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FCX > SEC Filings for FCX > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for FREEPORT MCMORAN COPPER & GOLD INC

Form 10-Q for FREEPORT MCMORAN COPPER & GOLD INC


2-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

In Management's Discussion and Analysis of Financial Condition and Results of Operations, "we," "us" and "our" refer to Freeport-McMoRan Copper & Gold Inc. (FCX) and its consolidated subsidiaries. You should read this discussion in conjunction with our financial statements, the related Management's Discussion and Analysis of Financial Condition and Results of Operations and the discussion of our Business and Properties in our annual report on Form 10-K for the year ended December 31, 2011, filed with the United States (U.S.) Securities and Exchange Commission (SEC). The results of operations reported and summarized below are not necessarily indicative of future operating results (refer to "Cautionary Statement" for further discussion). References to "Notes" are Notes included in our Notes to Consolidated Financial Statements. Throughout Management's Discussion and Analysis of Financial Condition and Results of Operations all references to earnings or losses per share are on a diluted basis, unless otherwise noted.

We are one of the world's largest copper, gold and molybdenum mining companies in terms of reserves and production. Our portfolio of assets includes the Grasberg minerals district in Indonesia, significant mining operations in North and South America, and the Tenke Fungurume (Tenke) minerals district in the Democratic Republic of Congo (DRC). The Grasberg minerals district contains the largest single recoverable copper reserve and the largest single gold reserve of any mine in the world based on the latest available reserve data provided by third-party industry consultants. We also operate Atlantic Copper, our wholly owned copper smelting and refining unit in Spain.

Our results for the third quarter and first nine months of 2012, compared with the 2011 periods, primarily reflected lower copper and gold sales volumes. Results for the first nine months of 2012 were also impacted by lower copper prices. Our net income attributable to common stockholders also includes net credits for adjustments to Cerro Verde's deferred income taxes and to our environmental and related litigation reserves totaling $168 million for third-quarter 2012 and $116 million for the first nine months of 2012, compared with net charges totaling $73 million for third-quarter 2011 and $113 million for the first nine months of 2011. Refer to "Consolidated Results" for further discussion of our consolidated financial results for the three- and nine-month periods ended September 30, 2012 and 2011.

In May 2012, our Climax molybdenum mine began commercial production. Depending on market conditions, production from the Climax mine may ramp up to a rate of 20 million pounds of molybdenum per year during 2013, with the potential to produce 30 million pounds of molybdenum per year.

At September 30, 2012, we had $3.7 billion in consolidated cash and cash equivalents and $3.5 billion in total debt. In February 2012, we sold $3.0 billion of senior notes in three tranches with a weighted average interest rate of approximately three percent. We used the proceeds from this offering, plus cash on hand, to redeem the remaining $3.0 billion of our 8.375% Senior Notes. Refer to Note 5 and "Capital Resources and Liquidity - Financing Activities" for further discussion.

In February 2012, our Board of Directors (the Board) authorized an increase in the cash dividend on our common stock to an annual rate of $1.25 per share ($0.3125 per share quarterly). Refer to Note 5 for further discussion.

At current copper prices, we expect to produce significant operating cash flows, and to use our cash to invest in our development projects, including the underground development projects at Grasberg and the expansion projects at Morenci, Cerro Verde and Tenke, as well as to return cash to shareholders through common stock dividends and/or share repurchases.


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OUTLOOK

We view the long-term outlook for our business positively, supported by limitations on supplies of copper and by the requirements for copper in the world's economy. We will continue to adjust our operating strategy as market conditions change. Our financial results vary with fluctuations in market prices for copper, gold and molybdenum and other factors. World market prices for these commodities have fluctuated historically and are affected by numerous factors beyond our control. Because we cannot control the price of our products, the key measures that management focuses on in operating our business are sales volumes, unit net cash costs and operating cash flow. Discussion of the outlook for each of these measures follows.

Sales Volumes. Consolidated sales from mines for the year 2012 are expected to approximate 3.6 billion pounds of copper, 1.0 million ounces of gold and 82 million pounds of molybdenum, including 930 million pounds of copper, 255 thousand ounces of gold and 20 million pounds of molybdenum for fourth-quarter 2012. Expected gold sales for 2012 are approximately 50,000 ounces less than the estimates provided in our quarterly report on Form 10-Q for the period ended June 30, 2012, because of lower gold production at Grasberg. Consolidated sales from mines for the year 2013 are expected to total 4.3 billion pounds of copper, 1.4 million ounces of gold and 90 million pounds of molybdenum. Projected sales volumes are dependent on a number of factors, including achievement of targeted mining rates, the successful operation of production facilities, the impact of weather conditions and other factors.

