Document



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 June 30, 2017
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_logoa01a01a03a07.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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post 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, 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 ¨ (Do not check if a smaller reporting company)
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

On July 31, 2017, there were issued and outstanding 1,447,307,382 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)
 
June 30,
2017
 
December 31,
2016
 
(In millions)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,667

 
$
4,245

Trade accounts receivable
802

 
1,126

Income and other tax receivables
632

 
879

Inventories:
 
 
 
Materials and supplies, net
1,264

 
1,306

Mill and leach stockpiles
1,359

 
1,338

Product
1,019

 
998

Other current assets
211

 
199

Assets held for sale
463

 
344

Total current assets
10,417

 
10,435

Property, plant, equipment and mine development costs, net
23,067

 
23,219

Oil and gas properties, subject to amortization, less accumulated amortization and impairments
48

 
74

Long-term mill and leach stockpiles
1,554

 
1,633

Other assets
1,957

 
1,956

Total assets
$
37,043

 
$
37,317

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
1,880

 
$
2,393

Current portion of debt
2,216

 
1,232

Current portion of environmental and asset retirement obligations
379

 
369

Accrued income taxes
196

 
66

Liabilities held for sale
273

 
205

Total current liabilities
4,944

 
4,265

Long-term debt, less current portion
13,138

 
14,795

Deferred income taxes
3,870

 
3,768

Environmental and asset retirement obligations, less current portion
3,512

 
3,487

Other liabilities
1,586

 
1,745

Total liabilities
27,050

 
28,060

 
 
 
 
Equity:
 
 
 
Stockholders’ equity:
 
 
 
Common stock
158

 
157

Capital in excess of par value
26,734

 
26,690

Accumulated deficit
(16,043
)
 
(16,540
)
Accumulated other comprehensive loss
(456
)
 
(548
)
Common stock held in treasury
(3,720
)
 
(3,708
)
Total stockholders’ equity
6,673

 
6,051

Noncontrolling interests
3,320

 
3,206

Total equity
9,993

 
9,257

Total liabilities and equity
$
37,043

 
$
37,317


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

3

Table of Contents             

FREEPORT-McMoRan INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
 
(In millions, except per share amounts)
Revenues
$
3,711

 
$
3,334

 
$
7,052

 
$
6,576

Cost of sales:
 
 
 
 
 
 
 
Production and delivery
2,495

 
2,956

 
4,695

 
5,455

Depreciation, depletion and amortization
450

 
632

 
839

 
1,294

Impairment of oil and gas properties

 
291

 

 
4,078

Total cost of sales
2,945

 
3,879

 
5,534

 
10,827

Selling, general and administrative expenses
107

 
160

 
260

 
298

Mining exploration and research expenses
19

 
15

 
34

 
33

Environmental obligations and shutdown costs
(19
)
 
11

 
8

 
21

Net gain on sales of assets
(10
)
 
(749
)
 
(33
)
 
(749
)
Total costs and expenses
3,042

 
3,316

 
5,803

 
10,430

Operating income (loss)
669

 
18

 
1,249

 
(3,854
)
Interest expense, net
(162
)
 
(196
)
 
(329
)
 
(387
)
Net (loss) gain on exchanges and early extinguishment of debt
(4
)
 
39

 
(3
)
 
36

Other income, net
10

 
25

 
34

 
64

Income (loss) from continuing operations before income taxes and equity in affiliated companies’ net (losses) earnings
513

 
(114
)
 
951

 
(4,141
)
Provision for income taxes
(186
)
 
(116
)
 
(360
)
 
(193
)
Equity in affiliated companies’ net (losses) earnings
(1
)
 
1

 
3

 
8

Net income (loss) from continuing operations
326

 
(229
)
 
594

 
(4,326
)
Net income (loss) from discontinued operations
9

 
(181
)
 
47

 
(185
)
Net income (loss)
335

 
(410
)
 
641

 
(4,511
)
Net income attributable to noncontrolling interests:
 
 
 
 
 
 
 
Continuing operations
(66
)
 
(47
)
 
(141
)
 
(109
)
Discontinued operations
(1
)
 
(12
)
 
(4
)
 
(22
)
Preferred dividends attributable to redeemable noncontrolling interest

 
(10
)
 

 
(21
)
Net income (loss) attributable to common stockholders
$
268

 
$
(479
)
 
$
496

 
$
(4,663
)
 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
Continuing operations
$
0.18

 
$
(0.23
)
 
$
0.31

 
$
(3.54
)
Discontinued operations

 
(0.15
)
 
0.03

 
(0.16
)
 
