Freeport-McMoRan Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 26, 2022

There are 13 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport McMoran 4th Quarter Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer I would now like to turn the conference over to Ms. Kathleen Quirk, President and Chief Financial Officer.

Operator

Please go ahead, ma'am.

Speaker 1

Thank you and good morning. Welcome to the Freeport McMoran conference call. Earlier this morning, we reported our 4th quarter year end Our conference call today is being broadcast live on the Internet and anyone may listen to the call by accessing our website homepage And clicking on the webcast link for the conference call. 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 today's comments, We'd like to remind everyone that our press release and certain of our comments on today's call include forward looking statements And actual results may differ materially.

Speaker 1

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 our SEC filings. On the call with me today are Richard Atkerson, Mike Kendrick, who leads our molybdenum business. We also have Rick Coleman and Corey Stevens, Who support our team with engineering and construction, technical services and support for our growth projects And Steve Higgins, our Chief Administrative Officer. I'll start by briefly summarizing our financial results And then I'll turn over the call to Richard, who will review the slide materials in our presentation. I'll make some comments and then we'll open up the All for questions.

Speaker 1

Today, FCX reported 4th quarter 2021 net income Attributable to common stock of $1,100,000,000 or $0.74 per share and adjusted net income after excluding net charges totaling $300,000,000 or 0.21 dollars per share for the quarter. For the year ended 2021, our net income attributable to common stock totaled $4,300,000,002.90 per share and adjusted net income totaled $4,600,000,000 or $3.13 per share. We have a reconciliation of our adjusted net income on Roman numeral 7 as part of today's release. Our adjusted earnings before interest, taxes and depreciation for the 4th quarter totaled 3,200,000,000 And for the year totaled $10,900,000,000 We've got a reconciliation of our EBITDA calculations on Page 43 of our presentation materials. Our team delivered great volume growth during the year.

Speaker 1

Our Copper sales of over £1,000,000,000 during the Q4 approximated our guidance going into the period. And for the year, we sold £3,800,000,000 of copper. That was a 19% increase from 2020. Our Q4 2021 gold sales of 395,000 ounces were about 5% above our Guidance going into the quarter and that reflected higher throughput rates in Indonesia. Our annual gold sales totaled 1 Pricing for copper, our average realized price of $4.42 per pound in the 4th quarter was more than $1 A pound higher than the Q4 of 2020.

Speaker 1

Our realized gold price of $18.08 per ounce It was slightly below the year ago quarter, and our results also benefited from improved molybdenum prices, Our realization in the Q4 of 2021 of over $19 per pound was almost double the year ago period's realization. Unit net cash costs during the 4th quarter averaged $1.29 per pound of copper. That was slightly above our estimate of $126,000,000 going into the quarter, but that reflected A charge, a non recurring charge associated with the successful completion of our multi year collective labor agreements at Cerro Verde in Peru. Strong cash flow generation again during the quarter. We generated $2,300,000,000 of operating cash flows.

Speaker 1

And for the year, we generated $7,700,000,000 of operating cash flow and that exceeded our capital spending of 2,100,000,000 program authorizing purchases of up to $3,000,000,000 of FCX common stock. Through January 25, we Acquired 15,400,000 shares at a total cost of $600,000,000 and that was an average price of $39 per share. The Board also approved in November an increase in common stock dividends for 2022, Effectively doubling our common stock dividend. And on December 22nd, We declared dividends totaling $0.15 per share that will be paid on February 1 this year to shareholders of record As of January 14th, our balance sheet is strong. You'll see that in the results.

Speaker 1

The net debt At the end of the year, totaled $1,400,000,000 and we had no borrowings under our $3,500,000,000 revolver. So we've got strong liquidity with $8,000,000,000 of cash at the end of 2021. I'd now like to turn the call over to Richard, who will be referring to our presentation materials on our website.

Speaker 2

Thanks, Kathleen, and hello, everyone. The end of 2021 is a special time for our Freeport team. We've met a series of multiyear complex challenges with great success. You start by looking at The debt picture which Kathleen mentioned, just 6 years ago, our debt was at $20,000,000,000 and the Way to manage it was really unclear. We have now reached a point where our debt is de minimis.

Speaker 2

We have started a program of shareholder returns with higher dividends and share buybacks. We have assets And an outlook that will allow us to increase those over time, our credit rating has been raised to investment grade by 2 of the agencies. Then you look at the Grasberg underground project, which goes back much further. We began our initial plans for this underground operation in the mid-1990s. We began spending capital 20 years ago.

Speaker 2

By the end of the year, we met our target by reaching our metal Long term run rate, we are taking steps successfully and have the way forward to increase our mining rate well over 200,000 tons per day from the underground, that's just remarkable. During this period of ramping up Grasberg, we had challenges in our dealings with the Indonesian government about our contract of work. We resolved those 3 years ago, and I'm pleased to report that our relationships with the government of Indonesia is one Now cooperation, working together mutually for common goals, relationships have never been managed have never been Better. Then 2 years ago, we started facing COVID. That was a huge uncertainty for us.

Speaker 2

At the time, we took aggressive steps Be prepared to manage the risk that we're emerging. We've successfully managed our way through that and achieved our debt Production Grasberg Underground from that standpoint. ESG is on everybody's mind these days. It's always been part of our psyche at Freeport Because of the nature of operations, we've begun aggressive efforts to deal with climate change impacts of our operations. We're working with the copper industry with this copper mark designation, which we have been a leader in, working with ICMM With Communities, I became Chairman about a year ago.