Unit Net Cash Costs. Quarterly unit net cash costs will vary with fluctuations in sales volumes and average realized prices for gold and molybdenum. Assuming average prices of $1,700 per ounce of gold and $11 per pound of molybdenum for fourth-quarter 2012, and achievement of current 2012 sales volume and cost estimates, consolidated unit site production and delivery costs, before net noncash and other costs, for our copper mining operations are expected to average $2.03 per pound of copper and unit net cash costs (net of by-product credits) are expected to average $1.50 per pound of copper for the year 2012 (fourth-quarter 2012 consolidated site production and delivery costs are expected to average $2.11 per pound of copper and unit net cash costs (net of by-product credits) are expected to average $1.62 per pound of copper). The impact of price changes during fourth-quarter 2012 on consolidated unit net cash costs for the year 2012 would approximate $0.004 per pound for each $50 per ounce change in the average price of gold, and $0.004 per pound for each $2 per pound change in the average price of molybdenum. Assuming consistent commodity price assumptions, unit net cash costs for 2013 are expected to be lower than 2012 because of projected increased copper and gold volumes at Grasberg. Refer to "Consolidated Results - Production and Delivery Costs" for further discussion of consolidated production and delivery costs.

Operating Cash Flows. Our operating cash flows vary with prices realized from copper, gold and molybdenum sales, our sales volumes, production costs, income taxes and other working capital changes and other factors. Based on current 2012 sales volume and cost estimates, and assuming average prices of $3.70 per pound of copper, $1,700 per ounce of gold and $11 per pound of molybdenum for fourth-quarter 2012, consolidated operating cash flows are estimated to approximate $4.0 billion for the year 2012 (net of an estimated $1.4 billion in working capital uses and other tax payments). Projected operating cash flows for the year 2012 also reflect estimated taxes of $1.6 billion (refer to "Consolidated Results - Provision for Income Taxes" for further discussion of our projected consolidated effective annual tax rate for 2012). The impact of price changes for fourth-quarter 2012 on operating cash flows would approximate $80 million for each $0.10 per pound change in the average price of copper, $20 million for each $100 per ounce change in the average price of gold and $10 million for each $2 per pound change in the average price of molybdenum.


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COPPER, GOLD AND MOLYBDENUM MARKETS

World prices for copper, gold and molybdenum can fluctuate significantly. During the period from January 2002 through October 2012, the London Metal Exchange (LME) spot copper price varied from a low of $0.64 per pound in 2002 to a record high of $4.60 per pound in February 2011, the London Bullion Market Association (London) gold price fluctuated from a low of $278 per ounce in 2002 to a record high of $1,895 per ounce in September 2011, and the Metals Week Molybdenum Dealer Oxide weekly average price ranged from a low of $2.43 per pound in 2002 to a record high of $39.25 per pound in 2005. Copper, gold and molybdenum prices are affected by numerous factors beyond our control as described further in our "Risk Factors" contained in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2011.

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This graph presents LME spot copper prices and the combined reported stocks of copper at the LME, the New York Mercantile Exchange (COMEX) and the Shanghai Futures Exchange from January 2002 through October 2012. From 2006 through most of 2008, limited supplies, combined with growing demand from China and other emerging economies, resulted in high copper prices and low levels of inventories. In late 2008, slowing consumption, turmoil in the U.S. financial markets and concerns about the global economy led to a sharp decline in copper prices, which reached a low of $1.26 per pound in December 2008. Higher copper prices since the 2008 low are attributable to a combination of demand from emerging markets and limitations on available supply. During third-quarter 2012, LME spot copper prices ranged from $3.32 per pound to $3.81 per pound, averaged $3.50 per pound and closed at $3.75 per pound on September 30, 2012. While global economic concerns continue to influence prices, global exchange inventories have declined, representing less than two weeks of global demand.

We believe the underlying long-term fundamentals of the copper business remain positive, supported by the significant role of copper in the global economy and limited supplies. Future copper prices are expected to be volatile and are likely to be influenced by demand from China and emerging markets, economic activity in the U.S. and other industrialized countries, the timing of the development of new supplies of copper and production levels of mines and copper smelters. The LME spot copper price closed at $3.55 per pound on October 31, 2012.


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This graph presents London p.m. gold prices from January 2002 through October 2012. During third-quarter 2012, gold prices ranged from $1,556 per ounce to $1,785 per ounce, averaged $1,652 per ounce and closed at $1,776 per ounce on September 30, 2012. Gold prices closed at $1,719 per ounce on October 31, 2012.

