FREEPORT-MCMORAN INC. In Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), "we," "us" and "our" refer toFreeport-McMoRan Inc. (FCX) and its consolidated subsidiaries. You should read this discussion in conjunction with our consolidated financial statements, the related MD&A and the discussion of our Business and Properties in our annual report on Form 10-K for the year endedDecember 31, 2021 (2021 Form 10-K), filed with theUnited States (U.S.) Securities and Exchange Commission (SEC). The results of operations reported and summarized below are not necessarily indicative of future operating results (refer to "Cautionary Statement" for further discussion). References to "Notes" are Notes included in our Notes to Consolidated Financial Statements (Unaudited). Throughout MD&A, all references to income or losses per share are on a diluted basis. OVERVIEW We are a leading international mining company with headquarters inPhoenix, Arizona . We operate large, long-lived, geographically diverse assets with significant proven and probable mineral reserves of copper, gold and molybdenum. We are one of the world's largest publicly traded copper producers. Our portfolio of assets includes the Grasberg minerals district inIndonesia , one of the world's largest copper and gold deposits; and significant mining operations inNorth America andSouth America , including the large-scaleMorenci minerals district inArizona and the Cerro Verde operation inPeru . Our results for the first six months of 2022 reflect solid operating results, with strong margins and cash flow generation, despite the decline in copper prices that began in second-quarter 2022. We believe the actions we have taken in recent years to build a strong balance sheet, successfully expand low-cost operations, and maintain flexible growth options while maintaining sufficient liquidity will allow us to continue to execute our business plans in a prudent manner, despite current economic uncertainty, while preserving substantial future asset values. While we recognize the near-term volatility in our markets, we are optimistic about our portfolio of assets, our strong management and operating teams, and the long-term prospects for the copper markets we serve.The London Metal Exchange (LME) copper settlement price averaged$4.43 per pound for the first six months of 2022 and reached a record high of$4.87 per pound inMarch 2022 , supported by copper's increasingly important role in decarbonization technologies and limited mine supply. Beginning in second-quarter 2022, a series of macro-economic factors (concerns about the global economy, higherU.S. interest rates and currency exchange rates among other factors) led to a precipitous decline in copper prices. The LME copper settlement price declined from$4.69 per pound atMarch 31, 2022 , to$3.74 per pound atJune 30, 2022 , and was $$3.54 per pound onJuly 29, 2022 . Physical market fundamentals remain tight as evidenced by low levels of global exchange stocks. Our global customer base reports healthy demand for copper. We believe the outlook for copper fundamentals in the medium- and long-term remain favorable, with studies indicating that demand for copper may double in 15 years based on the global movement towards decarbonization. We also believe substantial new mine supply development will be required to meet the goals of the global energy transition, and current prices for copper are insufficient to support new mine supply development, which is expected to add to future supply deficits. Our management team and global organization have substantial experience and success in executing under volatile market conditions. We believe we benefit from a diversified operations portfolio with an attractive cost structure, long-lived reserves, optionality in our project pipeline and a strong balance sheet and liquidity position. We are closely monitoring market conditions and will adjust our operating plans to protect our liquidity and preserve our asset values, as necessary. We expect to maintain a strong balance sheet and liquidity position as we focus on building long-term value in our business, executing our operating plans safely, responsibly and efficiently, and prudently managing costs and capital expenditures. Net income attributable to common stock totaled$0.8 billion in second-quarter 2022, compared with$1.1 billion in second-quarter 2021, primarily reflecting lower copper prices and unfavorable adjustments to provisionally priced copper sales, partly offset by higher copper and gold sales volumes. Net income attributable to common stock totaled$2.4 billion for the first six months of 2022, compared with$1.8 billion for the first six months of 2021, primarily reflecting higher copper and gold sales volumes, partly offset by a higher provision for income taxes and lower copper prices. The results for the 2022 periods, compared with the 2021 periods, also reflect increased energy and other input costs. Refer to "Consolidated Results" for further discussion. 24 -------------------------------------------------------------------------------- Table of Contents AtJune 30, 2022 , we had consolidated debt of$11.1 billion and consolidated cash and cash equivalents of$9.5 billion , resulting in net debt of$1.6 billion ($1.0 billion excluding net debt for theIndonesia smelter projects). Refer to "Net Debt" for reconciliations of consolidated debt and consolidated cash and cash equivalents to net debt.
At
Refer to Note 5 and "Capital Resources and Liquidity" for further discussion.
OUTLOOK
Despite uncertain market conditions in the near-term, we continue to believe the medium- and long-term outlook for our business is positive, supported by limitations on supplies of copper and the expected requirements for copper in the world's economy. Our financial results vary as a result of fluctuations in market prices primarily for copper, gold and, to a lesser extent, molybdenum, as well as other factors. World market prices for these commodities have fluctuated historically and are affected by numerous factors beyond our control. Copper prices, in particular, experienced a significant drop beginning in second-quarter 2022. Refer to "Markets" below and "Risk Factors" in Part I, Item 1A. of our 2021 Form 10-K for further discussion. Because we cannot control the prices of our products, the key measures that management focuses on in operating our business are sales volumes, unit net cash costs, operating cash flows and capital expenditures. Consolidated Sales Volumes Following are our projected consolidated sales volumes for the year 2022: Copper (millions of recoverable pounds):North America copper mines 1,505South America mining 1,160Indonesia mining 1,549 Total 4,214 Gold (millions of recoverable ounces) 1.7
Molybdenum (millions of recoverable pounds) 80 a
a.Projected molybdenum sales include 30 million pounds produced by our
Molybdenum mines and 50 million pounds produced by our
Consolidated sales volumes in third-quarter 2022 are expected to approximate 1.0 billion pounds of copper, 400 thousand ounces of gold and 21 million pounds of molybdenum. Projected sales volumes are dependent on operational performance, weather-related conditions, timing of shipments, and other factors detailed in the "Cautionary Statement" below. For other important factors that could cause results to differ materially from projections, refer to "Risk Factors" contained in Part I, Item 1A. of our 2021 Form 10-K. Consolidated Unit Net Cash Costs Assuming average prices of$1,700 per ounce of gold and$16.00 per pound of molybdenum for the second half of 2022 and achievement of current sales volume and cost estimates, consolidated unit net cash costs (net of by-product credits) for our copper mines are expected to average$1.50 per pound of copper for the year 2022 (including$1.67 per pound of copper in third-quarter 2022). The increase from previous estimates primarily reflects lower by-product credits caused by lower projected gold and molybdenum prices. We also continue to experience significant cost inflation, principally associated with higher energy prices (which represents about 20 percent of our site operating costs) and increased costs for other consumables such as sulfuric acid, explosives and steel. The impact of price changes during the second half of 2022 on consolidated unit net cash costs for the year 2022 would approximate$0.02 per pound of copper for each$100 per ounce change in the average price of gold and$0.01 per pound of copper for each$2.00 per pound change in the average price of molybdenum. Quarterly unit net cash costs vary with fluctuations in sales volumes and realized prices, primarily for gold and molybdenum. 25 -------------------------------------------------------------------------------- Table of Contents Consolidated Operating Cash Flows Our consolidated operating cash flows vary with sales volumes; prices realized from copper, gold and molybdenum sales; production costs; income taxes; other working capital changes; and other factors. Based on current sales volume and cost estimates, and assuming average prices of$3.25 per pound for copper,$1,700 per ounce for gold, and$16.00 per pound for molybdenum for the second half of 2022, our consolidated operating cash flows are estimated to approximate$4.5 billion (net of$1.4 billion of working capital and other uses) for the year 2022. Estimated consolidated operating cash flows for the year 2022 also reflect an estimated income tax provision of$2.0 billion (refer to "Consolidated Results - Income Taxes" for further discussion of our projected income tax rate for the year 2022). The impact of price changes for the second half of 2022 on operating cash flows would approximate$230 million for each$0.10 per pound change in the average price of copper,$80 million for each$100 per ounce change in the average price of gold and$50 million for each$2.00 per pound change in the average price of molybdenum. Consolidated Capital Expenditures Capital expenditures are expected to approximate$4.5 billion for the year 2022 (including$1.9 billion for major mining projects and$1.4 billion for the greenfield smelter and precious metals refinery (PMR) - collectively, theIndonesia smelter projects). Projected capital expenditures for major mining projects include$1.3 billion for planned projects primarily associated with underground mine development in the Grasberg minerals district and supporting mill and power capital costs and$0.6 billion for discretionary growth projects. We closely monitor market conditions and will adjust our operating plans, including capital expenditures, as necessary. Capital expenditures for theIndonesia smelter projects are being funded with PT-FI's senior notes and its available revolving credit facility. Construction of the additional domestic smelter capacity will result in the elimination of export duties, providing an offset to the economic cost associated with theIndonesia smelter projects. Based on current development progress of additional smelting capacity, PT-FI expects export duties to be reduced from the current rate of 5 percent to 2.5 percent by the end of 2022, and eliminated in the second half of 2023. 26 -------------------------------------------------------------------------------- Table of Contents MARKETS World prices for copper, gold and molybdenum can fluctuate significantly. During the period fromJanuary 2012 throughJune 2022 , the LME copper settlement price varied from a low of$1.96 per pound in 2016 to a record high of$4.87 per pound in 2022; theLondon Bullion Market Association (London ) PM gold price fluctuated from a low of$1,049 per ounce in 2015 to a record high of$2,067 per ounce in 2020; and the Metals Week Molybdenum Dealer Oxide weekly average price ranged from a low of$4.46 per pound in 2015 to a high of$20.01 per pound in 2021. Copper, gold and molybdenum prices are affected by numerous factors beyond our control as described further in "Risk Factors" contained in Part I, Item 1A. of our 2021 Form 10-K.