Speaker 2

I made commitments to myself to strengthen Freeport's Board. This year we've added 6 new directors. 4 are well known, highly regarded CEOs with extensive international business experience who add a lot to our Board. We have 2 women we added that both are financial experts experienced in audit committee dealings. One is probably an Hispanic.

Speaker 2

It's just been a great work by our team. We have a real sense of accomplishment and we're really looking forward now to the future with optimism, commitment and excitement. Turning to our results. Our copper volumes grew by 19% compared with the prior year, Reflecting this ramp up in Indonesia, our unit costs declined despite rising energy Costs and other unit and other input costs, our team has done a great job of managing the challenges of supply chain and cost inflation. We generated strong margins.

Speaker 2

Our EBITDA and cash flow rose by 2.5x over 2020. And we ended the year with just over $1,000,000,000 in net debt and we're well prepared with our long lived reserve and resource base To advance organic growth over time, now with the ramp up at Grasberg Reaching the point of where it is, we're now looking to our operations in the Americas for future growth. It's nice to talk about Accomplishments, but we're all focused on what we go where we go from here, how we build more value for our company, and we have a great opportunity to do that. Copper, over 20 years ago, our company made a commitment to copper and it was driven by supply side constraints that we saw in the global marketplace, At that time, growth in China. And we have fundamentally stuck with that.

Speaker 2

Our Board made a diversion with this oil and gas deal, but that's behind us now. But the fundamental outlook for copper, As positive as it was 20 years ago, it's now even more positive and becoming increasingly positive. It's driven by copper's role in the global economy, just fundamentally the need for copper as the world develops. We saw it in China. China continues to be an important part of the market.

Speaker 2

Global growth will occur outside China, But the new elements of demand are really significant. Any investments in carbon reduction and everyone's talking about carbon reduction Requires significantly more copper than the world has required in the past. Electrification is the key to climate change and 2 thirds to 3 quarters of copper's use is dealt with electrification. Whether it's electric vehicles, Alternative energy generations, all of these require much more copper than the traditional power. Then you move beyond that to technology advances Communications, artificial intelligence, expanding connectivity as infrastructure Developed around the world public health initiatives, all of these are creating what I'm calling a new era of copper demand.

Speaker 2

And these are broad based. They're inevitable. Copper will be affected by Risk to the global economy from time to time, but underlying that is a long term very Positive outlook for copper and our company is solidly positioned to benefit from that. You add that together with supply scarcity In the demand factors, and you have a real compelling case for investing in our company. We are seeing increasing scarcity in supply at a time when demand is growing so significantly.

Speaker 2

There are a limited number of projects which have been under development for some time now that are scheduled to come on stream in the near term. But when you look beyond that, it's hard to find actionable projects that are can be Developed within a very short period of time, it just takes a long time. And then there's increasing political risk around the world That will have its impact on copper supply development. Notably, in Chile and Peru, where 40% of the world's copper comes There's new presidents who run on agendas that are oriented towards social programs that require More revenues to implement and how the industry and the governments deal with that will be very important. But beyond that, you see this in countries like the United States, you see other countries restricting new supply development for community social issues.

Speaker 2

Countries around the world are demanding more of miners in terms of Revenues that goes beyond Chile and Peru ranging all the way from Asia to Central America to Africa, all of these things Add into supply constraints at a time when the world needs more copper. We're focused on the long term outlook for our markets. We always prepare ourselves and recognize that near term risk may emerge to the global economy. Now we're strong financially to deal with those risks. We structured our business in a way that we have flexibility to manage it.

Speaker 2

So we're Much more comfortable today about whether our company is positioned to take advantage for what we believe will be a very Positive view for copper as a commodity. You look at our reserve base. We report reserves this year Based on mine plans of $2.50 copper, we don't limit ourselves to looking at Projects on that basis because we have an optimistic view about copper, but we have more than at 250 copper, we have more In a 25 year reserve life, approved and probable reserves and beyond that, in our Incremental mineral resources, we have enormous amounts of copper that over time will be brought into reserves as we do Delineation drilling and engineering work to bring those into reserves and ultimately into new projects. This is really a key asset for Freeport. It provides us a lot of options for the future when you look at the scarcity in the For development opportunities, Freeport does not need to rely on acquisitions to support our long term future.

Speaker 2

We always monitor opportunities, but we have the assets within our company now to sustain our business And growing significantly over time. With these favorable markets, our margins and cash flows are growing. We have well established plans. Our whole team globally is focused on executing plans to produce more copper, Produce it at a lower cost. We've built a strong foundation for the future.

Speaker 2

We had significant sales increase in 2021, and we've got growth factored For the near term, additional 13% in 2022 and improving in 2023. We have derisked our plans, expect growing margins and are really prepared To execute, to generate the cash, to support returns to shareholders as we invest in future growth. Looking at the slide now that shows the successful ramp up of the Grasberg Underground, and I just wish you all could see me because I've got a big smile on my face when I look It's really significant with what we've done there. Our team there is just really to be complemented in meeting all These challenges was nothing short of a monumental task. As I mentioned earlier, it was years to achieve this.

