Item 1. Financial Statements
Item 1. Financial Statements .
Freeport-McMoRan Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30,
2021 December 31,
2020
(In millions)
ASSETS
Current assets:
Cash and cash equivalents $ 7,672 $ 3,657
Trade accounts receivable 931 892
Income and other tax receivables 591 520
Inventories:
Materials and supplies, net 1,617 1,594
Mill and leach stockpiles 1,086 1,014
Product 1,417 1,285
Other current assets 477 341
Total current assets 13,791 9,303
Property, plant, equipment and mine development costs, net 30,102 29,818
Long-term mill and leach stockpiles 1,450 1,463
Other assets 1,574 1,560
Total assets $ 46,917 $ 42,144
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,949 $ 2,708
Accrued income taxes 1,237 324
Current portion of debt 897 34
Current portion of environmental and asset retirement obligations 329 351
Dividends payable 111 —
Total current liabilities 5,523 3,417
Long-term debt, less current portion 8,768 9,677
Deferred income taxes 4,500 4,408
Environmental and asset retirement obligations, less current portion 3,688 3,705
Other liabilities 1,907 2,269
Total liabilities 24,386 23,476
Equity:
Stockholders’ equity:
Common stock 160 159
Capital in excess of par value 26,023 26,037
Accumulated deficit ( 8,481 ) ( 11,681 )
Accumulated other comprehensive loss ( 572 ) ( 583 )
Common stock held in treasury ( 3,777 ) ( 3,758 )
Total stockholders’ equity 13,353 10,174
Noncontrolling interests 9,178 8,494
Total equity 22,531 18,668
Total liabilities and equity $ 46,917 $ 42,144
The accompanying notes are an integral part of these consolidated financial statements.
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Freeport-McMoRan Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(In millions, except per share amounts)
Revenues $ 6,083 $ 3,851 $ 16,681 $ 9,703
Cost of sales:
Production and delivery 3,009 2,465 8,862 7,404
Depreciation, depletion and amortization 528 394 1,430 1,093
Metals inventory adjustments 14 9 15 92
Total cost of sales 3,551 2,868 10,307 8,589
Selling, general and administrative expenses 102 72 289 273
Mining exploration and research expenses 15 8 36 42
Environmental obligations and shutdown costs
13 21 51 58
Net (gain) loss on sales of assets ( 60 ) 2 ( 63 ) 13
Total costs and expenses 3,621 2,971 10,620 8,975
Operating income 2,462 880 6,061 728
Interest expense, net ( 138 ) ( 120 ) ( 431 ) ( 362 )
Net loss on early extinguishment of debt
— ( 59 ) — ( 100 )
Other income, net 36 22 56 62
Income before income taxes and equity in affiliated companies’ net (losses) earnings 2,360 723 5,686 328
Provision for income taxes ( 628 ) ( 297 ) ( 1,674 ) ( 333 )
Equity in affiliated companies’ net (losses) earnings ( 9 ) 6 ( 5 ) 12
Net income 1,723 432 4,007 7
Net income attributable to noncontrolling interests ( 324 ) ( 103 ) ( 807 ) ( 116 )
Net income (loss) attributable to common stockholders $ 1,399 $ 329 $ 3,200 $ ( 109 )
Net income (loss) per share attributable to common stockholders:
Basic
$ 0.95 $ 0.22 $ 2.18 $ ( 0.08 )
Diluted
$ 0.94 $ 0.22 $ 2.16 $ ( 0.08 )
Weighted-average common shares outstanding:
Basic
1,469 1,453 1,466 1,453
Diluted
1,484 1,461 1,481 1,453
Dividends declared per share of common stock $ 0.075 $ — $ 0.225 $ —
The accompanying notes are an integral part of these consolidated financial statements.
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Freeport-McMoRan Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(In millions)
Net income $ 1,723 $ 432 $ 4,007 $ 7
Other comprehensive income (loss), net of taxes:
Defined benefit plans:
Actuarial losses arising during the period — ( 89 ) ( 1 ) ( 89 )
Amortization of unrecognized amounts included in net periodic benefit costs 4 14 12 38
Foreign exchange losses — ( 1 ) ( 1 ) ( 2 )
Other comprehensive income (loss) 4 ( 76 ) 10 ( 53 )
Total comprehensive income (loss) 1,727 356 4,017 ( 46 )
Total comprehensive income attributable to noncontrolling interests ( 324 ) ( 103 ) ( 806 ) ( 115 )
Total comprehensive income (loss) attributable to common stockholders
$ 1,403 $ 253 $ 3,211 $ ( 161 )
The accompanying notes are an integral part of these consolidated financial statements.
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Freeport-McMoRan Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended
September 30,
2021 2020
(In millions)
Cash flow from operating activities:
Net income $ 4,007 $ 7
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization 1,430 1,093
Metals inventory adjustments 15 92
Net (gain) loss on sales of assets ( 63 ) 13
Stock-based compensation 79 60
Net charges for environmental and asset retirement obligations, including accretion 131 166
Payments for environmental and asset retirement obligations ( 184 ) ( 162 )
Net charges for defined pension and postretirement plans 3 59
Pension plan contributions ( 75 ) ( 30 )
Net loss on early extinguishment of debt — 100
Deferred income taxes 96 119
Charges for Cerro Verde royalty dispute
11 26
Payments for Cerro Verde royalty dispute ( 421 ) ( 119 )
Other, net 39 ( 53 )
Changes in working capital and other:
Accounts receivable ( 218 ) 132
Inventories ( 310 ) 59
Other current assets ( 77 ) ( 17 )
Accounts payable and accrued liabilities 123 40
Accrued income taxes and timing of other tax payments 849 105
Net cash provided by operating activities 5,435 1,690
Cash flow from investing activities:
Capital expenditures:
North America copper mines ( 211 ) ( 398 )
South America ( 94 ) ( 156 )
Indonesia mining ( 904 ) ( 865 )
Indonesia smelter development ( 79 ) ( 94 )
Molybdenum mines ( 4 ) ( 14 )
Other ( 52 ) ( 46 )
Proceeds from sale of Freeport Cobalt 150 —
Proceeds from sales of other assets 21 146
Acquisition of minority interest in PT Smelting ( 33 ) —
Other, net ( 25 ) ( 6 )
Net cash used in investing activities ( 1,231 ) ( 1,433 )
Cash flow from financing activities:
Proceeds from debt 633 3,236
Repayments of debt ( 672 ) ( 3,105 )
Cash dividends and distributions paid:
Common stock ( 220 ) ( 73 )
Noncontrolling interests ( 187 ) —
Contributions from noncontrolling interests 135 115
Proceeds from exercised stock options 189 3
Payments for withholding of employee taxes related to stock-based awards ( 19 ) ( 5 )
Debt financing costs and other, net ( 47 ) ( 51 )
Net cash (used in) provided by financing activities ( 188 ) 120
Net increase in cash, cash equivalents, restricted cash and restricted cash equivalents 4,016 377
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of year 3,903 2,278
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period $ 7,919 $ 2,655
The accompanying notes are an integral part of these consolidated financial statements.
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Freeport-McMoRan Inc.
CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
THREE MONTHS ENDED SEPTEMBER 30
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 June 30, 2021 1,601 $ 160 $ 26,084 $ ( 9,880 ) $ ( 576 ) 133 $ ( 3,777 ) $ 12,011 $ 8,924 $ 20,935
Exercised and issued stock-based awards — — 6 — — — — 6 — 6
Stock-based compensation, including the tender of shares — — 21 — — — — 21 — 21
Dividends — — ( 111 ) — — — — ( 111 ) (94) ( 205 )
Contributions from noncontrolling interests — — 23 — — — — 23 24 47
Net income attributable to common stockholders — — — 1,399 — — — 1,399 — 1,399
Net income attributable to noncontrolling interests
— — — — — — — — 324 324
Other comprehensive income — — — — 4 — — 4 — 4
Balance at September 30, 2021 1,601 $ 160 $ 26,023 $ ( 8,481 ) $ ( 572 ) 133 $ ( 3,777 ) $ 13,353 $ 9,178 $ 22,531
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 June 30, 2020 1,583 $ 158 $ 25,905 $ ( 12,718 ) $ ( 652 ) 131 $ ( 3,739 ) $ 8,954 $ 8,201 $ 17,155
Exercised and issued stock-based awards 1 — 1 — — — — 1 — 1
Stock-based compensation, including the tender of shares — — 8 — — — — 8 — 8
Change in ownership interests — — — — — — — — 1 1
Contributions from noncontrolling interests — — 20 — — — — 20 21 41
Net income attributable to common stockholders — — — 329 — — — 329 — 329
Net income attributable to noncontrolling interests — — — — — — — — 103 103
Other comprehensive loss — — — — ( 76 ) — — ( 76 ) — ( 76 )
Balance at September 30, 2020 1,584 $ 158 $ 25,934 $ ( 12,389 ) $ ( 728 ) 131 $ ( 3,739 ) $ 9,236 $ 8,326 $ 17,562
The accompanying notes are an integral part of these consolidated financial statements.
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Freeport-McMoRan Inc.
CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30
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, 2020 1,590 $ 159 $ 26,037 $ ( 11,681 ) $ ( 583 ) 132 $ ( 3,758 ) $ 10,174 $ 8,494 $ 18,668
Exercised and issued stock-based awards 11 1 189 — — — — 190 — 190
Stock-based compensation, including the tender of shares — — 64 — — 1 ( 19 ) 45 ( 4 ) 41
Dividends — — ( 333 ) — — — — ( 333 ) ( 187 ) ( 520 )
Contributions from noncontrolling interests
— — 66 — — — — 66 69 135
Net income attributable to common stockholders — — — 3,200 — — — 3,200 — 3,200
Net income attributable to noncontrolling interests
— — — — — — — — 807 807
Other comprehensive income (loss) — — — — 11 — — 11 ( 1 ) 10
Balance at September 30, 2021 1,601 $ 160 $ 26,023 $ ( 8,481 ) $ ( 572 ) 133 $ ( 3,777 ) $ 13,353 $ 9,178 $ 22,531
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, 2019 1,582 $ 158 $ 25,830 $ ( 12,280 ) $ ( 676 ) 131 $ ( 3,734 ) $ 9,298 $ 8,150 $ 17,448
Exercised and issued stock-based awards 2 — 2 — — — — 2 — 2
Stock-based compensation, including the tender of shares — — 46 — — — ( 5 ) 41 1 42
Change in ownership interests — — — — — — — — 1 1
Contributions from noncontrolling interests — — 56 — — — — 56 59 115
Net loss attributable to common stockholders — — — ( 109 ) — — — ( 109 ) — ( 109 )
Net income attributable to noncontrolling interests
— — — — — — — — 116 116
Other comprehensive loss — — — — ( 52 ) — — ( 52 ) ( 1 ) ( 53 )
Balance at September 30, 2020 1,584 $ 158 $ 25,934 $ ( 12,389 ) $ ( 728 ) 131 $ ( 3,739 ) $ 9,236 $ 8,326 $ 17,562
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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 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, 2020 (2020 Form 10-K). The information furnished herein reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods reported. All such adjustments are, in the opinion of management, of a normal recurring nature. Operating results for the nine-month period ended September 30, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
Trade Accounts Receivable Agreements. In first-quarter 2021, PT Freeport Indonesia (PT-FI) entered into agreements to sell certain trade accounts receivables to unrelated third-party financial institutions. The agreements were entered into in the normal course of business to fund the working capital for the additional quantity of copper to be supplied by PT-FI to PT Smelting (PT-FI’s 39.5 percent owned copper smelter and refinery in Gresik, Indonesia - see “Acquisition of Minority Interest in PT Smelting” below for further discussion). The balances sold under the agreements were excluded from trade accounts receivable on the consolidated balance sheet at September 30, 2021. Receivables are considered sold when (i) they are transferred beyond the reach of PT-FI and its creditors, (ii) the purchaser has the right to pledge or exchange the receivables, and (iii) PT-FI has no continuing involvement in the transferred receivables. In addition, PT-FI provides no other forms of continued financial support to the purchaser of the receivables once the receivables are sold.
Gross amounts sold under these arrangements totaled $ 131 million in third-quarter 2021 and $ 319 million for the nine-month period ended September 30, 2021. Discounts on the sold receivables totaled less than $ 1 million in third-quarter 2021 and $ 1 million for the nine-month period ended September 30, 2021.
Acquisition of Minority Interest in PT Smelting. On April 30, 2021, PT-FI acquired 14.5 percent of the outstanding common stock of PT Smelting for $ 33 million, increasing its ownership interest from 25 percent to 39.5 percent. The remaining shares of PT Smelting continue to be owned by Mitsubishi Materials Corporation. PT-FI has continued to account for its investment in PT Smelting using the equity method since it does not have control over PT Smelting.
Sale of Freeport Cobalt. On September 1, 2021, FCX’s 56 -percent-owned subsidiary, Koboltti Chemicals Holdings Limited (KCHL), completed the sale of its remaining cobalt business based in Kokkola, Finland (Freeport Cobalt) to Jervois Global Limited (Jervois) for $ 208 million (subject to post-closing adjustments), consisting of cash consideration of $ 173 million and 7 percent of Jervois shares (valued at $ 35 million). At closing, Freeport Cobalt’s assets included cash of approximately $ 20 million and other net assets of $ 125 million. FCX recorded a gain of $ 60 million ($ 34 million to net income attributable to common stock) in third-quarter 2021. In addition, KCHL will have the right to receive contingent consideration of up to $ 40 million based on the future performance of Freeport Cobalt. Any gain related to the contingent consideration will be recognized when received.
The operating results of Freeport Cobalt are not significant to FCX’s financial statements for the year ended December 31, 2020, or the three- and nine-month periods ended September 30, 2021.
Subsequent Events. FCX evaluated events after September 30, 2021, and through the date the consolidated financial statements were issued, and took into account events and transactions occurring during this period requiring recognition or disclosure in these consolidated financial statements.
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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 (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.
Reconciliations of net income and weighted-average shares of common stock outstanding for purposes of calculating basic and diluted net income (loss) per share follow (in millions, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net income $ 1,723 $ 432 $ 4,007 $ 7
Net income attributable to noncontrolling interests ( 324 ) ( 103 ) ( 807 ) ( 116 )
Undistributed earnings allocated to participating securities ( 4 ) ( 3 ) ( 6 ) ( 3 )
Net income (loss) attributable to common stockholders $ 1,395 $ 326 $ 3,194 $ ( 112 )
Basic weighted-average shares of common stock outstanding
1,469 1,453 1,466 1,453
Add shares issuable upon exercise or vesting of dilutive stock options and restricted stock units (RSUs) 15 8 a
15 — a
Diluted weighted-average shares of common stock outstanding
1,484 1,461 1,481 1,453
Basic net income (loss) per share attributable to common stockholders $ 0.95 $ 0.22 $ 2.18 $ ( 0.08 )
Diluted net income (loss) per share attributable to common stockholders $ 0.94 $ 0.22 $ 2.16 $ ( 0.08 )
a. Excludes approximately 2 million shares in third-quarter 2020 and 13 million shares for the first nine months of 2020 associated with outstanding stock options with exercise prices less than the average market price of FCX’s common stock and RSUs 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 4 million shares of common stock in third-quarter 2021, 28 million shares of common stock in third-quarter 2020, 6 million shares of common stock for the first nine months of 2021 and 35 million shares of common stock the first nine months of 2020 were excluded.