[[Image Removed: fcx-20220630_g2.jpg]]
This graph presents LME copper settlement prices and the combined reported stocks of copper at the LME,Commodity Exchange Inc. , and theShanghai Futures Exchange fromJanuary 2012 throughJune 2022 . During second-quarter 2022, LME copper settlement prices ranged from a low of$3.74 per pound to a high of$4.73 per pound, averaged$4.31 per pound and settled at$3.74 per pound onJune 30, 2022 . Beginning inJune 2022 , copper prices declined sharply as a result of a series of macro-economic factors, including concerns about the global economy, Chinese economic data, risingU.S. interest rates and currency exchange rates related to the strength of theU.S. dollar. The LME copper settlement price was$3.54 per pound onJuly 29, 2022 . Future copper prices may continue to be volatile and are expected to be influenced by, among other things, demand fromChina and economic activity, including the possibility of global recession. We believe the weakness in current financial market sentiment is inconsistent with physical markets and longer-term fundamentals. We continue to believe future demand will be supported by copper's role in the global transition to renewable power, electric vehicles and other carbon-reduction initiatives, and continued urbanization in developing countries. The small number of approved, large-scale projects scheduled beyond those that have been announced, the long lead times required to permit and build new mines and declining ore grades at existing operations continue to highlight the fundamental supply challenges for copper. The current copper price weakness is expected to add to the already significant barriers to future copper supply development. 27 -------------------------------------------------------------------------------- Table of Contents [[Image Removed: fcx-20220630_g3.jpg]] This graph presents London PM gold prices fromJanuary 2012 throughJune 2022 . During second-quarter 2022, London PM gold prices ranged from a low of$1,810 per ounce to a high of$1,977 per ounce, averaged$1,871 per ounce, and closed at$1,817 per ounce onJune 30, 2022 . The strength of theU.S. dollar has negatively impacted gold prices as theU.S. dollar index reached a 20-year high inJune 2022 . The London PM gold price was$1,753 per ounce onJuly 29, 2022 . 28
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[[Image Removed: fcx-20220630_g4.jpg]]
This graph presents the Metals Week Molybdenum Dealer Oxide weekly average price fromJanuary 2012 throughJune 2022 . During second-quarter 2022, the weekly average price of molybdenum ranged from a low of$17.08 per pound to a high of$19.31 per pound, averaged$18.42 per pound, and was$17.08 per pound onJune 30, 2022 . During second-quarter 2022, concerns aboutChina's zero-COVID-19 policies, inflation and anticipated lower summer steel production prompted price weakness that has continued intoJuly 2022 . The Metals Week Molybdenum Dealer Oxide weekly average price was$15.15 per pound onJuly 29, 2022 . 29 -------------------------------------------------------------------------------- Table of Contents CONSOLIDATED RESULTS Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 SUMMARY FINANCIAL DATA (in millions, except per share amounts) Revenuesa,b$ 5,416 $ 5,748 $ 12,019 $ 10,598 Operating incomea$ 1,736 $ 2,067 $ 4,545 $ 3,599
Net income attributable to common stockc
Diluted weighted-average shares of common stock outstanding 1,457 1,483 1,463 1,480 Operating cash flowsf$ 1,621 $ 2,395 $ 3,312 $ 3,470 Capital expenditures$ 863 $ 433 $ 1,586 $ 803 At June 30: Cash and cash equivalents$ 9,492 $ 6,313 $ 9,492 $ 6,313 Total debt, including current portion$ 11,092 $
9,695
a.Refer to Note 9 for a summary of revenues and operating income by operating division.
b.Includes (unfavorable) favorable adjustments to prior period provisionally priced concentrate and cathode copper sales totaling$(355) million ($(154) million to net income attributable to common stock or$(0.10) per share) in second-quarter 2022,$173 million ($66 million to net income attributable to common stock or$0.05 per share) in second-quarter 2021,$65 million ($27 million to net income attributable to common stock or$0.02 per share) for the first six months of 2022 and$169 million ($65 million to net income attributable to common stock or$0.04 per share) for the first six months of 2021. Refer to Note 6 for further discussion. c.We defer recognizing profits on intercompany sales until final sales to third parties occur. Refer to "Operations - Smelting and Refining" for a summary of net impacts from changes in these deferrals. d.Includes net charges totaling$14 million ($0.01 per share) in second-quarter 2022 and$52 million ($0.04 per share) for the first six months of 2022. Net charges for second-quarter 2022 were primarily associated with environmental obligations and metals inventory adjustments, partly offset by a net gain on early extinguishment of debt. Net charges for the first six months of 2022 also included the settlement of an administrative fine and an adjustment to prior-period export duties at PT-FI, and asset retirement obligation (ARO) adjustments. e.Includes net charges totaling$56 million ($0.04 per share) in second-quarter 2021 and$94 million ($0.06 per share) for the first six months of 2021, primarily associated with contested matters at PT-FI (including historical tax audits and an administrative fine levied by theIndonesia government), nonrecurring labor-related costs at Cerro Verde and adjustments to environmental obligations and AROs.
