What’s The Significance Of Cost Of Sales In Freeport-McMoRan’s Expenses And Profitability?

by Trefis Team
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Freeport-McMoRan Inc.
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Freeport-McMoRan’s (NYSE: FCX) expenses are largely driven by cost of sales, which accounted for 85% of its total expenses in 2018. As a percentage of revenue, cost of sales accounts for 72% of revenues. However, this is a sharp reduction from 118% in 2016, mainly due to sale of its high cost oil and gas business, along with lower copper volume sold. This drop in cost of sales from 118% to 72% of revenues has added over $4 billion to the company’s profits, which translated into additional earnings of $2.80 per share between 2016 and 2018. However, with revenue expected to drop sharply in the near term, cost of sales as % of revenue is likely to rise to 88% in 2019, leading to a projected drop in net income margin from 15.5% in 2018 to 1% in 2019. The projected decline in margins (due to the planned production cuts on account of the mine transition at Grasberg) is one of the major factors behind a 30% drop in Freeport-McMoRan’s stock price in the last 2 years.

Our interactive dashboard How Does Freeport-McMoRan Spend Its Money? discusses the company’s total expense trend, major cost items, and margin movement.

Total Expenses

  • Freeport-McMoRan’s total expenses have trended lower, from around $18.9 billion in 2016 to about $15.7 billion in 2018, primarily driven by a drop in cost of sales and SG&A expenses.
  • As a % of revenue, total expenses have declined from 127% in 2016 to 84% in 2018.
  • However, despite the fall in expenses, the trend is expected to reverse with the metric projected to rise to about 99% of revenues in 2019, mainly due to a sharper drop expected in revenues.
  • For 2019, we expect total expenses to stand at $14.5 billion, which comprises of Cost of Sales: $12.9 billion; Operating Expenses: $615 million; Non-Operating Expense: $750 million; and Income Taxes: $250 million

Breakdown of Freeport-McMoRan’s Total Expenses

Cost of Sales

  • Cost of Sales have decreased from $17.5 Bil in 2016 to $13.4 Bil in 2018, driven by the sale of the high cost oil and gas business in late 2016, and a decrease in copper volume sold in the last 2 years.
  • As a % of Revenues, Cost of Sales has steadily decreased from 118% to 72% over the same period. However, cost of sales as % of revenue is likely to go up to 88% in 2019, due to a sharper fall in revenues.
  • To understand Freeport-McMoRan’s revenue trend and drivers, view our interactive dashboard.

SG&A

  • SG&A Expense has decreased from $597 Mil in 2016 to $443 Mil in 2018.
  • It declined sharply in 2017 due to the absence of any restructuring charges ($85 Mil included in 2016).
  • As a % of Revenues, SG&A has steadily decreased from 4% to 2%.
  • The metric is expected to rise in the near term to about 3% due to a sharp fall in revenues.

Environmental Obligations and Shutdown Cost

  • Environmental obligations increased sharply from $14 million in 2016 to about $244 million in 2017 due to adjustments resulting from revised cost estimates, before falling to $89 million in 2018.
  • As a % of Revenue, they increased from 0.1% in 2016 to 1.5% in 2017, before falling back to 0.5% in 2018.
  • The metric as % of revenue is expected to remain around the current level in the near term, due to shutdown cost related to Indonesian operations

Mining Exploration & Research (E&R)

  • Mining Exploration & Research (E&R) Expenses increased from $63 million in 2016 to about $105 million in 2018 due to continuous spending on increasing reserves and resources.
  • As a % of Revenue, E&R expenses have increased from 0.4% and 0.6% during the same period, and is expected to rise further to 0.8% in 2019 due to additional spending on the Lone Star project.

To understand how FCX’s other operating expenses have moved and what is the outlook, view our interactive dashboard.

Interest Expense

  • Company’s interest expense has continuously increased over recent years, with net interest expense as % of debt rising from 4.7% in 2016 to 8.5% in 2018, mainly due to rising interest rates.
  • The metric is expected to drop to 8% due to the drop in interest rates as well as lower indebtedness.

Tax Expense

  • Freeport-McMoRan’s Income Tax Expense has increased from $371 million in 2016 to $991 million in 2018, with Effective Tax rate rising from -10.7% to 25.5% during the same period. The rise was sharp in 2017 due to one-time charges related to TCJ Act and higher tax outgo in Indonesia. Effective tax rate is expected to be around 25% in the near term.

 

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