$
0.18

 
$
(0.38
)
 
$
0.34

 
$
(3.70
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
1,447

 
1,269

 
1,447

 
1,260

 
 
 
 
 
 
 
 
Diluted
1,453

 
1,269

 
1,453

 
1,260

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


4

Table of Contents             

FREEPORT-McMoRan INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(In millions)
Net income (loss)
 
$
335

 
$
(410
)
 
$
641

 
$
(4,511
)
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of taxes:
 
 
 
 
 
 
 
 
Unrealized gains on securities
 
1

 
1

 
2

 
1

Defined benefit plans:
 
 
 
 
 
 
 
 
Actuarial gains arising during the period, net of taxes of $48 million
 
69

 

 
69

 

Amortization or curtailment of unrecognized amounts included in net periodic benefit costs
 
19

 
15

 
30

 
23

Foreign exchange losses
 

 
(1
)
 
(1
)
 
(10
)
Other comprehensive income
 
89

 
15

 
100

 
14

 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
 
424

 
(395
)
 
741

 
(4,497
)
Total comprehensive income attributable to noncontrolling interests
 
(75
)
 
(59
)
 
(153
)
 
(130
)
Preferred dividends attributable to redeemable noncontrolling interest
 

 
(10
)
 

 
(21
)
Total comprehensive income (loss) attributable to common stockholders
 
$
349

 
$
(464
)
 
$
588

 
$
(4,648
)

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)
 
Six Months Ended
 
 
June 30,
 
 
2017
 
2016
 
 
(In millions)
 
Cash flow from operating activities:
 
 
 
 
Net income (loss)
$
641

 
$
(4,511
)
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation, depletion and amortization
839

 
1,374

 
Impairment of oil and gas properties

 
4,078

 
Non-cash drillship settlements/idle rig costs and other oil and gas adjustments
(33
)
 
694

 
Net gain on sales of assets
(33
)
 
(749
)
 
Stock-based compensation
44

 
42

 
Net charges for environmental and asset retirement obligations, including accretion
87

 
107

 
Payments for environmental and asset retirement obligations
(59
)
 
(116
)
 
Net loss (gain) on exchanges and early extinguishment of debt
3

 
(36
)
 
Deferred income taxes
55

 
169

 
(Gain) loss on disposal of discontinued operations
(38
)
 
177

 
Decrease (increase) in long-term mill and leach stockpiles
80

 
(99
)
 
Oil and gas contract settlement payments
(70
)
 

 
Other, net
(9
)
 
18

 
Changes in working capital and other tax payments, excluding amounts from dispositions:
 
 
 
 
Accounts receivable
589

 
259

 
Inventories
(101
)
 
190

 
Other current assets
(2
)
 
(53
)
 
Accounts payable and accrued liabilities
(267
)
 
44

 
Accrued income taxes and changes in other tax payments
103

 
26

 
Net cash provided by operating activities
1,829

 
1,614

 
 
 
 
 
 
Cash flow from investing activities:
 
 
 
 
Capital expenditures:
 
 
 
 
North America copper mines
(67
)
 
(76
)
 
South America
(45
)
 
(293
)
 
Indonesia
(457
)
 
(453
)
 
Molybdenum mines
(2
)
 
(1
)
 
Other, including oil and gas operations
(135
)
 
(992
)
 
Net proceeds from the sale of additional interest in Morenci

 
996

 
Net proceeds from sales of other assets
4

 
290

 
Other, net
(8
)
 
(6
)
 
Net cash used in investing activities
(710
)
 
(535
)
 
 
 
 
 
 
Cash flow from financing activities:
 
 
 
 
Proceeds from debt
606

 
2,811

 
Repayments of debt
(1,250
)
 
(3,649
)
 
Net proceeds from sale of common stock

 
32

 
Cash dividends paid:
 
 
 
 
Common stock
(2
)
 
(5
)
 
Noncontrolling interests
(39
)
 
(39
)
 
Stock-based awards net payments
(8
)
 
(5
)
 
Debt financing costs and other, net
(11
)
 
(18
)
 
Net cash used in financing activities
(704
)
 
(873
)
 
 
 
 
 
 
Net increase in cash and cash equivalents
415

 
206

 
Decrease (increase) in cash and cash equivalents in assets held for sale
7

 
(53
)
 
Cash and cash equivalents at beginning of year
4,245

 
177

 
Cash and cash equivalents at end of period
$
4,667

 
$
330

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

6

Table of Contents             

FREEPORT-McMoRan INC.
CONSOLIDATED STATEMENT 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, 2016
1,574