f.Working capital and other sources (uses) totaled
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Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
SUMMARY OPERATING DATA
Copper (millions of recoverable pounds)
Production 1,075 913 2,084 1,823
Sales, excluding purchases 1,087 929 2,111 1,754
Average realized price per pound $ 4.03 $ 4.34 $ 4.18 $ 4.25
Site production and delivery costs per $ 2.09 $ 2.02 b $ 2.06 $ 1.94 b
pounda
Unit net cash costs per pounda $ 1.41 $ 1.48 $ 1.37 $ 1.44
Gold (thousands of recoverable ounces)
Production 476 305 891 602
Sales, excluding purchases 476 305 885 563
Average realized price per ounce $ 1,827 $ 1,794 $ 1,861 $ 1,785
Molybdenum (millions of recoverable
pounds)
Production 23 20 44 40
Sales, excluding purchases 20 22 39 43
Average realized price per pound $ 19.44 $ 13.11 a.Reflects per pound weighted-average production and delivery costs and unit net cash costs (net of by-product credits) for all copper mines, before net noncash and other costs. For reconciliations of per pound unit costs (credits) by operating division to production and delivery costs applicable to sales reported in our consolidated financial statements, refer to "Product Revenues and Production Costs." b.Includes$0.07 per pound of copper in second-quarter 2021 and$0.04 per pound of copper for the first six months of 2021 associated with nonrecurring labor-related costs at Cerro Verde. Refer to "Operations - South America Mining" for further discussion. Revenues Consolidated revenues totaled$5.4 billion in second-quarter 2022,$5.7 billion in second-quarter 2021,$12.0 billion for the first six months of 2022 and$10.6 billion for the first six months of 2021. Revenues from our mining operations primarily include the sale of copper concentrate, copper cathode, copper rod, gold in concentrate and molybdenum. Refer to Note 9 for a summary of product revenues. Following is a summary of changes in our consolidated revenues between periods (in millions): Three Months Ended Six Months Ended June 30 June 30 Consolidated revenues - 2021 period $ 5,748 $ 10,598 Higher (lower) sales volumes: Copper 681 1,515 Gold 305 575 Molybdenum (34) (49) (Lower) higher average realized prices: Copper (337) (148) Gold 16 67 Molybdenum 121 270 Adjustments for prior period provisionally priced copper sales (528) (104) Lower Atlantic Copper revenues (361) (330) Lower revenues from purchased copper (206) (354) Higher treatment charges (38) (74) Higher royalties and export duties (69) (170) Other, including intercompany eliminations 118 223 Consolidated revenues - 2022 period $ 5,416
$ 12,019
Sales Volumes. Consolidated copper and gold sales volumes increased in the 2022
periods, compared with the 2021 periods, primarily reflecting increased
operating rates at the Grasberg minerals district and
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Realized Prices. Our consolidated revenues can vary significantly as a result of
fluctuations in the market prices of copper, gold and molybdenum. Average
realized prices in second-quarter 2022, compared with second-quarter 2021, were
7 percent lower for copper, 2 percent higher for gold and 48 percent higher for
molybdenum, and average realized prices for the first six months of 2022,
compared with the first six months of 2021, were 2 percent lower for copper, 4
percent higher for gold and 56 percent higher for molybdenum.
Average realized copper prices include net (unfavorable) favorable adjustments
to current period provisionally priced copper sales totaling $(365) million in
second-quarter 2022, $(55) million in second-quarter 2021, $(567) million for
the first six months of 2022 and $156 million for the first six months of 2021.
As discussed in Note 6, substantially all of our copper concentrate and cathode
sales contracts provide final copper pricing in a specified future month
(generally one to four months from the shipment date) based primarily on quoted
LME monthly average copper prices. We record revenues and invoice customers at
the time of shipment based on then-current LME prices, which results in an
embedded derivative on provisionally priced concentrate and cathode sales that
is adjusted to fair value through earnings each period, using the period-end
forward prices, until final pricing on the date of settlement. To the extent
final prices are higher or lower than what was recorded on a provisional basis,
an increase or decrease to revenues is recorded each reporting period until the
date of final pricing. Accordingly, in times of rising copper prices, our
revenues benefit from adjustments to the final pricing of provisionally priced
sales pursuant to contracts entered into in prior periods; in times of falling
copper prices, the opposite occurs.
Prior Period Provisionally Priced Copper Sales. Net (unfavorable) favorable
adjustments to prior periods' provisionally priced copper sales (i.e.,
provisionally priced sales at March 31, 2022 and 2021, and December 31, 2021 and
2020) recorded in consolidated revenues totaled $(355) million in second-quarter
2022, $173 million in second-quarter 2021, $65 million for the first six months
of 2022 and $169 million for the first six months of 2021. Refer to Notes 6 and
9 for a summary of total adjustments to prior period and current period
provisionally priced sales.
At June 30, 2022 , we had provisionally priced copper sales totaling 447 million
pounds of copper (net of intercompany sales and noncontrolling interests)
recorded at an average of $3.75 per pound, subject to final pricing over the
next several months. We estimate that each $0.05 change in the price realized
from the June 30, 2022 , provisional price recorded would have an approximate $14
million effect on our 2022 net income attributable to common stock. The LME
copper price settled at $$3.54 per pound on July 29, 2022 .
Atlantic Copper Revenues. Atlantic Copper revenues totaled $433 million in
second-quarter 2022 and $1.2 billion for the first six months of 2022, compared
with $794 million in second-quarter 2021 and $1.5 billion for the first six
months of 2021. Lower revenues in the 2022 periods, compared with 2021 periods,
primarily reflects reduced operations as a result of a scheduled major
maintenance turnaround that began in second-quarter 2022.
Purchased Copper. We purchase copper cathode primarily for processing by our Rod
& Refining operations. The volumes of copper purchases vary depending on cathode
production from our operations and totaled 23 million pounds in second-quarter
2022, 68 million pounds in second-quarter 2021, 38 million pounds for the first
six months of 2022 and 121 million pounds for the first six months of 2021. The
decrease in revenues associated with purchased copper in the 2022 periods,
compared to the 2021 periods, reflects the impact of lower purchases and copper
prices.
Treatment Charges. Revenues from our concentrate sales are recorded net of
treatment charges (i.e., fees paid to smelters that are generally negotiated
annually), which will vary with the sales volumes and the price of copper. The
increase in the treatment charges in the 2022 periods primarily reflects higher
copper sales volumes.
Royalties and Export Duties. Royalties are primarily on PT-FI sales and vary
with the volume of metal sold and the prices of copper and gold. Higher
royalties and export duties in the 2022 periods, compared to the 2021 periods,
are primarily associated with increased copper and gold sales volumes. PT-FI
currently pays duties on concentrate exports of 5 percent, declining to 2.5
percent when development progress for additional smelting capacity in Indonesia
exceeds 30 percent, and eliminated when development progress for additional
smelting capacity in Indonesia exceeds 50 percent. Based on current development
progress of additional smelting capacity, PT-FI expects export duties to be
reduced from the current rate of 5 percent to 2.5 percent by the end of 2022,
and eliminated in the second half of 2023. Refer to "Operations - Indonesia
Mining" for further discussion of the current progress on additional smelting
capacity in Indonesia and to Note 9 for a summary of royalty expense and export
duties.
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Production and Delivery Costs
Consolidated production and delivery costs totaled $3.0 billion in
second-quarter 2022, $3.1 billion in second-quarter 2021, $6.2 billion for the
first six months of 2022 and $5.9 billion for the first six months of 2021. We
continue to experience significant cost inflation, principally associated with
higher energy prices (which represents approximately 20 percent of our site
operating costs) and increased costs for other consumables such as sulfuric
acid, explosives and steel. These higher costs were partly offset by lower costs
at Atlantic Copper related to reduced operations as a result of a scheduled
major maintenance turnaround that began in second-quarter 2022.
Site Production and Delivery Costs Per Pound. Site production and delivery costs
for our copper mining operations primarily include labor, energy and
commodity-based inputs, such as sulfuric acid, explosives, steel, reagents,
liners and tires. Consolidated site production and delivery costs (before net
noncash and other costs) for our copper mines averaged $2.09 per pound of copper
in second-quarter 2022, $2.02 per pound of copper in second-quarter 2021, $2.06
for the first six months of 2022 and $1.94 for the first six months of 2021.
Higher consolidated site production and delivery costs per pound of copper for
the second quarter and first six months of 2022, compared with the second
quarter and first six months of 2021, primarily reflect higher costs associated
with energy, input costs (including operating supplies such as sulfuric acid,
explosives and steel) and maintenance. Refer to "Operations - Unit Net Cash
Costs" for further discussion of unit net cash costs associated with our
operating divisions and to "Product Revenues and Production Costs" for
reconciliations of per pound costs by operating division to production and
delivery costs applicable to sales reported in our consolidated financial
statements.
Depreciation, Depletion and Amortization
Depreciation will vary under the unit-of-production (UOP) method as a result of
changes in sales volumes and the related UOP rates at our mining operations.
Consolidated depreciation, depletion and amortization (DD&A) totaled $507
million in second-quarter 2022, $483 million in second-quarter 2021, $996
million for the first six months of 2022 and $902 million for the first six
months of 2021. Higher DD&A in the 2022 periods primarily reflects higher sales
volumes and assets placed in service associated with the ramp-up of underground
mining at PT-FI.
Metals Inventory Adjustments
Metals inventory adjustments totaled $18 million for the second quarter and
first six months of 2022 and $1 million for the first six months of 2021. Metals
inventory adjustments in the 2022 periods include net realizable value (NRV)
inventory adjustments related to lower market prices for copper ($9 million ) and
a stockpile write-off at Cerro Verde ($9 million ).
