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FREEPORT-MCMORAN INC - Quarter Report: 2019 March (Form 10-Q)




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
Commission File Number: 001-11307-01
fcx_logoa01a01a03a19.jpg
Freeport-McMoRan Inc.
(Exact name of registrant as specified in its charter)
Delaware
74-2480931
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
333 North Central Avenue
 
Phoenix, AZ
85004-2189
(Address of principal executive offices)
(Zip Code)
(602) 366-8100
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes  o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes  o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ   
 
 
Accelerated filer ¨
Non-accelerated filer ¨ 
Smaller reporting company ¨
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.10 per share
FCX
The New York Stock Exchange
On April 30, 2019, there were issued and outstanding 1,450,634,551 shares of the registrant’s common stock, par value $0.10 per share.



FREEPORT-McMoRan INC.

TABLE OF CONTENTS

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents             

Part I.
FINANCIAL INFORMATION

Item 1.
Financial Statements.

Freeport-McMoRan Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)

 
March 31,
2019
 
December 31,
2018
 
(In millions)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,833

 
$
4,217

Trade accounts receivable
781

 
829

Income and other tax receivables
410

 
493

Inventories:
 
 
 
Materials and supplies, net
1,595

 
1,528

Mill and leach stockpiles
1,374

 
1,453

Product
1,492

 
1,778

Other current assets
560

 
422

Total current assets
9,045

 
10,720

Property, plant, equipment and mine development costs, net
28,497

 
28,010

Long-term mill and leach stockpiles
1,343

 
1,314

Other assets
2,174

 
2,172

Total assets
$
41,059

 
$
42,216

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
2,599

 
$
2,625

Accrued income taxes
150

 
165

Current portion of environmental and asset retirement obligations
422

 
449

Dividends payable
73

 
73

Current portion of debt
3

 
17

Total current liabilities
3,247

 
3,329

Long-term debt, less current portion
9,902

 
11,124

Deferred income taxes
4,067

 
4,032

Environmental and asset retirement obligations, less current portion
3,632

 
3,609

Other liabilities
2,370

 
2,230

Total liabilities
23,218

 
24,324

 
 
 
 
Equity:
 
 
 
Stockholders’ equity:
 
 
 
Common stock
158

 
158

Capital in excess of par value
25,963

 
26,013

Accumulated deficit
(12,010
)
 
(12,041
)
Accumulated other comprehensive loss
(594
)
 
(605
)
Common stock held in treasury
(3,734
)
 
(3,727
)
Total stockholders’ equity
9,783

 
9,798

Noncontrolling interests
8,058

 
8,094

Total equity
17,841

 
17,892

Total liabilities and equity
$
41,059

 
$
42,216


The accompanying notes are an integral part of these consolidated financial statements.

3

Table of Contents             

Freeport-McMoRan Inc.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In millions, except per share amounts)
Revenues
$
3,792

 
$
4,868

Cost of sales:
 
 
 
Production and delivery
2,919

 
2,808

Depreciation, depletion and amortization
347

 
451

Metals inventory adjustments
57

 

Total cost of sales
3,323

 
3,259

Selling, general and administrative expenses
112

 
131

Mining exploration and research expenses
27

 
21

Environmental obligations and shutdown costs
42

 
9

Net gain on sales of assets
(33
)
 
(11
)
Total costs and expenses
3,471

 
3,409

Operating income
321

 
1,459

Interest expense, net
(146
)
 
(151
)
Net loss on early extinguishment of debt
(6
)
 
(1
)
Other income, net
14

 
29

Income from continuing operations before income taxes and equity in affiliated
companies’ net losses
183

 
1,336

Provision for income taxes
(105
)
 
(506
)
Equity in affiliated companies’ net losses
(3
)
 
(2
)
Net income from continuing operations
75

 
828

Net gain (loss) from discontinued operations
1

 
(11
)
Net income
76

 
817

Net income attributable to noncontrolling interests
(45
)
 
(125
)
Net income attributable to common stockholders
$
31

 
$
692

 
 
 
 
Basic and diluted net income (loss) per share attributable to common stockholders:
 
 
 
Continuing operations
$
0.02

 
$
0.48

Discontinued operations

 
(0.01
)
 
$
0.02

 
$
0.47

 
 
 
 
Weighted-average common shares outstanding:
 
 
 
Basic
1,451

 
1,449

Diluted
1,457

 
1,458

 
 
 
 
Dividends declared per share of common stock
$
0.05

 
$
0.05

 
The accompanying notes are an integral part of these consolidated financial statements.


4

Table of Contents             

Freeport-McMoRan Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In millions)
Net income
$
76

 
$
817

 
 
 
 
Other comprehensive income, net of taxes:
 
 
 
Defined benefit plans:
 
 
 
Amortization of unrecognized amounts included in net periodic benefit costs
11

 
12

Foreign exchange losses

 
(1
)
Other comprehensive income
11

 
11

 
 
 
 
Total comprehensive income
87

 
828

Total comprehensive income attributable to noncontrolling interests
(45
)
 
(124
)
Total comprehensive income attributable to common stockholders
$
42

 
$
704


The accompanying notes are an integral part of these consolidated financial statements.




5

Table of Contents             

Freeport-McMoRan Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
 
 
(In millions)
 
Cash flow from operating activities:
 
 
 
 
Net income
$
76

 
$
817

 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, depletion and amortization
347

 
451

 
Metals inventory adjustments
57

 

 
Net gain on sales of assets
(33
)
 
(11
)
 
Stock-based compensation
29

 
49

 
Net charges for environmental and asset retirement obligations, including accretion
64

 
53

 
Payments for environmental and asset retirement obligations
(46
)
 
(38
)
 
Net charges for defined pension and postretirement plans
26

 
18

 
Pension plan contributions
(16
)
 
(24
)
 
Net loss on early extinguishment of debt
6

 
1

 
Deferred income taxes
33

 
22

 
(Gain) loss on disposal of discontinued operations
(1
)
 
11

 
(Increase) decrease in long-term mill and leach stockpiles
(29
)
 
22

 
Other, net
48

 
19

 
Changes in working capital and other tax payments:
 
 
 
 
Accounts receivable
19

 
136

 
Inventories
221

 
(142
)
 
Other current assets
42

 
(42
)
 
Accounts payable and accrued liabilities
(247
)
 
(96
)
 
Accrued income taxes and timing of other tax payments
(62
)
 
123

 
Net cash provided by operating activities
534

 
1,369

 
 
 
 
 
 
Cash flow from investing activities:
 
 
 
 
Capital expenditures:
 
 
 
 
North America copper mines
(210
)
 
(92
)
 
South America
(61
)
 
(67
)
 
Indonesia
(319
)
 
(203
)
 
Molybdenum mines
(4
)
 
(1
)
 
Other
(28
)
 
(39
)
 
Proceeds from sales of oil and gas properties
84

 

 
Intangible water rights and other, net
(8
)
 
(90
)
 
Net cash used in investing activities
(546
)
 
(492
)
 
 
 
 
 
 
Cash flow from financing activities:
 
 
 
 
Proceeds from debt
114

 
122

 
Repayments of debt
(1,356
)
 
(1,633
)
 
Cash dividends and distributions paid:
 
 
 
 
Common stock
(73
)
 

 
Noncontrolling interests
(9
)
 
(80
)
 
Stock-based awards net (payments) proceeds
(7
)
 
3

 
Net cash used in financing activities
(1,331
)
 
(1,588
)
 
 
 
 
 
 
Net decrease in cash, cash equivalents, restricted cash and restricted cash equivalents
(1,343
)
 
(711
)
 
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of year
4,455

 
4,710

 
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
$
3,112

 
$
3,999

 

The accompanying notes are an integral part of these consolidated financial statements.

