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, 2018
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_logoa01a01a03a09.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, 2018, there were issued and outstanding 1,449,002,815 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,
2018
 
December 31,
2017
 
(In millions)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
3,859

 
$
4,447

Trade accounts receivable
1,077

 
1,246

Income and other tax receivables
225

 
325

Inventories:
 
 
 
Materials and supplies, net
1,404

 
1,305

Mill and leach stockpiles
1,435

 
1,422

Product
1,337

 
1,166

Other current assets
381

 
270

Assets held for sale
625

 
508

Total current assets
10,343

 
10,689

Property, plant, equipment and mine development costs, net
22,923

 
22,934

Long-term mill and leach stockpiles
1,371

 
1,409

Other assets
2,391

 
2,270

Total assets
$
37,028

 
$
37,302

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
2,420

 
$
2,321

Accrued income taxes
569

 
565

Current portion of environmental and asset retirement obligations
380

 
388

Dividends payable
73

 
—

Current portion of debt
4

 
1,414

Liabilities held for sale
353

 
323

Total current liabilities
3,799

 
5,011

Long-term debt, less current portion
11,123

 
11,703

Deferred income taxes
3,702

 
3,649

Environmental and asset retirement obligations, less current portion
3,631

 
3,631

Other liabilities
1,931

 
2,012

Total liabilities
24,186

 
26,006

 
 
 
 
Equity:
 
 
 
Stockholders’ equity:
 
 
 
Common stock
158

 
158

Capital in excess of par value
26,667

 
26,751

Accumulated deficit
(13,161
)
 
(14,722
)
Accumulated other comprehensive loss
(464
)
 
(487
)
Common stock held in treasury
(3,726
)
 
(3,723
)
Total stockholders’ equity
9,474

 
7,977

Noncontrolling interests
3,368

 
3,319

Total equity
12,842

 
11,296

Total liabilities and equity
$
37,028

 
$
37,302


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
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
 
(In millions, except per share amounts)
Revenues
$
5,168

 
$
3,711

 
$
10,036

 
$
7,052

Cost of sales:
 
 
 
 
 
 
 
Production and delivery
2,915

 
2,480

 
5,723

 
4,668

Depreciation, depletion and amortization
442

 
450

 
893

 
839

Total cost of sales
3,357

 
2,930

 
6,616

 
5,507

Selling, general and administrative expenses
109

 
107

 
240

 
258

Mining exploration and research expenses
24

 
19

 
45

 
33

Environmental obligations and shutdown costs
59

 
(21
)
 
68

 
4

Net gain on sales of assets
(45
)
 
(10
)
 
(56
)
 
(33
)
Total costs and expenses
3,504

 
3,025

 
6,913

 
5,769

Operating income
1,664

 
686

 
3,123

 
1,283

Interest expense, net
(142
)
 
(162
)
 
(293
)
 
(329
)
Net gain (loss) on early extinguishment of debt
9

 
(4
)
 
8

 
(3
)
Other income (expense), net
20

 
(7
)
 
49

 
—

Income from continuing operations before income taxes and equity in affiliated companies’ net earnings (losses)
1,551

 
513

 
2,887

 
951

Provision for income taxes
(515
)
 
(186
)
 
(1,021
)
 
(360
)
Equity in affiliated companies’ net earnings (losses)
3

 
(1
)
 
1

 
3

Net income from continuing operations
1,039

 
326

 
1,867

 
594

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

 
(15
)
 
47

Net income
1,035

 
335

 
1,852

 
641

Net income attributable to noncontrolling interests:
 
 
 
 
 
 
 
Continuing operations
(166
)
 
(66
)
 
(291
)
 
(141
)
Discontinued operations
—

 
(1
)
 
—

 
(4
)
Net income attributable to common stockholders
$
869

 
$
268

 
$
1,561

 
$
496

 
 
 
 
 
 
 
 
Basic net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
Continuing operations
$
0.60

 
$
0.18

 
$
1.08

 
$
0.31

Discontinued operations
—

 
—

 
(0.01
)
 
0.03

 
$
0.60

 
$
0.18

 
$
1.07

 
$
0.34

 
 
 
 
 
 
 
 
Diluted net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
Continuing operations
$
0.59

 
$
0.18

 
$
1.08

 
$
0.31

Discontinued operations
—

 
—

 
(0.01
)
 
