Stock Update (NYSE:FCX): Freeport-McMoRan Inc Reports First-Quarter 2016 Financial Results


Freeport-McMoRan Inc (NYSE:FCX) reported net losses attributable to common stock of $4.2 billion, $3.35 per share, for first-quarter 2016, compared with $2.5 billion, $2.38 per share, for first-quarter 2015. FCX’s net losses attributable to common stock include net charges totaling $4.0 billion, $3.19 per share, for first-quarter 2016 and $2.4 billion, $2.32 per share, for first-quarter 2015, primarily for the reduction of the carrying value of oil and gas properties, idle rig costs and other items described below.

Richard C. Adkerson, President and Chief Executive Officer, said, “During the first quarter, we remained focused on executing our plans to strengthen FCX’s balance sheet and to position the Company to enhance shareholder value in a challenging market environment. Our global team is successfully executing our plans, managing production efficiently and reducing costs and capital spending. We also achieved progress on our asset divestment program with $1.4 billion in announced transactions since the beginning of the year and expect to report additional progress in the second quarter. We believe the quality and scale of our assets provide opportunities for significant debt reduction while retaining a substantial business with attractive low-cost, long-lived reserves and resources that will enable our shareholders to benefit from improved conditions in the future.”

SUMMARY FINANCIAL DATA

       
    Three Months Ended  
    March 31,  
    2016   2015  
    (in millions, except per share amounts)  
Revenuesa,b   $ 3,527     $ 4,153   c
Operating lossa,b,d,e   $ (3,876 )   $ (2,963 ) c,f
Net loss attributable to common stockb,d,e,g   $ (4,184 )   $ (2,474 ) c,f
Diluted net loss per share of common stockb,d,e,g   $ (3.35 )   $ (2.38 ) c,f
Diluted weighted-average common shares outstanding   1,251     1,040    
Operating cash flowsh   $ 740     $ 717    
Capital expenditures   $ 982     $ 1,867    
At March 31:          
Cash and cash equivalents   $ 331     $ 549    
Total debt, including current portion   $ 20,777     $ 20,312    
                   
a.   For segment financial results, refer to the supplemental schedule, “Business Segments,” beginning on page VIII, which is available on FCX’s website, “fcx.com.”
b.   Includes favorable (unfavorable) adjustments to provisionally priced concentrate and cathode copper sales recognized in prior periods totaling $5 million ($3 million to net loss attributable to common stock or less than $0.01 per share) in first-quarter 2016 and $(106) million ($(59) million to net loss attributable to common stock or $(0.06) per share) in first-quarter 2015. For further discussion, refer to the supplemental schedule, “Derivative Instruments,” beginning on page VII, which is available on FCX’s website, “fcx.com.”
c.   Includes net noncash mark-to-market losses associated with crude oil derivative contracts totaling $48 million ($30 million to net loss attributable to common stock or $0.03 per share). FCX currently does not have any oil and gas derivative contracts in place for 2016 or future years.
d.   Includes charges to reduce the carrying value of oil and gas properties pursuant to full cost accounting rules of $3.8 billion ($3.8 billion to net loss attributable to common stock or $3.03 per share) in first-quarter 2016 and $3.1 billion ($2.4 billion to net loss attributable to common stock or $2.31 per share) in first-quarter 2015. As a result of the impairments to oil and gas properties, FCX recorded tax charges of $1.4 billion in first-quarter 2016 and $458 million in first-quarter 2015 to establish valuation allowances against United States (U.S.) federal and state deferred tax assets that will not generate a future benefit. These tax charges have been reflected in the after-tax impacts for the impairments of oil and gas properties.
e.   Includes charges at oil and gas operations totaling (i) $165 million ($165 million to net loss attributable to common stock or $0.13 per share) in first-quarter 2016 and $13 million ($8 million to net loss attributable to common stock or $0.01 per share) in first-quarter 2015 for idle rig costs and (ii) $35 million ($35 million to net loss attributable to common stock or $0.03 per share) in first-quarter 2016 and $4 million ($2 million to net loss attributable to common stock or less than $0.01 per share) in first-quarter 2015 primarily for inventory write downs.
f.   Includes a gain of $39 million ($25 million to net loss attributable to common stock or $0.02 per share) associated with the sale of FCX’s one-third interest in the Luna Energy power facility.
g.   FCX defers recognizing profits on intercompany sales until final sales to third parties occur. For a summary of net impacts from changes in these deferrals, refer to the supplemental schedule, “Deferred Profits,” on page VIII, which is available on FCX’s website, “fcx.com.”
h.   Includes net working capital sources (uses) and changes in other tax payments of $188 million in first-quarter 2016 and $(86) million in first-quarter 2015.
     

DEBT REDUCTION INITIATIVES

During first-quarter 2016, FCX announced plans to strengthen its balance sheet and accelerate its debt reduction initiatives. In addition to reducing costs and capital expenditures to maximize cash flows from its global business, FCX announced plans to sell assets to repay debt. FCX’s large portfolio of mining and oil and gas assets provide opportunities to generate significant proceeds while retaining a strong competitive position within the global copper industry and a high-quality portfolio of long-lived assets positioned to generate value as market conditions improve. FCX is advancing discussions on additional transactions and expects to achieve additional progress during second-quarter 2016.

 
Asset Sale Transactions To Date
             
    Date of Agreement   Consideration   Expected Closing
Morenci (13 percent interest)   February 15, 2016   $1.0 billion   Second-quarter 2016
Timok exploration project   March 3, 2016   0.3 billion (1) Second-quarter 2016
Oil and gas royalty interests   April 21, 2016   0.1 billion   Second-quarter 2016
        $1.4 billion    
             
(1) Includes $135 million payable at closing and $127.5 million payable to FCX in stages upon the achievement of defined milestones.
 

