United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from   to

Commission file number: 001-11307-01

Freeport-McMoRan Inc.

(Exact name of registrant as specified in its charter)

Delaware	74-2480931
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

333 North Central Avenue
Phoenix	AZ	85004-2189
(Address of principal executive offices)		(Zip Code)

(602) 366-8100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.10 per share	FCX	The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes  ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes  ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐ Yes  ☑ No 

On April 30, 2020, there were issued and outstanding 1,451,970,774 shares of the registrant’s common stock, par value $0.10 per share.

Freeport-McMoRan Inc.

TABLE OF CONTENTS

	Page
Part I. Financial Information	3
Item 1. Financial Statements:	3
Consolidated Balance Sheets (Unaudited)	3
Consolidated Statements of Operations (Unaudited)	4
Consolidated Statements of Comprehensive (Loss) Income (Unaudited)	5
Consolidated Statements of Cash Flows (Unaudited)	6
Consolidated Statements of Equity (Unaudited)	7
Notes to Consolidated Financial Statements (Unaudited)	8
Report of Independent Registered Public Accounting Firm	23
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	56
Item 4. Controls and Procedures	56
Part II. Other Information	56
Item 1. Legal Proceedings	56
Item 1A. Risk Factors	56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 4. Mine Safety Disclosures	60
Item 6. Exhibits	62
Signature	S-1

2

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Freeport-McMoRan Inc.

CONSOLIDATED BALANCE SHEETS (Unaudited)

	March 31, 2020			December 31, 2019
	(In millions)
ASSETS
Current assets:
Cash and cash equivalents	$	1,602		$	2,020
Trade accounts receivable	515			741
Income and other tax receivables	591			426
Inventories:
Materials and supplies, net	1,614			1,649
Mill and leach stockpiles	1,106			1,143
Product	1,134			1,281
Other current assets	795			655
Total current assets	7,357			7,915
Property, plant, equipment and mine development costs, net	29,899			29,584
Long-term mill and leach stockpiles	1,272			1,425
Other assets	1,691			1,885
Total assets	$	40,219		$	40,809
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	2,465		$	2,576
Current portion of environmental and asset retirement obligations	305			436
Current portion of debt	245			5
Accrued income taxes	128			119
Dividends payable	—			73
Total current liabilities	3,143			3,209
Long-term debt, less current portion	9,829			9,821
Deferred income taxes	4,087			4,210
Environmental and asset retirement obligations, less current portion	3,758			3,630
Other liabilities	2,439			2,491
Total liabilities	23,256			23,361
Equity:
Stockholders’ equity:
Common stock	158			158
Capital in excess of par value	25,875			25,830
Accumulated deficit	(12,771		)	(12,280		)
Accumulated other comprehensive loss	(668		)	(676		)
Common stock held in treasury	(3,739		)	(3,734		)
Total stockholders’ equity	8,855			9,298
Noncontrolling interests	8,108			8,150
Total equity	16,963			17,448
Total liabilities and equity	$	40,219		$	40,809

The accompanying notes are an integral part of these consolidated financial statements.

3

Freeport-McMoRan Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended
	March 31,
	2020			2019
	(In millions, except per share amounts)
Revenues	$	2,798		$	3,792
Cost of sales:
Production and delivery	2,545			2,919
Depreciation, depletion and amortization	341			347
Metals inventory adjustments	222			57
Total cost of sales	3,108			3,323
Selling, general and administrative expenses	110			112
Mining exploration and research expenses	16			27
Environmental obligations and shutdown costs	26			42
Net loss (gain) on sales of assets	11			(33		)
Total costs and expenses	3,271			3,471
Operating (loss) income	(473		)	321
Interest expense, net	(127		)	(146		)
Net loss on early extinguishment of debt	(32		)	(6		)
Other income, net	20			14
(Loss) income from continuing operations before income taxes and equity in affiliated companies’ net earnings (losses)	(612		)	183
Benefit from (provision for) income taxes	60			(105		)
Equity in affiliated companies’ net earnings (losses)	3			(3		)
Net (loss) income from continuing operations	(549		)	75
Net gain from discontinued operations	—			1
Net (loss) income	(549		)	76
Net loss (income) attributable to noncontrolling interests	58			(45		)
Net (loss) income attributable to common stockholders	$	(491	)	$	31
Basic and diluted net (loss) income per share attributable to common stockholders:
Continuing operations	$	(0.34	)	$	0.02
Discontinued operations	—			—
	$	(0.34	)	$	0.02
Weighted-average common shares outstanding:
Basic	1,452			1,451
Diluted	1,452			1,457
Dividends declared per share of common stock	$	—		$	0.05