As discussed in "Markets," there has been a sharp decline in the price of copper
in recent months. The LME copper settlement price was $3.74 per pound on June
30, 2022 , and $3.54 per pound on July 29, 2022 . Prolonged or further declines in
the prices of the commodities that we sell, particularly copper, could result in
additional NRV inventory adjustments, which could be significant.
Interest Expense, Net
Consolidated interest costs (before capitalization) totaled $189 million in
second-quarter 2022, $165 million in second-quarter 2021, $342 million for the
first six months of 2022 and $325 million for the first six months of 2021.
Higher interest costs (before capitalization) in the 2022 periods are primarily
related to PT-FI's senior notes that were issued in April 2022 . Nearly all of
our outstanding debt is fixed rate.
Capitalized interest varies with the level of qualifying assets associated with
our development projects and average interest rates on our borrowings.
Capitalized interest totaled $33 million in second-quarter 2022, $17 million in
second-quarter 2021, $59 million for the first six months of 2022 and $32
million for the first six months of 2021. The increase in capitalized interest
in the 2022 periods, compared with the 2021 periods, is related to major mining
projects primarily associated with underground development activities in the
Grasberg minerals district and development of the greenfield smelter in
Indonesia . Refer to "Capital Resources and Liquidity - Investing Activities" for
discussion of capital expenditures associated with our major development
projects.
Net Gain on Early Extinguishment of Debt
Net gain on extinguishment of debt totaled $8 million in the second quarter and
first six months of 2022, consisting of $18 million associated with senior note
purchases, partly offset by a charge of $10 million associated with the
repayment of the PT-FI term loan. Refer to Note 5 for further discussion.
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Income Taxes
Following is a summary of the approximate amounts used in the calculation of our
consolidated income tax provision (in millions, except percentages):
Six Months Ended June 30,
2022 2021
Income Tax Income Tax
Income Effective (Provision) Income Effective (Provision)
(Loss)a Tax Rate Benefit (Loss)a Tax Rate Benefit
U.S.b $ 909 1 % c $ (5) $ 743 - % c $ (3)
South America 776 39 % (302) 923 39 % (356)
Indonesia 2,625 39 % (1,020) 1,759 41 % (719)
Eliminations and other 2 N/A (7) (99) N/A 5
Rate adjustmentd - N/A (61) - N/A 27
Consolidated FCX $ 4,312 32 % $ (1,395) $ 3,326 31 % $ (1,046) a.Represents income before income taxes and equity in affiliated companies' net earnings.
b.In addition to our
c.Includes valuation allowance release on prior year unbenefited net operating losses.
d.In accordance with applicable accounting rules, we adjust our interim provision for income taxes equal to our consolidated tax rate.
Assuming achievement of current sales volume and cost estimates and average prices of$3.25 per pound for copper,$1,700 per ounce for gold and$16.00 per pound for molybdenum for the second half of 2022, we estimate our consolidated effective tax rate for the year 2022 would approximate 34 percent (which would result in a 47 percent effective tax rate in third-quarter 2022). The consolidated effective tax rate would decrease with higher prices - for example, we estimate that an increase in the average price of copper to$3.50 per pound for the second half of 2022 would result in an estimated effective tax rate of approximately 33 percent for the year 2022 (which would result in a 38 percent effective tax rate in third-quarter 2022). Changes in projected sales volumes and average prices during 2022 would incur tax impacts at estimated effective rates of 39 percent forPeru , 38 percent forIndonesia and 0 percent for theU.S. OPERATIONS Responsible Production 2021 Annual Report on Sustainability. InApril 2022 , we published our 2021 Annual Report on Sustainability, which is available on our website at fcx.com/sustainability. We have a long history of environmental, social and governance (ESG) programs, and we are focused on leading as a responsible copper producer. The Copper Mark. We are committed to validating all of our copper producing sites with the Copper Mark, a comprehensive assurance framework designed to demonstrate the copper industry's responsible production practices. To achieve the Copper Mark, each site is required to complete an external assurance process to assess conformance with 32 ESG requirements. During second-quarter 2022,Safford and Sierrita were awarded the Copper Mark. To date, we have achieved the Copper Mark at all 11 of our eligible copper producing sites inNorth America ,South America andEurope , and PT-FI has signed a letter of commitment and initiated the validation process. Leaching Innovation Initiatives We are advancing efforts to improve copper recovery from all ore types using leach processes. Several initiatives ongoing across ourNorth America andSouth America operations incorporate new applications, technologies and data analytics. We believe these leach innovation initiatives provide potential opportunities to produce incremental copper from our large existing leach stockpiles and lower-grade material currently classified as waste. Initial results support the potential for incremental low-cost additions to our production and reserve profile. 34 -------------------------------------------------------------------------------- Table of Contents Feasibility and Optimization Studies We are engaged in various studies associated with potential future expansion projects primarily inNorth America andSouth America . The costs for these studies are charged to production and delivery costs as incurred and totaled$31 million in second-quarter 2022,$11 million in second-quarter 2021,$50 million for the first six months of 2022 and$16 million for the first six months of 2021. We estimate the costs of these studies will approximate$180 million for the year 2022 (including approximately$60 million in third-quarter 2022), compared with approximately$60 million for the year 2021, subject to market conditions and other factors.
North America Copper Mines
We operate seven open-pit copper mines in
TheNorth America copper mines include open-pit mining, sulfide-ore concentrating, leaching and solution extraction/electrowinning (SX/EW) operations. A majority of the copper produced at ourNorth America copper mines is cast into copper rod by our Rod & Refining segment. The remainder of ourNorth America copper production is sold as copper cathode or copper concentrate, a portion of which is shipped to Atlantic Copper (our wholly owned smelter). Molybdenum concentrate, gold and silver are also produced by certain of ourNorth America copper mines.
Operating and Development Activities. We have substantial reserves and future
opportunities in the
Lone Star is increasing its operating rates to achieve targeted production of approximately 300 million pounds of copper per year in 2023 from oxide ores (compared with the initial design capacity of 200 million pounds per year). The oxide project atLone Star advances the opportunity for development of the underlying, large-scale sulfide resources. We are also increasing exploration in the area to support metallurgical testing and mine development planning for a potential significant long-term investment to build additional scale on an economically attractive basis. We are planning an expansion to double the concentrator capacity of ourBagdad operation in northwestArizona . We are engaging stakeholders and have commenced a feasibility study, which is expected to be completed in 2023, for this project. 35 -------------------------------------------------------------------------------- Table of Contents Operating Data. Following is summary consolidated operating data for theNorth America copper mines: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Operating Data, Net of Joint Venture Interests Copper (millions of recoverable pounds) Production 382 360 736 713 Sales, excluding purchases 389 389 770 697 Average realized price per pound $ 4.36 $
4.42 $ 4.46
Molybdenum (millions of recoverable pounds) Productiona 8 9 15 17 100% Operating Data Leach operations Leach ore placed in stockpiles (metric tons 722,900 688,000 715,800 696,500 per day) Average copper ore grade (percent) 0.29 0.30 0.29 0.29 Copper production (millions of recoverable 254 265 499 527
pounds)
Mill operations Ore milled (metric tons per day) 306,900 264,700 299,200 266,300 Average ore grade (percent): Copper 0.39 0.36 0.38 0.37 Molybdenum 0.02 0.03 0.02 0.03 Copper recovery rate (percent) 83.2 82.4 82.1 80.5 Copper production (millions of recoverable 195 155 364 306
pounds)
a.Refer to "Consolidated Results" for our consolidated molybdenum sales volumes,
which include sales of molybdenum produced at the
Our consolidated copper sales volumes fromNorth America totaled 389 million pounds in both second-quarter 2022 and second-quarter 2021, 770 million pounds for the first six months of 2022 and 697 million pounds for the first six months of 2021. The changes in production and sales volumes for the 2022 periods, compared with the 2021 periods, primarily reflect timing of shipments.