During first-quarter 2016, FCX conducted a formal process involving multiple third-party oil and gas industry and financial participants to evaluate alternatives for the oil and gas business. Further weakening in oil and gas prices and negative credit and financing market conditions during first-quarter 2016 had a significant unfavorable impact on the process. While the process did not identify a buyer for the entire oil and gas business, a number of parties have interest in select assets, and FCX continues to engage in discussions with parties interested in potential asset or joint venture transactions.

In the interim, FCX is taking immediate steps to reduce oil and gas costs further. In April 2016, FCX announced a new management structure and is instituting an approximate 25 percent oil and gas workforce reduction. The newly structured oil and gas management team is actively engaged in managing costs and developing plans to preserve and enhance asset values. FCX expects to record a charge of approximately $40 million in second-quarter 2016 associated with workforce reductions and other restructuring costs.

SUMMARY OPERATING DATA

       
    Three Months Ended  
    March 31,  
    2016   2015  
Copper (millions of recoverable pounds)          
Production   1,097     915    
Sales, excluding purchases   1,123     960    
Average realized price per pound   $ 2.17     $ 2.72    
Site production and delivery costs per pounda   $ 1.51     $ 1.93    
Unit net cash costs per pounda   $ 1.38     $ 1.64    
Gold (thousands of recoverable ounces)          
Production   184     259    
Sales, excluding purchases   201     263    
Average realized price per ounce   $ 1,227     $ 1,186    
Molybdenum (millions of recoverable pounds)          
Production   20     24    
Sales, excluding purchases   17     23    
Average realized price per pound   $ 7.61     $ 10.17    
Oil Equivalents          
Sales volumes          
MMBOE   12.1     12.5  
Thousand BOE (MBOE) per day   133     139  
Cash operating margin per BOEb          
Realized revenues   $ 23.79     $ 43.71   c
Cash production costs   (15.85 )   (20.26 )  
Cash operating margin   $ 7.94     $ 23.45    
                   
a.   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 per pound unit costs by operating division to production and delivery costs applicable to sales reported in FCX’s consolidated financial statements, refer to the supplemental schedules, “Product Revenues and Production Costs,” beginning on page X, which are available on FCX’s website, “fcx.com.”
b.   Cash operating margin for oil and gas operations reflects realized revenues less cash production costs. 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 FCX’s consolidated financial statements, refer to the supplemental schedules, “Product Revenues and Production Costs,” beginning on page X, which are available on FCX’s website, “fcx.com.”
c.   Includes realized cash gains on crude oil derivative contracts of $8.00 per BOE. FCX currently does not have any oil and gas derivative contracts in place for 2016 or future years.
     

Consolidated Sales Volumes

First-quarter 2016 consolidated copper sales of 1.1 billion pounds approximated the January 2016 estimate and were higher than first-quarter 2015 sales of 960 million pounds, primarily reflecting higher volumes from Cerro Verde.

First-quarter 2016 consolidated gold sales of 201 thousand ounces approximated the January 2016 estimate, but were lower than first-quarter 2015 sales of 263 thousand ounces, primarily reflecting lower ore grades and recoveries.

First-quarter 2016 consolidated molybdenum sales of 17 million pounds were lower than the January 2016 estimate of 19 million pounds and first-quarter 2015 sales of 23 million pounds, primarily reflecting lower demand and reduced volumes from the Henderson molybdenum mine.

First-quarter 2016 sales from oil and gas operations of 12.1 MMBOE, including 8.3 million barrels (MMBbls) of crude oil, 19.6 billion cubic feet (Bcf) of natural gas and 0.6 MMBbls of natural gas liquids (NGLs), were slightly lower than first-quarter 2015 sales of 12.5 MMBOE and the January 2016 estimate of 12.4 MMBOE.

Consolidated sales for the year 2016 are expected to approximate 5.0 billion pounds of copper, 1.85 million ounces of gold, 71 million pounds of molybdenum and 54.4 MMBOE, including 1.15 billion pounds of copper, 195 thousand ounces of gold, 19 million pounds of molybdenum and 13.5 MMBOE for second-quarter 2016. Projected consolidated copper sales have been adjusted for the anticipated closing of the Morenci transaction in second-quarter 2016. Anticipated higher grades from Grasberg in the second half of 2016 are expected to result in approximately 55 percent of consolidated copper sales and 80 percent of consolidated gold sales to occur in the second half of the year.

Consolidated Unit Costs

Mining Unit Net Cash Costs. Consolidated average unit net cash costs (net of by-product credits) for FCX’s copper mines of $1.38 per pound of copper in first-quarter 2016 were lower than unit net cash costs of $1.64 per pound in first-quarter 2015, primarily reflecting higher copper sales volumes in South America and the impact of ongoing cost reduction initiatives.

Assuming average prices of $1,250 per ounce of gold and $5 per pound of molybdenum for the remainder of 2016 and achievement of current sales volume and cost estimates, consolidated unit net cash costs (net of by-product credits) for copper mines are expected to average $1.05 per pound of copper for the year 2016. The impact of price changes for the remainder of 2016 on consolidated unit net cash costs would approximate $0.015 per pound for each $50 per ounce change in the average price of gold and $0.01per pound for each $2 per pound change in the average price of molybdenum. Quarterly unit net cash costs vary with fluctuations in sales volumes and realized prices primarily for gold and molybdenum.