The accompanying notes are an integral part of these consolidated financial statements.

4

Freeport-McMoRan Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

	Three Months Ended
	March 31,
	2020			2019
	(In millions)
Net (loss) income	$	(549	)	$	76
Other comprehensive income, net of taxes:
Defined benefit plans:
Amortization of unrecognized amounts included in net periodic benefit costs	12			11
Foreign exchange losses	(5		)	—
Other comprehensive income	7			11
Total comprehensive (loss) income	(542		)	87
Total comprehensive loss (income) attributable to noncontrolling interests	59			(45		)
Total comprehensive (loss) income attributable to common stockholders	$	(483	)	$	42

The accompanying notes are an integral part of these consolidated financial statements.

5

Freeport-McMoRan Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Three Months Ended
	March 31,
	2020			2019
	(In millions)
Cash flow from operating activities:
Net (loss) income	$	(549	)	$	76
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation, depletion and amortization	341			347
Metals inventory adjustments	222			57
Net loss (gain) on sales of assets	11			(33		)
Stock-based compensation	27			29
Net charges for environmental and asset retirement obligations, including accretion	60			64
Payments for environmental and asset retirement obligations	(71		)	(46		)
Net charges for defined pension and postretirement plans	18			26
Pension plan contributions	(26		)	(16		)
Net loss on early extinguishment of debt	32			6
Deferred income taxes	(118		)	33
Charges for Cerro Verde royalty dispute	9			15
Payments for Cerro Verde royalty dispute	(57		)	(10		)
Other, net	(56		)	42
Changes in working capital and other:
Accounts receivable	205			19
Inventories	154			192
Other current assets	(89		)	42
Accounts payable and accrued liabilities	(149		)	(247		)
Accrued income taxes and timing of other tax payments	(2		)	(62		)
Net cash (used in) provided by operating activities	(38		)	534
Cash flow from investing activities:
Capital expenditures:
North America copper mines	(184		)	(210		)
South America	(74		)	(61		)
Indonesia	(326		)	(319		)
Molybdenum mines	(7		)	(4		)
Other	(19		)	(28		)
Proceeds from sales of assets	66			84
Other, net	(2		)	(8		)
Net cash used in investing activities	(546		)	(546		)
Cash flow from financing activities:
Proceeds from debt	1,478			114
Repayments of debt	(1,242		)	(1,356		)
Cash dividends and distributions paid:
Common stock	(73		)	(73		)
Noncontrolling interests	—			(9		)
Contributions from noncontrolling interests	32			—
Stock-based awards net payments	(4		)	(7		)
Debt financing costs and other, net	(18		)	—
Net cash provided by (used in) financing activities	173			(1,331		)
Net decrease in cash, cash equivalents, restricted cash and restricted cash equivalents	(411		)	(1,343		)
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of year	2,278			4,455
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	1,867		$	3,112

The accompanying notes are an integral part of these consolidated financial statements.

6

Freeport-McMoRan Inc.

CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)

THREE MONTHS ENDED MARCH 31

	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	1	—		1		—			—			—	—			1			—			1
Stock-based compensation, including the tender of shares	—	—		29		—			—			—	(5		)	24			—			24
Contributions from noncontrolling interests	—	—		15		—			—			—	—			15			17			32
Net loss attributable to common stockholders	—	—		—		(491		)	—			—	—			(491		)	—			(491		)
Net loss attributable to noncontrolling interests	—	—		—		—			—			—	—			—			(58		)	(58		)
Other comprehensive income (loss)	—	—		—		—			8			—	—			8			(1		)	7
Balance at March 31, 2020	1,583	$	158	$	25,875	$	(12,771	)	$	(668	)	131	$	(3,739	)	$	8,855		$	8,108		$	16,963

	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, 2018	1,579	$	158	$	26,013		$	(12,041	)	$	(605	)	130	$	(3,727	)	$	9,798		$	8,094		$	17,892
Exercised and issued stock-based awards	3	—		1			—			—			—	—			1			—			1
Stock-based compensation, including the tender of shares	—	—		23			—			—			1	(7		)	16			—			16
Dividends	—	—		(73		)	—			—			—	—			(73		)	(70		)	(143		)
Changes in noncontrolling interests	—	—		(1		)	—			—			—	—			(1		)	(11		)	(12		)
Net income attributable to common stockholders	—	—		—			31			—			—	—			31			—			31
Net income attributable to noncontrolling interests	—	—		—			—			—			—	—			—			45			45
Other comprehensive income	—	—		—			—			11			—	—			11			—			11
Balance at March 31, 2019	1,582	$	158	$	25,963		$	(12,010	)	$	(594	)	131	$	(3,734	)	$	9,783		$	8,058		$	17,841

The accompanying notes are an integral part of these consolidated financial statements.

7

Freeport-McMoRan Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1. GENERAL INFORMATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and disclosures required by generally accepted accounting principles (GAAP) in the United States (U.S.). Therefore, this information should be read in conjunction with Freeport-McMoRan Inc.’s (FCX) consolidated financial statements and notes contained in its annual report on Form 10-K for the year ended December 31, 2019 (2019 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 three-month period ended March 31, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

Operations Update. Because of the significant negative impacts of the COVID-19 pandemic on the global economy, including the recent decline in copper and molybdenum prices, in April 2020 FCX revised its operating plans. FCX has assessed its near-term operating plans with a focus on maximizing cash flow and protecting liquidity in a weak and uncertain economic environment and to preserve asset values for anticipated improved copper prices as economic conditions recover. A series of actions are being implemented to significantly reduce costs and capital spending and adjust mine plans and corresponding mining and milling rates to maximize cash flow at lower prices. The plans also incorporate the impact of lower input costs, principally energy and foreign exchange rates, and higher gold prices.

In mid-March 2020, the Peruvian government issued a Supreme Decree and declaration of a National Emergency in its efforts to contain the outbreak of COVID-19, and subsequently extended this order through May 10, 2020. To comply with the government’s requirements, Cerro Verde temporarily transitioned to a care and maintenance status and has adjusted its operations to prioritize critical activities. Cerro Verde has also completed construction of temporary onsite facilities and enhanced protocols to enable critical operations to be maintained in compliance with the Peruvian government order. During April 2020, Cerro Verde operated at an average of approximately one-third of planned rates. Beginning in late April 2020, operating rates increased to over 50 percent of capacity. In early May, the Peruvian government updated its State of Emergency to allow major mining operations to gradually increase activities. Cerro Verde is in discussions with the Peruvian government to clarify the requirements for gradual resumption of normal operations. The revised operating plans reflect the continuation of limited operations at Cerro Verde during second-quarter 2020 and increased mining and milling rates in the second half of 2020. Idle facility costs associated with this temporary shutdown totaled $22 million in first-quarter 2020. Additionally, in April 2020, FCX suspended operations at its Chino copper mine in New Mexico to address COVID-19 concerns. The revised operating plans take into account the impact of the currently suspended operations at the Chino mine. FCX is currently assessing options and future timing of restart of the Chino mine. FCX’s revised operating plans and estimates reflect current assumptions, and FCX will continue to closely monitor health and market conditions and make further adjustments to its mine plans as required.