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NOTE 3. INVENTORIES, INCLUDING LONG-TERM MILL AND LEACH STOCKPILES
The components of inventories follow (in millions):
September 30, 2021 December 31, 2020
Current inventories:
Total materials and supplies, net a
$ 1,617 $ 1,594
Mill stockpiles $ 209 $ 205
Leach stockpiles 877 809
Total current mill and leach stockpiles $ 1,086 $ 1,014
Raw materials (primarily concentrate) $ 437 $ 366
Work-in-process 184 174
Finished goods 796 745
Total product $ 1,417 $ 1,285
Long-term inventories:
Mill stockpiles $ 223 $ 223
Leach stockpiles 1,227 1,240
Total long-term mill and leach stockpiles b
$ 1,450 $ 1,463
a. Materials and supplies inventory was net of obsolescence reserves totaling $ 37 million at September 30, 2021, and $ 32 million at December 31, 2020.
b. Estimated metals in stockpiles not expected to be recovered within the next 12 months.
FCX recorded charges for metals inventory adjustments totaling $ 15 million for the first nine months of 2021 primarily related to a leach stockpile adjustment. Net realizable value inventory adjustments to decrease metals inventory carrying values totaled $ 92 million for the first nine months of 2020 associated with lower market prices for copper ($ 58 million) and molybdenum ($ 34 million). Refer to Note 9 for metals inventory adjustments by business segment.
Morenci Stockpile Recoveries. In accordance with FCX's policy, processes and recovery rates for mill and leach stockpiles are monitored regularly, and recovery rate estimates are adjusted periodically as additional information becomes available and as related technology changes. Adjustments to recovery rates will typically result in a future impact to the value of the material removed from the stockpiles at a revised weighted-average cost per pound of recoverable copper.
Expected copper recovery rates for leach stockpiles are determined using small-scale laboratory tests, small- to large-scale column testing (which simulates the production process), historical trends and other factors, including mineralogy of the ore and rock type. Total copper recovery in leach stockpiles can vary significantly from a low percentage to more than 90 percent depending on several variables, including processing methodology, processing variables, mineralogy and particle size of the rock. For newly placed material on active stockpiles, as much as 80 percent of the total copper recovery may occur during the first year, and the remaining copper may be recovered over many years.
Over the last three years, FCX's Morenci mine has experienced improved recoveries and following an analysis of column testing results to date, Morenci concluded it had sufficient evidence to increase its estimated recovery rate for certain of its leach stockpiles effective July 1, 2021. As a result of the revised recovery rate, Morenci increased its estimated recoverable copper in leach stockpiles, net to its joint venture interest, by 191 million pounds. The effect of this change in estimate reduced site production and delivery costs and increased net income by $ 52 million ($ 0.04 per share) in the third quarter and first nine months of 2021.
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NOTE 4. INCOME TAXES
Geographic sources of FCX’s (provision for) benefit from income taxes follow (in millions):
Nine Months Ended
September 30,
2021 2020
U.S. operations $ ( 7 )
$ 56 a
International operations ( 1,667 ) b
( 389 ) c
Total $ ( 1,674 ) $ ( 333 )
a. Includes a tax credit of $ 53 million associated with the reversal of a year-end 2019 tax charge related to the sale of FCX’s interest in the lower zone of the Timok exploration project in Serbia.
b. Includes net tax benefits totaling $ 83 million ($ 66 million net of noncontrolling interest), consisting of $ 69 million associated with the release of a portion of the valuation allowances recorded against PT Rio Tinto Indonesia (PT RTI), PT-FI’s wholly owned subsidiary, net operating losses (NOLs) and $ 24 million primarily associated with the reversal of a tax reserve related to the treatment of prior year contractor support costs; partly offset by a tax charge of $ 10 million associated with the audit of PT-FI's 2019 tax returns.
c. Includes a tax charge of $ 21 million ($ 17 million net of noncontrolling interests) associated with establishing a tax reserve related to the treatment of prior year contractor support costs.
FCX’s consolidated effective income tax rate was 29 percent for the first nine months of 2021 and 102 percent for the first nine months of 2020. Because FCX's U.S. jurisdiction generated pre-tax losses for the first nine months of 2020 that did not result in a realized tax benefit, applicable accounting rules required FCX to adjust its 2020 estimated annual effective tax rate to exclude the impact of U.S. pre-tax losses. Variations in the relative proportions of jurisdictional income result in fluctuations to FCX’s consolidated effective income tax rate.
As discussed in Note 8, Cerro Verde paid the balance of its royalty dispute liabilities during third-quarter 2021, which resulted in a $ 252 million reduction of unrecognized tax benefits (including a $ 137 million reduction of accrued interest and penalties), but did not have an impact on FCX’s provision for income taxes for the third quarter or nine months ended September 30, 2021.
In connection with the negative impacts of the COVID-19 pandemic on the global economy, governments throughout the world announced measures that are intended to provide tax and other financial relief. Such measures include the American Rescue Plan Act of 2021, enacted on March 11, 2021, and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020. None of these measures resulted in material impacts to FCX’s provision for income taxes for the nine months ended September 30, 2021 and 2020. However, certain provisions of the CARES Act provided FCX with the opportunity to accelerate collections of tax refunds, primarily those associated with the U.S. alternative minimum tax. FCX collected U.S. alternative minimum tax credit refunds of $ 23 million in March 2021, $ 24 million in October 2020 and $ 221 million in July 2020. FCX continues to evaluate income tax accounting considerations of COVID-19 measures as they develop, including any impact on its measurement of existing deferred tax assets and deferred tax liabilities. FCX will recognize any impact from COVID-19 related changes to tax laws in the period in which the new legislation is enacted.
As previously disclosed in our 2020 Form 10-K, PT-FI received unfavorable Indonesia Tax Court decisions in 2018 with respect to its appeal of capitalized mine development costs on its 2012 and 2014 corporate income tax returns. PT-FI appealed those decisions to the Indonesia Supreme Court. On October 31, 2019, the Indonesia Supreme Court communicated an unfavorable ruling regarding the treatment of mine development costs on PT-FI’s 2014 tax return. During the fourth quarter of 2019, PT-FI met with the Indonesia Tax Office and developed a framework for resolution of the disputed matters and progress of the framework for resolution continued in 2020 and through the nine months ended September 30, 2021.
During October 2021, PT-FI participated in discussions with the Indonesian tax office regarding progress on the framework for resolution of disputes arising from the audits of tax years 2012 through 2016. As a result of these discussions and the revised positions taken by both the Indonesian tax office and PT-FI, FCX believes it can no longer conclude a resolution of all of the disputed tax items at a more-likely-than-not threshold. Because of these recent events, FCX continues to evaluate its uncertain tax positions and may record a material tax charge during fourth-quarter 2021. This tax charge may be offset by a tax benefit related to the additional release of valuation allowance associated with PT Rio Tinto net operating loss carryforwards that PT-FI may deem realizable. PT-FI will
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continue to engage with the Indonesian tax office in pursuit of certain aspects of the original framework for resolution.
NOTE 5. DEBT AND FINANCIAL POLICY
The components of debt follow (in millions):
September 30,
2021 December 31, 2020
Senior notes and debentures:
Issued by FCX $ 8,790 $ 8,783
Issued by Freeport Minerals Corporation 355 356
Cerro Verde Term Loan 325 523
PT-FI Term Loan 146 —
Other 49 49
Total debt 9,665 9,711
Less current portion of debt ( 897 ) a ( 34 )
Long-term debt $ 8,768 $ 9,677
a. Includes $ 524 million for the 3.55% Senior Notes, which will be redeemed on December 1, 2021, and $ 325 million for the Cerro Verde Term Loan due June 2022.