Oil and Gas Cash Production Costs per BOE. Cash production costs for oil and gas operations of $15.85 per BOE in first-quarter 2016 were lower than cash production costs of $20.26 per BOE in first-quarter 2015, primarily reflecting increased production from the Deepwater Gulf of Mexico (GOM) and ongoing cost reduction efforts.

Based on current sales volume and cost estimates, cash production costs are expected to approximate $15 per BOE for the year 2016.

MINING OPERATIONS

North America Copper Mines. FCX operates seven open-pit copper mines in North America – Morenci, Bagdad, Safford, Sierrita and Miami in Arizona, and Chino and Tyrone in New Mexico. In addition to copper, molybdenum concentrate and silver are also produced by certain of FCX’s North America copper mines.

All of the North America mining operations are wholly owned, except for Morenci. FCX records its 85 percent joint venture interest in Morenci using the proportionate consolidation method. In February 2016, FCX entered into a definitive agreement to sell an additional 13 percent joint venture interest in Morenci, which is expected to close in second-quarter 2016.

Operating and Development Activities. FCX has significant undeveloped reserves and resources in North America and a portfolio of long-term development projects. In the near term, FCX is deferring development of new projects as a result of current market conditions. Future investments will be undertaken based on the results of economic and technical feasibility studies, and market conditions.

During 2015, FCX’s revised plans for its North America copper mines to incorporate reductions in mining rates to reduce operating and capital costs, including the suspension of mining operations at the Miami mine, a transitioned suspension of production at the Sierrita mine, a 50 percent reduction in mining rates at the Tyrone mine and adjustments to mining rates at other North America mines. The revised plans at each of the operations incorporate the impacts of lower energy, acid and other consumables, reduced labor costs and a significant reduction in capital spending plans. These plans continue to be reviewed and additional adjustments will be made as market conditions warrant.

Operating Data. Following is a summary of consolidated operating data for the North America copper mines for the first quarters of 2016 and 2015:

     
    Three Months Ended
    March 31,
    2016   2015
Copper (millions of recoverable pounds)        
Production   487     452  
Sales   503     472  
Average realized price per pound   $ 2.16     $ 2.73  
         
Molybdenum (millions of recoverable pounds)        
Productiona   8     9  
         
Unit net cash costs per pound of copperb        
Site production and delivery, excluding adjustments   $ 1.40     $ 1.81  
By-product credits   (0.08 )   (0.18 )
Treatment charges   0.10     0.13  
Unit net cash costs   $ 1.42     $ 1.76  
                 
a.   Refer to summary operating data on page 4 for FCX’s consolidated molybdenum sales, which includes sales of molybdenum produced at the North America copper mines.
b.   For a reconciliation of unit net cash costs per pound to production and delivery costs applicable to sales reported in FCX’s consolidated financial statements, refer to the supplemental schedules, “Product Revenues and Production Costs,” beginning on page X, which are available on FCX’s website, “fcx.com.”
     

North America’s consolidated copper sales volumes of 503 million pounds in first-quarter 2016 were higher than first-quarter 2015 sales of 472 million pounds, primarily reflecting higher ore grades at Morenci and Safford. North America copper sales (adjusted for the anticipated closing of the Morenci transaction) are estimated to approximate 1.75 billion pounds for the year 2016, compared with 2.0 billion pounds in 2015.

Average unit net cash costs (net of by-product credits) for the North America copper mines of $1.42 per pound of copper in first-quarter 2016 were lower than the unit net cash costs of $1.76 per pound in first-quarter 2015, primarily reflecting the impact of cost reduction initiatives and higher sales volumes, partly offset by lower by-product credits.

Average unit net cash costs (net of by-product credits) for the North America copper mines are expected to approximate $1.45 per pound of copper for the year 2016, based on current sales volume and cost estimates and assuming an average molybdenum price of $5 per pound for the remainder of 2016. North America’s average unit net cash costs would change by approximately $0.013 per pound for each $2 per pound change in the average price of molybdenum.

South America Mining. FCX operates two copper mines in South America – Cerro Verde in Peru (in which FCX owns a 53.56 percent interest) and El Abra in Chile (in which FCX owns a 51 percent interest). These operations are consolidated in FCX’s financial statements. In addition to copper, the Cerro Verde mine produces molybdenum concentrate and silver.

Operating and Development Activities. In September 2015, the Cerro Verde expansion project commenced operations and achieved capacity operating rates during first-quarter 2016. Cerro Verde’s expanded operations benefit from its large-scale, long-lived reserves and cost efficiencies. The project expanded the concentrator facilities from 120,000 metric tons of ore per day to 360,000 metric tons of ore per day and is on track to provide incremental annual production of approximately 600 million pounds of copper and 15 million pounds of molybdenum.

During 2015, FCX revised plans for its South America copper mines, principally to reflect adjustments to the mine plan at El Abra to reduce mining and stacking rates by approximately 50 percent to achieve lower operating and labor costs, defer capital expenditures and extend the life of the existing operations.

Operating Data. Following is a summary of consolidated operating data for the South America mining operations for the first quarters of 2016 and 2015:

     
    Three Months Ended
    March 31,
    2016   2015
Copper (millions of recoverable pounds)        
Production   335     193  
Sales   323     200  
Average realized price per pound   $ 2.19     $ 2.71  
         
Molybdenum (millions of recoverable pounds)        
Productiona   5     2  
         
Unit net cash costs per pound of copperb        
Site production and delivery, excluding adjustments   $ 1.23     $ 1.75  
By-product credits   (0.07 )   (0.08 )
Treatment charges   0.23     0.17  
Royalty on metals   0.01      
Unit net cash costs   $ 1.40     $ 1.84  
                 
a.   Refer to summary operating data on page 4 for FCX’s consolidated molybdenum sales, which includes sales of molybdenum produced at Cerro Verde.
b.   For a reconciliation of unit net cash costs per pound to production and delivery costs applicable to sales reported in FCX’s consolidated financial statements, refer to the supplemental schedules, “Product Revenues and Production Costs,” beginning on page X, which are available on FCX’s website, “fcx.com.”
     