0.03

 
$
0.59

 
$
0.18

 
$
1.07

 
$
0.34

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
1,449

 
1,447

 
1,449

 
1,447

Diluted
1,458

 
1,453

 
1,458

 
1,453

 
 
 
 
 
 
 
 
Dividends declared per share of common stock
$
0.05

 
$
—

 
$
0.10

 
$
—

 
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
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
 
(In millions)
Net income
$
1,035

 
$
335

 
$
1,852

 
$
641

 
 
 
 
 
 
 
 
Other comprehensive income, net of taxes:
 
 
 
 
 
 
 
Unrealized gains on securities
—

 
1

 
—

 
2

Defined benefit plans:
 
 
 
 
 
 
 
Actuarial gains arising during the period, net of taxes of $48 million for the three and six months ended June 30, 2017
—

 
69

 
—

 
69

Amortization of unrecognized amounts included in net periodic benefit costs
11

 
19

 
23

 
30

Foreign exchange losses
—

 
—

 
(1
)
 
(1
)
Other comprehensive income
11

 
89

 
22

 
100

 
 
 
 
 
 
 
 
Total comprehensive income
1,046

 
424

 
1,874

 
741

Total comprehensive income attributable to noncontrolling interests
(166
)
 
(75
)
 
(290
)
 
(153
)
Total comprehensive income attributable to common stockholders
$
880

 
$
349

 
$
1,584

 
$
588


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,
 
 
2018
 
2017
 
 
(In millions)
 
Cash flow from operating activities:
 
 
 
 
Net income
$
1,852

 
$
641

 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, depletion and amortization
893

 
839

 
Net gain on sales of assets
(56
)
 
(33
)
 
Stock-based compensation
60

 
44

 
Payments for Cerro Verde royalty dispute
(21
)
 
(21
)
 
Net charges for environmental and asset retirement obligations, including accretion
152

 
87

 
Payments for environmental and asset retirement obligations
(110
)
 
(59
)
 
Net charges for defined pension and postretirement plans
38

 
70

 
Pension plan contributions
(44
)
 
(56
)
 
Net (gain) loss on early extinguishment of debt
(8
)
 
3

 
Deferred income taxes
61

 
55

 
Loss (gain) on disposal of discontinued operations
15

 
(38
)
 
Decrease in long-term mill and leach stockpiles
38

 
80

 
Non-cash drillship settlements/idle rig costs and other oil and gas adjustments
—

 
(33
)
 
Oil and gas contract settlement payments
—

 
(70
)
 
Other, net
21

 
(23
)
 
Changes in working capital and other tax payments:
 
 
 
 
Accounts receivable
309

 
589

 
Inventories
(468
)
 
(101
)
 
Other current assets
(20
)
 
(2
)
 
Accounts payable and accrued liabilities
114

 
(267
)
 
Accrued income taxes and timing of other tax payments
(148
)
 
124

 
Net cash provided by operating activities
2,678

 
1,829

 
 
 
 
 
 
Cash flow from investing activities:
 
 
 
 
Capital expenditures:
 
 
 
 
North America copper mines
(232
)
 
(67
)
 
South America
(138
)
 
(45
)
 
Indonesia
(449
)
 
(457
)
 
Molybdenum mines
(2
)
 
(2
)
 
Other
(63
)
 
(135
)
 
Intangible water rights and other, net
(86
)
 
3

 
Net cash used in investing activities
(970
)
 
(703
)
 
 
 
 
 
 
Cash flow from financing activities:
 
 
 
 
Proceeds from debt
352

 
606

 
Repayments of debt
(2,297
)
 
(1,250
)
 
Cash dividends paid:
 
 
 
 
Common stock
(73
)
 
(2
)
 
Noncontrolling interests
(241
)
 
(39
)
 
Stock-based awards net proceeds (payments)
5

 
(8
)
 
Debt financing costs and other, net
(23
)
 
(11
)
 
Net cash used in financing activities
(2,277
)
 
(704
)
 
 
 
 
 
 
Net (decrease) increase in cash, cash equivalents, restricted cash and restricted cash equivalents
(569
)
 
422

 
Decrease in cash and cash equivalents in assets held for sale
44

 
7

 
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of year
4,631

 
4,403

 
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
$
4,106

 
$
4,832

 
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, 2017
1,578

 
$
158

 
$
26,751

 
$
(14,722
)
 
$
(487
)
 
130

 
$
(3,723
)
 