Revolving Credit Facility. At September 30, 2021, FCX had no borrowings outstanding and $ 8 million in letters of credit issued under its 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. Availability under FCX’s revolving credit facility consists of $ 3.28 billion maturing April 2024 and $ 220 million maturing April 2023.
In March 2021, FCX delivered a Covenant Reversion Notice (as defined in the third amendment to the revolving credit facility dated June 3, 2020), which provided notification of its election to end the Covenant Increase Period (as defined in the third amendment to the revolving credit facility dated June 3, 2020). As a result, the leverage ratio limit reverted to 5.25 x and stepped down to 3.75 x beginning with the quarter ending September 30, 2021, and the interest expense coverage ratio minimum reverted to 2.25 x. Additionally, following FCX’s election to end the Covenant Increase Period, the additional limits on priority debt and liens, and the provisions related to minimum liquidity and restricted payments (which included restrictions on the payment of common stock dividends) are no longer applicable. At September 30, 2021, FCX was in compliance with its revolving credit facility covenants.
PT-FI Credit Facility. In July 2021, PT-FI entered into a $ 1.0 billion, five-year, unsecured credit facility (consisting of a $ 667 million term loan and a $ 333 million revolving credit facility) to fund project costs in connection with the PT Smelting expansion and construction of a precious metals refinery (PMR), and for PT-FI’s general corporate purposes. The term loan allows for borrowings up to $ 667 million within the first three years, and then the loan amortizes in four installments, with 15 percent of the outstanding balance due in January 2025, 15 percent due in July 2025, 35 percent due in January 2026 and the remaining 35 percent due in July 2026. The $ 333 million revolving credit facility is available for drawings until June 2026. Amounts drawn under the credit facility bear interest at the London Inter-bank Offered Rate plus a margin of 1.875 % or 2.125 %, as defined by the agreement.
PT-FI’s credit facility contains customary affirmative covenants and representations and also contains standard covenants that, among other things, restrict, subject to certain exceptions, the ability of PT-FI to incur additional indebtedness; create liens on assets; enter into sale and leaseback transactions; sell assets; and modify or amend the shareholders agreement or related governance structure. The credit facility also contains financial ratios governing maximum total leverage and minimum interest expense coverage and certain environmental and social compliance requirements.
As of September 30, 2021, $ 158 million ($ 146 million net of debt issuance costs) was drawn under the PT-FI Term Loan and no amounts were drawn under the revolving credit facility.
Senior Notes. On October 21, 2021, FCX called for redemption all of its outstanding $ 524 million principal amount of 3.55 % Senior Notes due 2022. The notes will be redeemed on December 1, 2021, at a redemption price equal to 100 percent of the principal amount of the notes outstanding, plus accrued and unpaid interest to, but not including, the redemption date. Annual interest costs associated with the 3.55 % Senior Notes approximate $ 19 million. FCX has no other senior note maturities until March 2023.
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As further discussed in the 2020 Form 10-K, in the first nine months of 2020, FCX redeemed in full or purchased a portion of its 4.00 % Senior Notes due 2021, 3.55 % Senior Notes due 2022, 3.875 % Senior Notes due 2023 and 4.55 % Senior Notes due 2024. As a result of these transactions, FCX recorded a loss on early extinguishment of debt of $ 59 million in third-quarter 2020 and $ 100 million for the nine months ended September 30, 2020.
Cerro Verde Term Loan. In September 2021, Cerro Verde prepaid $ 200 million on its term loan. The $ 325 million balance of the loan is due June 2022.
Interest Expense, Net. Consolidated interest costs (before capitalization) totaled $ 157 million in third-quarter 2021, $ 160 million in third-quarter 2020, $ 482 million for the first nine months of 2021 and $ 490 million for the first nine months of 2020. Capitalized interest added to property, plant, equipment and mine development costs, net, totaled $ 19 million in third-quarter 2021, $ 40 million in third-quarter 2020, $ 51 million for the first nine months of 2021 and $ 128 million for the first nine months of 2020. The decrease in capitalized interest for the 2021 periods results from assets placed in service as PT-FI’s underground mining operations continue to ramp up.
Financial Policy. In February 2021, FCX’s Board of Directors (Board) adopted a financial policy for the allocation of cash flows aligned with FCX’s strategic objectives of maintaining a strong balance sheet and increasing cash returns to shareholders while advancing opportunities for future growth. The policy includes a base dividend and a performance-based payout framework, whereby up to 50 percent of available cash flows generated after planned capital spending and distributions to noncontrolling interests would be allocated to shareholder returns and the balance to debt reduction and investments in value enhancing growth projects, subject to FCX maintaining its net debt at a level not to exceed the net debt target of $ 3 billion to $ 4 billion (excluding project debt for additional smelting capacity in Indonesia).
In February 2021, the Board reinstated a cash dividend on FCX’s common stock (base dividend), and on November 1, 2021, the Board approved (i) a new share repurchase program authorizing repurchases of up to $ 3.0 billion of FCX common stock, and (ii) a variable cash dividend on FCX’s common stock for 2022.
The timing and amount of any share repurchases will be at the discretion of management and will depend on a variety of factors. The share repurchase program may be modified, increased, suspended or terminated at any time at the Board’s discretion. The declaration and payment of dividends (base or variable) is also at the discretion of the Board and will depend on FCX's financial results, cash requirements, business prospects, global economic conditions and other factors deemed relevant by the Board.
On September 22, 2021, FCX declared a quarterly cash dividend (base dividend) of $ 0.075 per share
on its common stock, which was paid on November 1, 2021, to common stockholders of record as of October 15, 2021.
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.
In April 2020, FCX entered into forward sales contracts for 150 million pounds of copper for settlement in May and June of 2020. The forward sales provided for fixed pricing of $ 2.34 per pound of copper on approximately 60 percent of North America's sales volumes for May and June 2020. These contracts resulted in hedging losses totaling $ 24 million in second-quarter 2020 and for the six months ended June 30, 2020. There were no remaining forward sales contracts as of June 30, 2020.
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A discussion of FCX’s other 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 and cathode 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 nine-month periods ended September 30, 2021 and 2020. At September 30, 2021, FCX held copper futures and swap contracts that qualified for hedge accounting for 84 million pounds at an average contract price of $ 4.23 per pound, with maturities through May 2023.
A summary of gains (losses) recognized in revenues for derivative financial instruments related to commodity contracts that are designated and qualify as fair value hedge transactions, including the unrealized (losses) gains on the related hedged item follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Copper futures and swap contracts:
Unrealized (losses) gains:
Derivative financial instruments $ ( 20 ) $ 1 $ ( 28 ) $ 8
Hedged item – firm sales commitments 20 ( 1 ) 28 ( 8 )
Realized gains (losses):
Matured derivative financial instruments 5 15 57 ( 1 )
Derivatives Not Designated as Hedging Instruments
Embedded Derivatives. Certain FCX concentrate, copper cathode and gold sales contracts provide for provisional pricing primarily based on the London Metal Exchange (LME) copper price or the COMEX copper price and the London Bullion Market Association (London) gold price at the time of shipment as specified in the contract. FCX receives market prices based on prices in the specified future month, which results in price fluctuations recorded in revenues until the date of settlement. FCX records revenues and invoices customers at the time of shipment based on then-current LME or COMEX copper prices and the London gold prices as specified in the contracts, which results in an embedded derivative ( i.e. , a pricing mechanism that is finalized after the time of delivery) that is required to be bifurcated from the host contract. The host contract is the sale of the metals contained in the concentrate or cathode at the then-current LME or COMEX copper price, and the London gold price. FCX applies the normal purchases and normal sales scope exception in accordance with derivatives and hedge accounting guidance to the host contract in its concentrate or cathode sales agreements since these contracts do not allow for net settlement and always result in physical delivery. The embedded derivative does not qualify for hedge accounting and is adjusted to fair value through earnings each period, using the period-end LME or COMEX copper forward prices and the adjusted London gold prices, until the date of final pricing. Similarly, FCX purchases copper under contracts that provide for provisional pricing. Mark-to-market price fluctuations from these embedded derivatives are recorded through the settlement date and are reflected in revenues for sales contracts and in inventory for purchase contracts.