6

Table of Contents             

Freeport-McMoRan Inc.
CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
Accum-ulated Deficit
 
Accumu-
lated
Other Compre-
hensive
Loss
 
Common Stock
Held in Treasury
 
Total
Stock-holders’ Equity
 
 
 
 
 
Number
of
Shares
 
At Par
Value
 
Capital in
Excess of
Par Value
 
 
 
Number
of
Shares
 
At
Cost
 
 
Non-
controlling
Interests
 
Total
Equity
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Balance at December 31, 2018
1,579

 
$
158

 
$
26,013

 
$
(12,041
)
 
$
(605
)
 
130

 
$
(3,727
)
 
$
9,798

 
$
8,094

 
$
17,892

Exercised and issued stock-based awards
3

 

 
1

 

 

 

 

 
1

 

 
1

Stock-based compensation, including the tender of shares

 

 
23

 

 

 
1

 
(7
)
 
16

 

 
16

Dividends

 

 
(73
)
 

 

 

 

 
(73
)
 
(70
)
 
(143
)
Changes in noncontrolling interests

 

 
(1
)
 

 

 

 

 
(1
)
 
(11
)
 
(12
)
Net income attributable to common stockholders

 

 

 
31

 

 

 

 
31

 

 
31

Net income attributable to noncontrolling interests

 

 

 

 

 

 

 

 
45

 
45

Other comprehensive income

 

 

 

 
11

 

 

 
11

 

 
11

Balance at March 31, 2019
1,582

 
$
158

 
$
25,963

 
$
(12,010
)
 
$
(594
)
 
131

 
$
(3,734
)
 
$
9,783

 
$
8,058

 
$
17,841


 
Stockholders’ Equity
 
 
 
 
 
Common Stock
 
 
 
Accum-ulated Deficit
 
Accumu-
lated
Other Compre-
hensive
Loss
 
Common Stock
Held in Treasury
 
Total
Stock-holders’ Equity
 
 
 
 
 
Number
of
Shares
 
At Par
Value
 
Capital in
Excess of
Par Value
 
 
 
Number
of
Shares
 
At
Cost
 
 
Non-
controlling
Interests
 
Total
Equity
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Balance at December 31, 2017
1,578

 
$
158

 
$
26,751

 
$
(14,722
)
 
$
(487
)
 
130

 
$
(3,723
)
 
$
7,977

 
$
3,319

 
$
11,296

Exercised and issued stock-based awards
1

 

 
6

 

 

 

 

 
6

 

 
6

Stock-based compensation, including the tender of shares

 

 
44

 

 

 

 
(3
)
 
41

 

 
41

Dividends

 

 
(72
)
 

 

 

 

 
(72
)
 
(173
)
 
(245
)
Net income attributable to common stockholders

 

 

 
692

 

 

 

 
692

 

 
692

Net income attributable to noncontrolling interests

 

 

 

 

 

 

 

 
125

 
125

Other comprehensive income (loss)

 

 

 

 
12

 

 

 
12

 
(1
)
 
11

Balance at March 31, 2018
1,579

 
$
158

 
$
26,729

 
$
(14,030
)
 
$
(475
)
 
130

 
$
(3,726
)
 
$
8,656

 
$
3,270

 
$
11,926



The accompanying notes are an integral part of these consolidated financial statements.


7

Table of Contents             

FREEPORT-McMoRan INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1. GENERAL INFORMATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and disclosures required by generally accepted accounting principles (GAAP) in the United States (U.S.). Therefore, this information should be read in conjunction with Freeport-McMoRan Inc.’s (FCX) consolidated financial statements and notes contained in its annual report on Form 10-K for the year ended December 31, 2018 (2018 Form 10-K). The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods reported. All such adjustments are, in the opinion of management, of a normal recurring nature. Operating results for the three-month period ended March 31, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

Attribution of PT Freeport Indonesia (PT-FI) Net Income. FCX has concluded that the attribution of PT-FI’s net income or loss from the date of the divestment transaction (i.e., December 21, 2018) through December 31, 2022 (the Initial Period), should be based on the economics replacement agreement, which provides for FCX and the other pre-transaction PT-FI shareholders (i.e., PT Indonesia Asahan Aluminium (Persero) (PT Inalum) and PT Indonesia Papua Metal Dan Mineral (PTI)) to retain the economics of the revenue and cost sharing arrangements under PT-FI’s joint venture formerly with Rio Tinto plc (refer to Note 2 of FCX’s 2018 Form 10-K). The economics replacement agreement entitles FCX to approximately 81 percent of PT-FI dividends paid during the Initial Period, with the remaining 19 percent paid to the noncontrolling interests. For first-quarter 2019, PT-FI’s net income totaled $52 million, of which $43 million was attributed to FCX. PT-FI’s cumulative net loss since the December 21, 2018, transaction date through March 31, 2019, totaled $(84) million, of which $(68) million was attributed to FCX.

The above-described attribution of PT-FI’s net income or loss applies only through the Initial Period. Beginning January 1, 2023, the attribution of PT-FI’s net income or loss will be based on equity ownership percentages (48.76 percent for FCX, 26.24 percent for PT Inalum and 25.00 percent for PTI). For all of its other partially owned consolidated subsidiaries, FCX attributes net income or loss based on equity ownership percentages.


8

Table of Contents             

NOTE 2. EARNINGS PER SHARE

FCX calculates its basic net income per share of common stock under the two-class method and calculates its diluted net income per share of common stock using the more dilutive of the two-class method or the treasury-stock method. Basic net income per share of common stock was computed by dividing net income attributable to common stockholders by the weighted-average shares of common stock outstanding during the period. Diluted net income per share of common stock was calculated by including the basic weighted-average shares of common stock outstanding adjusted for the effects of all potential dilutive shares of common stock, unless their effect would be anti-dilutive.