 
$
157

 
$
26,690

 
$
(16,540
)
 
$
(548
)
 
129

 
$
(3,708
)
 
$
6,051

 
$
3,206

 
$
9,257

Exercised and issued stock-based awards
3

 
1

 
4

 

 

 

 

 
5

 

 
5

Stock-based compensation

 

 
40

 

 

 

 

 
40

 

 
40

Tender of shares for stock-based awards

 

 

 

 

 
1

 
(12
)
 
(12
)
 

 
(12
)
Dividends on common stock

 

 

 
1

 

 

 

 
1

 

 
1

Dividends to noncontrolling interests

 

 

 

 

 

 

 

 
(39
)
 
(39
)
Net income attributable to common stockholders

 

 

 
496

 

 

 

 
496

 

 
496

Net income attributable to noncontrolling interests, including discontinued operations

 

 

 

 

 

 

 

 
145

 
145

Other comprehensive income

 

 

 

 
92

 

 

 
92

 
8

 
100

Balance at June 30, 2017
1,577

 
$
158

 
$
26,734

 
$
(16,043
)
 
$
(456
)
 
130

 
$
(3,720
)
 
$
6,673

 
$
3,320

 
$
9,993

 
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, 2016. 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. With the exception of the accounting for discontinued operations, assets held for sale and the remeasurement of a pension plan, all such adjustments are, in the opinion of management, of a normal recurring nature. As a result of FCX’s sale of its interest in TF Holdings Limited (TFHL), FCX has reported TFHL as discontinued operations for all periods presented in the unaudited consolidated financial statements (refer to Note 2). Operating results for the six-month period ended June 30, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

Indonesia Mining. As a result of the first-quarter 2017 regulatory restrictions and uncertainties regarding long-term investment stability, PT Freeport Indonesia (PT-FI) took actions to adjust its cost structure, reduce its workforce and slow investments in its underground development projects and new smelter. These actions included workforce reductions through furlough and voluntary retirement programs. Following the furlough and voluntary retirement programs, a significant number of employees and contractors elected to participate in an illegal strike action beginning in May 2017, and were subsequently deemed to have voluntarily resigned under existing laws and regulations. As a result, PT-FI recorded charges to operating income for employee severance and related costs totaling $83 million for second-quarter 2017 and $104 million for the first six months of 2017.

Additionally, because of the significant reduction in workforce, PT-FI was required to remeasure its pension assets and pension benefit obligation as of June 30, 2017. The discount rate and rate of compensation increase used for the June 30, 2017, remeasurement were 7.50 percent and 4.00 percent, respectively, compared to the December 31, 2016, discount rate of 8.25 percent and the rate of compensation increase of 8.00 percent. The expected long-term rate of return on the plan assets was unchanged (7.75 percent). The remeasurement and curtailment resulted in the projected benefit obligation declining by $145 million and plan assets declining by $21 million. In addition, PT-FI recognized a curtailment loss of $4 million in second-quarter 2017. As of June 30, 2017, the funded status of PT-FI’s pension plan was a net asset of $34 million (included in other assets in the consolidated balance sheet).

Oil and Gas Properties. In the first half of 2016, FCX Oil & Gas LLC (FM O&G, a wholly owned subsidiary of FCX) determined the carrying values of certain of its unevaluated properties were impaired. For the first six months of 2016, FM O&G transferred $3.2 billion of costs (including $3.1 billion in first-quarter 2016) 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 and reserve revisions in 2016, net capitalized costs exceeded the related ceiling test limitation under full cost accounting rules, which resulted in the recognition of impairment charges of $291 million in second-quarter 2016 and $4.1 billion for the first six months of 2016. Refer to Note 1 of FCX’s annual report on Form 10-K for the year ended December 31, 2016, for further discussion.



8

Table of Contents             

NOTE 2. DISPOSITIONS

TF Holdings Limited - Discontinued Operations. FCX had a 70 percent interest in TFHL, which owns 80 percent of Tenke Fungurume Mining S.A. (TFM or Tenke) located in the Democratic Republic of Congo (DRC). On November 16, 2016, FCX completed the sale of its interest in TFHL to China Molybdenum Co., Ltd. (CMOC) for $2.65 billion in cash (before closing adjustments) and 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 calendar years 2018 and 2019. The contingent consideration is considered a derivative, and at June 30, 2017, the related fair value of $55 million was recorded in other assets on the consolidated balance sheets. During the first six months of 2017, the fair value of the contingent consideration derivative increased by $42 million ($6 million in second-quarter 2017), primarily resulting from higher cobalt prices, and was recorded in net income (loss) from discontinued operations.

