Freeport-McMoRan Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 20, 2021

There are 10 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport McMoran Third Quarter Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I I'd now like to hand the conference over to Ms.

Operator

Kathleen Quirk, President and Chief Financial Officer. Please go ahead, ma'am.

Speaker 1

Great. Thank you and good morning everyone and welcome to the Freeport McMoran conference call. Earlier this morning, we reported our Q3 20 21 operating and financial results and a copy of today's press release and the slides are available on our website at fcx In addition to analysts and investors, the financial Press has been invited to listen to today's call and a replay of the webcast will be available on our website later today. Before we begin our comments, we'd like to remind everyone that today's press release and certain of our comments on the call include forward looking statements And actual results may differ materially. We'd like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in FCX's SEC filings.

Speaker 1

On the call with me today Richard Atchison, our Chairman and Chief Executive Officer Mark Johnson, our COO of Indonesia Josh Olmstead, and Construction Business and Mike Kendrick, who runs our molybdenum business. I'll start I briefly summarizing our financial results and then we'll turn the call over to Richard, who will go through the materials in our slide presentation materials. After our formal remarks, we'll take your questions. Today, FCX reported 3rd quarter 2021 net income attributable to common stock of $1,400,000,000 that was $0.94 per share and adjusted net income attributable Common stock of $1,300,000,000 or $0.89 per share. The $0.89 per share excludes net credits Totaling $0.05 a share, primarily associated with tax credits related to the release of valuation allowances at PT Freeport Indonesia and a gain on the sale of FCX's remaining cobalt business.

Speaker 1

The details of our Adjusted net income are reflected in our press release on Page Roman Numeral 7. We generated adjusted EBITDA for the 3rd quarter of Roughly $3,000,000,000 and we've got a reconciliation of the EBITDA on Page 37 of our slide deck. Favorable results in the 3rd quarter reflect strong execution by our team, growing our production volumes safely, efficiently and Our sales volumes for the quarter for copper exceeded £1,000,000,000 that approximated our prior estimate in July of 2021 and was above the year ago period. Gold sales of 400,000 ounces were approximately 12% higher than our prior estimate And also significantly above the year ago period. We also benefited from positive pricing For copper, our 3rd quarter average realized copper price was $4.20 per pound.

Speaker 1

That was substantially above the year ago period. And gold prices were slightly below the year ago period. We also benefited from improved molybdenum prices in the quarter, where prices nearly doubled from the year ago period. Net unit cash costs were $1.24 Per pound in the Q3, that was lower than our estimate going into the period, and we had some good performance from our leach production, which We've reduced our unit production costs in the period. Generated strong cash flows and we've been doing that Every quarter this year generating $2,000,000,000 of operating cash flow, which exceeded capital spending of roughly $500,000,000 during the quarter.

Speaker 1

Our balance sheet is strong. We ended the quarter with Consolidated debt of $9,700,000,000 and consolidated cash of $7,700,000,000 which resulted in net debt of $2,000,000,000 We had no borrowings under our credit facility and have $3,500,000,000 Available. We also announced today some liability management where we called for redemption. Our outstanding notes due 2022, that has a total principal amount of 524,000,000 I'd now like to turn the call over to Richard, who will be referring to the slide presentation materials. Richard, go ahead.

Speaker 2

Thanks, everyone. Thank you for joining our call. Really pleased to be able to review our strong performance for this quarter and where we are with the company. It's a special time. Several years ago in the call, I said if we could be fortunate enough to ramp up our underground production at Grasberg, at the same time we had a positive copper market, it would be a great time for Freeport and this is really a great time for us.

Speaker 2

We're going to focus on the future, But just one comment. I was last at job site 2 years ago in October And we were just completing the mining of the open pit and starting the ramp up of the Grasberg Block Cave. And so during this 2 year period, our progress has been nothing short of remarkable. And I really congratulate our team in JobSite, but also in the Americas for what we've been able to accomplish Even in the face of all the distractions and challenges that COVID brought on, I hope you and all your family and your colleagues are staying healthy this thing's Not over. We're keeping our guards up.

Speaker 2

I encourage you to as well. We have, at Freeport, Had a successful program to get vaccines to our people internationally. Over 90% of our people in South America are now vaccinated And 85% in Papua and Indonesia are vaccinated. We continue to be challenged Some of our operations in the United States, which is common across our country, unfortunately, but we're encouraging our people and making some progress there. But the news is we've been able to meet the challenge of COVID and accomplish what we're reporting to you today.

Speaker 2

Our copper volumes have grown over 20% from a year ago and that reflects this really exceptional With these prices that we have today, we're generating very strong margin. Our EBITDA doubled from a year ago. Our strong operating cash flows that Kathleen mentioned in the quarter Are really exceptional and particularly when you looked at our capital expenditures, we're only $500,000,000 Now this is generating cash flows to now that we've met our debt target and we met that at the end of June, Way ahead of what we anticipated at the beginning of the year. We're now focused on managing these cash flows and that's a Happy time for us looking at investments for our long term future. At the same time, we're being able to increase returns to shareholders And maintain a really strong balance sheet, which is going to be a real hallmark of our company going forward.

Speaker 2

Everybody is focused on carbon reduction and climate initiatives and COP26 coming up next month. It's going to be All over the papers, we published our second report on our climate initiatives. We put a lot more resources into it. We're really focused on it. As a company compared with other natural resource companies, We have much limited Scope 3 emissions and other natural resources, And we're really focused on our Scope 1 and 2 emissions and have a plan to achieve targets That we believe are realistic and achievable.

Speaker 2

We and the other 28 members of ICMM, International Council of Mining and Metals, which I chair, have signed a commitment to work towards having 0 net Carbon emissions by 2,050 and everybody is working hard on it. We're also continuing to make progress to certify all of our operations With the International Copper Association's Copper Mart, and this just clearly demonstrates our commitment to responsible production. You recall that I became Chairman earlier this year. And When that occurred, I made a real commitment to build the kind of Board that the company like ours really needs And deserves. We have added 4 new members in 2021.