Reconciliations of net income and weighted-average shares of common stock outstanding for purposes of calculating basic and diluted net income per share follow (in millions, except per share amounts):
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
 
Net income from continuing operations
$
75

 
$
828

 
Net income from continuing operations attributable to noncontrolling interests
(45
)
 
(125
)
 
Undistributed earnings allocated to participating securities
(3
)
 
(4
)
 
Net income from continuing operations attributable to common stockholders
27

 
699

 
 
 
 
 
 
Net income (loss) from discontinued operations attributable to common stockholders
1

 
(11
)
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
28

 
$
688

 
 
 
 
 
 
Basic weighted-average shares of common stock outstanding
1,451

 
1,449

 
Add shares issuable upon exercise or vesting of dilutive stock options and
restricted stock unitsa
6

 
9

 
Diluted weighted-average shares of common stock outstanding
1,457

 
1,458

 
 
 
 
 
 
Basic and diluted net income (loss) per share attributable to common stockholders:
 
 
 
 
Continuing operations
$
0.02

 
$
0.48

 
Discontinued operations

 
(0.01
)
 
 
$
0.02

 
$
0.47

 

a.
Excludes approximately 3 million shares of common stock in first-quarter 2019 and 4 million in first-quarter 2018 associated with outstanding stock options with exercise prices less than the average market price of FCX’s common stock that were anti-dilutive.

Outstanding stock options with exercise prices greater than the average market price of FCX’s common stock during the period are excluded from the computation of diluted net income per share of common stock. Stock options for 39 million shares of common stock in first-quarter 2019 and 33 million shares of common stock in first-quarter 2018 were excluded.


9

Table of Contents             

NOTE 3. INVENTORIES, INCLUDING LONG-TERM MILL AND LEACH STOCKPILES

The components of inventories follow (in millions):
 
March 31,
2019
 
December 31, 2018
 
Current inventories:
 
 
 
 
Total materials and supplies, neta
$
1,595

 
$
1,528

 
 
 
 
 
 
Mill stockpiles
$
247

 
$
282

 
Leach stockpiles
1,127

 
1,171

 
Total current mill and leach stockpiles
$
1,374

 
$
1,453

 
 
 
 
 
 
Raw materials (primarily concentrate)
$
273

 
$
260

 
Work-in-process
137

 
192

 
Finished goods
1,082

 
1,326

 
Total product
$
1,492

 
$
1,778

 
 
 
 
 
 
Long-term inventories:
 
 
 
 
Mill stockpiles
$
265

 
$
265

 
Leach stockpiles
1,078

 
1,049

 
Total long-term mill and leach stockpilesb
$
1,343

 
$
1,314

 

a.
Materials and supplies inventory was net of obsolescence reserves totaling $23 million at March 31, 2019, and $24 million at December 31, 2018.
b.
Estimated metals in stockpiles not expected to be recovered within the next 12 months.

FCX recorded charges for adjustments to cobalt metals inventory carrying values of $57 million in first-quarter 2019 because of lower cobalt prices.

NOTE 4. INCOME TAXES

Variations in the relative proportions of jurisdictional income result in fluctuations to FCX’s consolidated effective income tax rate. FCX’s consolidated effective income tax rate was 57 percent for first-quarter 2019 and 38 percent for first-quarter 2018. Geographic sources of FCX’s benefit from (provision for) income taxes follow (in millions):
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
 
U.S. operations
$
2

 
$
3

 
International operations
(107
)
 
(509
)
 
Total
$
(105
)
 
$
(506
)
 

FCX's first-quarter 2019 consolidated effective income tax rate is a function of the combined effective tax rates for the jurisdictions in which FCX operates, excluding the U.S. jurisdiction. Because FCX's U.S. jurisdiction generated net losses in first-quarter 2019 that will not result in a realized tax benefit, applicable accounting rules require FCX to adjust its estimated annual effective tax rate to exclude the impact of U.S. net losses.


10

Table of Contents             

NOTE 5. DEBT AND EQUITY

The components of debt follow (in millions):
 
 
March 31,
2019
 
December 31, 2018
Senior notes and debentures:
 
 
 
 
Issued by FCX
 
$
8,595

 
$
9,594

Issued by Freeport Minerals Corporation (FMC)
 
357

 
358

Cerro Verde credit facility
 
825

 
1,023

Other
 
128

 
166

Total debt
 
9,905

 
11,141

Less current portion of debt
 
(3
)
 
(17
)
Long-term debt
 
$
9,902

 
$
11,124



Revolving Credit Facility. At March 31, 2019, there were no borrowings outstanding and $13 million in letters of credit issued under FCX’s revolving credit facility, resulting in availability of approximately $3.5 billion, of which approximately $1.5 billion could be used for additional letters of credit.
 
On May 2, 2019, FCX’s $3.5 billion revolving credit facility was amended to extend $3.26 billion of the facility by one year to April 20, 2024. The remaining $240 million matures on April 20, 2023 (the scheduled maturity date). In addition, the revolving credit facility was amended to modify the calculation of the total debt component used to determine the total leverage ratio by increasing the amount of unrestricted cash that may be applied to reduce the amount of total debt. There were no other substantive modifications to the revolving credit facility.

Senior Notes.  On March 27, 2019, FCX redeemed all of its outstanding $1.0 billion aggregate principal amount of 3.100% Senior Notes due 2020. Holders of these senior notes received the principal amount together with the redemption premium and accrued and unpaid interest up to the redemption date. As a result of this redemption, FCX recorded a loss on early extinguishment of debt totaling $5 million in first-quarter 2019.

Cerro Verde Credit Facility.  In March 2019, Cerro Verde prepaid $200 million of its credit facility, which resulted in a $1 million loss recorded to early extinguishment of debt.

Interest Expense, Net. Consolidated interest costs totaled $178 million in first-quarter 2019 and $176 million in first-quarter 2018. Capitalized interest added to property, plant, equipment and mine development costs, net, totaled $32 million in first-quarter 2019 and $25 million in first-quarter 2018.

Common Stock.  On March 27, 2019, FCX declared a quarterly cash dividend of $0.05 per share on its common stock, which was paid on May 1, 2019, to common stockholders of record as of April 15, 2019.


11

Table of Contents             

NOTE 6. FINANCIAL INSTRUMENTS

FCX does not purchase, hold or sell derivative financial instruments unless there is an existing asset or obligation, or it anticipates a future activity that is likely to occur and will result in exposure to market risks, which FCX intends to offset or mitigate. FCX does not enter into any derivative financial instruments for speculative purposes, but has entered into derivative financial instruments in limited instances to achieve specific objectives. These objectives principally relate to managing risks associated with commodity price changes, foreign currency exchange rates and interest rates.

Commodity Contracts.  From time to time, FCX has entered into derivative contracts to hedge the market risk associated with fluctuations in the prices of commodities it purchases and sells. Derivative financial instruments used by FCX to manage its risks do not contain credit risk-related contingent provisions. As of March 31, 2019, and December 31, 2018, FCX had no price protection contracts relating to its mine production. A discussion of FCX’s derivative contracts and programs follows.