In accordance with accounting guidance, FCX has reported the results of operations of TFHL as discontinued operations in the consolidated statements of operations. The consolidated statements of cash flows are reported on a combined basis without separately presenting discontinued operations.

Net income (loss) from discontinued operations in the consolidated statements of operations consists of the following (in millions):
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
Revenuesa
$
4

 
$
272

 
$
13

 
$
558

 
Costs and expenses:
 
 
 
 
 
 
 
 
Production and delivery costs

 
256

 

 
482

 
Depreciation, depletion and amortization


20

 

 
80

 
Interest expense allocated from parent

 
11

b 

 
21

b 
Other costs and expenses, net

 
5

 

 
6

 
Income (loss) before income taxes and net gain (loss) on disposal
4

 
(20
)
 
13

 
(31
)
 
Net gain (loss) on disposal
6

c 
(177
)
d 
38

c 
(177
)
d 
Net income (loss) before income taxes
10

 
(197
)
 
51

 
(208
)
 
(Provision for) benefit from income taxes
(1
)
 
16

 
(4
)
 
23

 
Net income (loss) from discontinued operations
$
9

 
$
(181
)
 
$
47

 
$
(185
)
 
a.
In accordance with accounting guidance, amounts are net of recognition (eliminations) of intercompany sales totaling $4 million in second-quarter 2017, $(41) million in second-quarter 2016, $13 million for the first six months of 2017 and $(73) million for the first six months of 2016.
b.
In accordance with accounting guidance, interest associated with FCX’s term loan that was required to be repaid as a result of the sale of TFHL has been allocated to discontinued operations.
c.
Includes a gain of $6 million in second-quarter 2017 and $42 million for the first six months of 2017 associated with the change in the fair value of contingent consideration.
d.
In accordance with accounting guidance, an estimated loss on disposal was recorded in second-quarter 2016 and was adjusted through closing of the transaction in November 2016.

Cash flows from discontinued operations included in the consolidated statements of cash flows for the six months ended June 30, 2016, follow (in millions):
Net cash provided by operating activities
 
$
157

Net cash used in investing activities
 
(57
)
Net cash used in financing activities
 
(51
)
Increase in cash and cash equivalents in assets held for sale
 
$
49




9

Table of Contents             

Oil and Gas Operations. On March 17, 2017, FM O&G sold property interests in the Madden area in central Wyoming for cash consideration of $17.5 million, before closing adjustments. Under the full cost accounting rules, the sale resulted in recognition of a $17 million gain for the first six months of 2017 because the reserves associated with the Madden properties were significant to the full cost pool.

On June 17, 2016, FM O&G sold certain oil and gas royalty interests for cash consideration of $102 million, before closing adjustments. Under the full cost accounting rules, the proceeds from this transaction were recorded as a reduction to capitalized oil and gas properties, with no gain or loss recognition in second-quarter 2016 because the reserves were not significant to the full cost pool.

Morenci. On May 31, 2016, FCX sold a 13 percent undivided interest in its Morenci unincorporated joint venture to SMM Morenci, Inc. for $1.0 billion in cash. FCX recorded a $577 million gain in second-quarter 2016 on the transaction and used losses to offset cash taxes on the transaction. A portion of the proceeds from the transaction was used to repay borrowings under FCX's unsecured bank term loan and revolving credit facility. As a result of the transaction, the unincorporated joint venture is owned 72 percent by FCX, 15 percent by Sumitomo Metal Mining Arizona, Inc. and 13 percent by SMM Morenci, Inc.

Timok. On May 2, 2016, Freeport Minerals Corporation (FMC), a wholly owned subsidiary of FCX, sold an interest in the Timok exploration project in Serbia to Global Reservoir Minerals Inc. (now known as Nevsun Resources, Ltd.) for consideration of $135 million in cash and contingent consideration of up to $107 million payable to FCX in stages upon achievement of defined development milestones. As a result of this transaction, FCX recorded a gain of $133 million in second-quarter 2016, and no amounts were recorded for contingent consideration under the loss recovery approach. A portion of the proceeds from the transaction was used to repay borrowings under FCX's unsecured bank term loan.

