Freeport-McMoRan Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 21, 2022

There are 14 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport McMoran First Quarter Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session.

Speaker 1

I would

Operator

now like to turn the conference over to Ms. Kathleen Quirk, President. Please go ahead, ma'am.

Speaker 2

Thank you, and good morning. Welcome to the Freeport McMoran conference call. Earlier this morning, we reported Q1 2022 operating and financial results, And a copy of our press release and slides are available on our website at fcx.com. Our conference call today is being broadcast live 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.

Speaker 2

I'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 annual report on Form 10 ks. On the call with me today are Richard Atkerson, our Chairman and CEO. We'd also like to welcome Marie Robertson, our new CFO. She's joined us today on the call and Marie joined us In March, we're delighted to have her on our team. Mark Johnson is on, who is the COO of our Indonesian business Josh Olmstead, who is the COO of our Americas business Mike Kendrick is on, who runs our Global Molybdenum Business and Steve Higgins is also on today, our Chief Administrative Officer.

Speaker 2

Richard is going to start by making some opening comments and then we'll be going through the slide materials and the outlook included in our slide materials. So Richard,

Speaker 3

I'll turn it to you.

Speaker 4

Yes. Thanks, Kathleen. We're going to follow a new format for our earnings presentation today. This format reflects the current position of our company After years, literally years of having to deal with significant company specific problems that are now largely behind us, We have a clear mission in Freeport and that is to be foremost in copper. I will make some very brief opening comments, Kathleen will review our positive first quarter results, our positive outlook and then we'll be available to answer questions.

Speaker 4

The case for copper as a commodity is strong. I've been saying this for 20 years, but it's never been better. Demand is growing globally. Globally, growth is no longer dependent solely on China. With COVID recovery, infrastructure spending, The spread of electricity everywhere is generating significant growth in Europe.

Speaker 4

Business is strong in U. S. And in Asia, outside China. The coming demand for carbon reduction and its impact on copper demand is truly extraordinary And it's coming. It's beginning, but it's not here now.

Speaker 4

Copper supply development for many reasons is challenging. As I said recently, The supply challenge can't be solved simply by higher prices. I find it notable that the price of copper today is $4.50 In a world where there are a whole series of economic headwinds, many of these are transitory. Higher copper prices in the future are likely, And I'm very comfortable with Freeport's strategy of focusing its business on copper. Our strategy to achieve our mission of being foremost in Copper is straightforward.

Speaker 4

We will execute our operating plans safely and responsibly. We have an unmatched set of globally diverse copper producing assets. We are taking advantage of emerging technology involving data analytics, New work practices and increasingly important advancing in leaching technology where Freeport is well positioned as a global leader in leaching. We will be developing organic growth projects in a disciplined way over time from our large set of undeveloped resources. We will execute our financial plan, maintain our currently strong balance sheet while returning significant cash to shareholders.

Speaker 4

Other opportunities for Freeport may arise and we are positioned to take advantage if they do, but our strategy is focused internally. Here is a few points I suggest you note in Kathleen's presentation. Look at our strong execution of our plans in the Q1. Look at our success in meeting the challenges of higher input costs, both through effective cost management and the benefit of past strategic decision. For example, the long term development of the Grasberg mine and its high copper and gold grades, higher gold grades Our higher gold prices are helping to offset input cost increases.

Speaker 4

Note our positive situation in Indonesia With our partner shareholder mind ID with the government of Indonesia, local communities and workforce, we worked hard to achieve this. Our environmental performance in a very challenging location is exemplary in Indonesia. The financial results are spectacular, Reflecting the good work of our PTFI team and literally 3 decades of efforts and investments getting to where we are today. We're progressing with the development of a new large scale smelter in Indonesia. Our recent international bond financing at PTFI was a major milestone for our Our team achieved investment grade ratings and there was strong market reception for this $3,000,000,000 financing.

Speaker 4

Looking back years ago, I would have envisioned our ability to do this. 2 thirds of our copper is produced in the Americas where our Team is operating effectively and where we have significant growth for the future. And finally, I want to briefly note steps we have taken this past year To build a high quality sustainable Board of Directors and a sustainable management team for the future. These are commitments I personally made to myself a year ago when I came Chairman. We've added 6 new directors in a year.