Speaker 2

The underground development, turning to the next slide, over 3 50 miles of tunnels, 7 miles of an underground railroad with 10 electric Trains running 4 huge crushers, 5 miles of conveyor belts, these shafts to take large numbers of people down Underground, it's all underground. Over 500 drawbells have been opened, almost 350,000 meters of undercut. And we're really on track To achieve long term sustainable rates of in excess of 200,000 tons a day from our mines through our mills, This gives us a very strong base of long terms. We've done this now to create Return Grasberg To be the 2nd largest copper mine in the world, the largest single gold mine even though it's a byproduct, you look at the 4th quarter When we had our net cash costs in the face of all this inflation of only $0.08 per pound for the 2nd largest copper mine in the world. We are on track to achieve a long term run rate of £1,600,000,000 of copper a year, over 750,000 tons.

Speaker 2

Always looks simple on paper, but man, it was a challenge to get it done and our team deserves a tremendous amount of credit for doing that. Now we look at where are we going to grow for the future, how we're going to sustain our business for the future. This new lease technologies that we're working In the Americas is a huge opportunity for Freeport. Our company historically was a leader in developing leaching. Our Marinsi mine in Arizona is the world's largest leaching operation in today's global copper market.

Speaker 2

This technology that we will have to improve recoveries and achieve recoveries from historical Waste tax, just creating copper that no one thought we had the opportunity to recover It's really significant for us. Then we have our mine in northwestern Arizona, the Bagdad Mine, which has a long reserve life Set up perfectly for a mill expansion and to achieve greater volumes out of it Relatively straightforward way, in Eastern Arizona, we have the Lone Star Mine, Which I truly believe someday will be the all star mine for Freeport. We are working and expanding Recoveries from the oxide ore that's there, taking advantage of facilities that are nearby Safford mine, which is ore production is declining as planned, but underneath that, the Lone Star mine has a sulfide resource That I really believe will make it be the all star mine for us. The project in Chile that the world will need, we're waiting to see how Things unfold there. And then this Coochingly air mine that we have undeveloped at Grasberg is going to be an important part of our future there.

Speaker 2

This will be one of the world's largest block cave mines in its own right, 80,000 tons a day. It's got resource with 6,000,000,000 Pounds of copper, 5,000,000 ounces of gold through 2,041. And we're talking with the government now, preliminarily about Standing our rights beyond that, and that mine will be producing well below 2,041. When that's on stream, We are targeting getting up to 240,000 tons a day of moderate mill rate out of the operations at Grasberg. There's a slide on Lone Star that I referred to earlier.

Speaker 2

You can see the data of how we're increasing it. But the real prize there, the oxide development will be profitable at the volumes, attractive cost, But the real long term prize there is this sulfide resource that underlies the oxide. It's very large. It takes time to do it, but it will have a complex, we believe, ultimately similar To the Morenci Mine, which is the largest mine in North America now. This leach technology is something you'll hear a lot about from us Throughout the energy industry, we will be a leader here.

Speaker 2

We are looking at several different Types of technologies, all of them are excited. We are Corey is leading our team here and It's really a new element of demand. Just in our existing waste tax, We have we believe we have almost £40,000,000,000 of copper in those stacks and even small recoveries out of that could result In copper, that would be equivalent to developing a whole new mine. So it's early stage technology, a lot of work to do, A lot of excitement by our team about doing this. So it's really good.

Speaker 2

I want to close by Just recognizing our team around the world, I'm so proud to be part of this team. We've got a group People that are technically competent, that are highly motivated, that work together cooperatively, that are Buying in to making Freeport the foremost copper company in the world and keeping it there, and we have the capabilities on hand to meet and exceed our expectations, exceptional opportunities for our business. And I want you to know that in Regards to what you read out in London, I'm planning on staying part of this team for as long as God's willing to allow me to do it. I'm having more fun now than I've had in years, and I'm really excited to be part of this team as we go forward. What's up, Kathleen?

Speaker 2

All right. All right.

Speaker 1

Thank you, Richard. And I'll just start on Slide 17 and make some Comments on our operating and financial matters and then we can turn it over to your questions. We're providing some additional details on our 4th quarter operating Activities on Slide 17. And as Richard said, the Lone Star Mine, he's now renamed it the All Star Mine, but it You'll recall we commissioned the mine in the second half of twenty twenty And last year, we produced £265,000,000 of copper. That was a 30% increase The original design of £200,000,000 per year.

Speaker 1

We have incorporated now a further incremental expansion into our plans, which will take us up to £300,000,000 per year by 2023 with an investment of approximately 250,000,000 And as Richard mentioned, as we accelerate the mining of the oxide ores, this will expose as to the larger sulfide opportunity. At Morenci, we're gaining momentum on our leach initiatives. We have substantial material that has already been placed on leach stockpiles, which provide an opportunity to increase our copper production At a low incremental cost and notably a low carbon footprint, we're applying new technologies and using data analytics and censoring To measure our success and we're very encouraged by some early wins and are optimistic that there's much more to come. We started the effort at Morenci because of its significance, but the early wins at Morenci have allowed The team at Morenci to share its findings across the portfolio and this gives us a significant value opportunity for Freeport And we hope to report progress ongoing progress to you as we go through the year. We also continue to ramp up mining and milling rates At Morenci, we estimate that production from Morenci will be about 10% more copper in 2022 compared with 2021.

Speaker 1

In South America, our teams there are doing great work to restore production to pre pandemic levels. The 2021 sales from South America were about 8% higher than 2020 and we're projecting an additional increase in 2022. We continue to target a full restoration at Cerro Verde of its mill operations During this year, and we'll be on our way to getting back to £1,000,000,000 per annum from this large scale operation. Our team at Cerro Verde continues to do outstanding work in managing the pandemic and had really a terrific 4th quarter. We were also successful in finalizing our multiyear labor agreement at Cerro Verde during 2021.

