freeport mcmoran copper and gold inc-fcx

Freeport McMoRan Copper Inc (FCX) Company Research

May 24th, 2012 Posted by Company Research Report No Comment yet

Freeport McMoRan Inc (FCX) features picture above was taken way back in Arizona; these guys gave a friend a hand when he needed most, brave souls.  I didn’t realize Freeport-McMoran Copper and Gold Inc. was founded in Arizona until now.

Freeport McMoRan Company Research

What is the background of the company? Its history and development?

  • On 1881, Phelps Dodge entered mining.
  • Freeport has roots in the mineral industry in the early 1900s.
  • Phelps Dodge quit the import-export business in 1906.
  • The company began to diversify in 1931.
  • Produced nickel during WW2, and potash in the 1950s.
  • On 1955, invested $119 million and constructed a nickel-cobalt mine at Moa Bay.
  • In 1956, the company formed Freeport Oil Company.
  • In 1961, the company entered the kaolin business.
  • By 1966, Freeport Indonesia, Inc. was founded.
  • McMoran Oil & Gas was formed in 1967.

May 1970

  • Construction of an open pit mine began in May 1970.
  • In the mid-1980s, it was the first to use solution extraction and electrowinning.
  • Freeport McMoran Copper and Gold Inc. was founded in 1987 and is established in Phoenix, Arizona.
  • On 1988, Grasberg copper-gold deposit discovered in Indonesia.
  • On 1989, series of expansions begun after the Grasberg discovery.
  • On 1991, a new 30-year term contract to 10 years extensions was signed with the Indonesia government.
  • Freeport McMoRan completed the acquisition of Atlantic Copper (formerly Rio Tinto Minera) in 1993.
  • Remaining eighty percent of FCX was publicly listed on NYSE in 1995.
  • In 1997, Freeport McMoRan received approval from Indonesia’s Minister of Environment for the expansion of the milling rate up to 300,000 metric tons of ore per day.
  • On 1998, the fourth concentrator mill expansion completed, Freeport McMoRan became one of the world’s leading producer of copper and gold.

December 1999

  • Received Montgomery-Watson Environmental Audit in December 1999.
  • On 2001, Freeport McMoRan signed a special voluntary Trust Fund agreement with the Amungme and Kamoro villagers.
  • Bought 23.9 million common shares from Rio Tinto for $882 million in 2004.
  • Achieved record copper and gold production in 2005.
  • The company showed consistent performance resulted in record revenue, earnings, and cash flow in 2007. (Production from Grasberg was one of the factors.)
  • Phelps Dodge merged with Freeport McMoRan Copper and Gold Inc. in March 2007.

Freeport McMoRan nature of business?

Freeport McMoRan Copper and Gold Inc is one of the world’s leading producers of copper, molybdenum, and gold. The company markets copper in seven principal forms: Bayway Operations Specialty Copper Products, Continuous Cast Copper Rod, Copper Cathodes, Copper Concentrate, Copper Electrode & Bare Wire, Copper Sulfate, and Magnetite. Gold is used for jewelry, industrial and electronic applications and sold throughout the world. Molybdenum is a key alloying element in steel and the raw material for several chemical-grade products.

Freeport McMoran Copper operations through its principal operating subsidiaries and they continuously develop their mining strategy. The company was headquartered in Phoenix, Arizona, incorporated under the laws of the state of Delaware on November 10, 1987. The company has principal operating subsidiaries are PT Freeport Indonesia, Freeport McMoran Corporation (formerly Phelps Dodge) and Atlantic Copper.

Freeport McMoRan is known as the largest publicly traded copper and molybdenum producer in the world, mines and mills ores containing copper, gold, molybdenum, and silver.  The company applies “variable cutoff grade” strategy for underground ore bodies used by geologists and geological engineers.

Copper is used as a ductile metal with very high thermal and electrical conductivity.  Pure copper is soft and malleable.  Copper was used as a conductor of heat and electricity, a building material, and are part of various metal alloys.

Molybdenum is the free element, silvery metal with a gray cast. Industrially, molybdenum compounds are used in high-pressure and high-temperature applications, as pigments and catalysts.

Freeport McMoRan Leadership and their background?