In connection with the decline in copper and molybdenum prices, FCX evaluated its long-lived assets, other than indefinite-lived intangible assets, for impairment as of March 31 2020. Indefinite-lived intangible assets are evaluated annually as of December 31, and when it is more likely than not that the intangible asset is impaired. FCX’s long-lived asset impairment evaluations required FCX to make several assumptions in determining estimates of future cash flows of its individual mining operations, including: near- and long-term metal price assumptions; estimates of commodity-based and other input costs; proven and probable mineral reserves estimates, including the timing and costs to develop and produce the reserves; and the value of mineral resources not yet included in proven and probable mineral reserves. Projected long-term average metal prices represented the most significant assumption used in the cash flow estimates.

FCX’s evaluation of long-lived assets (other than indefinite-lived intangible assets) did not result in the recognition of significant impairments as of March 31, 2020. Should copper and molybdenum prices decline further in future periods, FCX will continue to evaluate its long-lived assets for impairment. Refer to Note 3 for adjustments to reduce inventories to their net realizable values.

8

NOTE 2. EARNINGS PER SHARE

FCX calculates its basic net (loss) income per share of common stock under the two-class method and calculates its diluted net (loss) income per share of common stock using the more dilutive of the two-class method or the treasury-stock method. Basic net (loss) income per share of common stock was computed by dividing net (loss) income 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 (loss) income per share of common stock was calculated by including the basic weighted-average shares of common stock outstanding adjusted for the effects of all potential dilutive shares of common stock, unless their effect would be anti-dilutive.

Reconciliations of net (loss) income and weighted-average shares of common stock outstanding for purposes of calculating basic and diluted net (loss) income per share follow (in millions, except per share amounts):

	Three Months Ended
	March 31,
	2020			2019
Net (loss) income from continuing operations	$	(549	)	$	75
Net loss (income) from continuing operations attributable to noncontrolling interests	58			(45		)
Undistributed earnings allocated to participating securities	(3		)	(3		)
Net (loss) income from continuing operations attributable to common stockholders	(494		)	27
Net income from discontinued operations attributable to common stockholders	—			1
Net (loss) income attributable to common stockholders	$	(494	)	$	28
Basic weighted-average shares of common stock outstanding	1,452			1,451
Add shares issuable upon exercise or vesting of dilutive stock options and restricted stock units (RSUs)a	—			6
Diluted weighted-average shares of common stock outstanding	1,452			1,457
Basic and diluted net (loss) income per share attributable to common stockholders:
Continuing operations	$	(0.34	)	$	0.02
Discontinued operations	—			—
	$	(0.34	)	$	0.02

a. Excludes approximately 10 million shares of common stock in first-quarter 2020 and 3 million in first-quarter 2019 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 (loss) income per share of common stock. Stock options for 40 million shares of common stock were excluded in first-quarter 2020 and 39 million shares in first-quarter 2019.

9

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

The components of inventories follow (in millions):

	March 31, 2020		December 31, 2019
Current inventories:
Total materials and supplies, neta	$	1,614	$	1,649
Mill stockpiles	$	158	$	220
Leach stockpiles	948		923
Total current mill and leach stockpiles	$	1,106	$	1,143
Raw materials (primarily concentrate)	$	209	$	318
Work-in-process	106		124
Finished goods	819		839
Total product	$	1,134	$	1,281
Long-term inventories:
Mill stockpiles	$	193	$	181
Leach stockpiles	1,079		1,244
Total long-term mill and leach stockpilesb	$	1,272	$	1,425

a. Materials and supplies inventory was net of obsolescence reserves totaling $25 million at March 31, 2020, and $24 million at December 31, 2019.

b. Estimated metals in stockpiles not expected to be recovered within the next 12 months.