Derivatives Designated as Hedging Instruments – Fair Value Hedges
Copper Futures and Swap Contracts. Some of FCX’s U.S. copper rod customers request a fixed market price instead of the Commodity Exchange Inc. (COMEX) average copper price in the month of shipment. FCX hedges this price exposure in a manner that allows it to receive the COMEX average price in the month of shipment while the customers pay the fixed price they requested. FCX accomplishes this by entering into copper futures or swap contracts. Hedging gains or losses from these copper futures and swap contracts are recorded in revenues. FCX did not have any significant gains or losses resulting from hedge ineffectiveness during the three-month periods ended March 31, 2019 and 2018. At March 31, 2019, FCX held copper futures and swap contracts that qualified for hedge accounting for 66 million pounds at an average contract price of $2.81 per pound, with maturities through November 2020.

A summary of gains (losses) recognized in revenues for derivative financial instruments related to commodity contracts that are designated and qualify as fair value hedge transactions, including the unrealized (losses) gains on the related hedged item follows (in millions):
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
Copper futures and swap contracts:
 
 
 
 
Unrealized gains (losses):
 
 
 
 
Derivative financial instruments
 
$
18

 
$
(15
)
Hedged item – firm sales commitments
 
(18
)
 
15

 
 
 
 
 
Realized gains:
 
 
 
 
Matured derivative financial instruments
 
2

 
2



Derivatives Not Designated as Hedging Instruments
Embedded Derivatives. Certain FCX concentrate, copper cathode and gold sales contracts provide for provisional pricing primarily based on the London Metal Exchange (LME) copper price or the COMEX copper price and the London Bullion Market Association (LBMA) gold price at the time of shipment as specified in the contract. FCX receives market prices based on prices in the specified future month, which results in price fluctuations recorded in revenues until the date of settlement. FCX records revenues and invoices customers at the time of shipment based on then-current LME or COMEX copper prices and the LBMA gold prices as specified in the contracts, which results in an embedded derivative (i.e., a pricing mechanism that is finalized after the time of delivery) that is required to be bifurcated from the host contract. The host contract is the sale of the metals contained in the concentrate or cathode at the then-current LME or COMEX copper price, and the LBMA gold price. FCX applies the normal purchases and normal sales scope exception in accordance with derivatives and hedge accounting guidance to the host contract in its concentrate or cathode sales agreements since these contracts do not allow for net settlement and always result in physical delivery. The embedded derivative does not qualify for hedge accounting and is adjusted to fair value through earnings each period, using the period-end LME or COMEX copper forward prices and the adjusted LBMA gold prices, until the date of final pricing. Similarly, FCX purchases copper and cobalt under contracts that provide for provisional pricing. Mark-to-market price fluctuations from these embedded derivatives are recorded through the settlement date and are reflected in revenues for sales contracts and in inventory for purchase contracts.

12

Table of Contents             

A summary of FCX’s embedded derivatives at March 31, 2019, follows:
 
Open Positions
 
Average Price
Per Unit
 
Maturities Through
 
 
Contract
 
Market
 
Embedded derivatives in provisional sales contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
613

 
$
2.83

 
$
2.94

 
September 2019
Gold (thousands of ounces)
131

 
1,300

 
1,296

 
May 2019
Embedded derivatives in provisional purchase contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
100

 
2.81

 
2.94

 
July 2019
Cobalt (millions of pounds)
3

 
14.98

 
9.24

 
June 2019


Copper Forward Contracts. Atlantic Copper, FCX’s wholly owned smelting and refining unit in Spain, enters into copper forward contracts designed to hedge its copper price risk whenever its physical purchases and sales pricing periods do not match. These economic hedge transactions are intended to hedge against changes in copper prices, with the mark-to-market hedging gains or losses recorded in cost of sales. At March 31, 2019, Atlantic Copper held net copper forward purchase contracts for 11 million pounds at an average contract price of $2.92 per pound, with maturities through June 2019.

Summary of Gains (Losses). A summary of the realized and unrealized gains (losses) recognized in operating income for commodity contracts that do not qualify as hedge transactions, including embedded derivatives, follows (in millions):
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
Embedded derivatives in provisional sales contracts:a
 
 
 
 
Copper
 
$
122

 
$
(135
)
Gold and other metals
 
(2
)
 
18

Copper forward contractsb
 
1

 
2

a.
Amounts recorded in revenues. 
b.
Amounts recorded in cost of sales as production and delivery costs.

Unsettled Derivative Financial Instruments
A summary of the fair values of unsettled commodity derivative financial instruments follows (in millions):
 
 
March 31,
2019
 
December 31, 2018
Commodity Derivative Assets:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Copper futures and swap contracts
 
$
9

 
$

Derivatives not designated as hedging instruments:
 
 
 
 
Embedded derivatives in provisional copper, gold and cobalt
 
 
 
 
sales/purchase contracts
 
85

 
23

Copper forward contracts
 
1

 

Total derivative assets
 
$
95

 
$
23

 
 
 
 
 
Commodity Derivative Liabilities:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Copper futures and swap contracts
 
$

 
$
9

Derivatives not designated as hedging instruments:
 
 
 
 
Embedded derivatives in provisional copper, gold and cobalt
 
 
 
 
sales/purchase contracts
 
14

 
39

Copper forward contracts
 
1

 

Total derivative liabilities
 
$
15

 
$
48



FCX’s commodity contracts have netting arrangements with counterparties with which the right of offset exists, and it is FCX’s policy to generally offset balances by contract on its balance sheet. FCX’s embedded derivatives on provisional sales/purchase contracts are netted with the corresponding outstanding receivable/payable balances.

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Table of Contents             

A summary of these unsettled commodity contracts that are offset in the balance sheets follows (in millions):
 
 
Assets
 
Liabilities
 
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
 
 
 
 
 
 
 
 
 
Gross amounts recognized:
 
 
 
 
 
 
 
 
Embedded derivatives in provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
$
85

 
$
23

 
$
14

 
$
39

Copper derivatives
 
10

 

 
1

 
9

 
 
95

 
23

 
15

 
48

 
 
 
 
 
 
 
 
 
Less gross amounts of offset:
 
 
 
 
 
 
 
 
Embedded derivatives in provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
1

 
7

 
1

 
7

Copper derivatives
 
1

 

 
1

 

 
 
2

 
7

 
2

 
7

 
 
 
 
 
 
 
 
 
Net amounts presented in balance sheet:
 
 
 
 
 
 
 
 
Embedded derivatives in provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
84

 
16

 
13

 
32

Copper derivatives
 
9

 

 

 
9

 
 
$
93

 
$
16

 
$
13

 
$
41

 
 
 
 
 
 
 
 
 
Balance sheet classification:
 
 
 
 
 
 
 
 
Trade accounts receivable
 
$
70

 
$
3

 
$

 
$
24

Other current assets
 
9

 

 

 

Accounts payable and accrued liabilities
 
14

 
13

 
13

 
17

 
 
$
93

 
$
16

 
$
13

 
$
41



Credit Risk.  FCX is exposed to credit loss when financial institutions with which it has entered into derivative transactions (commodity, foreign exchange and interest rate swaps) are unable to pay. To minimize the risk of such losses, FCX uses counterparties that meet certain credit requirements and periodically reviews the creditworthiness of these counterparties. FCX does not anticipate that any of the counterparties it deals with will default on their obligations. As of March 31, 2019, the maximum amount of credit exposure associated with derivative transactions was $93 million.