Let’s look into people behind the company. Richard C. Adkerson is the President, CEO, director, and has been a board member in Freeport McMoRan since 2006. He previously was CFO from October 2000 to December 2003 and he served as Co-Chairman of the Board of McMoran Exploration Co. (MMR) since 1998. He is CEO since 2003 and president since 2008. He also completed an advanced management program at Harvard Business School (HBS). HBS is part of Harvard University in Boston, Massachusetts, United States. HBS is recognized as one of the top business schools in the world. Mr. Richard C. Adkerson has been with the company for 23 years.

The second-in-command is the CFO. Kathleen L. Quirk has been with the company for 21 years. She worked as the Treasurer of Freeport-McMoran Copper since 2000, then Chief Financial Officer since December 2003.  She was Executive Vice President since March 2007.  Her responsibility includes tax, investor relations, treasury, and finance.  She is a graduate of Louisiana State University with a BS degree in Accounting.

Do you know what does a Treasurer does? A treasury is where currency or things of value are received and paid. The Treasurer heads the treasury.

Who is directing the company? How are the committees structured?

Freeport McMoran Copper board of directors is 12 members with various perspectives and experience in the mining industry, geology, business, finance, economics, accounting, and public affairs. Directors are elected to oversee the activities of a company. We will focus on the members charged with heading the committees.

Robert A. Day is an independent and nonexecutive director since 1995, director of McMoran exploration, founding chairman of W. M. Keck Foundation, and chairman of the audit committee of FCX. Graham H. Devon, Jr. is an independent and nonexecutive director since 2000. He was the President of R. E. Smith Interests, and chairman of corporate personnel committee of FCX. Robert J. Allison is an independent and nonexecutive director since 2001. He was chairman of Anadarko Petroleum Corporation and chairman of nominating and corporate governance committee of FCX. Stephen H. Siegel is an independent and nonexecutive director, a founding executive officer of Advanced Delivery & Chemical Systems, Inc. (ADCS), and an investor and current chairman of the public policy committee of FCX.

What is their workforce like?

The competitive edge of the company is the innovation and workforce.  The global workforce totaled of 31,800 employees and 27,400 subcontractors were by unions as of December 31, 2011.

How do they treat their employees? What are the pay and working condition like?

The pay structure of Freeport-McMoran Copper and Gold Inc. is a combination of cash and equity-based incentive payment to attract and retain directors to serve. The principal part of executive officer salary is base salaries, annual incentive awards, and long-term incentive awards; all of these are “total direct compensation.” As a rough guide, the individual base salary is about 13% of the executive officers’ salary.

The compensation committee links the company’s performance to incentive compensation using cash (short-term), performance-based restricted stock units (long-term), and stock options (long term). Nonexecutive directors and advisory directors may exchange or defer all or part of their annual fee and meeting fees for an equivalent number of shares of the common stock on the payment date, based on the fair market value.

Gossips

What is happening with the company lately? On 14 December 2011, Reuter reported that FCX resolved PT-FI labor problems and updates the status of PT-FI operations. The labor strike that started on September 15, 2011, has ended.

Tatyana Shumsky, with 4-traders.com through Dow Jones Newswires, reported on March 19, 2012, that (FCX) copper-mining operations in Indonesia are back after labor-related disruptions during the first quarter. Richard Adkerson said. “We are seeing progress in returning to normal operations. Milling rates are back above 200,000 tons per day; from around 115,000 throughout the first quarter.” Reuters reported on April 19, 2012; a sharp drop in first-quarter profit, partly due to lower metal sales following labor problems at its Grasberg mine in Indonesia. The result was a loss of 80 million pounds of copper output and around 125,000 ounces of gold production.

Freeport McMoRan Value Investing

So far we have been exploring the qualitative side provided by our Stories team.  The rest of the post will be from our Numbers team. They will help us analyze the numbers and interpret the meanings.

Freeport McMoRan Balance Sheet

Liquidity

In value investing, the balance sheet is a formal statement showing the financial condition, or the ability to pay its obligations, with liquidity, solvency, and stability of the company. We can find out what happened and not what is happening.  It shows the past. Here the working capital shows that FCX has sufficient resources to meet their current obligations; current asset was greater than its current debts, with a slight dip in 2008 to 2010, overall the ratio is impressive at 2.62, on average. The average for quick ratio was 1.31. This consists of liquid assets over the current liability.  By 2011 both ratios had increased from the dip in 2008.