$
7,977

 
$
3,319

 
$
11,296

Exercised and vested stock-based awards
1

 
—

 
8

 
—

 
—

 
—

 
—

 
8

 
—

 
8

Stock-based compensation, including the tender of shares
—

 
—

 
53

 
—

 
—

 
—

 
(3
)
 
50

 
—

 
50

Dividends
—

 
—

 
(145
)
 
—

 
—

 
—

 
—

 
(145
)
 
(241
)
 
(386
)
Net income attributable to common stockholders
—

 
—

 
—

 
1,561

 
—

 
—

 
—

 
1,561

 
—

 
1,561

Net income attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
291

 
291

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
23

 
—

 
—

 
23

 
(1
)
 
22

Balance at June 30, 2018
1,579

 
$
158

 
$
26,667

 
$
(13,161
)
 
$
(464
)
 
130

 
$
(3,726
)
 
$
9,474

 
$
3,368

 
$
12,842

 
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, 2017. 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 in second-quarter 2017, all such adjustments are, in the opinion of management, of a normal recurring nature. Operating results for the six-month period ended June 30, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

Assets Held for Sale.  FCX is continuing to assess opportunities for its Kisanfu copper and cobalt exploration project, located in the Democratic of Republic of Congo, including development of the project on its own or a sale of all or a minority stake in the project. Because management no longer believes that it is probable an outright sale will occur in the near term, the related assets and liabilities are no longer classified as held for sale. The primary revisions to the consolidated balance sheet as of December 31, 2017, were a $90 million increase to property, plant, equipment and mine development costs, net, with an offsetting reduction in current assets held for sale, and a $27 million increase to deferred income taxes, with an offsetting reduction in current liabilities held for sale.

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.

8
Table of Contents             

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
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
 
Net income from continuing operations
$
1,039

 
$
326

 
$
1,867

 
$
594

 
Net income from continuing operations attributable to noncontrolling interests
(166
)
 
(66
)
 
(291
)
 
(141
)
 
Undistributed earnings allocated to participating securities
(3
)
 
(3
)
 
(4
)
 
(3
)
 
Net income from continuing operations attributable to common stockholders
870

 
257

 
1,572

 
450

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

 
(15
)
 
47

 
Net income from discontinued operations attributable to noncontrolling interests
—

 
(1
)
 
—

 
(4
)
 
Net (loss) income from discontinued operations attributable to common stockholders
(4
)
 
8

 
(15
)
 
43

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
866

 
$
265

 
$
1,557

 
$
493

 
 
 
 
 
 
 
 
 
 
Basic weighted-average shares of common stock outstanding
1,449

 
1,447

 
1,449

 
1,447

 
Add shares issuable upon exercise or vesting of dilutive stock options and restricted stock units
9

a 
6

 
9

a 
6

 
Diluted weighted-average shares of common stock outstanding
1,458

 
1,453

 
1,458

 
1,453

 
 
 
 
 
 
 
 
 
 
Basic net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
 
Continuing operations
$
0.60

 
$
0.18

 
$
1.08

 
$
0.31

 
Discontinued operations
—

 
—

 
(0.01
)
 
0.03

 
 
$
0.60

 
$
0.18

 
$
1.07

 
$
0.34

 
Diluted net income (loss) per share attributable to common stockholders:
 
 
 
 
 
 
 
 
Continuing operations
$
0.59

 
$
0.18

 
$
1.08

 
$
0.31

 
Discontinued operations
—

 
—

 
(0.01
)
 
0.03

 
 
$
0.59

 
$
0.18

 
$
1.07

 
$
0.34

 
a.
Excludes approximately 2 million shares of common stock for second-quarter 2018 and 3 million shares of common stock for the first six months of 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 35 million shares of common stock were excluded for second-quarter 2018, 44 million for second-quarter 2017, 34 million for the first six months of 2018 and 44 million for the first six months of 2017.

9
Table of Contents             

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

The components of inventories follow (in millions):
 
June 30,
2018
 
December 31, 2017
 
Current inventories:
 
 
 
 
Total materials and supplies, neta
$
1,404

 
$
1,305

 
 
 
 
 
 
Mill stockpiles
$
293

 
$
360

 
Leach stockpiles
1,142

 
1,062

 
Total current mill and leach stockpiles
$
1,435

 
$
1,422

 
 
 
 
 
 
Raw materials (primarily concentrate)
$
435

 
$
265

 
Work-in-process
179

 
154

 
Finished goods
723

 
747

 
Total product inventories
$
1,337

 
$
1,166

 
 
 
 
 
 
Long-term inventories:
 
 
 
 
Mill stockpiles
$
288

 
$
300

 
Leach stockpiles
1,083

 
1,109

 
Total long-term mill and leach stockpiles
$
1,371

 
$
1,409

 
a.
Materials and supplies inventory was net of obsolescence reserves totaling $25 million at June 30, 2018, and $29 million at December 31, 2017.