Speaker 2

We added 2 this quarter, Marcello Donadio and Sarah Lewis, that brings us to a total of 8 independent directors, which have a broad range of experience And it's going to be a real strength of our company going forward. Underlying all of this is the fundamental outlook for copper is Incredibly favorable. Copper's role in the economy and as the economy changes with global investments in I know we have a controversy here, but the industries are going to develop. The world is getting increasingly focused on Electrification with modern technology intelligence. And then a new Our first question comes from the line of John Franzrebren of Raymond James.

Speaker 2

Please go ahead. Our first

Speaker 3

question comes from the line of

Speaker 2

John Franzrebren of Raymond James. Please go ahead. Making to reduce carbon. And across the board, those investments are result Insignificant demands for copper. And then you've got and we'll talk about this more, the commodity really supported by I mentioned our climate report.

Speaker 2

It was reported in September. It's on our website. I encourage you all to take a look at it. It really details work in a much more comprehensive way than we did in our first report last year about how our company will work to reduce greenhouse gas emissions and how we are approaching climate scenario analysis And we're reporting in line with recommendations of the task force on climate related financial disclosures. We are, as a company and as an organization, Firmly committed to this.

Speaker 2

We see it now every day, our operations in the West And hurricanes on the Gulf Coast, weather patterns all around the world. We all know we need to be a part of our company. And As I said, as the rest of the world, the rest of the industry, it's going to create a lot of copper demand. We established a target to reduce our greenhouse gas emissions in Indonesia by 30%, which is a new target We have this aspirational goal of net 0 by 2,050. Our 2 big issues are 1, The coal power plant in Indonesia, a lot of power required for our Massive operations there.

Speaker 2

We're now investing in a dual Fuel powered plant there. We're looking to a future of power being generated Biodiesel initially natural gas Looking at hydropower opportunities, so we're working on that. And then the Other major issue is how to convert our big haul truck fleet, massive trucks, diesel driven, How to convert that to electrical powered or hydrogen powered vehicles. We'll hear a lot more about this in the week. Just know that our company is committed to it to deal with our own emissions and to work with Industry and communities in general to meet the things we need to meet with climate change.

Speaker 2

Copper is essential to that. It's a strategic metal in many respects for the future. The world is getting increasingly electrified and More than 65% of the world's copper is used to deliver electricity. And when you look at electric vehicles, charging stations, Clean power from wind, solar, all of these require significantly more copper to operate then the way that things are currently done now. And so it's a challenging time for us and we're serious about this challenge, But it is also a great opportunity for us as a responsible global copper producer.

Speaker 2

So we got this rising demand and supply is a real issue for this industry. Even today with the economic uncertainties in China And globally, copper inventories are remarkably low. The LME recently hit a 47 year low. Shanghai is lower than it's been since 2009. And while there will be some new projects that were started 4 or 5 years ago, delayed by COVID coming on stream in the next couple of years, that will bring some new copper to the market.

Speaker 2

Beyond that, the cupboard is pretty empty in terms of new Supply projects of any significance and the world today, the opportunities are smaller. They're more difficult to develop and produce. Permitting still requires a very long period of time. And so The industry really, one, has an issue with meeting the demand with supply, And that's going to require action across a lot of fronts, more scrap, But copper as a commodity is so Much better than any alternatives that in whatever environment you can envision for the world going forward, Absent some doomsday situation in the global economy, it's just in a situation of where Copper prices have to be strong and in my view stronger than they are today. Turning to Slide 7, What this means for our company is with all the work we've done today in preparing our business and building our assets, We're going to have really significant margins and cash flow.

Speaker 2

6 years ago, our company was facing real challenges and we worked our way through that Very successfully. As we were working so hard and facing dealing with some real tough problems and talked about The assets that we had in our company, the long term assets, the quality of the team, our track record, our capabilities, And that's really what inspired us all to work so hard to get to where we are today. Copper volumes are 20%, gold volumes are 50% higher than they were a year ago and they'll be growing another 15%, twenty Next year. It's a great feeling as we were Ending the quarter and looking at September in particularly that the capital and execution risk To achieve these higher volumes, which we've been pointing to For a very long period of time that those risks are behind us. The higher volumes are coming with low incremental cost.

Speaker 2

Capital expenditures, we have a new project that we'll be talking about In Indonesia, including that, our capital expenditures will range on the order of $2,000,000,000 to $2,500,000,000 a year. So that means we're where we're wanting to be, where we're targeting to be, where we thought we would be. But The important part is now we've done it, we're just not pointing to it. And Slide 8 shows about this ramp up of the Grasberg Mine. Man, that was this slide looks like this was really a straightforward, easy to accomplish deal.

Speaker 2

There are challenges every day. I'll tell you, this is the most complicated mine in the world when it was an open pit mine. And now in the industries Historically, a historic large underground mine, It is truly remarkable. The 3rd quarter was 90% of our target annualized rate. We were at target in September.

Speaker 2

We're now on track to reach full rates metal production by the end of the year. Our team in Indonesia just needs to be congratulated and recognized for It was strategically so important for us, and it was a real matter of concern when we had COVID facing us. It's easy on paper, but man, it's a challenge every day. And I had a great meeting with our team in advance of this call and The excitement, morale and so forth is just exceptional. It's really something special for our company, and we now look forward To taking the steps that we need to take to sustain this For the life of this ore body, we're beginning to talk with the government and getting Positive initial responses about extending our operating rights beyond 2,041 Because of the ramp up, the limit of the operating rights, we haven't done much Exploratory drilling, extension type core drilling, Our feeling and our confidence is there's a lot more resources beyond what we're developing now.

Speaker 2

And we're explaining that to the government. As Initial reactions is positive and I'm confident that we will not be facing an end to this operation in 2,041. That makes no sense for any stakeholder. We need to look at it to take advantage of the long term resources available to us. Slide 9 talks about our growth of our company.

Speaker 2

Real strength of Freeport is its large reserve base, Proved and probable reserves, which gives us a sustainable ability of our operations for a very long period of time. And beyond that, we have resources that are even larger than our reserves that are ground trying to permit We have grown these. We've involved them. We should. And so as a result, we have these multiple options for long term brownfield.

Speaker 2

And I'm really encouraged by the opportunities we have in the United States, where we have great community sport, You have the benefit of strong communities and supporting schools, hospitals, education, great workforce, Great, great community. We pay our people really well. We make sure they have living wages and we're sensitive to them. So here we see across the board Long reserve life and double production. Lone Star, You're going to hear a lot about Lonestar and Freeport's future.