South America’s consolidated copper sales volumes of 323 million pounds in first-quarter 2016 were higher than first-quarter 2015 sales of 200 million pounds, primarily reflecting higher mining and milling rates at Cerro Verde. Sales from South America mining are expected to approximate 1.37 billion pounds of copper for the year 2016, compared with 871 million pounds of copper in 2015.

Average unit net cash costs (net of by-product credits) for South America mining of $1.40 per pound of copper in first-quarter 2016 were lower than unit net cash costs of $1.84 per pound in first-quarter 2015, primarily reflecting higher copper sales volumes associated with the Cerro Verde expansion. Average unit net cash costs (net of by-product credits) for South America mining are expected to approximate $1.43 per pound of copper for the year 2016, based on current sales volume and cost estimates and assuming average prices of $5 per pound of molybdenum for the remainder of 2016.

Indonesia Mining. Through its 90.64 percent owned and consolidated subsidiary PT-FI, FCX’s assets include one of the world’s largest copper and gold deposits at the Grasberg minerals district in Papua, Indonesia. PT-FI operates a proportionately consolidated joint venture, which produces copper concentrates that contain significant quantities of gold and silver.

Regulatory Matters. In October 2015, the Indonesian government provided a letter of assurance to PT-FI indicating that it will approve the extension of operations beyond 2021, and provide the same rights and the same level of legal and fiscal certainty provided under its current Contract of Work (COW). PT-FI continues to engage in discussions with the Indonesian government to obtain extension of its long-term rights available under the COW.

In connection with its COW negotiations and upon completion of concluding an agreement to extend PT-FI’s operations beyond 2021 on acceptable terms, PT-FI has agreed to construct new smelter capacity in Indonesia and to divest an additional 20.64 percent interest in PT-FI at fair market value.

PT-FI is required to apply for renewal of export permits at six-month intervals. On February 9, 2016, PT-FI’s export permit was renewed through August 8, 2016. The Indonesian government continues to impose a 5.0 percent export duty while it reviews PT-FI’s smelter plans.

Operating and Development Activities. PT-FI has further revised its plans to incorporate improved operational efficiencies, reductions in input costs, supplies and contractor costs, foreign exchange impacts and an approximate 20 percent deferral of capital expenditures that had been planned for 2016.

PT-FI has several projects in progress in the Grasberg minerals district related to the development of its large-scale, long-lived, high-grade underground ore bodies. In aggregate, these underground ore bodies are expected to produce large-scale quantities of copper and gold following the transition from the Grasberg open pit, currently anticipated to occur in late 2017. Production from the Deep Mill Level Zone commenced during September 2015, and the Grasberg Block Cave mine is anticipated to commence production in 2018.

From 2016 to 2020, estimated aggregate capital spending on these projects is currently expected to average $1.0 billion per year ($0.8 billion per year net to PT-FI). Considering the long-term nature and size of these projects, actual costs could vary from these estimates. In response to market conditions and Indonesian regulatory uncertainty, the timing of these expenditures continues to be reviewed.

Operating Data. Following is a summary of consolidated operating data for the Indonesia mining operations for the first quarters of 2016 and 2015:

     
    Three Months Ended
    March 31,
    2016   2015
Copper (millions of recoverable pounds)        
Production   165     154  
Sales   174     155  
Average realized price per pound   $ 2.20     $ 2.74  
         
Gold (thousands of recoverable ounces)        
Production   178     255  
Sales   195     260  
Average realized price per ounce   $ 1,228     $ 1,186  
         
Unit net cash costs per pound of coppera        
Site production and delivery, excluding adjustments   $ 2.24     $ 2.84  
Gold and silver credits   (1.52 )   (2.09 )
Treatment charges   0.31     0.29  
Export duties   0.08     0.14  
Royalty on metals   0.13     0.16  
Unit net cash costs   $ 1.24     $ 1.34  
                 
a.   For a reconciliation of unit net cash costs per pound to production and delivery costs applicable to sales reported in FCX’s consolidated financial statements, refer to the supplemental schedules, “Product Revenues and Production Costs,” beginning on page X, which are available on FCX’s website, “fcx.com.”
     

Indonesia’s first-quarter 2016 consolidated copper sales of 174 million pounds were higher than first-quarter 2015 sales of 155 million pounds, primarily reflecting higher copper ore grades. Indonesia’s first-quarter 2016 gold sales of 195 thousand ounces were lower than first-quarter 2015 sales of 260 thousand ounces, primarily reflecting lower gold ore grades and recoveries.

During first-quarter 2016, copper production was impacted by reduced mill operating rates associated with unplanned equipment failures. Temporary repairs to the mill were performed and a permanent repair is scheduled in second-quarter 2016. As a result, second-quarter 2016 mill rates are expected to approximate first-quarter 2016 mill rates. The impact of the equipment failure and repairs is a reduction of 65 million pounds of copper for the year 2016, compared with January 2016 estimates.

At the Grasberg mine, the sequencing of mining areas with varying ore grades causes fluctuations in quarterly and annual production of copper and gold. Consolidated sales volumes from Indonesia mining are expected to approximate 1.4 billion pounds of copper and 1.85 million ounces of gold for the year 2016, compared with 744 million pounds of copper and 1.2 million ounces of gold for the year 2015. PT-FI expects ore grades to improve significantly beginning in the second half of 2016, with approximately 70 percent of copper sales and 80 percent of gold sales anticipated in the second half of the year.