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 35 percent for the first six months of 2018 and 38 percent for the first six months of 2017. Geographic sources of FCX’s (provision for) benefit from income taxes follow (in millions):
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
 
U.S. operations
$
5

a 
$
29

b 
$
8

a 
$
22

b 
International operations
(520
)
 
(215
)
 
(1,029
)
 
(382
)
 
Total
$
(515
)
 
$
(186
)
 
$
(1,021
)
 
$
(360
)
 
a.
Includes a tax credit of $5 million in second-quarter 2018 and for the first six months of 2018 associated with the settlement of a state income tax examination.
b.
Includes net tax credits of $32 million in second-quarter 2017 and $31 million for the first six months of 2017 associated with anticipated recovery of alternative minimum tax credit carryforwards.

The December 2017 Tax Cuts and Jobs Act (the Act) included significant modifications to then-existing U.S. tax laws and created many new complex tax provisions. As of December 31, 2017, FCX recorded provisional impacts of the tax effects related to specific provisions and continues to evaluate other provisions of the Act. During the first six months of 2018, no adjustments were made to the provisional amounts recorded at December 31, 2017, as FCX has not fully completed its analysis of the Act, and the provisional amounts continue to represent FCX’s best estimates. FCX’s current analysis of the Act indicates that there may be adjustments to tax receivables associated with minimum tax credit refunds resulting from an ongoing review of tax positions taken in prior years and impacts from the Act’s Global Intangible Low-Taxed Income provisions resulting in use of net operating loss (NOL) carryforwards against income that would not generate a net tax liability absent the availability of NOLs. FCX continues to carry a valuation allowance against all U.S. federal NOLs. During the remainder of 2018, FCX will continue to refine its calculations, including quantifying potential impacts discussed above, as it completes its analysis of the Act.




10
Table of Contents             

NOTE 5. DEBT AND EQUITY

The components of debt follow (in millions):
 
 
June 30,
2018
 
December 31, 2017
Senior notes and debentures:
 
 
 
 
Issued by FCX
 
$
9,594

 
$
11,429

Issued by Freeport Minerals Corporation (FMC)
 
358

 
358

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

 
54

Cerro Verde credit facility
 
1,171

 
1,269

Other
 
4

 
7

Total debta
 
11,127

 
13,117

Less current portion of debt
 
(4
)
 
(1,414
)
Long-term debt
 
$
11,123

 
$
11,703

a.
Includes additions for unamortized fair value adjustments totaling $63 million at June 30, 2018 ($97 million at December 31, 2017), and is net of reductions for unamortized net discounts and unamortized debt issuance costs totaling $76 million at June 30, 2018 ($85 million at December 31, 2017).

Revolving Credit Facility. At June 30, 2018, 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.

In April 2018, FCX, PT Freeport Indonesia (PT-FI) and FM O&G LLC entered into a new $3.5 billion, five-year, unsecured revolving credit facility, which replaced FCX’s prior revolving credit facility (scheduled to mature on May 31, 2019). The new revolving credit facility is available until April 20, 2023, with $500 million available to PT-FI, and up to $1.5 billion available in letters of credit, and has a substantially similar structure and terms as the prior revolving credit facility. Interest on loans made under the new revolving credit facility will, at the option of FCX, be determined based on the adjusted London Interbank Offered rate or the alternate base rate (each as defined in the new revolving credit facility) plus a spread to be determined by reference to FCX’s credit ratings. The new revolving credit facility contains customary affirmative covenants and representations, and also contains a number of negative covenants that, among other things, restrict, subject to certain exceptions, the ability of FCX's subsidiaries that are not borrowers or guarantors to incur additional indebtedness (including guarantee obligations) and FCX's or its subsidiaries’ ability to: create liens on assets; enter into sale and leaseback transactions; engage in mergers, liquidations and dissolutions; and sell assets. FCX’s new revolving credit facility also contains financial ratios governing maximum total leverage and minimum interest expense coverage. FCX’s total leverage ratio (ratio of total debt to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA), as defined in the credit agreement) cannot exceed 3.75x, and the minimum interest expense coverage ratio (ratio of consolidated EBITDA to consolidated cash interest expense, as defined in the credit agreement) is 2.25x.
 