Other Financial Instruments.  Other financial instruments include cash and cash equivalents, restricted cash, restricted cash equivalents, accounts receivable, investment securities, legally restricted funds, accounts payable and accrued liabilities, dividends payable and long-term debt. The carrying value for cash and cash equivalents (which included time deposits of $1.5 billion at March 31, 2019, and $2.3 billion at December 31, 2018), restricted cash, restricted cash equivalents, accounts receivable, accounts payable and accrued liabilities, and dividends payable approximates fair value because of their short-term nature and generally negligible credit losses (refer to Note 7 for the fair values of investment securities, legally restricted funds and long-term debt).

In addition, as of March 31, 2019, FCX has contingent consideration assets related to the 2016 asset sales of TF Holdings Limited (TFHL), onshore California oil and gas properties and the Deepwater Gulf of Mexico (GOM) oil and gas properties (refer to Note 7 for the related fair values and to Note 2 of FCX’s 2018 Form 10-K for further discussion of these instruments).

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents. The following table provides a reconciliation of total cash, cash equivalents, restricted cash and restricted cash equivalents presented in the consolidated statements of cash flows (in millions):
 
 
March 31, 2019
 
December 31, 2018
Balance sheet components:
 
 
 
 
Cash and cash equivalents
 
$
2,833

 
$
4,217

Restricted cash and restricted cash equivalents included in:
 
 
 
 
Other current assets
 
115

 
110

Other assets
 
164

 
128

Total cash, cash equivalents, restricted cash and restricted cash equivalents presented in the consolidated statements of cash flows
 
$
3,112

 
$
4,455



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Table of Contents             

NOTE 7. FAIR VALUE MEASUREMENT

Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). FCX did not have any significant transfers in or out of Level 3 during first-quarter 2019.

FCX’s financial instruments are recorded on the consolidated balance sheets at fair value except for contingent consideration associated with the sale of the Deepwater GOM oil and gas properties (which was recorded under the loss recovery approach) and debt. A summary of the carrying amount and fair value of FCX’s financial instruments (including those measured at net asset value (NAV) as a practical expedient), other than cash and cash equivalents, restricted cash, restricted cash equivalents, accounts receivable, accounts payable and accrued liabilities, and dividends payable (refer to Note 6) follows (in millions):
 
At March 31, 2019
 
Carrying
 
Fair Value
 
Amount
 
Total
 
NAV
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
Investment securities:a,b
 
 
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
$
25

 
$
25

 
$
25

 
$

 
$

 
$

Equity securities
4

 
4

 

 
4

 

 

Total
29

 
29

 
25

 
4

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Legally restricted funds:a
 
 
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
57

 
57

 
57

 

 

 

Government mortgage-backed securities
41

 
41

 

 

 
41

 

Government bonds and notes
33

 
33

 

 

 
33

 

Corporate bonds
29

 
29

 

 

 
29

 

Asset-backed securities
12

 
12

 

 

 
12

 

Collateralized mortgage-backed securities
7

 
7

 

 

 
7

 

Money market funds
6

 
6

 

 
6

 

 

Municipal bonds
1

 
1

 

 

 
1

 

Total
186

 
186

 
57

 
6

 
123

 

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional copper, gold and cobalt sales/purchase contracts in a gross asset positionc
85

 
85

 

 

 
85

 

Copper futures and swap contractsc
9

 
9

 

 
8

 
1

 

Copper forward contractsc
1

 
1

 

 

 
1

 

Contingent consideration for the sales of TFHL
 
 
 
 
 
 
 
 
 
 
 
and onshore California oil and gas propertiesa
87

 
87

 

 

 
87

 

Total
182

 
182

 

 
8

 
174

 

 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration for the sale of the
 
 
 
 
 
 
 
 
 
 
 
Deepwater GOM oil and gas propertiesa
138

 
117

 

 

 

 
117

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives:c
 
 
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional copper, gold and cobalt sales/purchase contracts in a gross liability position
$
14

 
$
14

 
$

 
$

 
$
14

 
$

Copper forward contracts
1

 
1

 

 

 
1

 

Total
15

 
15

 

 

 
15

 

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, including current portiond
9,905

 
9,659

 

 

 
9,659

 

 
 
 
 
 
 
 
 
 
 
 
 



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Table of Contents             

 
At December 31, 2018
 
Carrying
 
Fair Value
 
Amount
 
Total
 
NAV
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
Investment securities:a,b
 
 
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
$
25

 
$
25

 
$
25

 
$

 
$

 
$

Equity securities
4

 
4

 

 
4

 

 

Total
29

 
29

 
25

 
4

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Legally restricted funds:a
 
 
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
55

 
55

 
55

 

 

 

Government mortgage-backed securities
38

 
38

 

 

 
38

 

Government bonds and notes
36

 
36

 

 

 
36

 

Corporate bonds
28

 
28

 

 

 
28

 

Asset-backed securities
11

 
11

 

 

 
11

 

Collateralized mortgage-backed securities
7

 
7

 

 

 
7

 

Money market funds
5

 
5

 

 
5

 

 

Municipal bonds
1

 
1

 

 

 
1

 

Total
181

 
181

 
55

 
5

 
121

 

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional copper, gold and cobalt sales/purchase contracts in a gross asset positionc
23

 
23

 

 

 
23

 

Contingent consideration for the sales of TFHL
 
 
 
 
 
 
 
 
 
 
 
   and onshore California oil and gas propertiesa
73

 
73

 

 

 
73

 

Total
96

 
96

 

 

 
96

 

 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration for the sale of the
 
 
 
 
 
 
 
 
 
 
 
   Deepwater GOM oil and gas propertiesa
143

 
127

 

 

 

 
127

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives:c
 
 
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional copper, gold and cobalt sales/purchase contracts in a gross liability position
$
39

 
$
39

 
$

 
$

 
$
39

 
$

Copper futures and swap contracts
9

 
9

 

 
7

 
2

 

Total
48

 
48

 

 
7

 
41

 

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, including current portiond
11,141

 
10,238

 

 

 
10,238

 

 
 
 
 
 
 
 
 
 
 
 
 

a.
Current portion included in other current assets and long-term portion included in other assets.
b.
Excludes time deposits (which approximated fair value) included in (i) other current assets of $115 million at March 31, 2019, and $109 million at December 31, 2018, and (ii) other assets of $163 million at March 31, 2019, and $126 million at December 31, 2018, primarily associated with an assurance bond to support PT-FI’s commitment for the development of a new smelter in Indonesia and PT-FI’s closure and reclamation guarantees.
c.
Refer to Note 6 for further discussion and balance sheet classifications.
d.
Recorded at cost except for debt assumed in acquisitions, which are recorded at fair value at the respective acquisition dates.