Speaker 1

At Alabra in Chile, we're making good progress in increasing our stacking rates of material on our leach pads there, and we're also Advancing construction of a new leach pad to accommodate the higher rates. We're expecting a 30% increase in 2022 production at El Abra off of a relatively low base, but we plan to sustain a level of £200,000,000 to £250,000,000 per year For the next several years as we assess opportunities there for future growth. At Grasberg, as I should mention the highlight of the year was really reaching our targeted net metal run rate in the 4th quarter. This It was an enormous milestone of success for us. We're all proud of it.

Speaker 1

We're focused on sustaining this during 2022, Working to advance Cuchin Liar and several other projects in the portfolio. Our next slide is just an update on our progress to develop new smelting capacity in Indonesia to meet our commitments to the government. The site for the new smelter is starting 4th quarter, we completed the pile support for the flash furnace and are starting to pour concrete. We also completed agreements in the 4th quarter with our Japanese partner to expand the existing Smelter at PT Smelting. We're focused on completing these projects as efficiently and timely as possible.

Speaker 1

We've been funding the costs of the smelter through a $1,000,000,000 bank credit Facility that PT FI secured and we're planning additional debt financing at PT FI which can be attained Obtained at attractive rates to complete the project. As indicated on the slide, the long term cost of the financing for the smelter would be essentially Set by a phase out of the 5% export duty, so the economic impact is not material. We provide on Slide 19 A 3 year outlook for volumes, and just we're pleased to report our execution is on track. We have For 20222023 and it now included our current outlook for 2024. After delivering a 19% increase in copper in 2021, We've got further growth about 36% will come from the U.

Speaker 1

S, 27% from South America and about 37 We're showing on Slide 20 how the quarterly volumes Workout, we're expecting great growth at several of our sites in the Americas, And that will be increasing throughout the year. You can see our gold sales are fairly steady at roughly 400,000 And you can see that the costs are pretty similar. For some time, our Well, team has been focused on cost management and efficiency projects to extend equipment lives, improve And we're also a great global supply chain team that work with our site operations management And through our partnerships with long term suppliers to address our business needs. As you'll see on the slide, our estimated Considering that we're going to be looking at the Q1, we've got increases that We're experiencing in for input costs, including energy, sulfuric acid. We've got some higher labor and outside services compared to 2021 and higher Richard mentioned the strong cash flows that we're generating and we see that Continuing in the future, on Slide 22, we show the significance Our cash flow using our volume and cost estimates and prices ranging from $4 $5 copper per ounce and molybdenum at $19 per pound.

Speaker 1

We show modeled results Excuse me, using the average of $23,000,000 $24,000,000 And you'd see here that annual EBITDA over this period And our operating cash flows As demonstrated in the last several quarters, we have significant free cash flow and this trend is expected to continue With cash flow significantly above our capital spending. Moving to capital spending, we show on Slide 23, our outlook for capital. For 2021, expenditures excluding The smelter costs totaled $1,900,000,000 and that was slightly below $1,000,000,000 We're projecting We're now taking capital of $3,300,000,000 in 20.22 $2,700,000,000 in 2023. Guidance prior guidance for 2022 reflects the addition of the incremental And our Lone Star expansion,

Speaker 2

we're pleased to see the significant increase in our

Speaker 1

overall capital projects at Atlantic Copper. You'll also note the large decrease in spend on the Grasberg Block And you've also seen here The discretionary projects that we're advancing to improve Profitability and value as we go forward and about 20% of the capital for the next 2 years reflects recent value enhancing The discretionary capital was added to our plan since achieving our net debt targets last year and commenced our shareholder return policy. These projects all have solid financial returns, great operational benefits, and again, represent value enhancing investments Using a portion of the 50% of free cash flow, we are earmarking for organic investments and balance sheet improvement. Our free cash flow generation is significant and that's supported by growing volumes, Positive markets and low capital requirements. You'll see on Slide 25, and Richard Highlighted this not only the last what we've done over the last several years, but just in 2021 alone, We reduced our net debt by nearly $5,000,000,000 and our EBITDA continues to grow.

Speaker 1

We're really in a fantastic position To execute our strategy, maintain a solid balance sheet and return substantial cash to shareholders. Our financial policy is summarized on Slide 26. It's centered around a strong balance sheet And combined with a performance based payout policy that provides for up to 50% of free cash flow To be used for shareholder returns with the balance for growth and further balance sheet improvements. As you'll see on Slide 27, We commenced implementation of the policy following our Board's actions in November of last year. We purchased nearly $500,000,000 in stock in the 4th quarter and through January to date, Our purchases cumulative purchases totaled $600,000,000 We're well on our way to using our $3,000,000,000 authorization.

Speaker 1

Our Board also approved a variable dividend for 2022, which essentially doubles our common Stock dividend. The combination of the share purchase program and our dividends are designed to distribute 50% of our cash flow While maintaining the balance sheet in a super strong position and providing flexibility for our long term investments. So in summary, I just want to echo what Richard said. We're well positioned for success in 2022 and beyond. Our team is passionate about execution.

Speaker 1

We've got momentum and we look forward to building on this success. And operator, we'll now like to turn the call back to you to start the quick Q and A session.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer 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. One moment please for our first question.

Operator

The first question comes from the line of Emily Chang from Goldman Sachs. Your line is now open.