Assets Held for Sale. Freeport Cobalt includes the large-scale cobalt refinery in Kokkola, Finland, and the related sales and marketing business, in which FCX owns an effective 56 percent interest. Kisanfu is a copper and cobalt exploration project, located near Tenke, in which FCX holds a 100 percent interest. As a result of the sale of TFHL, FCX expects to sell its interest in Freeport Cobalt and Kisanfu, and the assets and liabilities of Freeport Cobalt and Kisanfu are classified as held for sale in the consolidated balance sheets. During second-quarter 2017, a favorable adjustment of $13 million was recorded in net gain on sales of assets in the consolidated statements of operations associated with the estimated fair value less costs to sell of the Kisanfu exploration project. The adjustment was limited to the reduction in the carrying value when the Kisanfu exploration project was initially classified as held for sale in November 2016.

NOTE 3. EARNINGS PER SHARE

FCX calculates its basic net income (loss) per share of common stock under the two-class method and calculates its diluted net income (loss) per share of common stock using the more dilutive of the two-class method or the treasury-stock method. Basic net income (loss) per share of common stock was computed by dividing net income (loss) attributable to common stockholders (after deducting accumulated dividends and undistributed earnings to participating securities) by the weighted-average shares of common stock outstanding during the period. Diluted net income (loss) 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.


10

Table of Contents             

A reconciliation of net income (loss) and weighted-average shares of common stock outstanding for purposes of calculating basic and diluted net income (loss) per share follows (in millions, except per share amounts):
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
Net income (loss) from continuing operations
$
326

 
$
(229
)
 
$
594

 
$
(4,326
)
 
Net income from continuing operations attributable to noncontrolling interests
(66
)
 
(47
)
 
(141
)
 
(109
)
 
Preferred dividends on redeemable noncontrolling interest

 
(10
)
 

 
(21
)
 
Undistributed earnings allocated to participating securities
(3
)
 
(3
)
 
(3
)
 
(3
)
 
Net income (loss) from continuing operations attributable to common stockholders
$
257

 
$
(289
)
 
$
450

 
$
(4,459
)
 
 
 
 
 
 
 
 
 
 
Net income (loss) from discontinued operations
$
9

 
$
(181
)
 
$
47

 
$
(185
)
 
Net income from discontinued operations attributable to noncontrolling interests
(1
)
 
(12
)
 
(4
)
 
(22
)
 
Net income (loss) from discontinued operations attributable to common stockholders
$
8

 
$
(193
)
 
$
43

 
$
(207
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
$
265

 
$
(482
)
 
$
493

 
$
(4,666
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic weighted-average shares of common stock outstanding
1,447

 
1,269

 
1,447

 
1,260

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

 

a 
6

 

a 
Diluted weighted-average shares of common stock outstanding
1,453

 
1,269

 
1,453

 
1,260

 
 
 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
 
Continuing operations
$
0.18

 
$
(0.23
)
 
$
0.31

 
$
(3.54
)
 
Discontinued operations

 
(0.15
)
 
0.03

 
(0.16
)
 
 
$
0.18

 
$
(0.38
)
 
$
0.34

 
$
(3.70
)
 
 
 
 
 
 
 
 
 
 
a.
Excludes 12 million shares of common stock for second-quarter 2016 and 11 million for the first six months of 2016 associated with outstanding stock options with exercise prices less than the average market price of FCX’s common stock and restricted stock units 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 (loss) per share of common stock. Stock options for 44 million shares of common stock were excluded for second-quarter 2017, 46 million for second-quarter 2016, 44 million for the first six months of 2017 and 47 million for the first six months of 2016.



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NOTE 4. INVENTORIES, INCLUDING LONG-TERM MILL AND LEACH STOCKPILES

The components of inventories follow (in millions):
 
June 30,
2017
 
December 31, 2016
 
Current inventories:
 
 
 
 
Total materials and supplies, neta
$
1,264

 
$
1,306

 
 
 
 
 
 
Mill stockpiles
$
313

 
$
259

 
Leach stockpiles
1,046

 
1,079

 
Total current mill and leach stockpiles
$
1,359

 
$
1,338

 
 
 
 
 
 
Raw materials (primarily concentrate)
$
295

 
$
255

 
Work-in-process
121

 
114

 
Finished goods
603

 
629

 
Total product inventories
$
1,019

 
$
998

 
 
 
 
 
 
Long-term inventories:
 
 
 
 
Mill stockpiles
$
425

 
$
487

 
Leach stockpiles
1,129

 
1,146

 
Total long-term mill and leach stockpilesb
$
1,554

 
$
1,633

 
a.
Materials and supplies inventory was net of obsolescence reserves totaling $30 million at June 30, 2017, and $29 million at December 31, 2016.
b.
Estimated metals in stockpiles not expected to be recovered within the next 12 months.