Valuation Techniques. The U.S. core fixed income fund is valued at NAV. The fund strategy seeks total return consisting of income and capital appreciation primarily by investing in a broad range of investment-grade debt securities, including U.S. government obligations, corporate bonds, mortgage-backed securities, asset-backed securities and money market instruments. There are no restrictions on redemptions (which are usually within one business day of notice).

Equity securities are valued at the closing price reported on the active market on which the individual securities are traded and, as such, are classified within Level 1 of the fair value hierarchy.

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Table of Contents             

Fixed income securities (government securities, corporate bonds, asset-backed securities, collateralized mortgage-backed securities and municipal bonds) are valued using a bid-evaluation price or a mid-evaluation price. A bid-evaluation price is an estimated price at which a dealer would pay for a security. A mid-evaluation price is the average of the estimated price at which a dealer would sell a security and the estimated price at which a dealer would pay for a security. These evaluations are based on quoted prices, if available, or models that use observable inputs and, as such, are classified within Level 2 of the fair value hierarchy.

Money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.

FCX’s embedded derivatives on provisional copper concentrate, copper cathode and gold purchases and sales are valued using quoted monthly LME or COMEX copper forward prices and the adjusted LBMA gold prices at each reporting date based on the month of maturity (refer to Note 6 for further discussion); however, FCX’s contracts themselves are not traded on an exchange. FCX’s embedded derivatives on provisional cobalt purchases are valued using quoted monthly LME cobalt forward prices or average published Metals Bulletin cobalt prices subject to certain adjustments as specified by the terms of the contracts, at each reporting date based on the month of maturity. As a result, these derivatives are classified within Level 2 of the fair value hierarchy.

FCX’s derivative financial instruments for copper futures and swap contracts and copper forward contracts that are traded on the respective exchanges are classified within Level 1 of the fair value hierarchy because they are valued using quoted monthly COMEX or LME prices at each reporting date based on the month of maturity (refer to Note 6 for further discussion). Certain of these contracts are traded on the over-the-counter market and are classified within Level 2 of the fair value hierarchy based on COMEX and LME forward prices.

As reported in Note 2 of FCX’s 2018 Form 10-K, in November 2016, FCX’s sale of its interest in TFHL included contingent consideration of up to $120 million in cash, consisting of $60 million if the average copper price exceeds $3.50 per pound and $60 million if the average cobalt price exceeds $20 per pound, both during the 24-month period beginning January 1, 2018. Also in 2016, FCX Oil & Gas LLC’s (FM O&G) sale of its onshore California oil and gas properties included contingent consideration of up to $150 million, consisting of $50 million per year for 2018, 2019 and 2020 if the price of Brent crude oil averages over $70 per barrel in each of these calendar years. Future changes in the fair value of the contingent consideration derivative for the sale of (i) TFHL will continue to be recorded in discontinued operations and (ii) the onshore California oil and gas properties will continue to be recorded in operating income. The fair value of the contingent consideration derivative was (i) $58 million at March 31, 2019 (included in other current assets in the consolidated balance sheet), and $57 million at December 31, 2018 (included in other assets), associated with the sale of TFHL and (ii) $29 million at March 31, 2019 ($13 million included in other current assets and $16 million in other assets), and $16 million at December 31, 2018 (included in other assets), associated with the sale of the onshore California oil and gas properties. Also, contingent consideration of $50 million associated with the onshore California oil and gas properties was realized in 2018 and collected in first-quarter 2019 (included in proceeds from sales of oil and gas properties in the consolidated statements of cash flows) because the average Brent crude oil price exceeded $70 per barrel for 2018 and was included in other current assets in the consolidated balance sheet at December 31, 2018. These fair values were calculated based on average commodity price forecasts through applicable maturity dates using a Monte-Carlo simulation model. The models use various observable inputs, including Brent crude oil forward prices, historical copper and cobalt prices, volatilities, discount rates and settlement terms. As a result, these contingent consideration assets are classified within Level 2 of the fair value hierarchy.

As reported in Note 2 of FCX’s 2018 Form 10-K, in December 2016, FM O&G’s sale of its Deepwater GOM oil and gas properties included up to $150 million in contingent consideration that was recorded at the total amount under the loss recovery approach. The contingent consideration will be received over time as future cash flows are realized in connection with a third-party production handling agreement for an offshore platform. The first collection occurred in third-quarter 2018. The contingent consideration included in (i) other current assets totaled $19 million at March 31, 2019, and $27 million at December 31, 2018, and (ii) other assets totaled $119 million at March 31, 2019, and $116 million at December 31, 2018. The fair value of this contingent consideration was calculated based on a discounted cash flow model using inputs that include third-party estimates for reserves, production rates and production timing, and discount rates. Because significant inputs are not observable in the market, the contingent consideration is classified within Level 3 of the fair value hierarchy.


17

Table of Contents             

Long-term debt, including current portion, is valued using available market quotes and, as such, is classified within Level 2 of the fair value hierarchy.

The techniques described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while FCX believes its valuation techniques are appropriate and consistent with other market participants, the use of different techniques or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the techniques used at March 31, 2019, as compared with those techniques used at December 31, 2018.

A summary of the changes in the fair value of FCX’s Level 3 instrument, contingent consideration for the sale of the Deepwater GOM oil and gas properties, during the first three months of 2019 follows (in millions):
Fair value at January 1, 2019
$
127

 
Net unrealized loss related to assets still held at the end of the period
(5
)
 
Settlements
(5
)
 
Fair value at March 31, 2019
$
117

 


NOTE 8. CONTINGENCIES AND COMMITMENTS

Litigation
There were no significant updates to previously reported legal proceedings included in Note 12 of FCX’s 2018 Form 10-K, other than the matter below.

As discussed in Note 12 of FCX’s 2018 Form 10-K, there has been a significant increase in the number of cases alleging the presence of asbestos contamination in talc-based personal care products and in cases alleging exposure to talc products that are not alleged to be contaminated with asbestos. The primary targets have been the producers of those products, but defendants in many of these cases also include talc miners. Cyprus Amax Minerals Company (CAMC), an indirect wholly owned subsidiary of FCX, and Cyprus Mines Corporation (Cyprus Mines), a wholly owned subsidiary of CAMC, are among those targets. Cyprus Mines was engaged in talc mining from 1964 until 1992 when it exited its talc business by conveying it to a third party in two related transactions. Those transactions involved (i) a transfer by Cyprus Mines of the assets of its talc business to a newly formed subsidiary that assumed all pre-sale and post-sale talc liabilities, subject to limited reservations, and (ii) a sale of the stock of that subsidiary to the third party. In 2011, the third party sold that subsidiary to Imerys Talc America (Imerys), an affiliate of Imerys S.A.

