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FCX > SEC Filings for FCX > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for FREEPORT MCMORAN COPPER & GOLD INC

Form 10-Q for FREEPORT MCMORAN COPPER & GOLD INC


9-May-2014

Quarterly Report


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

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, 2013, 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.

OVERVIEW

We are a premier U.S.-based natural resources company with an industry-leading global portfolio of mineral assets, significant oil and gas resources and a growing production profile. We are the world's largest publicly traded copper producer. Our portfolio of assets includes the Grasberg minerals district in Indonesia, one of the world's largest copper and gold deposits; significant mining operations in North and South America; the Tenke Fungurume (Tenke) minerals district in the Democratic Republic of Congo (DRC) in Africa; and significant oil and natural gas assets in the U.S., including reserves in the Deepwater Gulf of Mexico (GOM), onshore and offshore California, in the Eagle Ford shale play in Texas, in the Haynesville shale play in Louisiana, in the Madden area in central Wyoming, and an industry-leading position in the emerging Inboard Lower Tertiary/Cretaceous natural gas trend in the shallow waters of the GOM and onshore in South Louisiana.

As further discussed in Note 13, in May 2014, we announced that Freeport-McMoRan Oil & Gas LLC, a wholly owned subsidiary of FCX Oil & Gas Inc. (FM O&G), had entered into separate agreements to (i) sell its Eagle Ford shale assets for $3.1 billion to a subsidiary of Encana Corporation and (ii) acquire certain of Apache Corporation's interests in the Deepwater GOM for $1.4 billion. These transactions are expected to close by the end of second-quarter 2014, and we estimate combined after-tax net proceeds from the transactions will approximate $1.3 billion, which will be used to repay outstanding indebtedness following the close of the transactions. Our 2014 estimates and projections included in this quarterly report do not reflect the impact of these recently announced transactions.

Our results for first-quarter 2014, compared with first-quarter 2013, primarily reflect lower sales volumes in Indonesia because of restrictions on concentrate exports and lower copper price realizations, partly offset by the inclusion of the results of FM O&G in first-quarter 2014. Refer to "Consolidated Results" for further discussion of our consolidated financial results for the three months ended March 31, 2014 and 2013.

In January 2014, the Indonesian government published regulations regarding exports of minerals, including copper concentrates. The regulations provide that holders of contracts of work with existing processing facilities in Indonesia could continue to export product through January 12, 2017, but established new requirements for the continued export of copper concentrates, including the imposition of a progressive export duty on copper concentrates. To date, PT Freeport Indonesia (PT-FI) has not received authorization from the Indonesian government to export copper concentrate. Refer to "Operations - Indonesia" for further discussion.

At March 31, 2014, we had $1.3 billion in consolidated cash and cash equivalents and $20.9 billion in total debt. We continue to target significant reductions in debt by the end of 2016 using cash flows generated above capital expenditures and other cash requirements. Refer to Note 6 and "Capital Resources and Liquidity" for further discussion.

At current commodity prices, we expect to produce significant operating cash flows, and to use our cash to invest in our development projects, reduce debt and return cash to shareholders through dividends on our common stock.


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OUTLOOK

We view the long-term outlook for our business positively, supported by limitations on supplies of copper and oil and by the requirements for copper and oil in the world's economy. Our financial results vary as a result of fluctuations in market prices primarily for copper, gold, molybdenum and oil, as well as 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 for our mining operations, cash production costs per barrel of oil equivalent (BOE) for our oil and gas operations and operating cash flow. The outlook for each of these measures follows.

Sales Volumes. Following are our projected consolidated sales volumes for the year 2014:

Copper (millions of recoverable pounds):
North America copper mines                  1,720
South America mining                        1,210
Indonesia mining                              930  a
Africa mining                                 440
                                            4,300
Gold (millions of recoverable ounces):
Indonesia mining                              1.5  a
North and South America mining                0.1
                                              1.6
Molybdenum (millions of recoverable pounds)    97  b
Oil Equivalents (million BOE, or MMBOE)      64.2  c

a. This estimate assumes resumption of exports from PT-FI beginning in May 2014. To the extent PT-FI is unable to resume exports in May 2014, this would result in a deferral of approximately 50 million pounds of copper and 80 thousand ounces of gold per month.

b. Projected molybdenum sales include 49 million pounds produced at our Molybdenum mines and 48 million pounds produced at our North and South America copper mines.

c. This estimate does not reflect the impact of the recently announced transactions to sell the Eagle Ford shale assets and to acquire certain additional interests in the Deepwater GOM.