Speaker 3

Good morning, Kathleen, and thank you for the update this morning. My question is just around the Baghdad I believe in the slides there is a comment around potential for construction to commence in 2023 with a potential 2026 start up. Bart, could you talk about the progress you've made to date there in advancing sort of technical studies as well as any final hurdles to be met Before project sanctioning, any early indication of what CapEx could potentially look like for this CapEx?

Speaker 1

Emily, we are starting feasibility of that project now and we've been working on various scoping level Studies over the past several years as we've been discussing, but we are starting the feasibility And that will really define the final cost estimates. But we think it will be efficient because we've got A lot of infrastructure already there. We're adding a new concentrator that will really take into account The efficiencies that we've gained at that Baghdad existing concentrator in recent years and once we go forward And get the feasibility studies done. We have a limited permitting process, we believe, And that's what gives us hope that, that project could be in operation in 2026. The economics of it will be we believe will be positive and really Advancing in an efficient manner, the production that doubled the production there because it is a very long reserve life

Operator

Your next question comes from the line of Lawson Winder from Bank of America Securities.

Speaker 4

Hello. Good morning, Richard and Kathleen. Very nice to hear from you both and thank you for today's update. Maybe I could ask about the All Star Mine. Could you also Can you update us on your thoughts in terms of what's driving the current outperformance?

Speaker 4

Is that just better recoveries or is there other aspects at play? And then when we think about the current Lone Star Mine and your expansion to £300,000,000 I mean it's outperforming by 5% or 6%. So how should we think about That £300,000,000 should we think about it in terms of being more like £318,000,000 to £320,000,000 Thank you.

Speaker 5

Josh, you want

Speaker 1

to take that?

Speaker 2

Yes. Josh, why don't you respond to it? Josh is our Chief Operating Officer for the Americas.

Speaker 6

Good morning. Yes, realistically, if we look at Lonestar and what we've been able to achieve since we've started it up, We really leveraged a lot of the learnings that we had seen from our exercises and experience at Bagdad with Identifying bottlenecks in the process and leveraging the workforce through kind of an agile way of working. And as we've done that, the team at Lonestar has able to identify opportunities that really eliminated bottlenecks and that allowed for us to Work on incremental gains over time. And as we think about the next step in that, it was just a continuation of that same process in the sense of Identifying what's limiting our ability to maximize the production at the site. And so the team has done a great job of going through that entire System identifying what those bottlenecks are and we put projects in place to really attack those bottlenecks and maximize Where we're at, the £300,000,000 is probably at the limit of our current existing hydro met facilities and the tank house capacity.

Speaker 6

So anything above and beyond that would be a bit of a challenge, but I'm not going to say that the team there isn't going to continue to look for opportunities to add additional incremental pounds. Think that £300,000,000 target that we're headed for is pretty close to that based on what we have today.

Speaker 4

Yes. Thanks very much.

Operator

Your next question comes from the line of Christopher Lascellino with Jefferies. Your line is now open.

Speaker 7

Hi, thanks. Hi, Rich and Kathleen. Thank you for taking my question. So if we look at the progress of Freeport in the last 5 or 6 years, you've obviously overcome some Really substantial challenges and the company has you find yourself in a position of clear strength today and you're kind of unleashing What is ultimately a massive organic growth pipeline, with probably more growth than we even are aware of today, just because the resources are so substantial. And you talked today, Richard, about Leaching Technologies, which you mentioned last quarter as well, but you talked about this as a huge opportunity.

Speaker 7

And my question around that is, first of all, how much Production potential could we see from these new leaching technologies? What's the timeframe? Is it in any of your guidance yet? What sort of operating costs, just like the economic benefit that you will realize from this leaching? And I guess the reason why I asked that question is because a lot of other major copper miners are talking about Various new leaching technologies being substantial.

Speaker 7

And it really comes down to there's going to be an economic benefit to you to having more volumes. But the question then is what does it mean for overall Copper supply and demand. So how much when is it coming online? Is it in your guidance and what sort of operating costs?

Speaker 1

We do have a small amount A benefit factored into our guidance from the early successes at Morenci, but that's just a very small fraction of We do have some and this is unfolding, Chris. So it's going to be evolving as we go. But we've kind of internally said, let's go after trying to get £100,000,000 to £200,000,000 from In the near term. And so we're Looking to gradually improve where we are in 2022 and you'll be hearing more about it. But from a cost standpoint, If you think about where the incremental cost of this is, we've got much of this material Already in our leach stockpiles.

Speaker 1

So we've already expanded the funds to mine it and it's in stockpiles. And so it's a very low incremental cost to be able to recover it. So That's the opportunity for us as we look at it having low incremental capital to go after it, low incremental Operating costs, we had latent tank house capacity. Josh mentioned we're filling the tank house at Safford, but at all of our mines, we've got Some tank house capacity that we can fill, if we're able to get more recoveries. So economically, this is a real opportunity for us.

Speaker 1

But when you're talking about £100,000,000 to £200,000,000 And we've got £38,000,000,000 of material in stockpiles. That's a small amount, but it does have value to us and we hope to go capture it. But in terms of This being a sea change for supply for the industry, we just don't see it. It'll take time and it'll Come out over time, but it is it's a meaningful value opportunity for us as a company given our set of circumstances with the Large stockpiles and the Layton tank house capacity. And Corey, I don't know if you want to add anything to that, but that's where we are with it.

Speaker 8

Thanks. Now Kathleen, you covered it well.

Speaker 5

Thank you.