FCX recorded charges to adjust metals inventory carrying values to net realizable values because of lower market prices totaling $222 million in first-quarter 2020, associated with copper inventories ($205 million) and molybdenum inventories ($17 million); and $57 million in first-quarter 2019, associated with cobalt inventories (refer to Note 9 for metals inventory adjustments by business segment).

NOTE 4. INCOME TAXES

Geographic sources of FCX’s benefit from (provision for) income taxes follow (in millions):

	Three Months Ended
	March 31,
	2020		2019
U.S. operations	$	5	$	2
International operations	55		(107		)
Total	$	60	$	(105	)

FCX’s consolidated effective income tax rate was 10 percent for first-quarter 2020 and 57 percent for first-quarter 2019. Because FCX's U.S. jurisdiction generated net losses in first-quarter 2020 and 2019 that will not result in a realized tax benefit, applicable accounting rules require FCX to adjust its estimated annual effective tax rate to exclude the impact of U.S. net losses. Variations in the relative proportions of jurisdictional income result in fluctuations to FCX’s consolidated effective income tax rate.

In connection with the negative impacts of the COVID-19 pandemic on the global economy, governments throughout the world are announcing measures that are intended to provide tax and other financial relief. Such measures include the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law by President Trump on March 27, 2020. None of these measures, including the CARES Act, resulted in material impacts to FCX’s March 31, 2020, provision for income taxes.  Some of these measures will provide FCX with the opportunity to accelerate the timing of cash collections, primarily those associated with the U.S. alternative minimum tax credit refunds. FCX continues to evaluate income tax accounting considerations of additional measures as they develop, including any impact on the Company’s 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.

10

NOTE 5. DEBT AND EQUITY

The components of debt follow (in millions):

	March 31, 2020			December 31, 2019
Senior notes and debentures:
Issued by FCX	$	8,773		$	8,602
Issued by Freeport Minerals Corporation (FMC)	357			357
Cerro Verde credit facility	826			826
Other	118			41
Total debt	10,074			9,826
Less current portion of debt	(245		)	(5		)
Long-term debt	$	9,829		$	9,821

Revolving Credit Facility. At March 31, 2020, FCX had no borrowings outstanding and $13 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. At March 31, 2020, FCX was in compliance with its revolving credit facility covenants.

Senior Notes.  On March 4, 2020, FCX completed the sale of $700 million of 4.125% Senior Notes due 2028 and $600 million of 4.25% Senior Notes due 2030 for total net proceeds of $1.29 billion. Interest on these senior notes is payable semiannually on March 1 and September 1 of each year. These senior notes rank equally with FCX’s other existing and future unsecured and unsubordinated indebtedness. FCX used a portion of the net proceeds from this offering to purchase a portion of its 4.00% Senior Notes due 2021 and its 3.55% Senior Notes due 2022 and the payment of accrued and unpaid interest, premiums, fees and expenses in connection with these transactions. As a result of these transactions, FCX recorded a loss on early extinguishment of debt totaling $32 million in first-quarter 2020 as follows (in millions):

	Principal Amount		Net Adjustments		Book Value		Tender Value		Loss
FCX 4.00% Senior Notes due 2021	$	40	$	—	$	40	$	42	$	2
FCX 3.55% Senior Notes due 2022	1,075		5		1,070		1,100		30
	$	1,115	$	5	$	1,110	$	1,142	$	32

On April 3, 2020, FCX used the remaining net proceeds from the offering to fund the make-whole redemption of all of its remaining 4.00% Senior Notes due 2021 (book value of $154 million as of March 31, 2020) and the payment of accrued and unpaid interest, premiums, fees and expenses in connection with the transaction. As a result of the redemption, FCX expects to record a loss on early extinguishment of debt of $9 million in second-quarter 2020.