Speaker 2

This has a long term opportunity to be Across the ridge from Morenci, the largest mine in North America, And it's got right now, we're having real success with our The new oxide mine we started this past year, it's expanding. It's got funded by using available production At our nearby Safford mine that is winding down. And then That is really a stripping operation for this enormous sulfide deposit. We have a great project in Chile at our El Abra mine where we're partners with Codelco. This is a mine where we have There's a big sulfide resource capital project to build a mill with desalination plant.

Speaker 2

We're looking at a number of alternatives there. Chile is Going through a process of assessing how they're going to See how that plays out before making any investment decision. But in the meantime, we're getting more We're getting prepared, working with communities, working with preparing for permitting and so forth. This will be a project that the world will ultimately need going forward. We've got a neat project that's not very much recycling electronic equipment.

Speaker 2

This Carbon emissions are significant investments. And so we're looking for that. We're looking for other opportunities like that. And then this coochiengly air mine in Indonesia is really special. It is a I was actually out there in the '90s when as we were driving the Amoli drift, which was a dewatering drift going Underneath the Grasberg open pit, driving the pit, we found this ore body.

Speaker 2

The engineers give our geologists a hard time with that because they literally pierce this ore body that we had It's really to the South Flank of the Grasberg pit. And we've been working The timing for it, in the context of and if you turn to Slide Tien, you can see where it's located. That's in a separate mineralization zone from our Our DOZ, Deep MLZ in the Grasberg pit, it's a long fault line. It may have resource. It has some complicated geology and mineralogy, It's a big mine.

Speaker 2

I mean, 90,000 tons a day Block Cave, you only think of that as not being a huge mine Because it's next to the Grasberg Blockade, but it's like 60% size of Deep MLZ, 40% the size of Grasberg Blockade, 350,000,000 tons of ore, good copper and gold grades, 90,000 tons a day from a block cave. That's big by global standards and it's going to occur over a number of years. It will help Sustain our high level of low cost production out of Grasberg, £500,000,000 of copper a year, 500,000 ounces of gold When it's ramped up in 2,030, capital expenditure is going to be spent over a number of years, use existing Infrastructure, just to ask your gold analysts how they feel gold companies were to announce a gold mine that was $500,000 a year and £500,000,000 of copper a year. This is a significant opportunity for us. 12, I mentioned, Lone Star.

Speaker 2

You can see how we're ramping up the oxides. We got 2 P reserves, about £5,500,000,000 The real prize here is sulfides underlying it. We've done some drilling to identify it. We're doing preliminary plans of how to process it and so forth. Mineral potential is £50,000,000,000 £50,000,000,000 Our guys on this call are really exciting about it is New opportunities to apply technology to leaching.

Speaker 2

Dodge and Freeport predecessors We're long leaders in leaching, part of SX EW Leaching. The opportunities globally for traditional XXEW leaching are diminishing because they've been With limited capital and low carbon emissions, this will range from Looking at a series of additives and approaches For existing Leach Stacks, we're really getting excited by using These data analytics efforts that we started several years ago We've taken certain actions. So it's a combination of things. There are several alternatives we're looking at. The opportunity is really significant.

Speaker 2

Our guys estimate we've got almost £40,000,000,000 of copper in as our This is not this has already been mined. It's not in reserves or resources and any production plans. If we could record if we're going to cover just a piece of this, it's the size of a new mine, low capital, low operating cost, Low carbon footprint. A lot of this is at Morenci, There are other places and it could even apply to some old historical mines that have old leach stacks To take advantage of that, the columns of the history that we've had With these older mines and what this could mean for it. So this is a stay tuned deal.

Speaker 2

We're not building in our plans yet, but it's like a development project, Low capital, low cost, low carbon, so it's really good. So listen, We're just feeling great about Freeport. I mean, we just We've been to the wards together. Our team is we're adding some really new resources to our team despite COVID. We're bringing in support.

Speaker 2

We got young people in our organization stepping up to leadership positions. It's a dynamic company. It's remarkable that through all the trials and tribulations went through, We had very limited numbers of people to leave us. Our people look at each other and we're inspired by each other and it's just great. Strong cash flows.

Speaker 2

We're going to be responsible. We have this great track record of doing all this. If you look at our success we've had in developing projects all around the world, Different kinds of mining, different kinds of processing technology. Market outlook is great. We've got these organic growth opportunities.

Speaker 2

And really, as a shareholder myself, the prospects of seeing returns on those shareholders coming of significance It's just a great feeling. So I hope you can sense how we all feel about our company and our outlook And really appreciate your interest. And I'm going to turn it over to Kathleen before we open up for questions.

Speaker 1

All right, great. Thank you, Richard. I'm just going to cover some brief And just really starting on Slide 16, we provide Some additional details on our operating activities. Richard mentioned Lone Star and the performance there has been really strong. Our operations are exceeding our design capacity, which was originally £200,000,000 We're exceeding that now by 25% And we're continuing to optimize and planning for the next increment of production from oxides as we study the longer term opportunities.

Speaker 1

Richard mentioned the leach work that we're doing. It's a major focus at Morenci. We have a big effort underway to enhance And we're deploying a variety of initiatives. Some of these have already produced results And that did enable us to increase expected recovery from some of our leach material in the Q3. And what this does It gets us more volumes, but also allows us to reduce unit costs, having a bigger pool to spread So that's a really positive thing and more to come as we go forward.

Speaker 1

At Molency, we're continuing To work to increase mining rates, We're targeting getting up to 900,000 tons of material per day In 2023, that's a major undertaking. It's 30% higher than where we were in 2020. As we reported, We have started restarting mill, which had been idled since the first half of twenty twenty and that's proceeding. We started the mill in the Q3. We did experience some delays, but those are largely behind us.