Speaker 2

Corey Stevens, by the way, is Stepping up to lead our project development engineering and he's the key guy leading us on this deal. And Chris, you know in an earlier life back in the 80s, I was working in the oil and gas business when the shale business really got Initially kicked off. And so this team here will tell you, I'm always looking around corners to say, is there some kind of Shell oil and gas development, it could change the industry like that did for the And this is a huge opportunity for us, huge in the sense of Being able to add value of significance, but in terms of being a shale oil kind of sea change for the industry, as Kathleen called it, We think that's not in the cards.

Speaker 7

That's very helpful. Thank you, Richard.

Operator

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

Speaker 8

Good morning, Richard, Kathleen. Good

Speaker 2

morning.

Speaker 9

My question surrounds, given the You highlighted the difficulty in supply growth that you see in the pipeline being somewhat thin. Can you maybe characterize, like, from where you thought a year ago to where you are today, Given the political dynamics, especially in the 2 largest copper producing countries and given your kind of Positioning in much better jurisdiction, so it seems. Is that going to really be a delay even further just in the next 6 to 12 months as The industry kind of figures out how to best negotiate and deal with those new governments. And certainly, there could be some other opportunities over the next Several quarters on those issues and limiting even getting some of these much needed projects to get out in the marketplace by the end of

Speaker 2

There's no question. I mean, you just look at our situation at Alagra, We would be in a different situation without labor if this was it's a political issues about royalties And the fiscal regime for copper production in Chile were different. We would be moving more aggressively right now With Al Iber, what we're doing is we're preparing ourselves to move forward, but we're not we're deferring any Decision to move forward until we get some clarity from the government in Chile. And so that's just one example, but there's no question It's affecting people. Some have stability agreements and the question is, are the government Honor stability agreements.

Speaker 2

You've seen recently in other countries where Monitors have had to go back and change deals where they thought they had firm contractual agreements. We had to make Some concessions in Indonesia to get our issue with the government resolved there, Which we did on a favorable basis, but that's just reality around the world today.

Speaker 10

Does the U. S. Look like it's

Speaker 9

a much better place to be relative to some of these other countries? Certainly your investment, what

Operator

you're talking about today seems like you want to

Speaker 2

Yes. Well, in the U. S, I would make a distinction Between Greenfield Developments and Brownfield Developments, All of our developments are brownfield. It's places where we have established operations And a solid track record of doing things in the right way and we have developed Positive relationships with local communities and with governments, State, local, governments and with mines inevitably Significant mines have impacts on the physical environment where they operate, on The local communities, there's competition for water resources, there's issues related to historic People and all that make it much more you can tick off a list of But there are also international projects that face the same deal. So for us, Favorable tax situation, support for our mines by communities is not True in other places in terms of having community, educational systems, healthcare systems, You know, we're at all that.

Speaker 2

So it's very attractive for us Virtually all of our lands in the U. S. In fees, so there's no royalties. And you think you look at The royalty rates that are being jacked up around the world, that's a big difference. And then we have the company specific situation of having a significant net operating loss carry forward.

Speaker 2

The only good I'm trying to think was another Maybe the only good thing that came out of the oil and gas deal. We've got a big NOL that protects us from Taxes for years to come, even though in the U. S. We have Lower tax rates fundamentally than we do internationally. So for all those reasons, Our established presence in the U.

Speaker 2

S. Is really the big one that makes it so attractive to us.

Operator

Appreciate that. Thank you, Rich. Your next question comes from the line of Alex Hacking with Citi. Your line is now open.

Speaker 8

CapEx for Bagdad, if that moves Discretionary, I assume it will be discretionary. And then just quickly on Lone Star, The increase in the production, right, that you've achieved and it's been announced, does that Does that meaningfully pull forward the potential for the sulfafide project by years? Or does it not really

Speaker 2

No. Well, Bagdad is Totally discretionary. I mean, if that were to make sense, I think with The markets we're facing and the opportunities that, that poses this We will update the market on the market forward, which I expect us to do. And the point about Lonestar is, you can just look back at the other major Projects around the world where to get The mineral resource, you have to sometimes take years of investment in stripping to We move overburdened to get into the market and by doing that, We are stripping that material that overlays the sulfide resource. So it is tremendously beneficial to the long term development of this opportunity.

Speaker 2

And as I said, we're going to make money Out of the sock side, at the end of the day, we're continuing I see a future of building a major mill complex At Lone Star to process this sulfide resources we're Talking about is 50,000,000,000 tons of ore.

Speaker 1

Financial policy, the answer is yes, in terms of how we will treat that. 50% that we're retaining of free cash flow, We're earmarking for future investments and growth as well as to maintain our balance sheet. So that's how we're thinking About

Operator

it. Your next question comes from the line of Carlos De Alba from Morgan Stanley. Your line is now open.

Speaker 5

Good morning, Richard and Khatin. Just a question around cash costs for the year and I guess for the Q1. How should we could you provide a bit Caller, I would have expected higher guidance for higher cost in the Q1 above and beyond the That will mitigate the negative implications on costs from the lower grades expected in the 1st semester.

Speaker 1

To the power costs in the U. S. And in South America. So that's why you're not seeing much fluctuation Between the Q1 and the full year.

Speaker 5

Thank you, Rafiki.