NOTE 5. 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 38 percent for the first six months of 2017 and (5) percent for first six months of 2016. Geographic sources of FCX’s provision for income taxes follow (in millions):
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2017
 
2016
 
2017
 
2016
 
U.S. operationsa
$
29

 
$
(49
)
 
$
22

 
$
(38
)
 
International operations
(215
)
 
(67
)
 
(382
)
 
(155
)
 
Total
$
(186
)
 
$
(116
)
 
$
(360
)
 
$
(193
)
 
a.
Includes net tax credits of $32 million for second-quarter 2017 and $31 million for the first six months of 2017 associated with anticipated recovery of alternative minimum tax credit carryforwards. The second quarter and first six months of 2016 include net tax charges of $36 million associated with net operating loss carryback claims, partly offset by alternative minimum tax credits.

Applicable accounting standards require that FCX estimate an annual effective tax rate and apply that rate to each year-to-date interim period. However, an exception is provided to exclude tax jurisdictions from the annual effective tax rate where losses are expected to be generated for which no tax benefit will be realized. Accordingly, U.S. operations have been excluded from the calculation of the estimated annual effective tax rate used to determine FCX’s income tax provision at June 30, 2017.

As a result of the impairment to U.S. oil and gas properties, FCX recorded tax charges of $1.5 billion for the first six months of 2016 to establish a valuation allowance primarily against U.S. federal and state deferred tax assets that will not generate a future benefit. FCX’s consolidated effective income tax rate was 33 percent for the first six months of 2016 excluding these tax charges.




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NOTE 6. DEBT

The components of debt follow (in millions):
 
 
June 30,
2017
 
December 31, 2016
Senior notes and debentures:
 
 
 
 
Issued by FCX
 
$
13,238

 
$
13,745

Issued by FMC
 
358

 
359

Issued by Freeport-McMoRan Oil & Gas LLC (FM O&G LLC)
 
266

 
267

Cerro Verde credit facility
 
1,485

 
1,390

Cerro Verde shareholder loans
 

 
261

Other
 
7

 
5

Total debta
 
15,354

 
16,027

Less current portion of debt
 
(2,216
)
 
(1,232
)
Long-term debt
 
$
13,138

 
$
14,795

a.
Includes additions for unamortized fair value adjustments totaling $163 million at June 30, 2017 ($179 million at December 31, 2016), and is net of reductions for unamortized net discounts and unamortized debt issuance costs totaling $98 million at June 30, 2017 ($100 million at December 31, 2016).

Revolving Credit Facility. At June 30, 2017, there were no borrowings outstanding and $37 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.

Senior Notes Issued by FCX. In March 2017, FCX’s 2.15% Senior Notes matured, and the $500 million outstanding principal balance was repaid.

Cerro Verde Credit Facility and Shareholder Loans. In June 2017, Cerro Verde’s credit facility was amended to increase the commitment by $225 million to $1.5 billion, modify the amortization schedule and to extend the maturity date to June 19, 2022. The amended credit facility amortizes in four installments, with $225 million due on December 31, 2020, $225 million due on June 30, 2021, $525 million due on December 31, 2021, and the remaining balance due on the maturity date of June 19, 2022. All other terms, including the interest rates, remain the same. The interest rate on Cerro Verde's credit facility was 3.12 percent at June 30, 2017. Cerro Verde used proceeds from its amended credit facility plus available cash to repay the balance of its shareholder loans in June 2017. Refer to Note 8 of FCX’s annual report on Form 10-K for the year ended December 31, 2016, for further discussion.

Exchanges and Early Extinguishment of Debt. During second-quarter 2017, a $4 million loss was recognized associated with the modification of Cerro Verde’s credit facility.

During second-quarter 2016, FCX redeemed certain senior notes in exchange for its common stock, which resulted in a gain of $39 million. Partially offsetting the gain was $3 million in losses primarily associated with the modification of FCX’s revolving credit facility in first-quarter 2016. Refer to Notes 8 and 10 of FCX’s annual report on Form 10-K for the year ended December 31, 2016, for further discussion.

Interest Expense, Net. Consolidated interest expense from continuing operations (excluding capitalized interest) totaled $192 million in second-quarter 2017, $218 million in second-quarter 2016, $387 million for the first six months of 2017 and $436 million for the first six months of 2016. Capitalized interest added to property, plant, equipment and mine development costs, net, totaled $30 million in second-quarter 2017, $22 million in second-quarter 2016, $58 million for the first six months of 2017 and $42 million for the first six months of 2016. Capitalized interest added to oil and gas properties not subject to amortization totaled $7 million for the first six months of 2016 (none in second-quarter 2016 or 2017).