Working capital, current ratio and quick ratio for 2007 to 2011 are as follows:

  • Working capital was $2,034, 2,075, 4,464, 6,088 and 7,107. Average of $4,353.60 with an uptrend.
  • Current ratio was 2.90, 1.66, 2.48, 2.62, and 3.42, averaged 2.62. To put it another way; there was $2.62 of current assets for every $1 of current liabilities, on average.
  • Quick ratio was 0.75, 0.66, 1.49, 1.64, and 2.03. Like having $0.75, 0.66, 1.49, 1.64, and 2.03 for every $1 of current liabilities.

The company’s accounts receivable turnover is averaging 12 times; funds are not tied up in receivables. Average collection period was 33 days. This number indicates how strict or relax the company’s credit policy towards the customer. Freeport-McMoRan Copper & Gold Inc. takes an average of 65 days to sell the entire inventory while payables took an average of 24 days to be paid.

Freeport McMoRan Cash Conversion Cycle

Cash conversion cycle shows an average of 73 days during the five years of operation. This measures liquidity and provides the interval in which additional short-term financing might be needed. It takes only a month for receivable and two months for inventory to turn into cash. During the same period, the company can pay creditors within 24 days. The details below are the breakdown of the various parts needed for the cash conversion cycle for the period between 2007 and 2011:

  • A rough gauge on how fast receivables are converted to cash. Accounts receivable turnover was 13.1, 14.7, 8.3, 7.8, and 18.3. Average collection period was 28, 25, 44, 47, and 20 days. Average of 33 days.  This measure the movement of accounts receivables or the average time it takes to collect an account.
  • Inventory turnover was 5.87, 6.4, 5.2, 5.5, and 5.4. Average of 5.7 times inventory. Inventory conversion period was 62.2, 57, 70, 66, 67.6 days. The company takes about 65 days to sell the entire inventory.
  • Payables turnover ratio was 14.2, 15.3, 16.9, 14.9, and 15.4. Average of 15.3 times. Average day payable was 25.7, 23.9, 21.6, 24.5, and 23.7days. Average of 24 days for payables to be paid.
  • Thus, the cash conversion cycle was 64, 58, 92, 88, and 64 days. Average of 73 days.  The time for cash to complete the operating cycle was 73 days.

To determine how efficient management is we need to look into fixed assets and total assets. The company’s fixed assets turnover ratio was 0.91, 0.92, 0.91, 0.91 and 0.91. The calculation is the ratio of revenue to fixed assets. Total assets turnover ratio was 0.42, 0.76, 0.58, 0.65, and 0.65. The average is 0.612 or 61.2 cents of revenue was generated for every $1 of total assets. Fixed assets turnover was constant for the average five years except in 2008 in which it slightly increased due to increases in total assets.

Leverage

Leverage is when the firm is financed with current or long-term debt capital. The debt ratio is slightly decreasing year after year. On average, 60.6 percent of the total asset is supplied by long-term debt or banks. Debt to equity ratio was high in 2008 since have been decreasing; with an average 170.6 percent. The higher the level of equity the more stable the company’s earnings; the basis for determining the debt ceiling. Solvency has to do with how the company’s ability to meet the interest repayment schedules associated with its long-term obligations. The solvency ratio shows that from 2007 to 2009, after tax net profit plus depreciation is not enough, but in 2010 to 2011 shows a higher solvency ratio of 119 percent and 162 percent respectively. This is enough to service the short and long-term obligations.

Ownership of the company’s total assets are; creditors have 11.6 percent claims on the company’s total assets while the bondholders have 60.6 percent. Owners or stockholders have on average 39.4 percent claim against total assets.  The details for 2007 to 2011 are below:

  • Debt ratio was 0.55, 0.75, 0.65, 0.57and 0.51. The average was 0.606 or 60.6 percent of the company’s total liabilities against its total assets.
  • Debt to equity ratio was 1.23, 3.05, 1.85, 1.35, and 1.05. Averaged 170.6 percent of total liabilities against total equity; the extent the company is levered.
  • Solvency ratio was 0.52, -1.43, 0.55, 1.19, and 1.62.
  • Current liabilities to total assets were 0.10, 0.14, 0.12, 0.13 and 0.09.
  • Total liabilities to total assets were 0.55, 0.75, 0.65, 0.57and 0.51.
  • Equity to total asset was 0.45, 0.25, 0.35, 0.43 and 0.49.