A significant portion of PT-FI’s costs are fixed and unit costs vary depending on volumes and other factors. Indonesia’s unit net cash costs (including gold and silver credits) of $1.24 per pound of copper in first-quarter 2016 were lower than unit net cash costs of $1.34 per pound in first-quarter 2015, primarily reflecting higher copper sales volumes and lower export duties, partly offset by lower gold and silver credits.

Based on current sales volume and cost estimates, and assuming an average gold price of $1,250 per ounce for the remainder of 2016, unit net cash costs (net of gold and silver credits) for Indonesia mining are expected to approximate $0.07 per pound of copper for the year 2016 and $0.96 per pound for second-quarter 2016. Indonesia mining’s unit net cash costs for the year 2016 would change by approximately $0.06 per pound for each $50 per ounce change in the average price of gold. Because of the fixed nature of a large portion of Indonesia mining’s costs, unit costs vary from quarter to quarter depending on copper and gold volumes. Higher anticipated ore grades from Grasberg in the second half of 2016 are expected to result in lower unit net cash costs in the second half of the year.

Africa Mining. Through its 56 percent owned and consolidated subsidiary Tenke Fungurume Mining S.A. (TFM), FCX operates in the Tenke minerals district in the Southeast region of the Democratic Republic of Congo (DRC). In addition to copper, the Tenke mine produces cobalt hydroxide.

Operating and Development Activities. During 2015, FCX revised plans at Tenke to incorporate a 50 percent reduction in capital spending for 2016 and various initiatives to reduce operating, administrative and exploration costs.

TFM successfully commissioned a sulphuric acid plant in first-quarter 2016, which will reduce requirements for third-party acid purchases. FCX continues to engage in exploration activities and metallurgical testing to evaluate the potential of the highly prospective minerals district at Tenke. Future development and expansion opportunities are being deferred pending improved market conditions.

Operating Data. Following is a summary of consolidated operating data for the Africa mining operations for the first quarters of 2016 and 2015:

     
    Three Months Ended
    March 31,
    2016   2015
Copper (millions of recoverable pounds)        
Production   110     116  
Sales   123     133  
Average realized price per pounda   $ 2.10     $ 2.66  
         
Cobalt (millions of contained pounds)        
Production   9     7  
Sales   10     8  
Average realized price per pound   $ 6.32     $ 8.72  
         
Unit net cash costs per pound of copperb        
Site production and delivery, excluding adjustments   $ 1.64     $ 1.57  
Cobalt creditsc   (0.38 )   (0.37 )
Royalty on metals   0.05     0.06  
Unit net cash costs   $ 1.31     $ 1.26  
                 
a.   Includes point-of-sale transportation costs as negotiated in customer contracts.
b.   For a reconciliation of unit net cash costs per pound to production and delivery costs applicable to sales reported in FCX’s consolidated financial statements, refer to the supplemental schedules, “Product Revenues and Production Costs,” beginning on page X, which are available on FCX’s website, “fcx.com.”
c.   Net of cobalt downstream processing and freight costs.
     

TFM’s copper sales of 123 million pounds in first-quarter 2016 were lower than first-quarter 2015 copper sales of 133 million pounds, primarily reflecting lower copper ore grades. TFM’s sales are expected to approximate 485 million pounds of copper and 35 million pounds of cobalt for the year 2016, compared with 467 million pounds of copper and 35 million pounds of cobalt for the year 2015.

Africa mining’s unit net cash costs (net of cobalt credits) of $1.31 per pound of copper in first-quarter 2016 were higher than unit net cash costs of $1.26 per pound of copper in first-quarter 2015, primarily reflecting lower sales volumes. Unit net cash costs (net of cobalt credits) for Africa mining are expected to approximate $1.32 per pound of copper for the year 2016, based on current sales volume and cost estimates and assuming an average cobalt price of $10 per pound for the remainder of 2016. Africa mining’s unit net cash costs for the year 2016 would change by approximately $0.065 per pound for each $2 per pound change in the average price of cobalt.

Molybdenum Mines. FCX has two wholly owned molybdenum mines in North America – the Henderson underground mine and the Climax open-pit mine, both in Colorado. The Henderson and Climax mines produce high-purity, chemical-grade molybdenum concentrate, which is typically further processed into value-added molybdenum chemical products. The majority of molybdenum concentrate produced at the Henderson and Climax mines, as well as from FCX’s North and South America copper mines, is processed at FCX’s conversion facilities.

Operating and Development Activities. The revised plans for the Henderson molybdenum mine incorporate lower operating rates, resulting in an approximate 65 percent reduction in Henderson’s annual production volumes. FCX also adjusted production plans at its by-product mines, including reduced production at its Sierrita mine. Additionally, FCX incorporated changes in the commercial pricing structure for its chemicals products to promote continuation of chemical-grade production.

Production from the Molybdenum mines totaled 7 million pounds of molybdenum in first-quarter 2016 and 13 million pounds in first-quarter 2015. Refer to summary operating data on page 4 for FCX’s consolidated molybdenum sales, which includes sales of molybdenum produced at the Molybdenum mines, and from FCX’s North and South America copper mines.

Average unit net cash costs for the Molybdenum mines of $7.43 per pound of molybdenum in first-quarter 2016 were higher than average unit net cash costs of $7.17 per pound in first-quarter 2015, primarily reflecting lower volumes from the Henderson mine. Based on current sales volume and cost estimates, unit net cash costs for the Molybdenum mines are expected to average approximately $8.60 per pound of molybdenum for the year 2016.

