10-QPeriod: Q2 FY2006

FREEPORT-MCMORAN INC Quarterly Report for Q2 Ended Jun 30, 2006

Filed August 3, 2006For Securities:FCX

Summary

Freeport-McMoRan Inc. (FCX) reported a significant increase in revenue and net income for the second quarter and first six months of 2006 compared to the same periods in 2005. This strong performance was driven by substantially higher average realized prices for copper and gold, despite a decrease in sales volumes for both metals from PT Freeport Indonesia. The company's outlook remains positive due to favorable market conditions for copper and gold, with significant sales volumes expected in the second half of 2006. Operationally, the company experienced lower ore grades and production at PT Freeport Indonesia, partly due to operational issues and mine plan revisions. However, advancements in the Deep Ore Zone (DOZ) underground mine and ongoing development projects like Big Gossan and Common Infrastructure are positioning the company for future production. The company also highlighted progress in its smelting and refining segment, with improved operating results driven by higher treatment charges.

Key Highlights

  • 1Revenues surged by 58% to $1.43 billion in Q2 2006 and by 47% to $2.51 billion in the first six months, driven by higher copper and gold prices.
  • 2Net income applicable to common stock more than doubled to $367.3 million in Q2 2006 and rose by 102% to $618.9 million in the first six months of 2006, compared to the prior year.
  • 3Average realized copper prices increased significantly to $3.33/lb in Q2 2006 and $3.27/lb in the first six months, up from $1.53/lb and $1.54/lb, respectively, in 2005.
  • 4Average realized gold prices also saw substantial gains, reaching $613.77/oz in Q2 2006 and $492.73/oz in the first six months, up from $428.23/oz and $427.54/oz, respectively, in 2005.
  • 5PT Freeport Indonesia reported lower sales volumes for both copper (down 29% in Q2, 31% YTD) and gold (down 55% in Q2, 38% YTD), attributed to lower ore grades and operational issues.
  • 6The company adopted SFAS No. 123R for stock-based compensation, resulting in increased expenses but also reclassifying tax benefits to financing cash flows.
  • 7Capital expenditures increased significantly, nearly doubling in the first six months of 2006 to $110.3 million, reflecting investments in long-term projects like the DOZ expansion and Big Gossan mine development.

Frequently Asked Questions

The substantial increase in revenue and net income was primarily driven by a significant rise in the average realized prices for both copper and gold. Despite lower sales volumes from PT Freeport Indonesia, the higher commodity prices more than offset this decrease, leading to a strong financial performance for the quarter and year-to-date.

PT Freeport Indonesia experienced challenges including mining lower grade ore, which impacted production and sales volumes. They also encountered operational issues such as a section of ore with abnormally high clay content, which affected mill recoveries and concentrate grades, and faced weather-related shipping delays at the end of June.

The adoption of SFAS No. 123R (Share-Based Payment) effective January 1, 2006, led to increased stock-based compensation expenses recognized in the income statement. Additionally, it required the reclassification of cash flows generated from tax benefits related to stock options from operating activities to financing activities.

FCX views the current market conditions for copper and gold as positive, citing strong demand and supply dynamics. The company projects significant sales volumes in the second half of 2006. Operational initiatives and ongoing development projects, such as the DOZ underground mine expansion and the Big Gossan mine, are expected to support future production levels.