Speaker 1

We also had, as probably a lot of you have seen, the weather conditions in the Southwest That we experienced this summer, we did experience severe wet weather and some power issues during monsoon season, and we always We have monsoon season, but this year was more severe than normal and that did impact Some of our operations in the Q3, and again, that's behind us as well. I want to just echo what Richard said about Our team in South America, the Cerro Verde team has overcome Significant challenges in dealing with the pandemic. We've been operating at about 95% Of compactions on movement around Arequipa and our team just Great work in managing this and being creative about How to manage it safely. We're optimistic that El Abra is making great progress. We're increasing the stacking rate of materials and we're focused on Sustaining a level of production at El Abra in the £200,000,000 to £250,000,000 per year range as we look To potentially expand that as we go forward.

Speaker 1

Richard talked about the terrific results at Grasberg. Team there is just continuing to deliver results quarter after quarter. We expect To be at our quarterly run rate for metal beginning here in the 4th quarter, And for the next several quarters, we project the mill will run at about 175,000 tons per day until 2023, when we install the new SAG mill, Which is currently under construction and that will support higher rates as we continue to ramp up deep MLZ and then make room for The Cuchimliar project that Richard mentioned. A lot of talk right now about inflation. Our team It's really focused on cost management and efficiency projects.

Speaker 1

We're focused on extending equipment lives, Ways to improve our energy efficiency, ways to efficiently implement maintenance practices and really use Technology in all of this. We have, like everyone else, experienced some cost increases. Those have really principally been associated with the energy price increases. To a lesser extent, we've had some other impacts On our consumables, the impact of steel prices on some of our consumables, we've had higher sulfuric acid costs, Freight costs, but we really want to send appreciation to our global Supply chain team, they're doing excellent work in keeping our operations stocked with critical supplies and managing in these uncertain And they've just done an outstanding job in keeping our business continuity going. I will note that we have Seeing very strong prices in molybdenum and those have more than offset some of these inflationary pressures we've had on the cost side.

Speaker 1

Turning to the smelter on Slide 17, we provide an update of our activities With the Greenfield smelter we're developing in East Java and the work we're doing with Our partner at PT Smelting to expand the facility there. We were focused On completing this project as efficiently and timely as possible, we're advancing the engineering and commercial arrangements And we've commenced preparing the land for construction. You probably have seen in press reports that the President of Indonesia Recently visited the site in a groundbreaking ceremony and this indicates the significance of this project to the country. We've got a $1,000,000,000 bank credit facility in place for PTFI to use to advance the projects And we are going to plan additional debt financing for the project, which can be obtained at attractive rates to fund the project long term. As we previously discussed, the long term cost of The financing for the smelter will essentially be offset by a phase out of the 5% export duty.

Speaker 1

So the economic impact So PTFI is not material and this is a project that is shared 51% by Our shareholder, PT FI shareholder, MondID and the balance of FCX. Turning to our volumes and Richard talked about the growth in volumes. We've had great success in execution. We've got our 3 year outlook Listed on Slide 18, and this is generally consistent with our previous guidance. We made some relatively minor adjustments to the Q4 of 2021, but you'll See here that the execution of our plan is on track.

Speaker 1

We show on Slide 19, The strong cash flow generation of this business. We've got very significant free cash flows Using our volume and cost estimates and prices ranging from $4 to $5 copper, holding gold flat at $1800 and molybdenum At current prices around $19 per pound, the real growth in our volumes With low incremental costs, show EBITDA ranging from $12,500,000,000 per annum on average for 20 And operating cash flows, and this is net of tax, ranges from $9,000,000,000 to over $12,000,000,000 which So increased capital returns to investors. Our capital spending plans Our detailed on the next slide, Slide 20, you'll see here that we reduced our outlook for 2021 For capital spending, from $2,200,000,000 previously to 2 point $2,000,000,000 and that excludes the smelter investment. But that reflects really timing. We've had really a timing issue in getting these projects going.

Speaker 1

And so that would just follow some of that falling over Into 2020 to commence development of the Cuchimliar ore body that Richard mentioned previously. So you're talking about $9,000,000,000 to $12,000,000,000 of operating cash flows and CapEx below $3,000,000,000 very strong free cash flow. We've got growing volumes, strong markets, low capital requirements. And that's really allowed us Just over the past 12 months to reduce our debt, our net debt by Nearly $6,000,000,000 And so we're down now to $2,000,000,000 in net debt. I know some of you remember a time when It was multiples of this and so we're in a great credit metrics, our stream It positions us well as we go forward to invest in future growth and increase our The last slide, 22, refers to our financial policy.

Speaker 1

It is centered The combination of the strong balance sheet and the success in growing our volumes will put us in a strong position. Our Board had established earlier this year, a policy that provides for up to 50% of free cash flow To be used for shareholder returns with the balance improvements, we look forward to with the Achievement of our net debt targets, we look forward to the implementation of this policy. We expect our Board will determine the structure and size of additional payouts to shareholders with our annual results and this will be something that we update And it gets reviewed periodically. So that concludes our remarks. We look forward to reporting our progress and continuing to build

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Please pick up your handset before pressing the numbers. We ask that you limit your questions to 1. If you have additional questions, Please return to the queue.

Operator

One moment please for our first question.

Speaker 4

But relative to the Zachary, in 4Q and really into 'twenty two, how should we think about inflationary pressures given what's happened with Coal in Indonesia, freight, power particularly in Europe and Spain And are there any annual contract resets we should be mindful of going into

Speaker 1

We've built in We have a coal contract in Indonesia That is done annually. But for the most part, our energy costs are floating with the market. Because of The increase that we're expecting next year, and that really we've got a big fixed cost business. So It comes at a low cost. We are projecting that our unit costs will decline So while cost inflation

Speaker 2

Great. Thank you. Yes, Michael, I raised this question with our team getting ready for this because Quite frankly, when I saw the out years, I was pleasantly surprised because of everything you're reading just generally about things. But the Currency rates are helping us and these byproduct credits aren't really important to us. Of course, in Indonesia, the gold is growing and the lives of them is doing well.

Speaker 2

And I'd like to say, we benefit because Freeport manages this Americas business as one business. We operate We're a premium customer for all of our major suppliers. So So it's something we're watching and we're and some of our costs are correlated to copper prices. So it's a factor, but I was struck I was expecting to be more quite frankly myself than it's

Speaker 4

Awesome. Thank you.

Operator

Our next question This comes from the line of Emily Chang with Goldman Sachs. Your line is now open.

Speaker 1

Good morning, Arjun and Kathleen. Perhaps could you give us some color as to what's driving the hesitation around maybe accelerating this announcement?