[[Image Removed]]
This graph presents the Metals Week Molybdenum Dealer Oxide weekly average prices from January 2002 through October 2012. In late 2008, molybdenum prices declined significantly as a result of the financial market turmoil and a decline in demand. During third-quarter 2012, the weekly average price of molybdenum ranged from $10.90 per pound to $12.95 per pound, averaged $11.93 per pound and closed at $11.65 on September 30, 2012. Average Metals Week Molybdenum Dealer Oxide prices were lower in third-quarter 2012, compared with second-quarter 2012, reflecting weaker demand and cautious buying activity in response to the global economic situation. The Metals Week Molybdenum Dealer Oxide weekly average price was $11.05 per pound on October 31, 2012.


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                              CONSOLIDATED RESULTS
                                       Three Months Ended                  Nine Months Ended
                                          September 30,                      September 30,
                                      2012             2011             2012               2011
Financial Data (in millions,
except per share amounts)
Revenuesa,b                       $    4,417        $   5,195        $  13,497          $  16,718
Operating incomea,c               $    1,411   d    $   2,150   d    $   4,456   d      $   7,843   d
Net income attributable to FCX                 d,e              d,e              d,e,f              d,e,f
common stockholders               $      824        $   1,053        $   2,298          $   3,920
Diluted net income per share
attributable to FCX common
stockholders                      $     0.86   d,e  $    1.10   d,e  $    2.41   d,e,f  $    4.10   d,e,f
Diluted weighted-average common
shares outstanding                       953              955              953                955

Mining Operating Data
Copper (millions of recoverable
pounds)
Production                               938              951            2,658              2,868
Sales, excluding purchases               922              947            2,676              2,875
Average realized price per pound  $     3.64        $    3.60        $    3.63          $    3.94
Site production and delivery      $     2.03        $    1.71        $    2.00          $    1.65
costs per poundg
Unit net cash costs per poundg    $     1.62        $    0.80        $    1.46          $    0.84
Gold (thousands of recoverable
ounces)
Production                               204              385              707              1,202
Sales, excluding purchases               202              409              756              1,245
Average realized price per ounce  $    1,728        $   1,693        $   1,666          $   1,565
Molybdenum (millions of
recoverable pounds)
Production                                20               23               61                 65
Sales, excluding purchases                21               19               62                 60
Average realized price per pound  $    13.62        $   16.34        $   14.79          $   17.57

a. Refer to Note 11 for a summary of revenues and operating income by business segment.

b. Includes the impact of adjustments to provisionally priced concentrate and cathode sales recognized in prior periods (refer to "Revenues" below for further discussion).

c. We defer recognizing profits on intercompany sales until final sales to third parties occur. Refer to "Operations - Atlantic Copper Smelting & Refining" for a summary of net impacts from changes in these deferrals.

d. Includes net (credits) charges for adjustments to environmental obligations and related litigation reserves totaling $(85) million ($(68) million to net income attributable to common stockholders or $(0.07) per share) for third-quarter 2012, $29 million ($23 million to net income attributable to common stockholders or $0.02 per share) for third-quarter 2011, $(19) million
($(16) million to net income attributable to common stockholders or $(0.02) per share) for the first nine months of 2012 and $78 million ($63 million to net income attributable to common stockholders or $0.07 per share) for the first nine months of 2011.

e. The 2012 periods include a net tax credit of $100 million, net of noncontrolling interests ($0.11 per share), associated with adjustments to Cerro Verde's deferred income taxes. The 2011 periods include a tax charge of $50 million, net of noncontrolling interests ($0.05 per share) for additional taxes associated with Cerro Verde's election to pay a special mining burden during the remaining term of its stability agreement. Refer to Note 4 and "Provision for Income Taxes" below for further discussion of these amounts.

f. Includes losses on early extinguishment of debt totaling $149 million ($0.16 per share) for the first nine months of 2012 and $60 million ($0.06 per share) for the first nine months of 2011 (refer to Note 5 for further discussion).

g. Reflects per pound weighted-average production and delivery costs and unit net cash costs (net of by-product credits) for all copper mines, before net noncash and other costs. For reconciliations of the per pound costs by operating division to production and delivery costs applicable to sales reported in our consolidated financial statements, refer to "Operations - Unit Net Cash Costs" and to "Product Revenues and Production Costs."


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Revenues
Consolidated revenues totaled $4.4 billion in third-quarter 2012 and $13.5 billion for the first nine months of 2012, compared with $5.2 billion in third-quarter 2011 and $16.7 billion for the first nine months of 2011. Consolidated revenues include the sale of copper concentrates, copper cathodes, copper rod, gold, molybdenum and other metals by our North and South America copper mines, the sale of copper concentrates (which also contain significant quantities of gold and silver) by our Indonesia mining operations, the sale of copper cathodes and cobalt hydroxide by our Africa mining operations, the sale of molybdenum in various forms by our Molybdenum operations, and the sale of copper cathodes, copper anodes, and gold in anodes and slimes by Atlantic Copper.

Following is a summary of changes in our consolidated revenues between periods (in millions):

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