Cyprus Mines has contractual indemnification rights, subject to limited reservations, against Imerys, which has historically acknowledged those indemnification obligations, and had taken responsibility for all cases tendered to it. However, on February 13, 2019, Imerys filed for Chapter 11 bankruptcy protection, which triggered an immediate automatic stay under the federal bankruptcy code prohibiting any party from continuing or initiating litigation or asserting new claims against Imerys. As a result, Imerys is no longer defending the talc lawsuits against Cyprus Mines and CAMC. In addition, Imerys has taken the position that it alone owns, and has the sole right to access, the proceeds of the legacy insurance coverage of Cyprus Mines and CAMC for talc liabilities. In late March 2019, Cyprus Mines and CAMC challenged this position and obtained emergency relief from the bankruptcy court to gain access to the insurance until the question of ownership and contractual access can be decided in an adversary proceeding before the bankruptcy court, which is currently scheduled for August 2019.

On March 13, 2019, in a case pending at the time Imerys filed bankruptcy, a California jury entered a $29 million verdict against Johnson & Johnson and Cyprus Mines, of which approximately $2 million was attributed to Cyprus Mines. Taking advantage of the temporary access to the insurance authorized by the bankruptcy court, Cyprus Mines used the insurance to fully resolve the case. Cyprus Mines and the insurers also settled several other cases set for trial over the succeeding 90 days. Several trials have been scheduled in July and August 2019, and others may be scheduled prior to the adversary proceeding regarding the legacy insurance.


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Table of Contents             

FCX believes that Cyprus Mines and CAMC each has strong defenses to legal liability and that both should have access to the legacy insurance to cover defense costs, settlements and judgments, at least until the bankruptcy court decides otherwise or the insurance is exhausted. At this time, FCX cannot estimate the range of possible loss associated with these proceedings, but it does not currently believe the amount of any such losses are material to its consolidated financial statements. However, there can be no assurance that future developments will not alter this conclusion.

Other Matters
In March 2019, PT-FI’s export license was extended to March 8, 2020, and PT Smelting (PT-FI’s 25 percent-owned smelter and refinery in Indonesia) received an extension of its anode slimes export license through March 11, 2020.

NOTE 9. BUSINESS SEGMENTS
FCX has organized its mining operations into four primary divisions – North America copper mines, South America mining, Indonesia mining and Molybdenum mines, and operating segments that meet certain thresholds are reportable segments. Separately disclosed in the following tables are FCX’s reportable segments, which include the Morenci, Cerro Verde and Grasberg (Indonesia Mining) copper mines, the Rod & Refining operations and Atlantic Copper Smelting & Refining.
 
Intersegment sales between FCX’s business segments are based on terms similar to arms-length transactions with third parties at the time of the sale. Intersegment sales may not be reflective of the actual prices ultimately realized because of a variety of factors, including additional processing, timing of sales to unaffiliated customers and transportation premiums.

FCX defers recognizing profits on sales from its mines to other segments, including Atlantic Copper Smelting & Refining and on 25 percent of PT-FI’s sales to PT Smelting, until final sales to third parties occur. Quarterly variations in ore grades, the timing of intercompany shipments and changes in product prices result in variability in FCX’s net deferred profits and quarterly earnings.
FCX allocates certain operating costs, expenses and capital expenditures to its operating divisions and individual segments. However, not all costs and expenses applicable to an operation are allocated. U.S. federal and state income taxes are recorded and managed at the corporate level (included in Corporate, Other & Eliminations), whereas foreign income taxes are recorded and managed at the applicable country level. In addition, most mining exploration and research activities are managed on a consolidated basis, and those costs, along with some selling, general and administrative costs, are not allocated to the operating divisions or individual segments. Accordingly, the following Financial Information by Business Segment reflects management determinations that may not be indicative of what the actual financial performance of each operating division or segment would be if it was an independent entity.


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Table of Contents             

Product Revenues. FCX’s revenues attributable to the products it sold for the first quarters of 2019 and 2018 follow (in millions):
 
Three Months Ended
 
March 31,
 
2019
 
2018
Copper:
 
 
 
Concentrate
$
1,165

 
$
1,647

Cathode
859

 
1,185

Rod and other refined copper products
507

 
670

Purchased coppera
337

 
238

Gold
391

 
808

Molybdenum
288

 
286

Otherb
277

 
398

Adjustments to revenues:
 
 
 
Treatment charges
(105
)
 
(132
)
Royalty expensec
(30
)
 
(69
)
Export dutiesd
(17
)
 
(46
)
Revenues from contracts with customers
3,672

 
4,985

Embedded derivativese
120

 
(117
)
Total consolidated revenues
$
3,792

 
$
4,868

a.
FCX purchases copper cathode primarily for processing by its Rod & Refining operations.
b.
Primarily includes revenues associated with cobalt and silver.
c.
Reflects royalties on sales from PT-FI and Cerro Verde that will vary with the volume of metal sold and prices.
d.
Reflects PT-FI export duties.
e.
Refer to Note 6 for discussion of embedded derivatives related to FCX’s provisionally priced concentrate and cathode sales contracts.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



20

Table of Contents             

Financial Information by Business Segment
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Atlantic
 
Corporate,
 
 
 
 
North America Copper Mines
 
South America Mining
 
 
 
 
 
 
 
Copper
 
Other
 
 
 
 
 
 
 
 
 
 
Cerro
 
 
 
 
 
Indonesia
 
Molybdenum
 
Rod &
 
Smelting
 
& Elimi-
 
FCX
 
 
Morenci
 
Other
 
Total
 
Verde
 
Other
 
Total
 
Mining
 
Mines
 
Refining
 
& Refining
 
nations
 
Total
 
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unaffiliated customers
$
12

 
$
95

 
$
107

 
$
727

 
$
98

 
$
825

 
$
705

a 
$

 
$
1,128

 
$
571

 
$
456

b 
$
3,792

 
Intersegment
458

 
469

 
927

 
126

 

 
126

 
58

 
91

 
6

 
5

 
(1,213
)
 

 
Production and delivery
295

 
448

 
743

 
439

 
100

 
539

 
556

 
71

 
1,133

 
552

 
(675
)
 
2,919

 
Depreciation, depletion and amortization
40

 
43

 
83

 
100

 
14

 
114

 
105

 
16

 
2

 
7

 
20

 
347

 
Metals inventory adjustments

 

 

 

 

 

 

 

 

 

 
57

 
57

 
Selling, general and administrative expenses
1

 
1

 
2

 
2

 

 
2

 
30

 

 

 
5

 
73

 
112

 
Mining exploration and research expenses

 

 

 

 

 

 

 

 

 

 
27

 
27

 
Environmental obligations and shutdown costs

 

 

 

 

 

 

 

 

 

 
42

 
42

 
Net gain on sales of assets

 

 

 

 

 

 

 

 

 

 
(33
)
 
(33
)
 
Operating income (loss)
134

 
72

 
206

 
312

 
(16
)
 
296

 
72

 
4

 
(1
)
 
12

 
(268
)
 
321

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
1

 

 
1

 
29

 

 
29

 

 

 

 
6

 
110

 
146

 
Provision for (benefit from) income taxes

 

 

 
110

 
(5
)
 
105

 
26

 

 

 
1

 
(27
)
 