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Table of Contents             

NOTE 7. 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 June 30, 2017, and December 31, 2016, 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 six-month periods ended June 30, 2017 and 2016. At June 30, 2017, FCX held copper futures and swap contracts that qualified for hedge accounting for 49 million pounds at an average contract price of $2.59 per pound, with maturities through December 2018.

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, along with the unrealized gains (losses) on the related hedged item follows (in millions):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Copper futures and swap contracts:
 
 
 
 
 
 
 
Unrealized gains (losses):
 
 
 
 
 
 
 
Derivative financial instruments
$
1

 
$
3

 
$
(1
)
 
$
10

Hedged item – firm sales commitments
(1
)
 
(3
)
 
1

 
(10
)
 
 
 
 
 
 
 
 
Realized gains (losses):
 
 
 
 
 
 
 
Matured derivative financial instruments
1

 
(4
)
 
9

 
(8
)

Derivatives Not Designated as Hedging Instruments
Embedded Derivatives. As described in Note 1 to FCX’s annual report on Form 10-K for the year ended December 31, 2016, under “Revenue Recognition,” certain FCX copper 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 (London) gold price at the time of shipment as specified in the contract. Similarly, FCX purchases copper under contracts that provide for provisional pricing. FCX applies the normal purchases and normal sales scope exception in accordance with derivatives and hedge accounting guidance to the host sales agreements since the contracts do not allow for net settlement and always result in physical delivery. Sales and purchases with a provisional sales price contain an embedded derivative (i.e., the price settlement mechanism is settled after the time of delivery) that is required to be bifurcated from the host contract. The host contract is the sale or purchase of the metals contained in the concentrate or cathode at the then-current LME or COMEX copper price or the London gold price as defined in the contract. Mark-to-market price fluctuations from these embedded derivatives related to continuing operations are recorded through the settlement date and are reflected in revenues for sales contracts and in cost of sales as production and delivery costs for purchase contracts. Mark-to-market price fluctuations associated with embedded derivatives for discontinued operations, which were minimal, are included in discontinued operations for all periods presented in these financial statements.


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Table of Contents             

A summary of FCX’s embedded derivatives at June 30, 2017, follows:
 
Open Positions
 
Average Price
Per Unit
 
Maturities Through
 
 
Contract
 
Market
 
Embedded derivatives in provisional sales contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
560

 
$
2.58

 
$
2.69

 
November 2017
Gold (thousands of ounces)
165

 
1,259

 
1,245

 
August 2017
Embedded derivatives in provisional purchase contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
109

 
2.60

 
2.69

 
October 2017

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 June 30, 2017, Atlantic Copper held net copper forward sales contracts for 33 million pounds at an average contract price of $2.57 per pound, with maturities through September 2017.

Summary of Gains (Losses). A summary of the realized and unrealized gains (losses) recognized in operating income (loss) for commodity contracts that do not qualify as hedge transactions, including embedded derivatives, follows (in millions):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Embedded derivatives in provisional copper and gold
 
 
 
 
 
 
 
sales contractsa
$
34

 
$
4

 
$
160

 
$
76

Copper forward contractsb
(4
)
 
(2
)
 
(5
)
 
5

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):
 
 
June 30,
2017
 
December 31, 2016
Commodity Derivative Assets:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Copper futures and swap contracts
 
$
6

 
$
9

Derivatives not designated as hedging instruments:
 
 
 
 
Embedded derivatives in provisional copper and gold
 
 
 
 
sales/purchase contracts
 
62

 
137

Total derivative assets
 
$
68

 
$
146

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

 
$
2

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

 
56

Copper forward contracts
 
4

 

Total derivative liabilities
 
$
18

 
$
58




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FCX’s commodity contracts have netting arrangements with counterparties with which the right of offset exists, and it is FCX’s policy to offset balances by counterparty on its balance sheet. FCX’s embedded derivatives on provisional sales/purchase contracts are netted with the corresponding outstanding receivable/payable balances. A summary of these unsettled commodity contracts that are offset in the balance sheets follows (in millions):
 
 
Assets
 
Liabilities
 
 
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
 
 
 
 
 
 
 
 
 
Gross amounts recognized:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives in provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
$
62

 
$
137

 
$
14

 
$
56

Copper derivatives
 
6

 
9

 
4

 
2

 
 
68

 
146

 
18

 
58

 
 
 
 
 
 
 
 
 
Less gross amounts of offset:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives in provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
4

 
12

 
4

 
12

Copper derivatives
 

 
2

 

 
2

 
 
4

 
14

 
4

 
14

 
 
 
 
 
 