Speaker 2

Henley, it's just more a question of how quickly this has developed. When we set the policy, we were anticipating meeting our debt target. It happened so quickly. Business has gone so well. We've added New Board members, and so we had set much earlier a process that would Result in this being addressed after the beginning of the year when we got our annual results.

Speaker 2

And so we'll be talking with our Board about it. We are also having engagements with a number of our Significant shareholders about stock buybacks and dividends, some of the traditional thinking Seems to be shifting some, but it's nothing about that's causing us to do that. And we have regular scheduled Board meetings and we talk about it every Board meeting. So it's just more of a question of how we set the process Early on and clearly we're making progress much faster Because of markets, but also because of our execution than we had anticipated. And so it's Good situation, but that's why we are where we are.

Speaker 1

And there's no hesitation, Emily, on this. We just got to implement it.

Speaker 2

Yes.

Speaker 1

Appreciate it and looking forward to it.

Speaker 2

All of us are humbly. Thanks.

Operator

Our next question comes from the line of David Gagliano with BMO Capital Markets. Your line is open.

Speaker 5

Hey, Dave. Hi. Thanks. Hey, thanks for taking my questions. Obviously, a lot going on here, the leaching potential, development opportunities, etcetera, etcetera.

Speaker 5

I just wanted to focus in on Cuching Liar for a In a certain respect, it's early days, but Coutinho has obviously been a well known part of the grasp. I just have a few questions. First of all, if you could talk about Spending over the next 10 years. And then secondly, talk about the primary developmental risks as you see it today. Again, I know it's early days, but you referenced complicated geology, mineralogy.

Speaker 6

What are, in your view,

Speaker 5

the primary developmental challenges for Cuching Liar? That's it for me.

Speaker 1

Like our other Block Ks, it's spread out over a long period of time. So It will start out next year somewhere in the 200 $1,000,000 range, maybe a bit lower than that, but ultimately Ramp up to average about $400,000,000 a year. And so that's done over approximate 10 year period. And the production will come on All of this is sequenced together, but the production will come on to sequence when we have availability in the mill as we have Some declines with other ore bodies. But Mark, if you want to give some background of About KL, as Richard was saying, this is just a natural progression for us.

Speaker 1

It gives us really a place to continue to use all everything we learned from Deep MLZ And Glassford Block Cave, we'll time to begin transitioning to develop another ore body there.

Speaker 6

Yes. And David, it's going to look very much like Deep MLZ. It's at a similar elevation. It's Technology to it. We ended up having to play a bit of catch up.

Speaker 6

So we've got a much better geotechnical knowledge And how to address that part of the risk? It does, as Kathleen says, it benefits. It ties into the GBC development of the Orflow system, ventilation access. We're driving 3 headings starting very soon and they all tie off of development that's Either off of the Big Dawson or off of drifting that goes back to GBC. The previous KL reserve had much more Complex metallurgy and geology, over the last couple of years, we changed our Material that was a little bit lower grade, but the material could be processed through our current mill.

Speaker 6

So that took away a lot of challenges at the previous KL mine plant. We had to change our flotation circuit. We had much more of the environmental management with Pyrite concentrate that would be generated. So this plan, It's about 0.9 copper, 0.9 tons per ton gold. It's The tons that Richard mentioned are very much driven by this 2,041 date that we're working on.

Speaker 6

And this It has a lot of growth, both on the same footprint that we're working out now and at deeper levels. I feel like this is going to be our chance to take all the lessons learned. We're looking at the potential of applying electrical, electric mining equipment there. So I think we get a fresh start with

Speaker 2

a lot of

Speaker 6

experience that's going to apply itself and Kale is going to benefit from it.

Speaker 2

And I want to tell you, Dave, that when Mark the original reserve, as Mark I said, had all this pyrite material and our gold coverage are very low and processing was complicated. And dealing with the pyrite Tails was real complicated. I was just so impressed when Mark and his mine planning team came in with this new plan, which makes it much more Traditional, much less risky, much less capital intensive, and in fact, created more value Because originally, we were only getting 50% recovery out of that pyrite laden Gold and ore. So it's a great example of having a really good mine planning team and led by Mark.

Speaker 5

Okay, that's helpful. Thank you. Just a quick follow-up on the timing of the CapEx. So $4,000,000,000 over roughly 10 years, dollars 200,000,000 in 2022, is the lion's share of the spend Likely towards the latter half of the decade, is that reasonable to say? Can you give us a little more color on the timing of that ramp?

Speaker 1

It will average around that. Yes,

Speaker 2

it's pretty consistent because this is Because we've developed most of the access and ventilation and all those sorts of things, it's not chunky. This is More or less mine development and that occurs on a regular pattern.

Speaker 5

Okay, understood. Thank you.

Operator

Our next question comes from the line of Chris Laffania with Jefferies. Your line is now open.

Speaker 7

Thank you. Hi, Richard. Hi, Kathleen. How are you?

Speaker 1

Thanks for asking.

Speaker 7

Just a follow-up question on the KL project. So it sounds like the gold grades there are quite a bit higher than they are at the Grasberg Blockade and the DMLZ and the copper grades are kind of similar. So Is this a project where we should expect operating costs to be at least as well if not lower than what you're going to get from the 2 current blockade projects? And secondly is

Speaker 2

The answer is yes.

Speaker 7

Okay. So it will be lower cost. And should we also think about it as just being sort of a mine life extension to the Grasberg Block Cave? Or is it would there be a period where you have I mean, you're obviously constrained by the mill Would there be a period where you might have higher production as this is online along with you still operating the Grasberg block cave?

Speaker 2

It just fits in really well with great changes with existing mines. It just it folds right in. It's a sustainability of production project as opposed to a significant growth project. We get up to

Speaker 6

a mill capacity of 240 at before KL would that mill would run somewhere around 220. So KAL benefits somewhat The mill capacity provide. And then as Richard and Kathleen mentioned, it just fits in nicely. As the grades and some of the When the grades at it are better than The grades at, for instance, at Deep MLZ.