Speaker 2

You just think about it as Indonesia ramps up, 4th quarter was $0.08 a pound. For the year, it was on the order of less than $0.20 I don't know, dollars 0.18 dollars 0.19 dollars a pound. And we see costs going forward with higher volumes in that same range and in Indonesia. So it's It's a big factor in our business and our team has done a good job of controlling costs, but we're like Everybody else, we have higher energy costs and other input costs are going up. So it's Okay, which is what we have to deal with, but that was the whole basis So putting these companies together back in 2007 was to match up the Indonesian assets, which is special because of its copper grades and its gold content with these Lower grade mines in America, Which are profitable, but which have higher cost.

Speaker 2

And so that's just Carryover benefit from what we did so many years ago. Sure.

Operator

Your next question comes from the line of Michael Glick from JPMorgan.

Speaker 2

Let me correct myself. I said 50,000,000,000 tons of ore at Lone Star, 50 £1,000,000,000 of copper resource.

Speaker 8

Good morning, guys. Just relative to your financial policy, could you remind us how often you'll revisit the variable portion of the policy on

Speaker 1

Our Board reviews it on a regular basis. Formally, it's at least annually, but it's something that we review with the Board on an ongoing basis. Okay.

Speaker 2

Got it. Thank you. You can see an example for that with what we did in the Q3. When we started the policy Of paying the variable dividend, Dime Stockback, a year ago when we started looking at this, we had planned to do that At our first meeting in 2022, but we had made such progress, markets were so good, we advanced So just a little color on the way we run Freeport, We don't have an annual planning process. We update and we go through a really disciplined process to do that.

Speaker 2

So everything is real time. So While we talked about looking at this financial policy on an annual basis, As Kathleen said, we talk with our Board about it continually. And if things change, we don't limit ourselves to acting on any kind of Straight jacket timeframe.

Speaker 4

Got it. Thank you. That's helpful color.

Operator

Your next question comes from the line of Abhi Agarwal from Deutsche Bank.

Speaker 10

Thanks, operator. Morning, Richard and Kathleen. Thanks a lot for your presentation. Anish, since you mentioned that you are in preliminary talks with the Indonesian government to Can you share a bit more detail around what the critical path is for that agreement to be signed? Thank you.

Speaker 2

Yes, it's rare preliminary talks. Really tried to address that years earlier and it was just so complicated to get everything else done. It's in everybody's interest, all stakeholders' interest for us to Have a continuation of operations beyond 2,041. It makes no sense for anybody for us to run this business with any kind of Drop dead date. And so there's a broad acknowledgment that we need to do it.

Speaker 2

It's very preliminary. And so I don't have answers to your questions about how we structured or what we would mean. But I can say that these preliminary talks are being very well received and there is A recognition that it's in everybody's interest for us to go beyond 2,041.

Speaker 8

Thank you.

Speaker 11

Hey, good morning. First on Moly, As recently as 2017, 2018, the output was £95,000,000 and the industry statistics are 5 0.4% decline in world mine output last year through November. So I guess a lot of the copper mines are having lower moly grades. World steel and stainless steel outputs are rising. Do you have any opportunities To expand moly throughput further to offset the lower grades at Cerro Verde or some of the other copper mines.

Speaker 1

John, you know we have 2 primary molybdenum mines in Colorado, the Climax mine and the Henderson mine. And we did cut back production from those mines when the market wasn't in a different Situation that it is today, but we do have the opportunity to expand production from our primary mines, Some work now to advance some stripping activities So that we do have more flexibility in the future to raise our primary molybdenum mine production to respond to this increased demand and limited supplies of molybdenum. So we do have a lot of optionality And our primary minds for malignum.

Speaker 11

Thank you. Concerning the costs in Indonesia You're reporting $0.24 for treatment charges and $0.20 for export I guess those are averages where Some of the output is in country at Grezik and some of it is exported concentrates. If it were, say, half and half domestic versus export, Would it be right to think of the costs as something like $0.18 when you export concentrates to Asia and $0.30 for the treatment costs, it's your own smelter and then the export duties would be nothing if you Treated them as your own smelter, but more than $0.20 for that portion you're exporting, maybe $0.40

Speaker 2

Yes. You're directionally right, John. And maybe we'll get Back to you with some details because I think some the export numbers that you talk about are in the range of what we're doing at $0.16 to $0.18 And we do pay this export duty. While the cost for domestic processing at the smelter will be much higher, Particularly when you provide for any kind of cost factor for the capital that will go into it, It will eliminate the ETFI together with the fact that The consolidated tax return that goes through there will serve to reduce taxes. So the reduction in taxes Having to pay the export duty offsets the economics to PTFI building smelter.

Speaker 1

Yes. So as we're thinking about it, John, the capital cost Amortization over the long period of the smelter will essentially offset the The cash operating cost of the smelter, It shouldn't be that much different than so that's kind of how we're thinking about the 2 elements.

Speaker 2

That was a point that I think, and I just don't have the numbers in front of me, John. Seeing that PT smelting is as high as you indicated, the current deal. And we're expanding that smelter by This effort to achieve the goal of in country processing. It's a very efficient smelter. We built it back in the mid-90s and it's kind of it's world class in terms of its cost management.

Speaker 11

Thank you. It's a lot of complicated details.

Speaker 2

Yes.

Operator

Your next question comes from the line of Jatin Derhgault from BNP Paribasik Zane.

Speaker 10

Thank you, operator. Good morning, Richard and Kathleen, and good Question on your 2024 copper guidance. Can you please indicate where which will drop volumes because there is a £300,000,000 drop here on year in 2024 and Grasberg is now flat. So which operations will see that drop? And is that just a 1 year blip or is that a continued trend just to understand because Grasberg will lose £150,000,000 in 2025 as well.