Speaker 4

You'll be able to see the details on this in our proxy, which will soon be available. 4 of these 6 are Individuals with significant international large company CEO experience. 2 have significant business and financial expertise. Together with the 4 continuing independent directors, we now have a high quality Board, one that Freeport has long deserved. Building this Board is a highlight of my personal professional career.

Speaker 4

At the same time, we made important changes to our management team. Kathleen mentioned that Marie has recently joined us as our CFO. At a young age, she has a distinguished career in international mining. We've made a number of transitions of important positions with internal promotions and added significant capabilities with external hires, Particularly in the ESP area. We now have a younger, more diverse management team at Freeport.

Speaker 4

They are great people who embrace the special culture We have with the Freeport Global family. I'm personally excited about continuing as a member of this team, blessed to be in good health and energy. I am confident knowing that Freeport now has a Board and management team that is capable of achieving our mission and executing our strategy beyond my tenure. With that, Kathleen, I'll turn it over to you.

Speaker 2

Thank you, Richard. And I'll start on Slide 3. Richard Mentioned, we had a really good, Q1. Slide 3 summarizes the highlights. We achieved meaningful growth in volumes and margins, which translated into strong cash flows and significant cash returns to shareholders.

Speaker 2

Our copper and gold sales were 24 Higher for copper than the year ago quarter and 59% higher for gold than the year ago quarter. Our copper sales were 6% above our guidance going into the year. We benefited from strong U. S. Demand in the quarter, which allowed us to reduce inventories.

Speaker 2

Our gold sales were also above our plan 8%. After reaching the targeted metal run rates in late 2021, Glassburg is operating well and sustaining a high volume, low cost operation. Our average unit net cash cost for the quarter of $1.33 per pound came in under our guidance in the Q1 and below the year ago quarterly average. This is particularly impressive given the cost pressures affecting all of us and allowed us to generate strong margins with average copper realizations of 4.66 Notably, Grasberg's costs were net credit of $0.06 per pound in the quarter. Richard referenced this earlier, but this means that the gold revenues more than offset all of our cash production costs at the site.

Speaker 2

We generated adjusted EBITDA of $3,400,000,000 in the quarter and adjusted net income excluding non recurring charges of $1,600,000,000 or $1.07 per share for the Q1. We generated very strong operating cash flows totaling $1,700,000,000 this was net of about $800,000,000 in working capital uses, primarily reflecting the timing of our cash taxes. Our cash flow significantly exceeded our capital spending And that allowed us to return substantial cash to shareholders while maintaining a strong balance sheet. We continued our share purchase program during the quarter, Funded nearly $600,000,000 of share purchases. Since starting the program in November of last year, We have purchased 27,000,000 shares at an average cost approximating $42 per share.

Speaker 2

We're $1,100,000,000 into the program out of a total of $3,000,000,000 Our total share purchases and common stock dividends, which doubled from the last year's rate, approached $800,000,000 in the Q1. Our balance sheet remains strong. Net debt was $1,300,000,000 at the end of the quarter. About half of this relates to financing of the Indonesian smelter project, which is advancing. As Richard said, as we look forward, we're enthusiastic about the embedded opportunities our asset can bring to supply the world's rising demand Copper with several projects we are progressing with near term, medium term and longer term horizons.

Speaker 2

We're continuing to dedicate significant resources to our sustainability objectives and now lead the industry with 9 of our operating sites We have a strong foundation for success. We're executing our strategy very effectively And we'll continue to focus on delivering on our plans. Slide 4 is just a summary of the recent reports that we filed, Our annual report to shareholders and just today filing our 2021 sustainability report. The theme for our recent annual report is titled Electrifying the Future and it highlights our assets and the prominent role that Freeport has And supplying modern uses for copper. We also published the sustainability report.

Speaker 2

This marks our 21st year of reporting on our Sustainability programs. As a leader in the industry, we also want to lead in our reporting and transparency in this important area. We really hope you'll have the opportunity to review the report in detail. It's available on our website. We're proud of the work we're doing.

Speaker 2

It's embedded in all of our business plans And supports our responsible production practices. On Slide 5, we had a neat deal earlier this This month, we celebrated PT Freeport Indonesia's 55th anniversary. We've operated the same site for more than 5 decades And we've developed one of the industry's most prominent operations, providing tens of thousands of jobs and meaningful economic impacts To the Indonesian government and province of Papua. As Richard mentioned, we've invested heavily over the years To create a modern world class operation there that will benefit all stakeholders for decades to come. We lead the industry in technology supporting our large Steel Block Cave Mining.