Consolidated sales for second-quarter 2014 are expected to approximate 1.1 billion pounds of copper, 320 thousand ounces of gold, 24 million pounds of molybdenum and 15.2 MMBOE. Projected sales volumes are dependent on a number of factors, including operational performance, the impact of newly enacted Indonesian governmental laws and regulations and other factors.

Mining Unit Net Cash Costs. Assuming average prices of $1,300 per ounce of gold and $10 per pound of molybdenum for the remainder of 2014, and achievement of current sales volume and cost estimates, which assumes the resumption of exports from PT-FI beginning in May 2014, consolidated unit net cash costs (net of by-product credits) for our copper mines are expected to average $1.58 per pound of copper in second-quarter 2014 and $1.41 per pound of copper for the year 2014. Quarterly unit net cash costs vary with fluctuations in sales volumes and average realized prices (primarily gold and molybdenum prices). The impact of price changes for the remainder of 2014 on consolidated unit net cash costs would approximate $0.017 per pound for each $50 per ounce change in the average price of gold and $0.015 per pound for each $2 per pound change in the average price of molybdenum. Refer to "Consolidated Results - Production and Delivery Costs" for further discussion of consolidated production and delivery costs for our mining operations.

Oil and Gas Cash Production Costs per BOE. Based on current sales volume and cost estimates for the remainder of 2014, cash production costs are expected to approximate $19 per BOE for the year 2014. Refer to "Operations - Oil and Gas" for further discussion of oil and gas production costs.

Consolidated Operating Cash Flow. Our consolidated operating cash flows vary with prices realized from copper, gold, molybdenum and oil sales, our sales volumes, production costs, income taxes, other working capital changes and other factors. Based on current sales volume and cost estimates, which assumes the resumption of exports from PT-FI beginning in May 2014, and assuming average prices of $3.00 per pound of copper, $1,300 per ounce of


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gold, $10 per pound of molybdenum and $105 per barrel of Brent crude oil for the remainder of 2014, consolidated operating cash flows are estimated to approximate $7.7 billion for the year 2014. Projected consolidated operating cash flows for the year 2014 also reflect estimated taxes of $1.9 billion (refer to "Consolidated Results - Provision for Income Taxes" for further discussion of our projected consolidated effective annual tax rate for 2014). The impact of price changes during the remainder of 2014 on operating cash flows would approximate $275 million for each $0.10 per pound change in the average price of copper, $60 million for each $50 per ounce change in the average price of gold, $85 million for each $2 per pound change in the average price of molybdenum and $100 million for each $5 per barrel change in the price of Brent crude oil above $100 per barrel.

MARKETS

Metals. World prices for copper, gold and molybdenum can fluctuate significantly. During the period from January 2004 through April 2014, the London Metal Exchange (LME) spot copper price varied from a low of $1.06 per pound in 2004 to a record high of $4.60 per pound in 2011, the London Bullion Market Association (London) PM gold price fluctuated from a low of $375 per ounce in 2004 to a record high of $1,895 per ounce in 2011, and the Metals Week Molybdenum Dealer Oxide weekly average price ranged from a low of $7.35 per pound in 2004 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, 2013.

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This graph presents LME spot copper prices and the combined reported stocks of copper at the LME, Commodity Exchange Inc. (COMEX), a division of the New York Mercantile Exchange (NYMEX), and the Shanghai Futures Exchange from January 2004 through April 2014. 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 that time are attributable to a combination of demand from developing economies and pro-growth monetary and fiscal policy decisions in Europe, China and the U.S. During first-quarter 2014, copper prices declined because of concerns about slowing growth rates in China and an outlook for higher near-term supplies. LME spot copper prices ranged from a low of $2.92 per pound to a high of $3.38 per pound, averaged $3.19 per pound, and closed at $3.01 per pound on March 31, 2014.