A summary of FCX’s embedded derivatives at September 30, 2021, follows:
Open Positions Average Price
Per Unit Maturities Through
Contract Market
Embedded derivatives in provisional sales contracts:
Copper (millions of pounds) 548 $ 4.28 $ 4.05 February 2022
Gold (thousands of ounces) 196 1,790 1,738 January 2022
Embedded derivatives in provisional purchase contracts:
Copper (millions of pounds) 116 4.31 4.05 February 2022
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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 production and delivery costs. At September 30, 2021, Atlantic Copper held net copper forward purchase contracts for 9 million pounds at an average contract price of $ 4.23 per pound, with maturities through November 2021.
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 Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Embedded derivatives in provisional sales contracts: a
Copper $ ( 102 ) $ 94 $ 223 $ 18
Gold and other metals ( 9 ) 15 ( 22 ) 39
Copper forward contracts b
1 ( 7 ) ( 12 ) 12
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):
September 30,
2021 December 31, 2020
Commodity Derivative Assets:
Derivatives designated as hedging instruments :
Copper futures and swap contracts $ 2 $ 15
Derivatives not designated as hedging instruments :
Embedded derivatives in provisional sales/purchase contracts 30 169
Copper forward contracts 5 —
Total derivative assets $ 37 $ 184
Commodity Derivative Liabilities:
Derivatives designated as hedging instruments :
Copper futures and swap contracts $ 14 $ —
Derivatives not designated as hedging instruments :
Embedded derivatives in provisional sales/purchase contracts 134 21
Copper forward contracts 4 —
Total derivative liabilities $ 152 $ 21
FCX’s commodity contracts have netting arrangements with counterparties with which the right of offset exists, and it is FCX’s policy to generally offset balances by contract on its balance sheet. FCX’s embedded derivatives on provisional sales/purchase contracts are netted with the corresponding outstanding receivable/payable balances.
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A summary of these unsettled commodity contracts that are offset in the balance sheets follows (in millions):
Assets Liabilities
September 30,
2021 December 31, 2020 September 30,
2021 December 31, 2020
Gross amounts recognized:
Embedded derivatives in provisional
sales/purchase contracts $ 30 $ 169 $ 134 $ 21
Copper derivatives 7 15 18 —
37 184 152 21
Less gross amounts of offset:
Embedded derivatives in provisional
sales/purchase contracts — 1 — 1
Copper derivatives 4 — 4 —
4 1 4 1
Net amounts presented in balance sheet:
Embedded derivatives in provisional
sales/purchase contracts 30 168 134 20
Copper derivatives 3 15 14 —
$ 33 $ 183 $ 148 $ 20
Balance sheet classification:
Trade accounts receivable $ 3 $ 168 $ 101 $ —
Other current assets 4 15 — —
Accounts payable and accrued liabilities 26 — 45 20
Other liabilities — — 2 —
$ 33 $ 183 $ 148 $ 20
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. As of September 30, 2021, the maximum amount of credit exposure associated with derivative transactions was $ 37 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 debt. The carrying value for cash and cash equivalents (which included time deposits of $ 0.2 billion at September 30, 2021, and $ 0.3 billion at December 31, 2020), 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 debt).
In addition, as of September 30, 2021, FCX has contingent consideration assets related to the sales of certain oil and gas properties (refer to Note 7 for the related fair values).
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents. The following table provides a reconciliation of total cash, cash equivalents, restricted cash and restricted cash equivalents presented in the consolidated statements of cash flows (in millions):
September 30,
2021 December 31, 2020
Balance sheet components:
Cash and cash equivalents $ 7,672 $ 3,657
Restricted cash and restricted cash equivalents included in:
Other current assets 114 97
Other assets 133 149
Total cash, cash equivalents, restricted cash and restricted cash equivalents presented in the consolidated statements of cash flows $ 7,919 $ 3,903
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NOTE 7. FAIR VALUE MEASUREMENT
Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). FCX did not have any significant transfers in or out of Level 3 during third-quarter 2021.
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 September 30, 2021
Carrying Fair Value
Amount Total NAV Level 1 Level 2 Level 3
Assets
Investment securities: a,b
Equity securities $ 52 $ 52 $ — $ 52 $ — $ —
U.S. core fixed income fund 29 29 29 — — —
Total 81 81 29 52 — —
Legally restricted funds: a
U.S. core fixed income fund 64 64 64 — — —
Government bonds and notes 53 53 — — 53 —
Corporate bonds 42 42 — — 42 —
Government mortgage-backed securities 24 24 — — 24 —
Asset-backed securities 14 14 — — 14 —
Money market funds 8 8 — 8 — —
Collateralized mortgage-backed securities 4 4 — — 4 —
Municipal bonds 1 1 — — 1 —
Total 210 210 64 8 138 —
Derivatives:
Embedded derivatives in provisional sales/purchase contracts in a gross asset position c
30 30 — — 30 —
Copper forward contracts c
5 5 — 2 3 —
Copper futures and swap contracts c
2 2 — — 2 —
Total 37 37 — 2 35 —
Contingent consideration for the sale of the
Deepwater GOM oil and gas properties a
94 85 — — — 85
Liabilities
Derivatives: c
Embedded derivatives in provisional sales/purchase contracts in a gross liability position 134 134 — — 134 —
Copper futures and swap contracts c
14 14 — 14 — —
Copper forward contracts 4 4 — 1 3 —
Total 152 152 — 15 137 —
Long-term debt, including current portion d
9,665 10,791 — — 10,791 —
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At December 31, 2020
Carrying Fair Value
Amount Total NAV Level 1 Level 2 Level 3
Assets
Investment securities: a,b
U.S. core fixed income fund $ 29 $ 29 $ 29 $ — $ — $ —
Equity securities 7 7 — 7 — —
Total 36 36 29 7 — —
Legally restricted funds: a
U.S. core fixed income fund 65 65 65 — — —
Government bonds and notes 49 49 — — 49 —
Corporate bonds 43 43 — — 43 —
Government mortgage-backed securities 30 30 — — 30 —
Asset-backed securities 16 16 — — 16 —
Money market funds 5 5 — 5 — —
Collateralized mortgage-backed securities 4 4 — — 4 —
Municipal bonds 1 1 — — 1 —
Total 213 213 65 5 143 —
Derivatives:
Embedded derivatives in provisional sales/purchase contracts in a gross asset position c
169 169 — — 169 —
Copper futures and swap contracts c
15 15 — 13 2 —
Total 184 184 — 13 171 —
Contingent consideration for the sale of the
Deepwater GOM oil and gas properties a
108 88 — — — 88
Liabilities
Derivatives: c
Embedded derivatives in provisional sales/purchase contracts in a gross liability position 21 21 — — 21 —
Long-term debt, including current portion d
9,711 10,994 — — 10,994 —
a. Current portion included in other current assets and long-term portion included in other assets.
b. Excludes time deposits (which approximated fair value) included in (i) other current assets of $ 114 million at September 30, 2021, and $ 97 million at December 31, 2020, and (ii) other assets of $ 132 million at September 30, 2021, and $ 148 million at December 31, 2020, primarily associated with an assurance bond to support PT-FI’s commitment for additional domestic smelter development in Indonesia and PT-FI’s closure and reclamation guarantees.
c. Refer to Note 6 for further discussion and balance sheet classifications.
d. Recorded at cost except for debt assumed in acquisitions, which are recorded at fair value at the respective acquisition dates.