Senior Notes.  In March 2018, FCX’s 2.375% Senior Notes matured, and the $1.4 billion outstanding principal balance was repaid.

On April 4, 2018, FCX redeemed $454 million of aggregate principal amount of outstanding senior notes (as discussed in Early Extinguishment of Debt).

Cerro Verde Credit Facility. In March 2018, Cerro Verde prepaid $100 million of its credit facility.

Early Extinguishment of Debt. During second-quarter 2018, FCX redeemed in full certain senior notes, and holders received the principal amounts together with the redemption premiums and accrued and unpaid interest up to the redemption date. A summary of these redemptions follows (in millions):
 
 
 
 
 
 
 
 
 
 
 
Principal Amount
 
Net Adjustments
 
Book Value
 
Redemption Value
 
Gain
FCX 6.75% Senior Notes due 2022
$
404

 
$
22

 
$
426

 
$
418

 
$
8

FM O&G LLC 67/8% Senior Notes due 2023
50

 
4

 
54

 
52

 
2

 
$
454

 
$
26

 
$
480

 
$
470

 
$
10


11
Table of Contents             

Partially offsetting the $10 million gain were losses in second-quarter 2018 and for the first six months of 2018, primarily associated with entering into the new revolving credit facility.

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

Interest Expense, Net. Consolidated interest costs (before capitalized interest) totaled $165 million in second-quarter 2018, $192 million in second-quarter 2017, $341 million for the first six months of 2018 and $387 million for the first six months of 2017. Capitalized interest added to property, plant, equipment and mine development costs, net, totaled $23 million in second-quarter 2018, $30 million in second-quarter 2017, $48 million for the first six months of 2018 and $58 million for the first six months of 2017.

Common Stock.  In February 2018, FCX’s Board of Directors (the Board) reinstated a cash dividend on FCX’s common stock. On June 27, 2018, the Board declared a quarterly cash dividend of $0.05 per share, which was paid on August 1, 2018, to common stockholders of record as of July 13, 2018.

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 June 30, 2018, and December 31, 2017, 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, 2018 and 2017. At June 30, 2018, FCX held copper futures and swap contracts that qualified for hedge accounting for 64 million pounds at an average contract price of $3.08 per pound, with maturities through September 2019.

A summary of (losses) gains recognized in revenues for derivative financial instruments related to commodity contracts that are designated and qualify as fair value hedge transactions, including the unrealized gains (losses) on the related hedged item follows (in millions):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Copper futures and swap contracts:
 
 
 
 
 
 
 
Unrealized (losses) gains:
 
 
 
 
 
 
 
Derivative financial instruments
$
(4
)
 
$
1

 
$
(19
)
 
$
(1
)
Hedged item – firm sales commitments
4

 
(1
)
 
19

 
1

 
 
 
 
 
 
 
 
Realized gains:
 
 
 
 
 
 
 
Matured derivative financial instruments
—

 
1

 
2

 
9



12
Table of Contents             

Derivatives Not Designated as Hedging Instruments
Embedded Derivatives. Certain FCX concentrate and cathode contracts are provisionally priced at the time of shipment. The provisional prices are finalized in a specified future month (generally one to four months from the shipment date) based on quoted monthly average copper settlement prices on the London Metal Exchange (LME) or COMEX and quoted monthly average London Bullion Market Association (LBMA) gold settlement prices as specified in the contract. FCX receives market prices based on prices in the specified future month, which results in price fluctuations until the date of settlement. Similarly, FCX purchases copper and cobalt 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 metal price as defined in the contract. 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.

A summary of FCX’s embedded derivatives at June 30, 2018, follows:
 
Open Positions
 
Average Price
Per Unit
 
Maturities Through
 
 
Contract
 
Market
 
Embedded derivatives in provisional sales contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
532

 
$
3.12

 
$
3.01

 
November 2018
Gold (thousands of ounces)
308

 
1,296.18

 
1,254.91

 
September 2018
Embedded derivatives in provisional purchase contracts:
 
 
 
 
 
 
 
Copper (millions of pounds)
159

 
3.11

 
3.01

 
October 2018
Cobalt (millions of pounds)a
8

 
32.55

 
28.60

 
September 2018
a.
Relates to assets held for sale. 