Unit Net Cash Costs. Unit net cash costs per pound of copper is a measure intended to provide investors with information about the cash-generating capacity of our mining operations expressed on a basis relating to the primary metal product for our respective operations. We use this measure for the same purpose and for monitoring operating performance by our mining operations. This information differs from measures of performance determined in accordance withU.S. generally accepted accounting principles (GAAP) and should not be considered in isolation or as a substitute for measures of performance determined in accordance withU.S. GAAP. This measure is presented by other metals mining companies, although our measure may not be comparable to similarly titled measures reported by other companies. Gross Profit per Pound of Copper and Molybdenum The following table summarizes unit net cash costs and gross profit per pound at ourNorth America copper mines. Refer to "Product Revenues and Production Costs" for an explanation of the "by-product" and "co-product" methods and a reconciliation of unit net cash costs per pound to production and delivery costs applicable to sales reported in our consolidated financial statements. 36
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Three Months Ended June 30,
2022 2021
Co-Product Method Co-Product Method
By- Product Molyb- By- Product Molyb-
Method Copper denuma Method Copper denuma
Revenues, excluding adjustments $ 4.36 $ 4.36 $ 18.75 $ 4.42 $ 4.42 $ 11.75
Site production and delivery, before net
noncash
and other costs shown below 2.50 2.30 12.42 2.14 2.03 6.86
By-product credits (0.35) - - (0.25) - -
Treatment charges 0.11 0.11 - 0.08 0.07 -
Unit net cash costs 2.26 2.41 12.42 1.97 2.10 6.86
DD&A 0.27 0.24 0.81 0.26 0.25 0.55
Metals inventory adjustments 0.02 0.02 0.16 - - -
Noncash and other costs, net 0.09 0.08 0.32 0.08 0.08 0.06
Total unit costs 2.64 2.75 13.71 2.31 2.43 7.47
Revenue adjustments, primarily for pricing
on prior period open sales (0.10) (0.10) - 0.02 0.02 -
Gross profit per pound $ 1.62 $ 1.51 $ 5.04 $ 2.13 $ 2.01 $ 4.28
Copper sales (millions of recoverable
pounds) 389 389 389 389
Molybdenum sales (millions of recoverable
pounds)a 8 9
Six Months Ended June 30,
2022 2021
Co-Product Method Co-Product Method
By- Product Molyb- By- Product Molyb-
Method Copper denuma Method Copper denuma
Revenues, excluding adjustments $ 4.46 $ 4.46 $ 18.36 $ 4.19 $ 4.19 $ 11.12
Site production and delivery, before net
noncash
and other costs shown below 2.44 2.25 11.68 2.09 1.96 6.76
By-product credits (0.35) - - (0.27) - -
Treatment charges 0.10 0.10 - 0.09 0.09 -
Unit net cash costs 2.19 2.35 11.68 1.91 2.05 6.76
DD&A 0.27 0.25 0.85 0.26 0.24 0.51
Metals inventory adjustments 0.01 0.01 0.08 - - -
Noncash and other costs, net 0.09 0.07 0.23 0.11 0.11 0.06
Total unit costs 2.56 2.68 12.84 2.28 2.40 7.33
Revenue adjustments, primarily for pricing
on prior period open sales (0.01) (0.01) - 0.01 0.01 -
Gross profit per pound $ 1.89 $ 1.77 $ 5.52 $ 1.92 $ 1.80 $ 3.79
Copper sales (millions of recoverable
pounds) 770 770 697 697
Molybdenum sales (millions of recoverable
pounds)a 15 17
a.Reflects sales of molybdenum produced by certain of the
OurNorth America copper mines have varying cost structures because of differences in ore grades and characteristics, processing costs, by-product credits and other factors. Our mining operations continue to experience significant cost inflation, principally associated with higher energy and other input costs. In addition to these higher costs, average unit net cash costs (net of by-product credits) for theNorth America copper mines of$2.26 per pound of copper in second-quarter 2022 and$2.19 per pound for the first six months of 2022, compared with$1.97 per pound in second-quarter 2021 and$1.91 per pound for the first six months of 2021, reflect higher operating rates, partly offset by higher by-product credits. Because certain assets are depreciated on a straight-line basis,North America's average unit depreciation rate may vary with asset additions and the level of copper production and sales.
Second-quarter 2022 revenue adjustments at our
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Average unit net cash costs (net of by-product credits) for our North America
copper mines are expected to approximate $2.25 per pound of copper for the year
2022, based on achievement of current sales volume and cost estimates and
assuming an average molybdenum price of $16.00 per pound for the second half of
2022. North America's average unit net cash costs for the year 2022 would change
by approximately $0.02 per pound for each $2.00 per pound change in the average
price of molybdenum for the second half of 2022.
South America Mining
We operate two copper mines in South America - Cerro Verde in Peru (in which we
own a 53.56 percent interest) and El Abra in Chile (in which we own a 51 percent
interest), which are consolidated in our financial statements.
South America mining includes open-pit mining, sulfide-ore concentrating,
leaching and SX/EW operations. Production from our South America mines is sold
as copper concentrate or cathode under long-term contracts. Our South America
mines also sell a portion of their copper concentrate production to Atlantic
Copper. In addition to copper, the Cerro Verde mine produces molybdenum
concentrate and silver.
Operating and Development Activities. The first six months of 2022 reflected
strong performance from Cerro Verde's concentrator facilities, including
achievement of a quarterly record milling average of 427,100 metric tons of ore
per day during second-quarter 2022. Subject to ongoing monitoring of COVID-19
protocols, milling rates at Cerro Verde are currently expected to average over
400,000 metric tons of ore per day for the second half of 2022.
Operating rates at El Abra have returned to pre-COVID-19 levels and increased
mining and stacking activities are expected to result in an approximate 30
percent increase in El Abra copper production for the year 2022, compared with
the year 2021.
El Abra's large sulfide resource supports a potential major mill project similar
to the large-scale concentrator constructed at Cerro Verde in 2015. Technical
and economic studies continue to be evaluated to determine the optimal scope and
timing for the sulfide project. We are considering options to invest in water
infrastructure to provide options to extend existing operations, while we
continue to monitor potential changes in Chile's regulatory and fiscal matters.
We will defer major investment decisions pending clarity on Chile's regulatory
and fiscal matters.
Operating Data. Following is summary consolidated operating data for South
America mining:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Copper (millions of recoverable pounds)
Production 286 245 560 504
Sales 288 230 552 489
Average realized price per pound $ 3.83 $
4.31 $ 4.00
Molybdenum (millions of recoverable pounds) Productiona 7 4 14 9 Leach operations Leach ore placed in stockpiles (metric tons per day) 157,700 190,200 148,800 172,100 Average copper ore grade (percent) 0.37 0.33 0.36 0.34 Copper production (millions of recoverable 71 65 126 pounds) 132 Mill operations Ore milled (metric tons per day) 427,100 374,100 410,800 382,100 Average ore grade (percent): Copper 0.31 0.29 0.32 0.30 Molybdenum 0.01 0.01 0.02 0.01 Copper recovery rate (percent) 84.4 85.2 85.5 86.4 Copper production (millions of recoverable 215 179 428 377
pounds)
a.Refer to "Consolidated Results" for our consolidated molybdenum sales volumes, which include sales of molybdenum produced at Cerro Verde.
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Our consolidated copper sales volumes from South America totaled 288 million
pounds in second-quarter 2022, 230 million pounds in second-quarter 2021, 552
million pounds for the first six months of 2022 and 489 million pounds for the
first six months of 2021. Higher copper sales volumes in the 2022 periods,
compared with the 2021 periods, primarily reflect higher mining and milling
rates at Cerro Verde.