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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 a challenging long-term supply environment. Future copper prices are expected to be volatile and are likely to be influenced by demand from China and emerging markets, as well as 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. LME spot copper prices closed at $3.05 per pound on April 30, 2014.

[[Image Removed]]

This graph presents London PM gold prices from January 2004 through April 2014. An improving economic outlook and positive equity performance contributed to lower demand for gold in 2013 and early 2014, resulting in generally lower prices. During first-quarter 2014, London PM gold prices ranged from a low of $1,221 per ounce to a high of $1,385 per ounce, averaged $1,293 per ounce and closed at $1,292 per ounce on March 31, 2014. Gold prices closed at $1,289 per ounce on April 30, 2014.

[[Image Removed]] This graph presents the Metals Week Molybdenum Dealer Oxide weekly average prices from January 2004 through April 2014. Market conditions for molybdenum declined in 2013 because of weak demand in the metallurgical sector and increased supply, but have shown improvement in first-quarter 2014. During first-quarter 2014, the weekly


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average price of molybdenum ranged from a low of $9.70 per pound to a high of $10.41 per pound, averaged $9.96 per pound and was $10.41 on March 31, 2014. The Metals Week Molybdenum Dealer Oxide weekly average price was $12.69 per pound on April 30, 2014.

Oil and Gas. Market prices for crude oil and natural gas can fluctuate significantly. During the period from January 2004 through April 2014, the Brent crude oil price ranged from a low of $28.83 per barrel in 2004 to a high of $146.08 per barrel in 2008 and the NYMEX natural gas price fluctuated from a low of $2.04 per million British thermal units (MMBtu) in 2012 to a high of $13.91 per MMBtu in 2005. Crude oil and natural gas 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, 2013.

[[Image Removed]]

This graph presents Brent crude oil prices and NYMEX natural gas contract prices from January 2004 through April 2014. Crude oil prices reached a record high in July 2008 as economic growth in emerging economies and the U.S. created high global demand for oil and lower inventories. By the end of 2008, financial turmoil in the U.S. contributed to a global economic slowdown and a decline in many commodity prices, including crude oil which reached a low of $36.61 per barrel in December 2008. Higher prices since that time have been supported by a gradually improving global economy and demand outlook. During first-quarter 2014, the Brent crude oil price ranged from a low of $105.75 per barrel to a high of $111.20 per barrel, averaged $107.84 per barrel and was $107.76 per barrel on March 31, 2014. The Brent crude oil price was $108.07 per barrel on April 30, 2014.


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                              CONSOLIDATED RESULTS
                                                            Three Months Ended
                                                                 March 31,
                                                        2014                   2013a
                                                       (in millions, except per share
SUMMARY FINANCIAL DATA                                           amounts)
Revenuesb                                         $         4,985   c,d    $      4,583   c
Operating incomeb                                 $         1,111   c,d,e  $      1,355   c,f
Net income attributable to FCX common                               c,d,e                 c,f,h
stockholdersg                                     $           510          $        648
Diluted net income per share attributable to FCX
common stockholders                               $          0.49   c,d,e  $       0.68   c,f,h
Diluted weighted-average common shares
outstanding                                                 1,044                   953
Operating cash flowsi                             $         1,201          $        831
Capital expenditures                              $         1,612          $        805
At March 31:
Cash and cash equivalents                         $         1,342          $      9,595   j
Total debt, including current portion             $        20,850          $     10,092

a. Results for first-quarter 2013 do not include FM O&G.

b.Following is a summary of revenues and operating income by operating division (in millions):