Speaker 2

And Chris, to put Put that in perspective, way back in the 1990s when we were designing the Grasberg open pit And looking forward to life beyond the pit, our original targets was 120,000 tonnes a day through the mill. So over time, the anticipated 120,000 ton per day mill rate from the underground The 240,000 tons from the underground, just to put in perspective.

Speaker 7

You went from being in a position where you were kind of managing your balance sheet, trying to develop these 2 really difficult underground projects Indonesia negotiating with the government regarding ownership at Grasberg. And you probably couldn't have drawn it up any better as to how it's progressed in terms of the development of the projects, the deleveraging of the balance The ramp up of the Grasberg Block Haven DMLZ has been really impressive. So I think there was a lot of skepticism in the market that whether you could actually deliver on that Kind of unleashing this massive opportunity to appreciate it until recently. I mean, you've kind of been highlighting it in recent quarters, But now we're there. So you're going to be developing these projects.

Speaker 7

And you're obviously talking as well about this kind of catalytic leaching and leaching Copyright of old leach stacks, choco power doors, which historically have not been commercial. Is this a technology that you think could potentially be Revolutionary in the industry in terms of leading to a lot of supply growth from old kind of what had been waste stockpiles. We

Speaker 2

That's again, Chris, Question I've been asking our team all along. In a prior life, I actually worked with the first company out of Houston that did the very first Fracking operation for the whole oil and gas industry way back in the 80s. And so I've asked that question. And while it's a tremendous Opportunity and particularly good for our company considering the nature of our stockpiles and the history of our operations and the way we've dealt with low grade. This will be beneficial.

Speaker 2

People are really going to be pursuing it. There are it's not just one technology that's being pursued, We've got a series of different options. So it's an evolving story. It's not likely to be The kind of game changer that fracking was in the oil and gas business.

Speaker 7

Okay. That's right. Thank you for that.

Operator

Our next question comes from the line of Lawson Winder from Bank of America Securities. Your line is now open. Hi, good morning and thank you for the update. It's

Speaker 6

There is so much

Operator

to discuss, but I'd like to actually touch on your efforts around ESG, particularly in Indonesia. I mean, it's Really exciting that you're targeting a 30% reduction in emissions by 2,030. And I'm

Speaker 1

wondering, how do you think

Operator

about the cost of that or what is the cost that you factored in order to achieve that? And then when you think about it maybe from the other way in terms of IRR, I mean, if you assume some carbon pricing assumption around where maybe your So,

Speaker 2

that I kind of hate people who say that's a good question. Some people just say it all the time, but that is a real good question. And it's something that It's really under appreciated right now. And we're particularly focused on it within ICMM Because here we had the 28 largest mining companies that represent about a third of the global mining industry, unanimously making this commitment. And as I said, with Freeport, because of our limited scope 3 emissions, it's not as big a challenge as it is for some other miners And resource companies.

Speaker 2

But we don't know yet what the cost of this is going to be. And it's going to be significant. I mean, there's just no way around it. You met with a Senior management Caterpillar and to try to think about designing 400 ton haul trucks that can make the grades of these big pits that we have. The battery in those at this current level of technology is changing.

Speaker 2

The damn Battery weighs a ton and its life is very short. So you got to deal with all the recharging and trowing systems and so forth. It's going to involve a lot of cost. And right now, While people are really making these commitments in good faith, they're doing it at a time when we It's going to rely on technology advance questions and answers with all that right We kind of have a good I think we got our arms around converting the coal plant Thanks. But the question is how do you deal with haulage and electrifying shovels and A lot of the shovels are already electric, but just light vehicles and so forth.

Speaker 2

In our underground mines, We have a big electric train helping us deliver ore, but there are going to be some investments there. So It's going to be an unfolding story. And you raised the point that people following us and companies in our industry ought to really be tracking because as we sit There's more questions than answers in that area. I just might make one add on to that. That's going to be another factor.

Speaker 2

And we've got 30 years or so to I have this unwind, but it's going to affect mine life, it's going to affect the economics of project development. All of those things are going to come into play. So in your list of

Speaker 8

Very fair.

Speaker 1

One of the other The things to keep in mind in Indonesia is we have with the Transition to underground, when we were mining at the surface, We had to move both ore and waste to get the metal production here underground. It's very efficient. You're With the block caving and you're really just mining ore, and so it is more efficient. As Richard said, We've got some electrical applications underground. Mark talked about expanding that As we look at new developments in KL, so there are some benefits that we have in Indonesia from the change from surface mining To our underground, Lonnie.

Speaker 2

Yes. We were moving 800,000 to 1,000,000 metric tons a day In that open pit mine, think about that. We still don't have to move material around to manage waste And deal with our tailing system and so forth. But that's a big change. But we've got plans of developing new mines.

Speaker 2

This is kind of a conundrum. The world needs more copper and And yet more copper until technology breaks through is going to result in more carbon emissions. And this is not the only industry where that's an issue that's unknown right now, but it's certainly true in our industry.

Operator

Thank you for your thoughts. Our next question comes from the line of Orest Wowkodaw from Scotiabank. Your line is now open.

Speaker 8

Yes, good morning. I was wondering if we can get Some details on the potential timeline for the Baghdad concentrator expansion, like how much time is involved for permitting something like that? And even with the Lone Star expansion, is it fair to say that probably we wouldn't see any CapEx for either in 2022?

Speaker 2

Well, I'll let others answer. We'll have CapEx For Lone Star, with this oxide, because we're expanding the oxide. We started out at a certain level and we're stepping it up. But Kathleen, you are calling somebody

Speaker 1

else to Yes, it will be advancing feasibility next year. Back to the guidance, I'm thinking back to that is probably out or so before we'll have production, and so you won't have meaningful CapEx For another couple of years associated with it. And Lonestar, the next increment of expansion It's relatively low in terms of capital intensity. The longer term opportunity is timeframe, but it's meaningful. The big thing that we really are focused on is Growth through these low capital intensive opportunities to get more out of what we already have That's really where we can impact things in the shorter term.

Speaker 2

Okay. I'm going to put an I just want to know what Catherine just said about Bagdad because going back to the early 2000s, there was just a feeling that higher prices would bring production. I mean, it was and that's been the history of the copper industry. But here we are at Baghdad We already have the reserves. We have established operation, full support of the community.