Efficiency

Return on asset (ROA) reflects what was earned on the investment of all the resources committed to the company. On average, the return was -10 percent and -16.3 percent from capital from equity holders or return on equity (ROE). Both ratios show a dip in 2008 and gradually recovered from 2009 to 2011; the operations had a stable increase. Here’s the summary for 2007 to 2011:

  • Return on asset was 7.3, -47.4, 10.6, 14.8, and 14.2. Average of -10 percent. The company lost 10 percent of the value in the five years period.
  • Return on equity was 16.3, -191.7, 30.1, 34.7, and 29.2.

Freeport McMoRan Income Statement

Now, let’s focus on the income statement. Why are we looking at the income statement? What are the trends for revenue and profit margins; what are the various margins. What is the relationship between revenue and margins? What are some key items affecting and driving these trends? How is the company’s ability to manage costs? How profitable is the company?

We have to determine how the company generates profit or loss. Two key areas we will be exploring are the total volume of business the company can generate and at the same time what sort of margins throughout the production cycle from gross profit margins to net profit margins. We analyze the revenue to determine the trend; if a trend was, what is the likelihood the trend will continue, and how that will affect the company’s profit? The second area is the margins; to help us determine how competitive the company with the competition.

Income

Revenue from 2007 to 2011 was trending up; 2009 was the year it went down by 15 percent, averaged in five years was 20 percent. Operating margin loss 71.5 percent in 2008, recovered in 2009 with an increase of 160 percent. The net margin was profitable, in 2008 down by 62.2 percent but recovered gradually by 18 percent, 22.8 percent from 2009 to 2010. Below are the results from 2007 to 2011:

  • Total revenue in $billion was 16.94, 17.8, 15.04, 18.98 and 20.88
  • Gross profit margin in percentage was 42.3, 27.1, 46.7, 50.6 and 47.7.
  • Operating profit margin ratios in percentage were 37.7, -71.5, 42.9, 47.3 and 43.4.
  • Income before tax in percentage was 36.2, -74.7, 38.7, 44.8 and 42.2.
  • Net profit margin was 17.6, -62.2, 18.3, 22.8 and 21.8.

Expenses

We also analyzed the cost and expenses. We want to know how the company managed cost. How these affect operations and what are the total expenses for the year?  The results of cost and other expenses incurred for the year 2007 to 2011 are:

  • The cost of revenue against total revenue was 58, 73, 53, 49 and 52.
  • The operating expense against total revenue in percentage was 5, 99, 4, 3, and 4.
  • Income tax over total revenue in percentage was 14, -16, 15, 16 and 15.

Through the cost of revenue to income tax expense, the management was efficient in managing total expense, except in 2008, wherein, the cost of revenue rose by 15 percent and the total operating expense reached at 99 percent of total revenue.

Freeport McMoRan Cash Flow Statement

To determine how management used funds we have to study the cash flow statement. This statement is used with the balance sheet and income statement.  The cash flow statement shows the incoming funds and the outgoing funds in three areas; operating, investing and financing.

Cash Flow from Operating Activities

Cash from operating activities is generated from the actual business. We can determine what was left from sales after the company pays the expense incurred while selling and converting the sales to cash.

Management was effective in generating cash from the operation. The starting line was the net income, which dropped by -376.5 percent in 2008 and -133.8 percent in 2009, corrected by 56.9 percent 2010. Depreciation increased 41.0 percent in 2008. The unusual item increased by 10848.7 percent in 2008. While, working capital decreased by -171.6 percent in 2008, -35.0 percent in 2009, then, went up 32.7 percent in 2010. Net cash from operating activities decreased by 45.9 percent in 2008 then reversed with a 305 percent increase in 2009, an increase of 42.7 percent and 5.5 percent for 2010 and 2011, respectively.

  • Net income was 3,779, -10450, 3,534, 5,544 and 5,747, average of 1,630.8 for five years.
  • Depreciation was $1,264, 1,782, 1,014, 1,036 and 1,022.
  • Unusual item was 152, 16,642, -56, -115, and -102.
  • Change in working capital was 1,223, -876, -5,692, -755 and -537.
  • Cash from operating activities was 6,225, 3,370, 4,397, 6,273 and 6,620.