For a reconciliation of unit net cash costs per pound to production and delivery costs applicable to sales reported in FCX’s consolidated financial statements, refer to the supplemental schedules, “Product Revenues and Production Costs,” beginning on page X, which are available on FCX’s website, “fcx.com.”

Mining Exploration Activities. FCX’s mining exploration activities are generally associated with its existing mines focusing on opportunities to expand reserves and resources to support development of additional future production capacity. Exploration results continue to indicate opportunities for significant future potential reserve additions in North and South America, and in the Tenke minerals district. Exploration spending continues to be constrained by market conditions and is expected to approximate $50 million for the year 2016, compared to $102 million in 2015.

OIL AND GAS OPERATIONS

Through its wholly owned oil and gas subsidiary, FM O&G, FCX’s principal oil and gas assets include significant oil production facilities and growth potential in the Deepwater GOM and established oil production facilities in California. During first-quarter 2016, 86 percent of FCX’s oil and gas revenues were from oil and NGLs.

Impairment of Oil and Gas Properties. FM O&G follows the full cost method of accounting, whereby all costs associated with oil and gas property acquisition, exploration and development activities are capitalized and amortized to expense under the unit-of-production method on a country-by-country basis using estimates of proved oil and gas reserves relating to each country where such activities are conducted. The costs of unproved oil and gas properties are excluded from amortization until the properties are evaluated.

Under full cost accounting rules, a “ceiling test” is conducted each quarter to review the carrying value of oil and gas properties for impairment. The U.S. Securities and Exchange Commission (SEC) requires the twelve-month average of the first-day-of-the-month historical reference oil price be used in determining the ceiling test limitation. Using West Texas Intermediate (WTI) as the reference oil price, the average price was $46.26 per barrel at March 31, 2016, compared with $50.28 per barrel at December 31, 2015. In addition, following a review of alternatives for its oil and gas business and the current limitations and cost of capital available for future drilling, FM O&G determined that the carrying values of certain of its unevaluated properties were impaired as of March 31, 2016. As a result, FM O&G transferred $3.1 billion of costs associated with unevaluated properties to the full cost pool, mostly reflecting impairment of the carrying values of unevaluated properties. Combined with the impact of the reduction in twelve-month historical prices, net capitalized costs exceeded the ceiling test limitation under full cost accounting rules, which resulted in the recognition of a first-quarter 2016 impairment charge of $3.8 billion.

If the twelve-month historical average price remains below the March 31, 2016, twelve-month average of $46.26 per barrel, the ceiling test limitation will decrease, potentially resulting in additional ceiling test impairments of FCX’s oil and gas properties. The WTI spot oil price was $42.64 per barrel at April 25, 2016. In addition to a decline in the trailing twelve-month average oil and gas prices, other factors that could result in future impairment of FCX’s oil and gas properties include costs transferred from unevaluated properties to the full cost pool without corresponding proved oil and gas reserve additions, negative reserve revisions and the future capitalization of exploration, development and production costs. At March 31, 2016, carrying costs for unevaluated properties excluded from amortization totaled $1.7 billion. These costs will be transferred into the full cost pool as the properties are evaluated and proved reserves are established or if impairment is determined. If these activities do not result in additions to discounted future net cash flows from proved oil and gas reserves at least equal to the related costs transferred (net of related tax effects), additional ceiling test impairments may occur.

Financial and Operating Data. Following is a summary of financial and operating data for the U.S. oil and gas operations for the first quarters of 2016 and 2015:

       
    Three Months Ended  
    March 31,  
    2016   2015  
Financial Summary (in millions)          
Realized revenuesa   $ 289     $ 547    
Cash production costsa   (192 )   (254 )  
Cash operating margin   $ 97     $ 293    
Capital expendituresb   $ 480     $ 1,018    
Sales Volumes          
Oil (MMBbls)   8.3     8.4    
Natural gas (Bcf)   19.6     21.8    
NGLs (MMBbls)   0.6     0.5    
MMBOE   12.1     12.5    
Average Realized Pricesa          
Oil (per barrel)   $ 29.06     $ 56.51   c
Natural gas (per million British thermal units, or MMBtu)   $ 2.00     $ 2.86    
NGLs (per barrel)   $ 14.83     $ 23.06    
Cash Operating Margin per BOEa          
Realized revenues   $ 23.79     $ 43.71   c
Cash production costs   (15.85 )   (20.26 )  
Cash operating margin   $ 7.94     $ 23.45    
                   
a.   Cash operating margin for oil and gas operations reflects realized revenues less cash production costs. Cash production costs exclude accretion and other costs. For reconciliations of realized revenues (including average realized prices for oil, natural gas and NGLs) and cash production costs to revenues and production and delivery costs reported in FCX’s consolidated financial statements, refer to the supplemental schedules, “Product Revenues and Production Costs,” beginning on page X, which are available on FCX’s website, “fcx.com.”
b.   Excludes international oil and gas expenditures totaling $43 million in first-quarter 2016 and $15 million in first-quarter 2015, primarily related to the Morocco oil and gas properties.
c.   Includes realized cash gains on crude oil derivative contracts of $8.00 per BOE ($11.97 per barrel of oil). FCX currently does not have any oil and gas derivative contracts in place for 2016 or future years.
     

FM O&G’s average realized price for crude oil was $29.06 per barrel in first-quarter 2016 (83 percent of the average Brent crude oil price of $35.21 per barrel). FM O&G’s average realized price for natural gas was $2.00 per MMBtu in first-quarter 2016, compared to the New York Mercantile Exchange natural gas price average of $2.07 per MMBtu for the January through March 2016 contracts.