Revenues                                        2014        2013
North America copper mines                    $ 1,286     $ 1,385
South America mining                              898       1,014
Indonesia mining                                  470         931
Africa mining                                     327         438
Molybdenum mines                                  126         143
Rod & Refining                                  1,154       1,337
Atlantic Copper Smelting & Refining               593         639
U.S. oil & gas operations                       1,261           -
Other mining, corporate, other & eliminations  (1,130 )    (1,304 )
Total FCX revenues                            $ 4,985     $ 4,583

Operating income (loss)
North America copper mines                    $   390     $   487
South America mining                              333         467
Indonesia mining                                   18         287
Africa mining                                     121         192
Molybdenum mines                                   28          43
Rod & Refining                                      4           6
Atlantic Copper Smelting & Refining                (9 )        (4 )
U.S. oil & gas operations                         277           -
Other mining, corporate, other & eliminations     (51 )      (123 )
Total FCX operating income                    $ 1,111     $ 1,355

c. Includes unfavorable adjustments to provisionally priced concentrate and cathode sales recognized in prior periods totaling $124 million ($66 million to net income attributable to common stockholders or $0.06 per share) in first-quarter 2014 and $11 million ($5 million to net income attributable to common stockholders or $0.01 per share) in first-quarter 2013. Refer to "Revenues" for further discussion.

d. Includes net noncash mark-to-market gains totaling $15 million ($9 million to net income attributable to common stockholders or $0.01 per share) associated with crude oil and natural gas derivative contracts. Refer to "Revenues" for further discussion.

e. Includes $53 million ($28 million to net income attributable to common stockholders or $0.03 per share) of fixed costs charged directly to cost of sales as a result of the impact of export restrictions on PT-FI's operating rates.

f. Includes transaction and related costs principally associated with the oil and gas acquisitions totaling $14 million ($10 million to net income attributable to common stockholders or $0.01 per share).

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

h. Includes losses on early extinguishment of debt totaling $40 million to net income attributable to FCX common stockholders ($0.04 per share) related to the termination of the acquisition bridge loan facilities. Refer to Note 6 for further discussion.


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i. Includes net working capital uses and changes in other tax payments of $413 million for first-quarter 2014 and $430 million for first-quarter 2013.

j. Includes net proceeds of $6.4 billion from the March 2013 sale of senior notes that were used to fund the second-quarter 2013 oil and gas acquisitions.

                                                     Three Months Ended
                                                          March 31,
                                                       2014          2013a
SUMMARY OPERATING DATA
Copper (recoverable)
Production (millions of pounds)                         948             980
Sales, excluding purchases (millions of pounds)         871             954
Average realized price per pound                 $     3.14         $  3.51
Site production and delivery costs per poundb    $     1.89         $  1.94
Unit net cash costs per poundb                   $     1.54         $  1.57
Gold (recoverable)
Production (thousands of ounces)                        231             235
Sales, excluding purchases (thousands of ounces)        187             214
Average realized price per ounce                 $    1,300         $ 1,606
Molybdenum (recoverable)
Production (millions of pounds)                          24              22
Sales, excluding purchases (millions of pounds)          27              25
Average realized price per pound                 $    11.21         $ 12.75
Oil Equivalents
Sales volumes:
MMBOE                                                  16.1
Thousand BOE (MBOE) per day                             179
Cash operating margin per BOE:c
Realized revenues                                $    77.22
Cash production costs                                 18.51
Cash operating margin                            $    58.71

a. Results for first-quarter 2013 do not include FM O&G.

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

c. Cash operating margin for oil and gas operations reflects realized revenues less cash production costs. Realized revenues exclude noncash mark-to-market adjustments on derivative contracts, and cash production costs exclude accretion and other costs. For reconciliations of realized revenues and cash production costs per BOE to revenues and production and delivery costs reported in our consolidated financial statements, refer to "Product Revenues and Production Costs."

Revenues
Consolidated revenues totaled $5.0 billion in first-quarter 2014, compared with $4.6 billion in first-quarter 2013, and primarily included the sale of copper concentrates, copper cathodes, copper rod, gold, molybdenum, silver and cobalt hydroxide, and in first-quarter 2014 the sale of oil, natural gas and natural gas liquids (NGLs) by our oil and gas operations.


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

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