 
 
 
Net amounts presented in balance sheet:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives in provisional
 
 
 
 
 
 
 
 
sales/purchase contracts
 
58

 
125

 
10

 
44

Copper derivatives
 
6

 
7

 
4

 

 
 
$
64

 
$
132

 
$
14

 
$
44

 
 
 
 
 
 
 
 
 
Balance sheet classification:
 
 
 
 
 
 
 
 
Trade accounts receivable
 
$
56

 
$
119

 
$

 
$
13

Other current assets
 
6

 
7

 

 

Accounts payable and accrued liabilities
 
2

 
6

 
14

 
31

 
 
$
64

 
$
132

 
$
14

 
$
44


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 June 30, 2017, the maximum amount of credit exposure associated with derivative transactions was $64 million.

Other Financial Instruments. Other financial instruments include cash and cash equivalents, accounts receivable, restricted cash, investment securities, legally restricted funds, accounts payable and accrued liabilities, and long-term debt. The carrying value for cash and cash equivalents (which included time deposits of $1.6 billion at June 30, 2017, and $64 million at December 31, 2016), accounts receivable, restricted cash, and accounts payable and accrued liabilities approximates fair value because of their short-term nature and generally negligible credit losses (refer to Note 8 for the fair values of investment securities, legally restricted funds and long-term debt).

In addition, as of June 30, 2017, FCX has contingent consideration assets related to the 2016 asset sales (refer to Note 8 for the related fair value and to Note 2 of FCX’s annual report on Form 10-K for the year ended December 31, 2016, for further discussion of these instruments).



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Table of Contents             

NOTE 8. 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 recognizes transfers between levels at the end of the reporting period. FCX did not have any significant transfers in or out of Level 1, 2 or 3 for second-quarter 2017.

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 Gulf of Mexico (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, other than cash and cash equivalents, accounts receivable, restricted cash, and accounts payable and accrued liabilities (refer to Note 7) follows (in millions):
 
At June 30, 2017
 
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

 
$

 
$

 
$

Money market funds
22

 
22

 

 
22

 

 

Equity securities
5

 
5

 

 
5

 

 

Total
52

 
52

 
25

 
27

 

 

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

 
55

 
55

 

 

 

Government bonds and notes
36

 
36

 

 

 
36

 

Corporate bonds
32

 
32

 

 

 
32

 

Government mortgage-backed securities
28

 
28

 

 

 
28

 

Asset-backed securities
17

 
17

 

 

 
17

 

Money market funds
11

 
11

 

 
11

 

 

Collateralized mortgage-backed securities
8

 
8

 

 

 
8

 

Municipal bonds
1

 
1

 

 

 
1

 

Total
188

 
188

 
55

 
11

 
122

 

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/
 
 
 
 
 
 
 
 
 
 
 
purchase contracts in a gross asset positionc
62

 
62

 

 

 
62

 

Copper futures and swap contractsc
6

 
6

 

 
5

 
1

 

Contingent consideration for the sales of TFHL
 
 
 
 
 
 
 
 
 
 
 
   and onshore California oil and gas propertiesa
76

 
76

 

 

 
76

 

Total
144

 
144

 

 
5

 
139

 

 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration for the sale of the
 
 
 
 
 
 
 
 
 
 
 
     Deepwater GOM oil and gas propertiesa
150

 
137

 

 

 

 
137

 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
 
$
521

 
$
80

 
$
43

 
$
261

 
$
137

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives:c
 
 
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional sales/
 
 
 
 
 
 
 
 
 
 
 
purchase contracts in a gross liability position
14

 
$
14

 
$

 
$

 
$
14

 
$

Copper forward contracts
4

 
4

 

 
3

 
1

 

Total
18

 
18

 

 
3

 
15

 

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, including current portiond
15,354

 
14,744

 

 

 
14,744

 

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
 
$
14,762

 
$

 
$
3

 
$
14,759

 
$




17

Table of Contents             

 
At December 31, 2016
 
Carrying
 
Fair Value
 
Amount
 
Total
 
NAV
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
Investment securities:a,b
 
 
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
$
23

 
$
23

 
$
23

 
$

 
$

 
$

Money market funds
22

 
22

 

 
22

 

 

Equity securities
5

 
5

 

 
5

 

 

Total
50

 
50

 
23

 
27

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Legally restricted funds:a
 
 
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
53

 
53

 
53

 

 

 

Government bonds and notes
36

 
36

 

 

 
36

 

Corporate bonds
32

 
32

 

 

 
32

 

Government mortgage-backed securities
25

 
25

 
—</