| Cost of Revenue | $13.47B$11.98B | +12.4% |
| Gross Profit | $5.16B$4.42B | +16.7% |
| SG&A Expenses | $422.00M$477.00M | −11.5% |
| Operating Expenses | $13.87B$12.71B | +9.1% |
| Operating Income | $4.75B$3.69B | +28.8% |
| Net Income | $2.60B$1.82B | +43.2% |
| EPS (Basic) | $1.79$1.25 | +43.2% |
| EPS (Diluted) | $1.78$1.25 | +42.4% |
| Shares Outstanding (Basic) | 1.45B1.45B | +0.1% |
| Shares Outstanding (Diluted) | 1.46B1.45B | +0.3% |
05—Questions
Frequently Asked Questions
Why did FCX's earnings improve so much in 2018 compared with 2016?
2016 included $4.3 billion of oil and gas impairments plus drillship settlement and other charges, producing a net loss of $4.2 billion. In 2018, FCX had no comparable impairments, higher gold and copper sales volumes (particularly from Indonesia), $208 million in asset-sale gains, and higher realized molybdenum prices ($12.50/lb vs. $9.33 in 2017). Oil and gas operations were largely sold off by 2016, which removed the earlier losses.
What does the PT-FI transaction mean for FCX's economic interest and control?
FCX's legal ownership of PT-FI fell from 90.64% to 48.76%, but a shareholders agreement gives FCX control over operations, so it continues to consolidate PT-FI. Because pre-transaction shareholders keep the revenue and cost-sharing economics of the former Rio Tinto joint venture, FCX's economic interest is expected to be about 81% from 2019 through 2022, falling to roughly 48.76% from 2023 through 2041. FCX received $350 million cash for its PTI stake plus $107 million from Rio Tinto, and PT-FI paid $3.5 billion to acquire Rio Tinto's JV interest.
What are the biggest risks to Indonesia operations going forward?
The IUPK extension beyond 2031 depends on completing a new smelter by December 21, 2023 (preliminary cost about $3 billion) and meeting fiscal terms. Export license renewals (current license expires February 16, 2019) are reviewed every six months. Indonesian elections in 2019, ongoing tax disputes (surface water, withholding, and a 2.5% export duty dispute), environmental permit actions by the MOEF, security incidents in Papua, and labor disruptions all present risks. FCX estimates it will mine only about 53% of Indonesian reserves before the initial 2031 term ends.
How much financial exposure does FCX have to the Cerro Verde royalty dispute?
Cerro Verde recorded net charges of $195 million attributable to common stock in 2018 and $186 million in 2017, including pre-tax charges for royalty assessments, interest, and penalties. Cerro Verde has recorded its full exposure, but interest continues to accrue until obligations are settled. About $188 million had been paid through 2018 under an installment program, with additional monthly payments starting in second-quarter 2019 under a 66-month plan. Cerro Verde is also pursuing international arbitration options.
Is the dividend sustainable, and what are the capital allocation priorities?
The Board reinstated a $0.20 annual dividend in February 2018 after suspending it in 2015, and paid $218 million in 2018. The declaration is at the Board's discretion and depends on financial results and cash requirements. Management's 2019 outlook projects capex of about $0.6 billion above operating cash flow, so FCX expects to fund the gap with cash on hand and its credit facility. Management has emphasized disciplined capital deployment and debt reduction, with $9.3 billion of net debt reduction over the three years ended 2018.
06—Continue