Realized revenues for oil and gas operations of $23.79 per BOE in first-quarter 2016 were below realized revenues of $43.71 per BOE in first-quarter 2015, primarily reflecting lower oil prices and the impact of realized cash gains on derivative contracts of $8.00 per BOE in first-quarter 2015.

Cash production costs for oil and gas operations of $15.85 per BOE in first-quarter 2016 were lower than cash production costs of $20.26 per BOE in first-quarter 2015, primarily reflecting increased production from the Deepwater GOM and cost reduction efforts.

Following is a summary of average oil and gas sales volumes per day by region for the first quarters of 2016 and 2015:

     
    Three Months Ended
    March 31,
Sales Volumes (MBOE per day)   2016   2015
GOMa   81     74
California   33     39
Haynesville/Madden/Other   19     26
Total oil and gas operations   133     139
           
a.   Includes sales from properties on the GOM Shelf and in the Deepwater GOM, and the Inboard Lower Tertiary/Cretaceous natural gas trend.
     

Daily sales volumes averaged 133 MBOE for first-quarter 2016, including 91 thousand barrels (MBbls) of crude oil, 216 million cubic feet (MMcf) of natural gas and 6 MBbls of NGLs. Since year-end 2015, FM O&G has commenced production from two 100-percent-owned Deepwater GOM wells and plans to commence production from four additional Deepwater GOM wells by mid-2016. Oil and gas sales volumes are expected to average 149 MBOE per day for the year 2016, comprised of 73 percent oil, 22 percent natural gas and 5 percent NGLs.

Based on current sales volume and cost estimates, cash production costs are expected to approximate $15 per BOE for the year 2016.

Oil and Gas Exploration, Operating and Development Activities. FCX’s oil and gas business has significant proved, probable and possible reserves with valuable infrastructure and associated resources with long-term production and development potential.

Since commencing development activities in 2014 at its three 100-percent-owned production platforms in the Deepwater GOM, FM O&G has drilled 14 wells in producing fields with positive results. Six of these wells have been brought on production. FM O&G plans to complete and place four additional wells on production in 2016.

FM O&G continues to take actions to reduce oil and gas costs and capital expenditures, including undertaking a near-term deferral of exploration and development activities. Past investments are expected to enable production to be increased to average rates of 149 MBOE per day in 2016 and 2017, and cash production costs to decline to an average of approximately $14 per BOE in 2016 and 2017.

Two drillships were fully idled in first-quarter 2016, and one drillship was used for completion operations, including a completion that commenced in March 2016 and is expected to be completed in May 2016. Following this operation, the three drillships are expected to remain idled. Under the existing drillship contracts, which expire in 2017, FM O&G would incur idle rig costs totaling an estimated $0.8 billion in 2016 and $0.5 billion in 2017. FCX continues to discuss the terms of the contracts with the drillship owners.

Oil and Gas Capital Expenditures. Capital expenditures for oil and gas operations in first-quarter 2016 totaled $480 million in the U.S. (including $258 million incurred for Deepwater GOM and $225 million associated with the change in capital expenditure accruals) and $43 million primarily associated with prior period costs in Morocco.

Capital expenditures for oil and gas operations for the year 2016 are estimated to total $1.5 billion, excluding $0.8 billion in idle rig costs (which reduce operating cash flows). Approximately 90 percent of the 2016 capital budget is expected to be directed to the GOM.

Deepwater GOM. FM O&G operates and owns 100-percent working interests in the Holstein, Marlin and Horn Mountain deepwater production platforms, which in total have processing capacity of 250 MBbls of oil per day. In addition, FM O&G has interests in the Lucius, Heidelberg, Ram Powell and Hoover producing oil fields and the Atwater Valley undeveloped area.

The Lucius field in the Keathley Canyon area, which commenced production in first-quarter 2015, continues to perform well. During first-quarter 2016, production from six wells averaged 18 MBOE per day, net to FM O&G’s 25 percent working interest. Approximately 80 percent of FM O&G’s working interest is held through its consolidated subsidiary Plains Offshore Operations Inc. (POI). Third parties hold a preferred interest in POI and are entitled to receive preferred dividends and have a liquidation preference which ranks above FM O&G’s common equity in the subsidiary.

In January 2016, first oil production commenced in the Heidelberg oil field in the Green Canyon area. Three wells began producing during the initial phase. Heidelberg is a subsea development consisting of five subsea wells tied back to a truss spar hull located in 5,300 feet of water. Heidelberg field was discovered in February 2009 and the subsequent development project was sanctioned in early 2013. FM O&G has a 12.5 percent working interest in Heidelberg.

At Holstein Deep, completion activities for the initial three-well subsea tieback development program are progressing, and the initial well commenced production in April 2016. Two additional wells are expected to commence in second-quarter 2016. The Holstein Deep development is located in Green Canyon Block 643, west of the 100-percent owned Holstein platform in 3,890 feet of water, with production facilities capable of processing 113 MBbls of oil per day.

FM O&G’s 100-percent-owned Horn Mountain field is located in the Mississippi Canyon area and has production facilities capable of processing 75 MBbls of oil per day. To enhance recovery of remaining oil in place, future development plans will target subsea tieback from multiple stacked sands in the area. FM O&G is currently completing the Kilo/Oscar well as a tieback to the Horn Mountain production platform. The Quebec/Victory well is also expected to be tied back and commence production in 2016. FM O&G’s well inventory also includes the Horn Mountain Deep well, where successful drilling results in 2016 indicated the presence of sand sections deeper than known pay sections in the field. These positive results and geophysical data support the existence of Middle Miocene reservoir potential for additional development opportunities in the Horn Mountain Deep area, including five 100-percent-owned exploration prospects with significant potential. FM O&G controls rights to over 55,000 acres associated with these prospects.