Valuation Techniques. The U.S. core fixed income fund is valued at NAV. The fund strategy seeks total return consisting of income and capital appreciation primarily by investing in a broad range of investment-grade debt securities, including U.S. government obligations, corporate bonds, mortgage-backed securities, asset-backed securities and money market instruments. There are no restrictions on redemptions (which are usually within one business day of notice).
Equity securities are valued at the closing price reported on the active market on which the individual securities are traded and, as such, are classified within Level 1 of the fair value hierarchy.
Fixed income securities (government securities, corporate bonds, asset-backed securities, collateralized mortgage-backed securities and municipal bonds) are valued using a bid-evaluation price or a mid-evaluation price. These evaluations are based on quoted prices, if available, or models that use observable inputs and, as such, are classified within Level 2 of the fair value hierarchy.
Money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.
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FCX’s embedded derivatives on provisional copper concentrate, copper cathode and gold purchases and sales are valued using quoted monthly LME or COMEX copper forward prices and the adjusted London gold prices at each reporting date based on the month of maturity (refer to Note 6 for further discussion); however, FCX’s contracts themselves are not traded on an exchange. As a result, these derivatives are classified within Level 2 of the fair value hierarchy.
FCX’s derivative financial instruments for copper futures and swap contracts and copper forward contracts that are traded on the respective exchanges are classified within Level 1 of the fair value hierarchy because they are valued using quoted monthly COMEX or LME prices at each reporting date based on the month of maturity (refer to Note 6 for further discussion). Certain of these contracts are traded on the over-the-counter market and are classified within Level 2 of the fair value hierarchy based on COMEX and LME forward prices.
In December 2016, FCX’s sale of its Deepwater GOM oil and gas properties included up to $ 150 million in contingent consideration that was recorded at the total amount under the loss recovery approach. The contingent consideration is being received over time as cash flows are realized from a third-party production handling agreement for an offshore platform, with the related payments commencing in third-quarter 2018. The contingent consideration included in (i) other current assets totaled $ 20 million at September 30, 2021, and $ 12 million at December 31, 2020, and (ii) other assets totaled $ 74 million at September 30, 2021, and $ 96 million at December 31, 2020. The fair value of this contingent consideration was calculated based on a discounted cash flow model using inputs that include third-party estimates for reserves, production rates and production timing, and discount rates. Because significant inputs are not observable in the market, the contingent consideration is classified within Level 3 of the fair value hierarchy.
Long-term debt, including current portion, is primarily valued using available market quotes and, as such, is classified within Level 2 of the fair value hierarchy.
The techniques described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while FCX believes its valuation techniques are appropriate and consistent with other market participants, the use of different techniques or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the techniques used at September 30, 2021, as compared with those techniques used at December 31, 2020.
A summary of the changes in the fair value of FCX’s Level 3 instrument, contingent consideration for the sale of the Deepwater GOM oil and gas properties, during the first nine months of 2021 follows (in millions):
Fair value at January 1, 2021 $ 88
Net unrealized gain related to assets still held at the end of the period 12
Settlements
( 15 )
Fair value at September 30, 2021 $ 85
NOTE 8. CONTINGENCIES AND COMMITMENTS
Environmental
Newtown Creek. From the 1930s until 1964, Phelps Dodge Refining Corporation (PDRC), an indirect wholly owned subsidiary of FCX, operated a copper smelter, and from the 1930s until 1984 operated a copper refinery, on the banks of Newtown Creek (the creek), which is a 3.5-mile-long waterway that forms part of the boundary between Brooklyn and Queens in New York City. Heavy industrialization along the banks of the creek and discharges from the City of New York’s sewer system over more than a century resulted in significant environmental contamination of the waterway. In 2010, U.S. Environmental Protection Agency (EPA) notified PDRC, four other companies and the City of New York that EPA considers them to be potentially responsible parties (PRPs) under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980. The notified parties began working with EPA to identify other PRPs. In 2010, EPA designated the creek as a Superfund site, and in 2011, PDRC and five other parties (the Newtown Creek Group, NCG) entered an Administrative Order on Consent (AOC) to perform a remedial investigation/feasibility study (RI/FS) to assess the nature and extent of environmental contamination in the creek and identify potential remedial options. The parties’ RI/FS work under the AOC and their efforts to identify other PRPs are ongoing. The final draft RI, which addressed all remaining EPA comments, was submitted in October 2021 and NCG expects EPA’s formal acceptance after their review. NCG expects to submit the draft FS in late 2025
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and currently expects EPA to select a creek-wide remedy in 2026, with the actual remediation construction starting several years later. In July 2019, the NCG entered into an AOC to conduct a Focused Feasibility Study (FFS) of the first two miles of the creek to support an evaluation of an interim remedy for that section of the creek. In July 2021, EPA terminated the FFS, which effectively incorporates remediation of the lower creek with the site-wide remedy. FCX’s environmental liability balance for the creek was $ 313 million at September 30, 2021. The final costs of fulfilling this remedial obligation and the allocation of costs among PRPs are uncertain and subject to change based on the results of the RI/FS, the remedy ultimately selected by EPA and related allocation determinations. Changes to the overall cost of this remedial obligation and the portion ultimately allocated to PDRC could be material to FCX.
Litigation
There were no significant updates to previously reported legal proceedings included in Note 12 of FCX’s 2020 Form 10-K, other than the matters discussed below.
Asbestos and Talc Claims . As previously disclosed, since approximately 1990, various FCX affiliates have been named as defendants in a large number of lawsuits alleging personal injury from, among other things, exposure to asbestos or talc allegedly contained in industrial products, and more recently alleging the presence of asbestos contamination in talc-based cosmetic and personal care products. Cyprus Amax Minerals Company (CAMC), an indirect wholly owned subsidiary of FCX, and Cyprus Mines Corporation (Cyprus Mines), a wholly owned subsidiary of CAMC, are among the targets of such lawsuits. Cyprus Mines and subsidiaries were engaged in talc mining and processing from 1964 until 1992 when Cyprus Mines exited its talc business. On February 13, 2019, Imerys Talc America (Imerys), the current owner of the talc business assets and liabilities previously owned by Cyprus Mines, filed for Chapter 11 bankruptcy protection. On December 22, 2020, Imerys filed an amended bankruptcy plan disclosing a global settlement with Cyprus Mines and CAMC, which provides a framework for a full and comprehensive resolution of all current and future potential liabilities arising out of the Cyprus Mines talc business, including claims against FCX, its affiliates, Cyprus Mines and CAMC. The hearing to consider confirmation of the Imerys bankruptcy plan previously scheduled to be held in November 2021 has been cancelled following a recent decision by the bankruptcy judge to invalidate a substantial number of votes in favor of the plan. Consistent with the global settlement agreement, Cyprus Mines commenced its own bankruptcy process on February 11, 2021, and talc-related litigation against both Cyprus Mines and Cyprus Amax Minerals Company is stayed through 2021. The global settlement is subject to, among other things, votes by claimants in both the Imerys and Cyprus Mines bankruptcy cases as well as bankruptcy court approvals in both cases, and there can be no assurance that the global settlement will be successfully implemented. FCX has a $ 130 million liability balance at September 30, 2021, associated with the proposed settlement.