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, 2018, Atlantic Copper held net copper forward sales contracts for 46 million pounds at an average contract price of $3.16 per pound, with maturities through August 2018.

Summary of (Losses) Gains. A summary of the realized and unrealized (losses) gains recognized in operating income 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,
 
2018
 
2017
 
2018
 
2017
Embedded derivatives in provisional sales contracts:a
 
 
 
 
 
 
 
Copper
$
(14
)
 
$
35

 
$
(149
)
 
$
142

Gold and other metals
(30
)
 
(1
)
 
(12
)
 
18

Copper forward contractsb
6

 
(4
)
 
8

 
(5
)
a.
Amounts recorded in revenues. 
b.
Amounts recorded in cost of sales as production and delivery costs.


13
Table of Contents             

Unsettled Derivative Financial Instruments
A summary of the fair values of unsettled commodity derivative financial instruments follows (in millions):
 
 
June 30,
2018
 
December 31, 2017
Commodity Derivative Assets:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Copper futures and swap contracts
 
$
—

 
$
11

Derivatives not designated as hedging instruments:
 
 
 
 
Embedded derivatives in provisional copper and gold
 
 
 
 
sales/purchase contracts
 
17

 
155

Copper forward contracts
 
6

 
1

Total derivative assets
 
$
23

 
$
167

 
 
 
 
 
Commodity Derivative Liabilities:
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
Copper futures and swap contracts
 
$
8

 
$
—

Derivatives not designated as hedging instruments:
 
 
 
 
Embedded derivatives in provisional copper and gold
 
 
 
 
sales/purchase contracts
 
73

 
31

Copper forward contracts
 
—

 
2

Total derivative liabilities
 
$
81

 
$
33


The table above and below excludes $31 million of embedded derivatives in provisional cobalt purchase contracts at June 30, 2018, and $24 million at December 31, 2017, which are reflected in liabilities held for sale.

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 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, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
 
 
 
 
 
 
 
 
Gross amounts recognized:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives in provisional copper
 
 
 
 
 
 
 
 
and gold sales/purchase contracts
 
$
17

 
$
155

 
$
73

 
$
31

Copper derivatives
 
6

 
12

 
8

 
2

 
 
23

 
167

 
81

 
33

 
 
 
 
 
 
 
 
 
Less gross amounts of offset:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives in provisional copper
 
 
 
 
 
 
 
 
and gold sales/purchase contracts
 
—

 
—

 
—

 
—

Copper derivatives
 
—

 
1

 
—

 
1

 
 
—

 
1

 
—

 
1

 
 
 
 
 
 
 
 
 
Net amounts presented in balance sheet:
 
 
 
 
 
 
 
 
Commodity contracts:
 
 
 
 
 
 
 
 
Embedded derivatives in provisional copper
 
 
 
 
 
 
 
 
and gold sales/purchase contracts
 
17

 
155

 
73

 
31

Copper derivatives
 
6

 
11

 
8

 
1

 
 
$
23

 
$
166

 
$
81

 
$
32

 
 
 
 
 
 
 
 
 
Balance sheet classification:
 
 
 
 
 
 
 
 
Trade accounts receivable
 
$
—

 
$
151

 
$
64

 
$
—

Other current assets
 
6

 
11

 
—

 
—

Accounts payable and accrued liabilities
 
17

 
4

 
17

 
32

 
 
$
23

 
$
166

 
$
81

 
$
32




14
Table of Contents             

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, 2018, the maximum amount of credit exposure associated with derivative transactions was $23 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 $2.4 billion at June 30, 2018, and $2.9 billion at December 31, 2017), 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 June 30, 2018, FCX has contingent consideration assets related to certain 2016 asset sales (refer to Note 7 for the related fair values and to Note 2 of FCX’s annual report on Form 10-K for the year ended December 31, 2017, 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 to the components presented in the consolidated balance sheets (in millions):
 
 
June 30, 2018
 
December 31, 2017
Balance sheet components:
 
 
 
 
Cash and cash equivalents
 
$
3,859

 
$
4,447

Restricted cash and restricted cash equivalents included in:
 
 
 
 
Other current assets
 
120

 
52

Other assets
 
127

 
132

Total cash, cash equivalents, restricted cash and restricted cash equivalents presented in the consolidated statements of cash flows
 
$
4,106

 
$
4,631


FCX’s restricted cash and restricted cash equivalents are primarily related to PT-FI’s commitment for smelter development in Indonesia; guarantees and commitments for certain mine closure and reclamation obligations, and customs duty taxes; and funds held as cash collateral for surety bonds related to plugging and abandonment obligations of certain oil and gas properties. Restricted cash and restricted cash equivalents are classified as a current or long-term asset based on the timing and nature of when or how the cash is expected to be used or when the restrictions are expected to lapse. Restricted cash and restricted cash equivalents are comprised of time deposits and money market funds.