Speaker 2

And we're just talking about Shortening the reserve life by building a new concentrator, and that's 5 years out. That's as easy a project as you're going to find So that's what I was just saying, this coming situation, absent some doomsday global economic situation, There's just going to be a time when the world is going to be very short of copper.

Speaker 8

I couldn't agree more. Richard, just as a quick follow-up, in terms of the capital allocation framework of paying out up to 50% of effectively free cash flow, How does the smelter CapEx fit into that? Is that excellent?

Speaker 2

And you need to keep that in mind because That is one of the goals I was trying to achieve when we're negotiating all this back in 2018 is We consolidate PT FI. The economics of and so that will show up as consolidated debt for But it's financed at the subsidiary level. The obligation is going to be shared by the 2 shareholders FCX and MindID. It will go into PTFI's tax calculations. So the project will be something that will affect And when you step back from that Indonesian operation, I was really pleased I don't know if any of you review The Indonesia media coverage, but they just had these athletic games in Papua where the President was there and Senior government people, they had the ground breaking aggressive.

Speaker 2

I have never in 30 years nagging what a great investment the country made When they bought out Rio Tinto's joint venture interest in 2018 for the government Going forward, and when you look at the government's equity position, their 51% share of equity, which will step up to that in stages, The high tax rate we have, royalties we pay, you look at the payments that are made for intercompany transfers to FCX, The government's economic interest in the project exceeds 70%. We were able to retain through the negotiations The interest we had going into it. So this is truly something that all the parties are very happy with. And what a relief it is to be working in Indonesia and not have to deal with the kind of complications we had for so many years.

Speaker 5

Thanks, Richard.

Operator

Our next question comes from the line of Carlos De Albo with Morgan Stanley. Your line is now

Speaker 3

open. Yes. Thank you very much. Good morning, Richard and Khatin. Just on KL, how much, if anything, of the Estimated £500,000,000 of copper at KL would be incremental or 100% would be just to replace and sustain your production profile in Indonesia.

Speaker 3

And together with that and just following on the discussion, How do you envision, Richard, or what is on the negotiating table for the potential extension of your rights in Indonesia? Would the government potentially get a higher stake in

Speaker 2

This

Speaker 3

is the scope of the negotiation.

Speaker 2

Okay. So, with your first question, Kathleen, help me. Well, let me just say though, we give a 5 year Outlook for PTFIs production? And is that in the press release or will that Yes. Yes.

Speaker 2

Okay. So Carlos, just follow that and you can see that as we said before, this is more of a question of sustaining production levels as opposed to A growth project. So but you can see what we've showed for 5 years And that will give you a view of the trend going forward. Now with respect to your second question, it's really early stages, But we have broached it. I've talked with senior government people about it and our partner, MindID, The state owned company under the auspices of the Minister of State Owned Enterprises, everybody recognizes The mutual benefits for it.

Speaker 2

Sure, the government like a bigger interest, but think about the complications of that Because with an extension, we will want to start, as Mark said, we've got opportunities at KL and elsewhere To invest and we'll make those investments in advance of 2,041. And so we have to balance out how you share those We basically have 50 percent economics of new investments With what's our interest going to be going forward? So that's early days to be

Speaker 1

The alignment Between FCX and the government is really good to have as the kind of incentives for both parties We tried to design in 2018 and that's really what's happened.

Speaker 3

That's right. And given everything that goes around developing a project of this magnitude, KL, What would be ideally the expansion of the time for those lines that you were looking for, 2,030

Speaker 1

Well, just to be clear on KL, that's in our To

Speaker 2

be clear on KL, yes, Kathleen, that Those economics are baked into a 2,041 drop dead date.

Operator

Okay.

Speaker 2

Okay. So they're not Judy is, is to make the KL bigger and to find other resources because we really have done very limited And so we don't know the answers, but we're optimistic that there's resources there We don't know about yet. And you know the best answer is for projects like this to not have a timeframe, But to have incentives for all the parties to work to maximize the resources over the long term, Timeframes make no sense. Thank you very much. But I want to be clear, the KL economics are not dependent on an extension, The current project.

Operator

Our next question comes from the line of Brian MacArthur with Raymond James. Your line is now open.

Speaker 5

Good morning. Walt, Richard, you just answered the question

Operator

I had right there.

Speaker 5

So maybe I'll try something else. Just On the molybdenum business, obviously, it's doing a lot better. I see climax has come up a little bit. Like what's the strategy going forward? Like you plan to ramp things up more there?

Speaker 5

And at Sareta, which obviously has a big Moly credit, like Why wouldn't it be ramped up bigger in the whole thing in the near term too?

Speaker 2

Well, We've been in creating the processing facilities, capabilities. Mike Kendrick is on the line. He can chip in on this. But Rather than just being a metal producer And a byproduct producer, the past efforts created a really sustainable global leading business Of where we're able to maximize the value of our ore resources in Colorado from our Bolivian mines Through the byproducts credits in North America and South America, and we can expect those to come with expansion projects and more over. And so we were able to generate higher than the metal price value from aluminum by processing as a chemical product.

Speaker 2

And we run this thing as a business. It obviously ebbs and flows with the price of molybdenum. Today's price will look out 3 or 4 years and a lot of cash But it's strategically important to us. We just got a great team. It's a global team.

Speaker 2

They work together very well. Colorado is a state where you've got all states are, but you got to be very careful about environmental management. The City of Denver gets maybe 10% of its drinking water off of Climax Mountain. And so it's a but it's a business that goes back 100 years more than 100 years for our predecessors and is strategically very important and now it's generating cash. Mike, you want to I was just going

Speaker 1

to add, Richard and Brian, we do have opportunities to increase primary moly production At the climax mine. And if you think about what the big deficits people are talking about in copper, there could be Mounting deficits in Mali at some point. And so we want to be in a position and that's what our primary mines can do Is meet market demand and we've got we had tail capacity in the past To match up with markets and now we have the opportunity potentially to increase. And so we're going to be doing So mine stripping and that sort of thing to be positioned so that the markets are there, we can be there to participate with this Quality product that the market wants. So we're looking at all of that.

Speaker 1

And I don't know, Mike, if you want to add something to that.