Louisiana Parishes Coastal Erosion Cases. As discussed in Note 12 of FCX's 2020 Form 10-K, certain FCX affiliates were named as defendants, along with numerous co-defendants, in 13 cases out of a total of 42 cases filed in Louisiana state courts by six south Louisiana parishes (Cameron, Jefferson, Plaquemines, St. Bernard, St. John the Baptist and Vermilion), alleging that certain oil and gas exploration and production operations and sulphur mining and production operations in coastal Louisiana contaminated and damaged coastal wetlands and caused significant land loss along the Louisiana coast.
In 2019, affiliates of FCX reached an agreement in principle to settle all 13 cases. The maximum out-of-pocket settlement payment will be $ 23.5 million with the initial payment of $ 15 million to be paid upon execution of the settlement agreement.
The settlement agreement must be executed by all parties, including authorized representatives of the six south Louisiana parishes originally plaintiffs in the suit and certain other non-plaintiff Louisiana parishes and the state of Louisiana. The agreement in principle does not include any admission of liability by FCX or its affiliates. FCX recorded a charge in 2019 for the initial payment of $ 15 million, which will be paid upon execution of the settlement agreement. The settlement agreement has been executed by the FCX affiliates, the state of Louisiana and 8 of the 12 Louisiana parishes. FCX is continuing its efforts to finalize the settlement.
Other Matters
PT-FI and PT Smelting Export Licenses. In March 2021, PT-FI received a one-year extension of its export license through March 15, 2022. In July 2021, PT Smelting received a six-month extension of its anodes slimes export license, which currently expires December 30, 2021.
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Cerro Verde Royalty Dispute. SUNAT (National Superintendency of Customs and Administration), the Peru national tax authority, assessed mining royalties on ore processed by the Cerro Verde concentrator for the period December 2006 to December 2013. Cerro Verde contested each of these assessments because it believes that its 1998 stability agreement exempts from royalties all minerals extracted from its mining concession, irrespective of the method used for processing such minerals. Since 2014, Cerro Verde has been paying the disputed assessments for the period from December 2006 through December 2013 under installment payment programs provided under Peru law. In third-quarter 2021, Cerro Verde paid the balance of its royalty dispute liabilities (payments totaled $ 356 million in third-quarter 2021 and $ 421 million for the first nine months of 2021) and is proceeding with international arbitration as previously disclosed in FCX’s 2020 Form 10-K.
Development Progress of Greenfield Smelter at East Java . On January 7, 2021, the Indonesia government levied an administrative fine of $ 149 million for the period from March 30, 2020, through September 30, 2020 (additional fines could be levied on exports after September 30, 2020), on PT-FI for failing to achieve physical development progress on the greenfield smelter as of July 31, 2020. PT-FI responded to the Indonesia government objecting to the fine because of events outside of its control that caused a delay in development progress for the greenfield smelter at East Java. PT-FI believes that its communications regarding these delays during 2020 with the Indonesia government were not properly considered before the administrative fine was levied. In June 2021, the Indonesia government issued a ministerial decree for the calculation of an administrative fine for lack of smelter development in light of the COVID-19 pandemic. PT-FI is continuing to discuss this matter with the Indonesia government as well as provide additional documentation to support its position on the cause of delays in development progress on the greenfield smelter. During the first nine months of 2021, PT-FI recorded charges totaling $ 16 million for a potential settlement of the administrative fine which is expected to include a revised construction schedule for the greenfield smelter. No additional fine is expected for the construction period after July 2020 based on the revised schedule. The final settlement could differ from the amounts recorded.
Chiyoda Contract. In July 2021, PT-FI awarded a construction contract to Chiyoda for the construction of a new greenfield smelter in Gresik, Indonesia with an estimated contract cost of $ 2.8 billion.
NOTE 9. BUSINESS SEGMENTS
FCX has organized its mining operations into four primary divisions – North America copper mines, South America mining, Indonesia mining and Molybdenum mines – and operating segments that meet certain thresholds are reportable segments. Separately disclosed in the following tables are FCX’s reportable segments, which include the Morenci, Cerro Verde and Grasberg (Indonesia Mining) copper mines, the Rod & Refining operations and Atlantic Copper Smelting & Refining.
Intersegment sales between FCX’s business segments are based on terms similar to arms-length transactions with third parties at the time of the sale. Intersegment sales may not be reflective of the actual prices ultimately realized because of a variety of factors, including additional processing, timing of sales to unaffiliated customers and transportation premiums.
FCX defers recognizing profits on sales from its mines to other segments, including Atlantic Copper Smelting & Refining, and on 39.5 percent of PT-FI’s sales to PT Smelting, until final sales to third parties occur. Quarterly variations in ore grades, the timing of intercompany shipments and changes in product prices result in variability in FCX’s net deferred profits and quarterly earnings.
FCX allocates certain operating costs, expenses and capital expenditures to its operating divisions and individual segments. However, not all costs and expenses applicable to an operation are allocated. U.S. federal and state income taxes are recorded and managed at the corporate level (included in Corporate, Other & Eliminations), whereas foreign income taxes are recorded and managed at the applicable country level. In addition, most mining exploration and research activities are managed on a consolidated basis, and those costs, along with some selling, general and administrative costs, are not allocated to the operating divisions or individual segments. Accordingly, the following Financial Information by Business Segment reflects management determinations that may not be indicative of what the actual financial performance of each operating division or segment would be if it was an independent entity.
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Product Revenues. FCX’s revenues attributable to the products it sold for the third quarters and first nine months of 2021 and 2020 follow (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Copper:
Concentrate $ 2,531 $ 1,185 $ 6,316 $ 2,783
Cathode 1,463 1,085 4,232 3,046
Rod and other refined copper products 1,048 634 2,565 1,479
Purchased copper a
124 167 652 568
Gold 741 497 1,856 1,108
Molybdenum 372 189 904 626
Other b
210 159 666 431
Adjustments to revenues:
Treatment charges ( 126 ) ( 95 ) ( 324 ) ( 250 )
Royalty expense c
( 97 ) ( 56 ) ( 242 ) ( 102 )
Export duties d
( 72 ) ( 23 ) ( 145 ) ( 43 )
Revenues from contracts with customers 6,194 3,742 16,480 9,646
Embedded derivatives e
( 111 ) 109 201 57
Total consolidated revenues $ 6,083 $ 3,851 $ 16,681 $ 9,703
a. FCX purchases copper cathode primarily for processing by its Rod & Refining operations.
b. Primarily includes revenues associated with cobalt and silver.
c. Reflects royalties on sales from PT-FI and Cerro Verde that will vary with the volume of metal sold and prices.
d. Reflects PT-FI export duties.
e. Refer to Note 6 for discussion of embedded derivatives related to FCX’s provisionally priced concentrate and cathode sales contracts.