Speaker 10

But just trying to put that discretionary and growth CapEx in perspective with the guidance and what we can't see beyond 2024? Thank you.

Speaker 2

I'll let Kathleen, maybe Josh talk to that. But I'll just make a point that these Mine plan projections are subject to constant adjustments for various reasons that and Some of them result in some volumes going from 1 year to another, but they all reflect steps taken to The long term values of the mines, we don't run these mines to achieve any kind of Targeted predetermined targets for volumes. But as I said, we have a dynamic Any real time planning process And our goal throughout all those planning process is how do we maximize the long term NPV and the resources that we have. And so you will and you look back at our history, there's continuous shifting of volumes from 1 year to the next and then other factors are going to play.

Speaker 1

Specific to 'twenty three versus 'twenty four, we do have some lower grades in some of the U. S. Operations, Notably at Valencia and some slightly lower grades at Cerro Verde, from 23 to 24. But as we talked about earlier, we don't have anything in here for of any consequence for this leasing opportunity. And so we are all motivated to get additional volumes with low capital intensity in from that leaching And then we've got Baghdad coming in beyond that, and we've got a series of other opportunities as well.

Speaker 1

But that's it's really some grade, As Richard was talking about, we do have grades shifting from year to year and we do have some lower grades in 2024 versus 2023.

Speaker 8

Thank you so much.

Operator

Your next question comes from the line of Alex Darren Hsieh from Stifel.

Speaker 12

Hi, guys, everybody. Thanks for taking my call. Just a couple of follow ups to some questions already asked. First, at the Cushing Myer In the Indonesian license discussions beyond 2,041, is the pace of investment at that project Dependent on those talks. And the second follow-up question, if I may, is on the moly business.

Speaker 12

The Price has obviously been quite strong in the past year, about $12 to $0.19 Can you give us any insight as to The demand outlook, I understand you guys have an opportunity and you're seeing opportunities to expand. But anything you can say about demand outlook for the next 1 or 2 years?

Speaker 1

On the KL, all of our economics were run on the basis of the 2,041. So if we are successful in extending it, there's going to be a lot more reserves from KL and other war bodies that come in. We've run the economics and our plans based on the 2,041 date. It's a very attractive project and Mark can talk to you more about this, but we're really leveraging all the Learnings that we gained from Deep MLZ and Grasberg Block Cave to continue our momentum in Spending development, and it's leverages off of all the infrastructure we have there. So it's really a good project on its own and it will Steve, even better if we're able to extend beyond the 2,041.

Speaker 2

And just one quick comment on that. With all these years of uncertainty related to our deal with the Indonesian government now to 2,041, We've done and the fact that we've had such resources already discovered to Fill up our mill and so forth. We haven't done much exploratory type drilling in Grasberg District for some time now. And so that's one of the main factors that makes it desirable for all stakeholders would be for To have a deal that goes beyond 2,041, which would then allow us to undertake more Delineation core drilling or exploratory core drilling, just look at that schematic that We have indicated in where they've come from historically. And it's just clear that while we don't know yet because we haven't drilled it, but the high likelihood is there's a lot more resources there that haven't yet been identified.

Speaker 12

Okay, that's great. Thanks,

Speaker 1

Mike, Ken Hems is on the line and he can share with you some of our feelings about the outlook for demand for moly.

Speaker 8

Yes. Thanks, Kathleen. Well, a few thoughts on that is we're positive on the outlook For Molly, over the next few years, things like energy, whether it's traditional energy sources that require Higher moly bearing steels or if it's Renewables are all very positive right now. Infrastructure development all around the world This is Molly. And as we've seen, whether it's here, Europe, China, Asia, all very positive indicators.

Speaker 8

And pollution control in general uses a lot of stainless steel. And there again, we're seeing very positive indicators. Our customer base, both in Europe, United States are have positive outlooks over the next few years.

Speaker 10

And then if you look at

Speaker 8

the Chinese 5 year plan, There's definitely an upscaling of materials that they're using throughout their economy and what they're emphasizing. So we're We're relatively optimistic on demand.

Speaker 12

That's great. Thank you.

Speaker 1

Thanks, Mike.

Operator

Our last question comes from the line of Carlos De Alba with Morgan Stanley.

Speaker 5

Thank you very much for squeezing me in for a second time. Just on working capital, If I may, maybe, Kathleen, the sensitivity on the number that you provided guidance on cash from operations It's around $8,000,000,000 this year and that is net of $1,300,000,000 working capital and other uses. I don't know exactly how much is working capital, but assuming that is the majority of the 1.3, could you give us some color on that? I mean, that's a bigger number for working capital than I was

Speaker 1

Yes. And you saw we had a benefit, a large benefit during 2021. A big A portion of that is the timing of our tax payments internationally. You're generally paying on the prior year Schedule and so there's some timing variances when you have rising volumes or rising Profitability and so that's just timing of tax payments.

Speaker 5

Got it. Thank you very much.

Operator

Now, I will turn the call over to management for any closing remarks.

Speaker 2

Yes. Thank you all for participating in the call today. Real pleasure to be able to report great progress our team is making and we look forward to Continuing that progress and I'm really excited about what lies ahead for us. So thank you for your interest. And if you have any further Questions or need for follow-up, please contact Dave at Joint and we will respond to you.

Speaker 2

Have a good day, everyone.

Operator

Ladies and gentlemen, that concludes our call for today. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Freeport-McMoRan Q4 2021
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