Interest Expense, Net. Consolidated interest costs (before capitalization) totaled $171 million in first-quarter 2020 and $178 million in first-quarter 2019. Capitalized interest added to property, plant, equipment and mine development costs, net, totaled $44 million in first-quarter 2020 and $32 million in first-quarter 2019.

Common Stock.  In March 2020, in response to the COVID-19 pandemic and resulting global economic uncertainties, the FCX Board of Directors (the Board) suspended FCX’s quarterly cash dividend of $0.05 per share previously planned for May 1, 2020. Under current market and economic conditions, the Board does not expect to declare common stock dividends during 2020. The declaration and payment of future dividends is at the discretion of the Board and will be assessed on an ongoing basis, taking into account FCX’s financial results, cash requirements, future prospects, global economic conditions and other factors deemed relevant by the Board.

11

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 provide for fixed pricing of $2.34 per pound of copper on approximately 60 percent of North America's projected sales volumes for May and June 2020.

A discussion of FCX’s other derivative contracts and programs follow.

Derivatives Designated as Hedging Instruments – Fair Value Hedges

Copper Futures and Swap Contracts. Some of FCX’s U.S. copper rod customers request a fixed market price instead of the Commodity Exchange Inc. (COMEX) average copper price in the month of shipment. FCX hedges this price exposure in a manner that allows it to receive the COMEX average price in the month of shipment while the customers pay the fixed price they requested. FCX accomplishes this by entering into copper futures or swap contracts. Hedging gains or losses from these copper futures and swap contracts are recorded in revenues. FCX did not have any significant gains or losses resulting from hedge ineffectiveness during the three-month periods ended March 31, 2020 and 2019. At March 31, 2020, FCX held copper futures and swap contracts that qualified for hedge accounting for 84 million pounds at an average contract price of $2.56 per pound, with maturities through September 2021.

A summary of (losses) gains recognized in revenues for derivative financial instruments related to commodity contracts that are designated and qualify as fair value hedge transactions, including the unrealized gains (losses) on the related hedged item follows (in millions):

	Three Months Ended
	March 31,
	2020			2019
Copper futures and swap contracts:
Unrealized (losses) gains:
Derivative financial instruments	$	(33	)	$	18
Hedged item – firm sales commitments	33			(18		)
Realized (losses) gains:
Matured derivative financial instruments	(9		)	2

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 (LBMA) 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 LBMA 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 LBMA 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

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and the adjusted LBMA 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 March 31, 2020, follows:

	Open Positions	Average Price Per Unit				Maturities Through
		Contract		Market
Embedded derivatives in provisional sales contracts:
Copper (millions of pounds)	333	$	2.59	$	2.24	July 2020
Gold (thousands of ounces)	92	1,601		1,614		May 2020
Embedded derivatives in provisional purchase contracts:
Copper (millions of pounds)	87	2.58		2.24		July 2020

Copper Forward Contracts. Atlantic Copper, FCX’s wholly owned smelting and refining unit in Spain, enters into copper forward contracts designed to hedge its copper price risk whenever its physical purchases and sales pricing periods do not match. These economic hedge transactions are intended to hedge against changes in copper prices, with the mark-to-market hedging gains or losses recorded in cost of sales. At March 31, 2020, Atlantic Copper held net copper forward purchase contracts for 34 million pounds at an average contract price of $2.35 per pound, with maturities through May 2020.

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
	March 31,
	2020			2019
Embedded derivatives in provisional sales contracts:a
Copper	$	(238	)	$	122
Gold and other metals	7			(2		)
Copper forward contractsb	24			1

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):

	March 31, 2020		December 31, 2019
Commodity Derivative Assets:
Derivatives designated as hedging instruments:
Copper futures and swap contracts	$	4	$	6
Derivatives not designated as hedging instruments:
Embedded derivatives in provisional
sales/purchase contracts	34		68
Total derivative assets	$	38	$	74
Commodity Derivative Liabilities:
Derivatives designated as hedging instruments:
Copper futures and swap contracts	$	28	$