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Financial Information by Business Segment
(In millions)
Atlantic Corporate,
North America Copper Mines South America Mining Copper Other
Cerro Indonesia Molybdenum Rod & Smelting & Elimi- FCX
Morenci Other Total Verde Other Total Mining Mines Refining & Refining nations Total
Three Months Ended September 30, 2021
Revenues:
Unaffiliated customers $ 16 $ 64 $ 80 $ 979 $ 149 $ 1,128 $ 1,961 a
$ — $ 1,697 $ 783 $ 434 b
$ 6,083
Intersegment 711 1,020 1,731 95 — 95 81 151 7 — ( 2,065 ) —
Production and delivery 312 592 904 533 97 630 569 70 1,701 765 ( 1,630 ) 3,009
Depreciation, depletion and amortization
40 54 94 101 10 111 280 19 1 7 16 528
Metals inventory adjustments
13 — 13 — — — — — — — 1 14
Selling, general and administrative expenses
— 1 1 2 — 2 28 — — 5 66 102
Mining exploration and research expenses — 1 1 — — — — — — — 14 15
Environmental obligations and shutdown costs
( 1 ) ( 1 ) ( 2 ) — — — — — — — 15 13
Net gain on sales of assets — — — — — — — — — — ( 60 ) c
( 60 )
Operating income (loss) 363 437 800 438 42 480 1,165 62 2 6 ( 53 ) 2,462
Interest expense, net — 1 1 6 — 6 1 — — 1 129 138
Provision for (benefit from) income taxes — — — 197 24 221 382 d
— — ( 1 ) 26 628
Total assets at September 30, 2021 2,586 5,244 7,830 8,554 1,843 10,397 18,592 1,726 278 1,067 7,027 46,917
Capital expenditures 42 74 116 41 6 47 328 1 1 5 43 e
541
Three Months Ended September 30, 2020
Revenues:
Unaffiliated customers $ 4 $ 12 $ 16 $ 632 $ 108 $ 740 $ 1,023 a
$ — $ 1,270 $ 536 $ 266 b
$ 3,851
Intersegment 584 637 1,221
66 — 66 3 42 8 3 ( 1,343 ) —
Production and delivery 308 460 768 394 83 477 409 51 1,272 522 ( 1,034 ) 2,465
Depreciation, depletion and amortization
42 49 91 92 13 105 150 13 6 8 21 394
Metals inventory adjustments
— ( 4 ) ( 4 ) — — — — 3 2 — 8 9
Selling, general and administrative expenses
1 — 1 2 — 2 25 — — 5 39 72
Mining exploration and research expenses — — — — — — — — — — 8 8
Environmental obligations and shutdown costs
— ( 3 ) ( 3 ) — — — — — — — 24 21
Net loss on sales of assets — — — — — — — — — — 2 2
Operating income (loss) 237 147 384 210 12 222 442 ( 25 ) ( 2 ) 4 ( 145 ) 880
Interest expense, net — — — 21 — 21 — — — — 99 120
Provision for (benefit from) income taxes — — — 105 4 109 211 — — — ( 23 ) 297
Total assets at September 30, 2020 2,654 5,137 7,791 8,569 1,640 10,209 16,858 1,770 251 877 3,343 41,099
Capital expenditures 21 45 66 26 5 31 297 3 1 6 32 e
436
a. Includes PT-FI's sales to PT Smelting totaling $ 795 million in third-quarter 2021 and $ 506 million in third-quarter 2020.
b. Includes revenues from FCX's molybdenum sales company, which includes sales of molybdenum produced by the Molybdenum mines and by certain of the North America and South America copper mines.
c. Represents the gain on the sale of FCX’s remaining cobalt business located in Kokkola, Finland (Freeport Cobalt).
d. Includes net tax benefits of $ 69 million associated with the release of a portion of the valuation allowances recorded against PT RTI NOLs.
e. Includes capital expenditures for the new greenfield smelter and precious metals refinery (collectively, the Indonesia smelter project) of $ 31 million in third-quarter 2021 and $ 27 million in third-quarter 2020.
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(In millions)
Atlantic Corporate,
North America Copper Mines South America Mining Copper Other
Cerro Indonesia Molybdenum Rod & Smelting & Elimi- FCX
Morenci Other Total Verde Other Total Mining Mines Refining & Refining nations Total
Nine months ended September 30, 2021
Revenues:
Unaffiliated customers $ 77 $ 147 $ 224 $ 2,721 $ 512 $ 3,233 $ 5,097 a
$ — $ 4,695 $ 2,264 $ 1,168 b
$ 16,681
Intersegment 1,996 2,783 4,779 260 — 260 189 310 20 — ( 5,558 ) —
Production and delivery 932 1,646 2,578 1,463 c
306 1,769 1,552 183 4,708 2,213 ( 4,141 ) d
8,862
Depreciation, depletion and amortization 114 161 275 272 34 306 726 51 3 22 47 1,430
Metals inventory adjustments 13 — 13 — — — — 1 — — 1 15
Selling, general and administrative expenses 1 2 3 6 — 6 81 — — 17 182 289
Mining exploration and research expenses — 1 1 — — — — — — — 35 36
Environmental obligations and shutdown costs — ( 1 ) ( 1 ) — — — — — — — 52 51
Net gain on sales of assets — — — — — — — — — — ( 63 ) e
( 63 )
Operating income (loss) 1,013 1,121 2,134 1,240 172 1,412 2,927 75 4 12 ( 503 ) 6,061
Interest expense, net — 1 1 31 — 31 8 — — 4 387 431
Provision for (benefit from) income taxes — — — 515 62 577 1,101 f
— — ( 1 ) ( 3 ) 1,674
Capital expenditures 74 137 211 84 10 94 904 4 2 18 111 g
1,344
Nine months ended September 30, 2020
Revenues:
Unaffiliated customers $ 26 $ 35 $ 61 $ 1,479 $ 312 $ 1,791 $ 2,151 a
$ — $ 3,491 $ 1,429 $ 780 b
$ 9,703
Intersegment 1,473 1,676 3,149
156 — 156 38 171 24 16 ( 3,554 ) —
Production and delivery 1,005 1,410 2,415 1,152 297 1,449 1,130 178 3,529 1,379 ( 2,676 ) 7,404
Depreciation, depletion and amortization 129 143 272 273 42 315 375 44 14 22 51 1,093
Metals inventory adjustments 4 48 52 — 3 3 — 8 3 — 26 92
Selling, general and administrative expenses 2 1 3 5 — 5 81 — — 15 169 273
Mining exploration and research expenses — 2 2 — — — — — — — 40 42
Environmental obligations and shutdown costs — ( 3 ) ( 3 ) — — — — — 1 — 60 58
Net loss on sales of assets — — — — — — — — — — 13 13
Operating income (loss) 359 110 469 205 ( 30 ) 175 603 ( 59 ) ( 32 ) 29 ( 457 ) 728
Interest expense, net 2 — 2 69 — 69 2 — — 4 285 362
Provision for (benefit from) income taxes — — — 82 ( 6 ) 76 302 — — 1 ( 46 ) 333
Capital expenditures 92 306 398 116 40 156 865 14 5 17 118 g
1,573
a. Includes PT-FI's sales to PT Smelting totaling $ 2.3 billion for the first nine months of 2021 and $ 1.3 billion for the first nine months of 2020.
b. Includes revenues from FCX's molybdenum sales company, which includes sales of molybdenum produced by the Molybdenum mines and by certain of the North America and South America copper mines.
c. Includes nonrecurring charges totaling $ 74 million associated with labor-related charges at Cerro Verde for agreements reached with approximately 65 percent of its hourly employees.
d. Includes charges associated with the major maintenance turnaround at the Miami smelter totaling $ 87 million.
e. Includes a $ 60 million gain on the sale of Freeport Cobalt.
f. Includes net tax benefits of $ 69 million associated with the release of a portion of the valuation allowances recorded against PT RTI NOLs.
g. Includes capital expenditures for the Indonesia smelter project of $ 79 million for the first nine months of 2021 and $ 94 million for the first nine months of 2020.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Freeport-McMoRan Inc.
Results of Review of Interim Financial Statements
We have reviewed the accompanying consolidated balance sheet of Freeport-McMoRan Inc. (the Company) as of September 30, 2021, the related consolidated statements of operations, comprehensive income (loss), and equity for the three- and nine-month periods ended September 30, 2021 and 2020, the related consolidated statements of cash flows for the nine-month periods ended September 30, 2021 and 2020, and the related notes (collectively referred to as the “consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2020, the related consolidated statements of operations, comprehensive income (loss), cash flows and equity for the year then ended, and the related notes (not presented herein); and in our report dated February 16, 2021, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ Ernst & Young LLP
Phoenix, Arizona
November 5, 2021
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.