105

 
Total assets at March 31, 2019
2,904

 
4,760

 
7,664

 
8,674

 
1,720

 
10,394

 
15,792

 
1,785

 
232

 
771

 
4,421

 
41,059

 
Capital expenditures
62

 
148

 
210

 
56

 
5

 
61

 
319

 
4

 
1

 
4

 
23

 
622

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unaffiliated customers
$
3

 
$
15

 
$
18

 
$
625

 
$
150

 
$
775

 
$
1,521

a 
$

 
$
1,385

 
$
577


$
592

b 
$
4,868

 
Intersegment
601

 
689

 
1,290

 
102

 

 
102

 
52

 
95

 
8

 
2

 
(1,549
)
 

 
Production and delivery
290

 
501

 
791

 
427


116

 
543

 
457


67

 
1,388

 
556

 
(994
)
 
2,808

 
Depreciation, depletion and amortization
46

 
48

 
94

 
105

 
22

 
127

 
181

 
19

 
2

 
7

 
21

 
451

 
Selling, general and administrative expenses
1

 
2

 
3

 
2

 

 
2

 
39

 

 

 
6

 
81

 
131

 
Mining exploration and research expenses

 
1

 
1

 

 

 

 

 

 

 

 
20

 
21

 
Environmental obligations and shutdown costs

 

 

 

 

 

 

 

 

 

 
9

 
9

 
Net gain on sales of assets

 

 

 

 

 

 

 

 

 

 
(11
)
 
(11
)
 
Operating income (loss)
267

 
152

 
419

 
193

 
12

 
205

 
896

 
9

 
3

 
10

 
(83
)
 
1,459

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
1

 

 
1

 
17

 

 
17

 

 

 

 
5

 
128

 
151

 
Provision for income taxes

 

 

 
68

 
4

 
72

 
401

 

 

 
1

 
32

 
506

 
Total assets at March 31, 2018
2,817

 
4,340

 
7,157

 
8,740

 
1,715

 
10,455

 
10,992

 
1,836

 
290

 
809

 
5,098

 
36,637

 
Capital expenditures
47

 
45

 
92

 
63

 
4

 
67

 
203

 
1

 
1

 
4

 
34

 
402

 

a.
Includes PT-FI’s sales to PT Smelting totaling $409 million in first-quarter 2019 and $628 million in first-quarter 2018.
b.
Includes revenues from FCX’s molybdenum sales company, which includes sales of molybdenum produced by the Molybdenum mines and by certain of the North America and South America copper mines.



21

Table of Contents             

NOTE 10. GUARANTOR FINANCIAL STATEMENTS

All of the senior notes issued by FCX are fully and unconditionally guaranteed on a senior basis jointly and severally by Freeport McMoRan Oil & Gas LLC (FM O&G LLC), as guarantor, which is a 100-percent-owned subsidiary of FM O&G and FCX. The guarantee is an unsecured obligation of the guarantor and ranks equal in right of payment with all existing and future indebtedness of FM O&G LLC, including indebtedness under FCX’s revolving credit facility. The guarantee ranks senior in right of payment with all of FM O&G LLC’s future subordinated obligations and is effectively subordinated in right of payment to any debt of FM O&G LLC’s subsidiaries. The indentures provide that FM O&G LLC’s guarantee may be released or terminated for certain obligations under the following circumstances: (i) all or substantially all of the equity interests or assets of FM O&G LLC are sold to a third party; or (ii) FM O&G LLC no longer has any obligations under any FM O&G senior notes or any refinancing thereof and no longer guarantees any obligations of FCX under the revolving credit facility or any other senior debt or, in each case, any refinancing thereof.

The following condensed consolidating financial information includes information regarding FCX, as issuer, FM O&G LLC, as guarantor, and all other non-guarantor subsidiaries of FCX. Included are the condensed consolidating balance sheets at March 31, 2019, and December 31, 2018, and the related condensed consolidating statements of comprehensive income (loss) and cash flows for the three months ended March 31, 2019 and 2018 (in millions), which should be read in conjunction with FCX’s notes to the consolidated financial statements.

CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2019
 
FCX
 
FM O&G LLC
 
Non-guarantor
 
 
 
Consolidated
 
Issuer
 
Guarantor
 
Subsidiaries
 
Eliminations
 
FCX
ASSETS
 
 
 
 
 
 
 
 
 
Current assets
$
253

 
$
516

 
$
8,801

 
$
(525
)
 
$
9,045

Property, plant, equipment and mine development costs, net
19

 
6

 
28,470

 
2

 
28,497

Investments in consolidated subsidiaries
17,935

 

 

 
(17,935
)
 

Other assets
977

 
23

 
3,250

 
(733
)
 
3,517

Total assets
$
19,184

 
$
545

 
$
40,521

 
$
(19,191
)
 
$
41,059

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities
$
199

 
$
30

 
$
3,579

 
$
(561
)
 
$
3,247

Long-term debt, less current portion
8,595

 
7,005

 
5,563

 
(11,261
)
 
9,902

Deferred income taxes
519

a 

 
3,548

 

 
4,067

Environmental and asset retirement obligations, less current portion

 
230

 
3,402

 

 
3,632

Investments in consolidated subsidiaries

 
574

 
10,634

 
(11,208
)
 

Other liabilities
88

 
3,340

 
2,428

 
(3,486
)
 
2,370

Total liabilities
9,401

 
11,179

 
29,154

 
(26,516
)
 
23,218

 
 
 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
 
 
 
Stockholders’ equity
9,783

 
(10,634
)
 
8,721

 
1,913

 
9,783

Noncontrolling interests

 

 
2,646

 
5,412

 
8,058

Total equity
9,783

 
(10,634
)
 
11,367

 
7,325

 
17,841

Total liabilities and equity
$
19,184

 
$
545

 
$
40,521

 
$
(19,191
)
 
$
41,059

a.
All U.S.-related deferred income taxes are recorded at the parent company.

22

Table of Contents             

CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2018
 
FCX
 
FM O&G LLC
 
Non-guarantor
 
 
 
Consolidated
 
Issuer
 
Guarantor
 
Subsidiaries
 
Eliminations
 
FCX
ASSETS
 
 
 
 
 
 
 
 
 
Current assets
$
309

 
$
620

 
$
10,376

 
$
(585
)
 
$
10,720

Property, plant, equipment and mine development costs, net
19

 
7

 
27,984

 

 
28,010

Investments in consolidated subsidiaries
19,064

 

 

 
(19,064
)
 

Other assets
880

 
23

 
3,218

 
(635
)
 
3,486

Total assets
20,272

 
650

 
41,578

 
(20,284
)
 
42,216

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities
$
245

 
$
34

 
$
3,667

 
$
(617
)
 
$
3,329

Long-term debt, less current portion
9,594

 
6,984

 
5,649

 
(11,103
)
 
11,124

Deferred income taxes
524

a 

 
3,508

 

 
4,032

Environmental and asset retirement obligations, less current portion

 
227

 
3,382

 

 
3,609