15
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 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 during second-quarter 2018.

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 (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 June 30, 2018
 
Carrying
 
Fair Value
 
Amount
 
Total
 
NAV
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
Investment securities:a,b
 
 
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
$
24

 
$
24

 
$
24

 
$
—

 
$
—

 
$
—

Equity securities
5

 
5

 
—

 
5

 
—

 
—

Total
29

 
29

 
24

 
5

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Legally restricted funds:a
 
 
 
 
 
 
 
 
 
 
 
U.S. core fixed income fund
54

 
54

 
54

 
—

 
—

 
—

Government bonds and notes
37

 
37

 
—

 
—

 
37

 
—

Government mortgage-backed securities
31

 
31

 
—

 
—

 
31

 
—

Corporate bonds
29

 
29

 
—

 
—

 
29

 
—

Asset-backed securities
14

 
14

 
—

 
—

 
14

 
—

Collateralized mortgage-backed securities
8

 
8

 
—

 
—

 
8

 
—

Money market funds
4

 
4

 
—

 
4

 
—

 
—

Municipal bonds
1

 
1

 
—

 
—

 
1

 
—

Total
178

 
178

 
54

 
4

 
120

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional copper and gold
 
 
 
 
 
 
 
 
 
 
 
sales/purchase contracts in a gross asset positionc,d
17

 
17

 
—

 
—

 
17

 
—

Copper forward contractsc
6

 
6

 
—

 
3

 
3

 
—

Contingent consideration for the sales of
 
 
 
 
 
 
 
 
 
 
 
TF Holdings Limited (TFHL) and onshore
 
 
 
 
 
 
 
 
 
 
 
California oil and gas propertiesa
151

 
151

 
—

 
—

 
151

 
—

Total
174

 
174

 
—

 
3

 
171

 
—

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

 
132

 
—

 
—

 
—

 
132

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives:c
 
 
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional copper and gold
 
 
 
 
 
 
 
 
 
 
 
sales/purchase contracts in a gross liability position
$
73

 
$
73

 
$
—

 
$
—

 
$
73

 
$
—

Copper futures and swap contracts
8

 
8

 
—

 
7

 
1

 
—

Total
81

 
81

 
—

 
7

 
74

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, including current portione
11,127

 
10,662

 
—

 
—

 
10,662

 
—

 
 
 
 
 
 
 
 
 
 
 
 



16
Table of Contents             

 
At December 31, 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

 
$
—

 
$
—

 
$
—

Equity securities
5

 
5

 
—

 
5

 
—

 
—

Total
30

 
30

 
25

 
5

 
—

 
—

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

 
55

 
55

 
—

 
—

 
—

Government bonds and notes
40

 
40

 
—

 
—

 
40

 
—

Corporate bonds
32

 
32

 
—

 
—

 
32

 
—

Government mortgage-backed securities
27

 
27

 
—

 
—

 
27

 
—

Asset-backed securities
15

 
15

 
—

 
—

 
15

 
—

Money market funds
11

 
11

 
—

 
11

 
—

 
—

Collateralized mortgage-backed securities
8

 
8

 
—

 
—

 
8

 
—

Municipal bonds
1

 
1

 
—

 
—

 
1

 
—

Total
189

 
189

 
55

 
11

 
123

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
Embedded derivatives in provisional copper and gold
 
 
 
 
 
 
 
 
 
 
 
sales/purchase contracts in a gross asset positionc
155

 
155

 
—

 
—

 
155

 
—

Copper futures and swap contractsc
11

 
11

 
—

 
9

 
2

 
—

Copper forward contractsc
1

 
1

 
—

 
—

 
1

 
—

Contingent consideration for the sales of TFHL
 
 
 
 
 
 
 
 
 
 
 
   and onshore California oil and gas propertiesa
108

 
108

 
—

 
—

 
108

 
—

Total
275

 
275

 
—

 
9

 
266

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration for the sale of the