Copper sales from
Unit Net Cash Costs. Unit net cash costs per pound of copper is a measure intended to provide investors with information about the cash-generating capacity of our mining operations expressed on a basis relating to the primary metal product for our respective operations. We use this measure for the same purpose and for monitoring operating performance by our mining operations. This information differs from measures of performance determined in accordance withU.S. GAAP and should not be considered in isolation or as a substitute for measures of performance determined in accordance withU.S. GAAP. This measure is presented by other metals mining companies, although our measure may not be comparable to similarly titled measures reported by other companies. Gross Profit per Pound of Copper The following table summarizes unit net cash costs and gross profit per pound of copper at ourSouth America mining operations. Refer to "Product Revenues and Production Costs" for an explanation of the "by-product" and "co-product" methods and a reconciliation of unit net cash costs per pound to production and delivery costs applicable to sales reported in our consolidated financial statements. Three Months Ended June 30, 2022 2021 By-Product Co-Product By-Product Co-Product Method Method Method Method Revenues, excluding adjustments$ 3.83 $
3.83
Site production and delivery, before net a noncash and other costs shown below 2.48 2.29 2.48 2.30 By-product credits (0.35) - (0.31) - Treatment charges 0.15 0.15 0.13 0.13 Royalty on metals 0.01 0.01 0.01 0.01 Unit net cash costs 2.29 2.45 2.31 2.44 DD&A 0.35 0.32 0.40 0.37 Metals inventory adjustments 0.04 b 0.03 - - Noncash and other costs, net 0.06 0.06 0.08 0.07 Total unit costs 2.74 2.86 2.79 2.88 Revenue adjustments, primarily for pricing on prior period open sales (0.53) (0.53) 0.38 0.38 Gross profit per pound$ 0.56 $ 0.44 $ 1.90 $ 1.81 Copper sales (millions of recoverable pounds) 288 288 230 230 39
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Six Months Ended June 30,
2022 2021
By-Product Co-Product By-Product Co-Product
Method Method Method Method
Revenues, excluding adjustments $ 4.00 $
4.00
Site production and delivery, before net a noncash and other costs shown below 2.45 2.26 2.23 2.09 By-product credits (0.38) - (0.26) - Treatment charges 0.15 0.15 0.13 0.13 Royalty on metals 0.01 0.01 0.01 0.01 Unit net cash costs 2.23 2.42 2.11 2.23 DD&A 0.36 0.32 0.40 0.37 Metals inventory adjustments 0.02 b 0.02 - - Noncash and other costs, net 0.06 0.06 0.06 0.05 Total unit costs 2.67 2.82 2.57 2.65 Revenue adjustments, primarily for pricing on prior period open sales 0.06 0.06 0.20 0.20 Gross profit per pound$ 1.39 $ 1.24 $ 1.91 $ 1.83 Copper sales (millions of recoverable pounds) 552 552 489 489
a.Includes
b.Primarily reflects a stockpile write-off at Cerro Verde.
OurSouth America mines have varying cost structures because of differences in ore grades and characteristics, processing costs, by-product credits and other factors. Our mining operations continue to experience significant cost inflation, principally associated with higher energy and other input costs. In addition to higher overall costs, average unit net cash costs (net of by-product credits) forSouth America mining of$2.29 per pound of copper in second-quarter 2022 and$2.23 per pound of copper for the first six months of 2022, compared with$2.31 per pounds of copper in second-quarter 2021 and$2.11 per pound of copper for the first six months of 2021, reflect higher sales volumes and by-product credits. Average unit net cash costs for the 2022 periods also reflect the impact of a change in estimate of copper recoveries in a leach stockpile at El Abra (refer to Note 3) and the 2021 periods reflect nonrecurring labor-related costs at Cerro Verde. As discussed in Note 3, the change in estimate of recoverable copper in the existing leach stockpile at El Abra resulted in a 135-million-pound reduction to its work in-process inventory volumes, which resulted in a higher average cost per pound of copper. Refer to "Consolidated Results - Metals Inventory Adjustments" for discussion of potential future NRV adjustments that may result because of prolonged or further declines in the price of copper.
Revenues from
Because certain assets are depreciated on a straight-line basis,South America's unit depreciation rate may vary with asset additions and the level of copper production and sales. Revenue adjustments primarily result from changes in prices on provisionally priced copper sales recognized in prior periods. Refer to "Consolidated Results - Revenues" for further discussion of adjustments to prior period provisionally priced copper sales. Average unit net cash costs (net of by-product credits) forSouth America mining are expected to approximate$2.31 per pound of copper for the year 2022, based on current sales volume and cost estimates and assuming an average price of$16.00 per pound of molybdenum for the second half of 2022. Indonesia Mining PT-FI operates one of the world's largest copper and gold mines at the Grasberg minerals district inPapua ,Indonesia . PT-FI produces copper concentrate that contains significant quantities of gold and silver. We have a 48.76 percent interest in PT-FI and manage its mining operations. As further discussed in Note 2 of our 2021 Form 40 -------------------------------------------------------------------------------- Table of Contents 10-K, under the terms of the 2018 shareholders agreement, our economic interest in PT-FI approximates 81 percent through 2022, and 48.76 percent thereafter. PT-FI's results are consolidated in our financial statements. Substantially all of PT-FI's copper concentrate is sold under long-term contracts. During first six months of 2022, 37 percent of PT-FI's concentrate production was sold to PT Smelting (PT-FI's 39.5-percent owned copper smelter and refinery inGresik, Indonesia ). Operating and Development Activities. PT-FI currently has three underground operating mines in the Grasberg minerals district: Grasberg Block Cave,Deep Mill Level Zone (DMLZ) and Big Gossan. In late2021, PT -FI achieved quarterly copper and gold volumes approximating 100 percent of projected annualized levels of approximately 1.6 billion pounds of copper and 1.6 million ounces of gold. PT-FI's milling rates for ore produced from its underground mines averaged 191,800 metric tons of ore per day for the first six months of 2022, and PT-FI expects milling rates to average approximately 190,000 metric tons of ore per day for the second half of 2022. The installation of additional milling facilities at PT-FI is currently expected to be completed in 2023, which would increase milling capacity to approximately 240,000 metric tons of ore per day and provide for continued annualized copper and gold production volumes of approximately 1.6 billion pounds of copper and 1.6 million ounces of gold. PT-FI is also advancing a mill recovery project with the installation of a new copper cleaner circuit that is expected to be completed in the first half of 2024, and is expected to provide incremental metal production of approximately 60 million pounds of copper and 40 thousand ounces of gold per year. For the year2022, PT -FI's estimated capital spending on the Grasberg Block Cave and DMLZ underground projects, including construction of a dual-fuel power plant, is expected to approximate$1.0 billion , net of scheduled contributions fromPT Indonesia Asahan Aluminium (Persero) (PT Inalum, also known as MIND ID). In accordance with applicable accounting guidance, the aggregate costs (before scheduled contributions from PT Inalum), expected to approximate$1.2 billion for the year 2022, will be reflected as an investing activity in our cash flow statement, and contributions from PT Inalum will be reflected as a financing activity. Kucing Liar. PT-FI commenced long-term mine development activities for its Kucing Liar deposit during 2021, which is expected to produce over 6 billion pounds of copper and 5 million ounces of gold over the life of the project. Pre-production development activities will occur over an approximate 10-year timeframe, and capital investments are expected to average approximately$400 million per year (including approximately$200 million for the year 2022). At full operating rates, annual production from Kucing Liar is expected to approximate 600 million pounds of copper and 500 thousand ounces of gold, providing PT-FI with sustained long-term, large-scale and low-cost production. Kucing Liar will benefit from substantial shared infrastructure and PT-FI's experience and long-term success in block-cave mining.Indonesia Smelter . In connection with PT-FI's 2018 agreement with theIndonesia government to secure the extension of its long-term mining rights, PT-FI committed to construct additional domestic smelting capacity totaling 2 million metric tons of concentrate per year by the end of 2023 (subject to force majeure provisions).
PT-FI is actively engaged in the following projects for additional domestic smelting capacity:
•Construction of a greenfield smelter inGresik, Indonesia with a capacity to process approximately 1.7 million metric tons of copper concentrate per year. InJuly 2021, PT -FI awarded a construction contract to a third-party contractor with an estimated cost of$2.8 billion . The greenfield smelter construction, currently approximately 30 percent complete, is expected to be completed as soon as feasible in 2024. •Expansion of PT Smelting's capacity by 30 percent to 1.3 million metric tons of concentrate per year, which is expected to be completed by the end of2023. PT -FI completed agreements inNovember 2021 with the majority owner of PT Smelting to implement the expansion plans. PT-FI is funding the cost of the expansion, estimated to approximate$250 million , with a loan that is expected to convert to equity, increasing ownership in PT Smelting from a 39.5 percent ownership interest to a majority ownership interest once the expansion is complete.