FM O&G’s 100-percent-owned Marlin Hub is located in the Mississippi Canyon area and has production facilities capable of processing 60 MBbls of oil per day. FM O&G has drilled five successful tieback opportunities in the area since 2014. The King D-12 and Dorado wells commenced production in 2015, and the King D-13 well commenced production in first-quarter 2016. The King D-9 and D-10 wells are expected to be completed in future periods.

California. Sales volumes from California averaged 33 MBOE per day for first-quarter 2016, compared with 39 MBOE per day for first-quarter 2015. FM O&G’s position in California is located onshore in the San Joaquin Valley and Los Angeles Basin, and offshore in the Point Pedernales field.

CASH FLOWS, CASH and DEBT TRANSACTIONS

Operating Cash Flows. FCX generated operating cash flows of $740 million (including $188 million in working capital sources and changes in other tax payments) for first-quarter 2016.

Based on current sales volume and cost estimates and assuming average prices of $2.25 per pound of copper, $1,250 per ounce of gold, $5 per pound of molybdenum and $45 per barrel of Brent crude oil for the remainder of 2016, FCX’s consolidated operating cash flows are estimated to approximate $4.8 billion for the year 2016 (including $0.8 billion in working capital sources and other tax payments). The impact of price changes for the remainder of 2016 on operating cash flows would approximate $340 million for each$0.10 per pound change in the average price of copper, $45 million for each $50 per ounce change in the average price of gold, $45 million for each $2 per pound change in the average price of molybdenum and $100 million for each $5 per barrel change in the average Brent crude oil price.

Capital Expenditures. Capital expenditures totaled $982 million for first-quarter 2016, consisting of $459 million for mining operations (including $350 million for major projects) and $523 million for oil and gas operations. Capital expenditures are expected to approximate $3.3 billion for the year 2016, consisting of $1.8 billion for mining operations (including $1.4 billion for major projects, primarily for underground development activities at Grasberg and remaining costs for the Cerro Verde expansion) and $1.5 billion for oil and gas operations. Projected capital expenditures for the year 2016 exclude $0.8 billion for idle rig cash costs, which reduce operating cash flows.

Cash. Following is a summary of the U.S. and international components of consolidated cash and cash equivalents available to the parent company, net of noncontrolling interests’ share, taxes and other costs at March 31, 2016 (in millions):

         
Cash at domestic companies   $ 9  
Cash at international operations   322  
Total consolidated cash and cash equivalents   331  
Noncontrolling interests’ share   (84 )
Cash, net of noncontrolling interests’ share   247  
Withholding taxes and other   (15 )
Net cash available   $ 232  
         

Debt. FCX continues to focus on cost and capital management and cash flow generation from its operations and is taking actions to reduce debt by pursuing asset sales and joint venture transactions. Following is a summary of total debt and the related weighted-average interest rates at March 31, 2016 (in billions, except percentages):

         
        Weighted-
        Average
        Interest Rate
FCX Senior Notes   $ 11.9     3.8%
FCX Term Loan   3.0     2.9%
FM O&G LLC Senior Notes   2.5     6.6%
Cerro Verde Credit Facility   1.8     2.8%
FCX Revolving Credit Facilitya   0.5     2.9%
Other debt   1.1     4.3%
    $ 20.8     3.9%
             
a.   At March 31, 2016, FCX has $38 million in letters of credit issued and availability of $3.0 billion under its revolving credit facility.
     

In February 2016, FCX reached agreement with its bank group to amend its revolving credit facility and term loan, which included modifications of the maximum leverage ratio and minimum interest expense coverage ratio to provide FCX with additional flexibility. Additionally, the commitment under the revolving credit facility was reduced from $4.0 billion to $3.5 billion.

A springing collateral and guarantee trigger was also added to the revolving credit facility and term loan. Under this provision, if FCX has not entered into definitive agreements for asset sales totaling $3.0 billion in aggregate by June 30, 2016, which are reasonably expected to close by December 31, 2016, FCX will be required to secure the revolving credit facility and term loan with a mutually acceptable collateral and guarantee package. Additionally, many of the exceptions to the subsidiary indebtedness and lien restrictions contained in the revolving credit facility and term loan have been limited through March 31, 2017. (Original Source)

Shares of Freeport-McMoRan closed yesterday at $11.35, down $0.32 or -2.74%. FCX has a 1-year high of $23.97 and a 1-year low of $3.52. The stock’s 50-day moving average is $10.27 and its 200-day moving average is $8.43.

On the ratings front, FCX has been the subject of a number of recent research reports. In a report issued on April 19, CLSA analyst David Lipschitz downgraded FCX to Sell, with a price target of $8, which reflects a potential downside of -29.5% from last closing price. Separately, on April 8, Deutsche Bank’s Jorge Beristain maintained a Hold rating on the stock and has a price target of $10.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, David Lipschitz and Jorge Beristain have a total average return of 8.7% and -10.4% respectively. Lipschitz has a success rate of 71.4% and is ranked #1456 out of 3829 analysts, while Beristain has a success rate of 38.0% and is ranked #3764.

The street is mostly Neutral on FCX stock. Out of 13 analysts who cover the stock, 9 suggest a Hold rating , 2 suggest a Sell and 2 recommend to Buy the stock. The 12-month average price target assigned to the stock is $9.00, which reflects a potential downside of -20.7% from last closing price.

Freeport-McMoRan, Inc. engages as copper, gold and molybdenum mining company. The company operates through five segments: North America Copper Mines, South America Copper Mines, Africa Mining, Indonesia Mining, and Molybdenum Mining.