Speaker 4

No, I think you both have captured it really well is that we've made Freeport has made Tremendous investments in the moly business over the last decade, including the Climax mine, a tremendously productive circuit at Cerro Verde and at our other byproduct circuits in North America. And we've been able to take that with Our downstream operations that we've inherited and we've made incremental investments over time And they're very productive and we can service not only the metallurgical, but the Chemical industry and the lubricant industry, very well. And as Kathleen says, we're definitely evaluating the next steps.

Speaker 5

And sorry, just on Sarita, given the big Moly credit there, is that all the way back to full capacity yet?

Speaker 9

Josh? Yes. Good morning. Yes, I was going to jump in with respect So they've been we've been ramping back up at Syuri to in terms of the mine plan and stripping over the last 6 to 8 months. And so if think about it from a moly perspective, it's really been driven by the sequencing and the grade available in the mine.

Speaker 9

And so as the moly price has gone up, they're looking at what's The best way to optimize the value at Searita, but the upside is incremental. It's not significant because the mill is at its As we sit today and going forward, there's opportunities as Kathleen touched on earlier with respect to incremental billing rate increases, which we're working on through Data analytics and digital type tools, but it will be incremental at best as we go forward.

Speaker 5

Thank you very much.

Speaker 1

Thanks, Brian.

Speaker 2

Thanks, Brian.

Operator

Our next question comes from the line of Alex Hacking from Citi.

Speaker 2

Hey Alex.

Speaker 5

Thanks. My question was already answered, which was around the economics of Okay. I'll let someone ask the question. Thanks.

Speaker 2

Thanks, Alex.

Operator

Our next question comes from the line of Michael Dudas from Vertical Research. Your line is

Speaker 2

Hey, Michael.

Speaker 8

Good morning, Richard, Kathleen. This Great news on the relationship with the Indonesian government. Maybe you can share some additional thoughts on what your Is there anything out of Washington with all the noise that's going to could impact mining, could impact potential investment or how the Then or how the mining industry will react as some of this legislation comes forward?

Speaker 2

All right. Wow, I got to just put my comments with those questions. Sorry about that, Richard. No, no, no, no. It's the world we live in.

Speaker 2

Chile is separate From Peru, and it's got really a lot of questions about it right now. It's driven by This widespread feeling within the country of people as people are having around the world dealing with income, inequalities and Social programs versus other government initiatives and so forth. And it's got a complicated election coming up. There's no clear cut front runner right now. There's processes going on within the Parliament, Within issues related to consideration of constitutional changes.

Speaker 2

And so it's really, From my perspective, muddy waters there. It's not currently nearly as significant as Peru in terms of That offers production is a small part of our production, but it is affecting our consideration of expansion. But we're working with the industry. We're not top of the charts in terms of production there, so We're working with others on it. In Peru, Peru always consistently He has complicated presidential politics and we've seen the story before where A less leaning candidate gets into office and runs on platforms that are Very much addressing getting more money out of mining companies.

Speaker 2

And President Castillo ran on that platform. He had the backing of the far left wing parties there. I got to meet him within this past month. He came to Washington and it was a Sunday before UN Week And with a small group of mining executives, I had dinner with him. And my first time to meet He comes from a non political, non political leader background.

Speaker 2

He was a teacher In the interior, Forou and when he talked with us that night, he was I found him to be very compelling in his Emotional feelings about doing more to help the people from the region where he came from, but also throughout Peru, The poor people in terms of education and so forth. There, I had a better feeling than I had going into it. I had the chance to have exchanges about different issues. We did not get into none of us got into Details about the 4th, but he emphasized that he recognized the importance that mining plays And that's what always happens when people get in office to achieve social programs. They see how much mining contributes to the country financially And that's needed to do at the very outset And replace that was Prime Minister.

Speaker 2

And So it's a really wait and see thing About it, we're working with others in the industry. We need to be responsive to his concerns. And that's what I'm trying to we focus almost all of our community programs On the regions where we operate, I think we've got to take a broader view and show people in the interior that mining can help their lives. And so that's what I'm working on right now. And so I am more optimistic now than I was during the election.

Speaker 2

You'll hear different views by different miners there. People are very concerned, rightly so. Our situation is We have a new stability agreement. We're maximizing the operations at Cerro Verde. It's It's got the world's largest mine site concentrate facilities.

Speaker 2

We have great relationships with the local community. So we want to Build off that and trying to reach out and find some common groundwork for President Castillo, but it's uncertain. Ma'am, what about the U. S? What can you say in Washington these days?

Speaker 2

And the current administration And yet I don't expect them to lessen up any requirements for Permitting environmental management community issues, Contact just runs against the grain of their political situation. So It's really uncertain. We're all hopeful we'll see Some steps towards infrastructure building. The country really needs it. You see it in ports and roads and bridges all over the country.

Speaker 2

But I just don't have any comment on the political situation other than be distressed about our approach to relationships China in this country and that's a byproduct part of it. It's an issue and it's a complicated one, but China is going to be Important part of our world going forward, I mean, the country is too big, the people Very smart. They work hard and they create a lot of economic velocity. So anyway, I'm focused I'm staying out of politics and focused on Freeport. You sound like a true ambassador, Richard.

Speaker 2

Thank you.

Speaker 1

Thanks, Mike.

Operator

Thank you. Now, we'll turn the call over to management for any closing remarks.

Speaker 2

Well, Kathleen, I thought going into this thing, we had such a good quarter, we'd have a real short call. But I really appreciate your good questions. As always, there are a lot of complicated issues to face with. I woke up this morning feeling on top of the world and then opened my screen to see for the first in a number of days a weekday in the market and that's it. That was just God's way of reminding me about the business we're in.

Speaker 2

But we couldn't be more I think you get I hope you get the sense, Not just from me, but from our whole team with just how good we feel about what we've done. And We're not going to focus on what we've done. We're focusing on where we go from here. And it's a long range business. This is a long range company.

Speaker 2

We don't feel any pressure to do anything from any kind of M and A standpoint Our be overly aggressive in new investment decisions, we can approach this in a very Straightforward, logical way. And in the meantime, make a lot of money and show shareholders some Gratitude for sticking with us and being part of our company. So thank you all. If you have follow-up questions, as always, let David know and we'll be

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Earnings Conference Call
Freeport-McMoRan Q3 2021
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