•Construction of a PMR to process gold and silver from the greenfield smelter
and PT Smelting at an estimated cost of
Capital expenditures for theIndonesia smelter projects, which are being funded with PT-FI's senior notes and available revolving credit facility, totaled$0.3 billion for the first six months of 2022 and are expected to approximate$1.4 billion for the year 2022. 41 -------------------------------------------------------------------------------- Table of Contents Construction of the additional domestic smelter capacity will result in the elimination of export duties, providing an offset to the economic cost associated with theIndonesia smelter projects. Based on current development progress of additional smelting capacity, PT-FI expects export duties to be reduced from the current rate of 5 percent to 2.5 percent by the end of 2022, and eliminated in the second half of 2023. Operating Data. Following is summary consolidated operating data forIndonesia mining: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Copper (millions of recoverable pounds) Production 407 308 788 606 Sales 410 310 789 568 Average realized price per pound $ 3.86 $
4.27
Gold (thousands of recoverable ounces) Production 473 303 885 597 Sales 474 302 880 558 Average realized price per ounce$ 1,827 $
1,795
Ore extracted and milled (metric tons per day): Grasberg Block Cave underground mine 101,800 64,400 101,100 58,100 DMLZ underground mine 77,300 53,900 77,800 50,300 Big Gossan underground mine 7,400 8,200 7,500 7,500 Deep Ore Zone underground minea and other 10,500 16,500 5,400 17,700 Total 197,000 143,000 191,800 133,600 Average ore grades: Copper (percent) 1.22 1.28 1.22 1.34 Gold (grams per metric ton) 1.08 1.00 1.05 1.03 Recovery rates (percent): Copper 89.8 88.8 89.6 90.0 Gold 79.0 75.9 78.2 77.4 a.Ore body depleted in 2021. Our consolidated copper and gold sales from PT-FI totaled 410 million pounds and 474 thousand ounces in second-quarter 2022 and 789 million pounds and 880 thousand ounces for the first six months of 2022, compared with copper and gold sales of 310 million pounds and 302 thousand ounces in second-quarter 2021 and 568 million pounds and 558 thousand ounces for the first six months of 2021. The increase in sales volumes for the 2022 periods, primarily reflects increased operating rates at the Grasberg minerals district.
Consolidated sales volumes from PT-FI are expected to approximate 1.5 billion pounds of copper and 1.7 million ounces of gold for the year 2022.
UnitNet Cash (Credits) Costs. Unit net cash (credits) costs per pound of copper is a measure intended to provide investors with information about the cash-generating capacity of our mining operations expressed on a basis relating to the primary metal product for our respective operations. We use this measure for the same purpose and for monitoring operating performance by our mining operations. This information differs from measures of performance determined in accordance withU.S. GAAP and should not be considered in isolation or as a substitute for measures of performance determined in accordance withU.S. GAAP. This measure is presented by other metals mining companies, although our measure may not be comparable to similarly titled measures reported by other companies. Gross Profit per Pound of Copper and per Ounce of Gold The following table summarizes the unit net cash (credits) costs and gross profit per pound of copper and per ounce of gold at ourIndonesia mining operations. Refer to "Product Revenues and Production Costs" for an explanation of "by-product" and "co-product" methods and a reconciliation of unit net cash costs per pound to production and delivery costs applicable to sales reported in our consolidated financial statements. 42
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Three Months Ended June 30,
2022 2021
By-Product Co-Product Method By-Product Co-Product Method
Method Copper Gold Method Copper Gold
Revenues, excluding adjustments $ 3.86 $ 3.86 $ 1,827 $ 4.27 $ 4.27 Site production and delivery, before net noncash and other costs shown below 1.43 0.91 433 1.54 1.07 449 Gold and silver credits (2.17) - - (1.93) - - Treatment charges 0.24 0.15 72 0.24 0.16 70 Export duties 0.21 0.13 63 0.14 0.10 42 Royalty on metals 0.27 0.18 74 0.26 0.19 66 Unit net cash (credits) costs (0.02) 1.37 642 0.25 1.52 627 DD&A 0.63 0.41 193 0.79 0.55 232 Noncash and other costs, net 0.01 0.01 2 0.04 0.03 11 Total unit costs 0.62 1.79 837 1.08 2.10 870 Revenue adjustments, primarily for pricing on prior period open sales (0.49) (0.49) (17) 0.28 0.28
53
PT Smelting intercompany profit (loss) 0.06 0.04 19 (0.13) (0.09) (39) Gross profit per pound/ounce$ 2.81 $ 1.62 $ 992 $ 3.34 $ 2.36 $ 939 Copper sales (millions of recoverable pounds) 410 410 310 310 Gold sales (thousands of recoverable ounces) 474 302 Six Months Ended June 30, 2022 2021 By-Product Co-Product Method By-Product Co-Product Method Method Copper Gold Method Copper Gold Revenues, excluding adjustments$ 4.04 $ 4.04 $ 1,861 $ 4.29 $ 4.29
Site production and delivery, before net noncash and other costs shown below 1.42 0.92 426 1.51 1.05 439 Gold and silver credits (2.17) - - (1.86) - - Treatment charges 0.24 0.16 73 0.24 0.17 71 Export duties 0.21 0.14 63 0.13 0.09 37 Royalty on metals 0.26 0.17 72 0.25 0.18 68 Unit net cash (credits) costs (0.04) 1.39 634 0.27 1.49 615 DD&A 0.64 0.42 194 0.78 0.55 228 Noncash and other costs, net 0.04 0.03 11 0.01 - 1 Total unit costs 0.64 1.84 839 1.06 2.04 844 Revenue adjustments, primarily for pricing on prior period open sales 0.04 0.04 3 0.12 0.12
(8)
PT Smelting intercompany (loss) (0.03) (0.02) (10) (0.16) (0.11) (46) Gross profit per pound/ounce$ 3.41 $ 2.22 $ 1,015 $ 3.19 $ 2.26 $ 887 Copper sales (millions of recoverable pounds) 789 789 568 568 Gold sales (thousands of recoverable ounces) 880 558 For the 2022 periods, PT-FI's gold and silver credits exceeded its cash costs resulting in unit net cash credits of$0.02 per pound of copper in second-quarter 2022 and$0.04 per pound for the first six months of 2022, compared to unit net cash costs of$0.25 per pound in second-quarter 2021 and$0.27 per pound for the first six months of 2021.
Lower site production and delivery unit costs (before net noncash and other costs) in the 2022 periods primarily reflect higher sales volumes, partly offset by higher operating rates, energy and other input costs.
Treatment charges vary with the volume of metals sold and the price of copper,
and royalties vary with the volume of metals sold and the prices of copper and
gold.
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PT-FI's export duties totaled $85 million in second-quarter 2022, $44 million in
second-quarter 2021, $164 million for the first six months of 2022 and $73
million for the first six months of 2021. The increase in export duties for the
2022 periods, compared with the 2021 periods, primarily reflects higher export
sales volumes.
PT-FI's royalties totaled $108 million in second-quarter 2022, $80 million in
second-quarter 2021, $201 million for the first six months of 2022 and $140
million for the first six months of 2021. The increase in royalties for the 2022
periods, compared with the 2021 periods, primarily reflects higher sales
volumes.
Because certain assets are depreciated on a straight-line basis, PT-FI's unit
depreciation rate may vary with asset additions and the level of copper
production and sales. The decrease in the DD&A rate per pound of copper for the
2022 periods, compared with the 2021 periods, primarily reflects depletion of
the Deep Ore Zone underground mine during 2021 and higher volumes associated
with increased operating rates, partly offset by significant underground
development assets placed into service.
Revenue adjustments primarily result from changes in prices on provisionally priced copper sales recognized in prior periods.