Cash Flow from Investing Activities

Next, we will focus on cash from investing. This will provide us with clues on what is happening with the company in buying and selling assets.  Is the company growing organically or through mergers and acquisitions? What is the current direction of the company with investments?

The cash was used throughout the years from 2007 to 2008 to pay for assets and expenses. Fixed asset increased by 35.19 percent in 2008, it went down by 70.64 percent in 2009. The other investing cash flow was in 2009 while cash inflow went up by 982.05 percent.

Below are the results:

  • Purchase of fixed asset was -1,755, -2,708, -1,587, -1,412 and -2,534, average of $1,999.20 for five years.
  • Other investing cash flow was -53, 344, -39, 23 and -26.
  • Cash from investing activities was -14,861, -2,318, -1,601, -1,869 and -2,535 average of -4,636.80 for five years.

Cash Flow from Financing Activities

Cash from financing activities, here we can determine how the company raise funds to finance operations to the acquisition; what management prefer between debt and equity?

The company raised money through debt financing in 2007.  In the same year the outflow of cash to service the debt was high, later the repayment tapered.  What I noticed was that in the same year cash outflow for dividend was not as high as 2008 and 2010. The net inflow of cash in 2007 overshadowed past and later years. After 2007, the company increased the repayment level. The details are below for 2007 to 2011:

  • Financing cash flow items is $-1,223, -482, -473, -688 and -313.
  • Total cash dividends paid is $-596, -948, -229, -980 and -1,423.
  • Issue (retire) debt, net is $5,555, 124, -1,050, -1,654 and -1,265.
  • Cash from financing activities is $9,355, -1,806, -1,012, -3,322 and -3,001.

Sources
History & Development

http://www.fcx.com/company/history.htm
http://en.wikipedia.org/wiki/Freeport-McMoRan
http://www.sec.gov/Archives/edgar/data/831259/000083125912000014/a2011form10-k.htm
http://finance.yahoo.com/q/pr?s=FCX+Profile

Products & Services

http://www.sec.gov/Archives/edgar/data/831259/000083125912000014/a2011form10-k.htm
http://www.fcx.com/metals/products.htm
http://www.fcx.com/metals/fmi/tomarket.html

Organizational Structure

http://www.sec.gov/Archives/edgar/data/831259/000083125912000014/a2011form10-k.ht.
http://en.wikipedia.org/wiki/Freeport-McMoRan
http://www.fcx.com/company/structure.htm

MANAGEMENT

CEO

http://www.fcx.com/ir/bios.htm
http://www.sec.gov/Archives/edgar/data/831259/000083125912000014/a2011form10-k.htm#s0C0DA546DD21BAB601B0A861FCDDB768
http://images.businessweek.com/slideshows/20110830/highest-paid-ceos-with-mbas/slides/2
http://www.sec.gov/Archives/edgar/data/831259/000119312512191204/d328627ddef14a.htm
http://www.forbes.com/lists/2012/12/ceo-compensation-12_Richard-C-Adkerson_94C5.html

CFO

http://www.sec.gov/Archives/edgar/data/831259/000083125912000014/a2011form10-k.htm#s0C0DA546DD21BAB601B0A861FCDDB768
http://www.fcx.com/ir/bios.htm#top
http://www.boardroominsiders.com/executive-profiles/5305/Freeport-McMoRan-Copper-and-Gold-Inc./Kathleen-L.-Quirk

Board of Directors & Committees

http://www.sec.gov/Archives/edgar/data/831259/000119312512191204/d328627ddef14a.htm
http://www.fcx.com/ir/board.htm
http://www.reuters.com/finance/stocks/officerProfile?symbol=FCX&officerId=18542
http://www.marketwatch.com/investing/stock/fcx/insiders?pid=21345
http://www.reuters.com/finance/stocks/officerProfile?symbol=FCX&officerId=171535
http://www.reuters.com/finance/stocks/officerProfile?symbol=FCX&officerId=835276

Workforce

http://www.sec.gov/Archives/edgar/data/831259/000083125912000014/a2011form10-k.htm#s0C0DA546DD21BAB601B0A861FCDDB768

Stories Team: Karla, Janice, Meriam, and Nelly

Numbers Team:  Nelly and Dyne

Edited by Cris

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