PT Smelting intercompany profit (loss) represents the change in the deferral of PT-FI's profit on sales to PT Smelting (25 percent prior toApril 30, 2021 , and 39.5 percent thereafter). Refer to "Smelting and Refining" below for further discussion. Assuming an average gold price of$1,700 per ounce for the second half of 2022 and achievement of current sales volume and cost estimates, unit net cash costs (net of gold and silver credits) for PT-FI are expected to approximate$0.18 per pound of copper for the year2022. PT -FI's unit net cash costs for the year 2022 would change by approximately$0.07 per pound of copper for each$100 per ounce change in the average price of gold for the second half of2022. PT -FI's projected sales volumes and unit net cash costs for the year 2022 are dependent on a number of factors, including operational performance and timing of shipments. Molybdenum Mines We operate two wholly owned molybdenum mines inColorado - the Climax open-pit mine and theHenderson underground mine. The Climax andHenderson mines produce high-purity, chemical-grade molybdenum concentrate, which is typically further processed into value-added molybdenum chemical products. The majority of the molybdenum concentrate produced at the Climax andHenderson mines, as well as from ourNorth America andSouth America copper mines, is processed at our conversion facilities. Operating and Development Activities. Production from the Molybdenum mines totaled 8 million pounds of molybdenum in second-quarter 2022, 15 million pounds for the first six months of 2022, 7 million pounds in second-quarter 2021 and 14 million pounds for the first six months of 2021. Refer to "Consolidated Results" for our consolidated molybdenum operating data, which includes sales of molybdenum produced at our Molybdenum mines and from ourNorth America andSouth America copper mines. Refer to "Outlook" for projected consolidated molybdenum sales volumes. Unit Net Cash Costs Per Pound of Molybdenum. Unit net cash costs per pound of molybdenum is a measure intended to provide investors with information about the cash-generating capacity of our mining operations expressed on a basis relating to the primary metal product for our respective operations. We use this measure for the same purpose and for monitoring operating performance by our mining operations. This information differs from measures of performance determined in accordance withU.S. GAAP and should not be considered in isolation or as a substitute for measures of performance determined in accordance withU.S. GAAP. This measure is presented by other metals mining companies, although our measure may not be comparable to similarly titled measures reported by other companies. Average unit net cash costs for our Molybdenum mines of$10.62 per pound of molybdenum in second-quarter 2022 and$10.75 per pound for the first six months of 2022 were higher than average unit net cash costs of$8.14 per pound in second-quarter 2021 and$8.53 per pound for the first six months of 2021, primarily reflecting higher energy, outside service costs and other input costs, and increased development costs at theHenderson mine. Based on current sales volume and cost estimates, average unit net cash costs for the Molybdenum mines are expected to approximate$11.75 per pound of molybdenum for the year 2022. 44 -------------------------------------------------------------------------------- Table of Contents Refer to "Product Revenues and Production Costs" for a reconciliation of unit net cash costs per pound to production and delivery costs applicable to sales reported in our consolidated financial statements. Smelting and Refining We wholly own and operate theMiami smelter inArizona , theEl Paso refinery inTexas and Atlantic Copper, a smelter and refinery inSpain . Additionally, PT-FI has a 39.5 percent ownership interest in PT Smelting and expects its ownership to increase to a majority interest upon completion of the expansion of PT Smelting's smelting capacity. Treatment charges for smelting and refining copper concentrate consist of a base rate per pound of copper and per ounce of gold and are generally fixed. Treatment charges represent a cost to our mining operations and income to Atlantic Copper and PT Smelting. Thus, higher treatment charges benefit our smelter operations and adversely affect our mining operations. OurNorth America copper mines are less significantly affected by changes in treatment charges because these operations are largely integrated with ourMiami smelter andEl Paso refinery .
Through this form of downstream integration, we are assured placement of a significant portion of our concentrate production.
Atlantic Copper smelts and refines copper concentrate and markets refined copper and precious metals in slimes. During the first six months of 2022,Atlantic Copper's concentrate purchases included 37 percent from our copper mining operations and 63 percent from third parties. Atlantic Copper's major maintenance turnarounds typically occur approximately every eight years, with shorter-term maintenance turnarounds in the interim. In second-quarter 2022, Atlantic Copper substantially completed a 78-day major maintenance turnaround and incurred maintenance charges and idle facility costs totaling$40 million . OurMiami smelter completed a major maintenance turnaround in second-quarter 2021 and incurred maintenance charges and idle facility costs totaling$19 million in second-quarter 2021 and$87 million for the first six months of 2021. Major maintenance turnarounds at theMiami smelter are anticipated to occur approximately every two or three years, with the next major maintenance turnaround scheduled for the first half of2024. PT -FI's contract with PT Smelting provides for PT-FI to supply 100 percent of the copper concentrate requirements (subject to a minimum or maximum treatment charge rate) necessary for PT Smelting to produce 205,000 metric tons of copper annually on a priority basis. PT-FI may also sell copper concentrate to PT Smelting at market rates for quantities in excess of 205,000 metric tons of copper annually. InNovember 2021, PT -FI entered into a tolling agreement with PT Smelting that will be effectiveJanuary 1, 2023 , and will replace the current concentrate sales agreement, as amended. Under the tolling agreement, PT-FI will pay PT Smelting to smelt and refine its concentrate and will retain title to all products for sale to third parties. We defer recognizing profits on sales from our mining operations toAtlantic Copper and on 39.5 percent of PT-FI's sales to PT Smelting until final sales to third parties occur. Changes in these deferrals attributable to variability in intercompany volumes resulted in net (reductions) additions to operating income totaling$(7) million (less than$1 million to net income attributable to common stock) in second-quarter 2022,$(99) million ($(81) million to net income attributable to common stock) in second-quarter 2021,$40 million ($23 million to net income attributable to common stock) for the first six months of 2022 and$(185) million ($(145) million to net income attributable to common stock) for the first six months of 2021. Our net deferred profits on our inventories at Atlantic Copper and PT Smelting to be recognized in future periods' net income attributable to common stock totaled$157 million atJune 30, 2022 . Quarterly variations in ore grades, the timing of intercompany shipments and changes in product prices will result in variability in our net deferred profits and quarterly earnings.
CAPITAL RESOURCES AND LIQUIDITY
Our consolidated operating cash flows vary with sales volumes; prices realized from copper, gold and molybdenum sales; production costs; income taxes; other working capital changes; and other factors. We generated operating cash flows totaling$3.3 billion during the first six months of 2022, reflecting solid operating and financial performance. We believe the actions we have taken in recent years to build a strong balance sheet, successfully expand low-cost operations and maintain flexible growth options while maintaining sufficient liquidity, will allow us to continue to execute our business plans in a prudent manner despite current economic uncertainty while preserving substantial future asset values. We are closely monitoring market conditions and will be prepared to adjust our operating plans if required. We will maintain a strong balance sheet and liquidity position as we focus on building 45
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Table of Contents long-term value in our business, executing our operating plans safely, responsibly and efficiently, and prudently managing costs and capital expenditures.
Based on current sales volume, cost and metal price estimates discussed in "Outlook," our projected consolidated operating cash flows for the year 2022 of$4.5 billion are expected to exceed projected capital expenditures of$3.1 billion , which includes$1.9 billion for major mining projects but excludes$1.4 billion of projected capital expenditures for theIndonesia smelter projects that are being funded with PT-FI's senior notes and its available revolving credit facility. We have cash on hand and the financial flexibility to fund these expenditures as well as our other cash requirements for the year, including noncontrolling interest distributions, income tax payments, debt repayments, common stock dividends (base and variable) and any share repurchases. Our cash generating capability and financial condition atJune 30, 2022 , which includes$9.5 billion of consolidated cash and cash equivalents (including$2.4 billion from PT-FI's senior notes), together with$3.5 billion of availability under our revolving credit facility, is expected to be adequate to meet our operating, investing and financing needs for the foreseeable future. In addition, PT-FI andCerro Verde have$1.3 billion and$350 million , respectively, of availability under their revolving credit facilities.
Refer to "Outlook" for further discussion of projected operating cash flows and capital expenditures for the year 2022 and to "Debt" below.
Financial Policy. Our financial policy is aligned with our 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 interest would be allocated to shareholder returns and the balance to debt reduction and investments in value enhancing growth projects, subject to us maintaining our net debt at a level not to exceed the net debt target of$3.0 billion to$4.0 billion (excluding project debt for additional smelting capacity inIndonesia ). The Board will review the structure of the performance-based payout framework at least annually.
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