Speaker 2

As Richard mentioned, with our new partnership with the government established in 2018 And our committed and focused team were enthusiastic about the future for this exceptional mining district. Turning to markets, Richard covered this in his comments. We view the fundamental outlook of the copper business is very positive. Supported by Koppers' role in the global economy, a renewed focus on infrastructure, connectivity and Koppers' essential role in Your role in meeting global de carbonization targets. The demand trends are broad based and global in nature.

Speaker 2

We see this continuing and accelerating With the increased intensity of use for copper associated with modern applications. Many are predicting we're in the early stages Over the last decade, most of the growth in demand has come from China. As Richard mentioned, we're now seeing a major expansion of growth in demand for copper for infrastructure spending and decarbonization from Western world economies. Scarcity of new mine supply development is growing at a time when demand is rising. The project pipeline of actionable development opportunities is significantly lower than it has been historically.

Speaker 2

Beyond the projects which are being completed now, there's a real absence of new supply development necessary to meet estimated demand increases. The current physical markets are tight as evidenced by the low level of inventories on global exchanges. Supply change continues to be stretched. While we will see macro factors such as China's economy, geopolitical considerations and actions by the Fed Impacting sentiment, the low level of inventories and supply limitations sets us up for a scenario of higher prices in the future. We're in a great position at Freeport as a responsible producer of scale and the strategies Richard outlined focused on copper, Long live reserves and future growth options, the prospects are bright for our portfolio become more scarce and highly valued in the future.

Speaker 2

I'll comment a little bit about some details of our Q1 operations, moving to Slide 7. In the U. S, the Lone Star Mine continues to perform well above design capacity. As you remember, we commissioned the mine In late 2020, we produced 265,000,000 pounds of copper in 2021, a 30% increase from the original design. We're expanding further to take us to £300,000,000 per annum by 2023 With an investment of roughly $250,000,000 As we accelerate the mining of oxide Ores at Lone Star, This will expose a much larger sulfide opportunity for us in the future.

Speaker 2

At Morenci, our largest mine In the North American portfolio, we completed the restart of our mill in March. We've been ramping up for several months and are now running at capacity. With the rise in COVID cases early in the quarter, our mining rates were strained resulting in the reduction in annual production compared with our prior expectations. We are back on track. We expect Morenci to produce 7% more copper in 2022 compared with last year.

Speaker 2

As Richard mentioned, we're also advancing In our leach recovery initiatives, we're focused at Morenci using data analytics and new technologies to enhance our leach production. This is a significant value enhancing opportunity for Freeport and we'll be reporting progress on this initiative as we go through the year. At Bagdad, we are advancing our plans for what we're calling the Bagdad 2X project to double production At this mine in Northwest Arizona, we're advancing studies and planning to commence early works principally for mine equipment and additional Stripping in parallel with the studies. Turning to South America, the teams have done exceptional work navigating The pandemic, when things started to improve in late 2021, we had a spike in cases In January February in Peru, that did have an impact on our mining rates in the Q1 by about 10%. Situation improved significantly in March.

Speaker 2

We expect to reach our targeted mill rates of 400,000 tons per day in the balance of the year. The lower mining rate in the Q1 is expected to have a small impact on our 2022 production at Cerro Verde compared with our prior plans, But we still see 8% growth in Cerro Verde production in 2022 compared with 2021. We continue to target a full restoration at Cerro Verde this year and be on our way to back to £1,000,000,000 per annum from this large scale operation. El Abra has been successful in Chile and increasing the stacking rate of material on its leach pad. We expect a 30% increase in 2022 production at El Abra and to sustain a level of £200,000,000 to £250,000,000 per annum for the Several years as we assess opportunities for future growth.

Speaker 2

At Grasberg, we sustained our large scale metal production After reaching our targeted metal run rate in the Q4 of last year, we achieved higher gold recoveries compared with our plan, which contributed To a favorable variance for the quarter. Our 2022 volumes are consistent with our prior forecast for Grasberg. We incorporated some relatively small adjustments for changes in mine sequencing in Grasberg Block Cave And Deep MLZ, but the 5 year metal forecast is generally consistent with prior expectation. We're advancing mill projects to provide additional capacity, targeted for the second half of next year. We're diversifying our power sources in Indonesia and we're advancing the long term development for Kuching Liar.

Speaker 2

The team there is doing outstanding work in managing and sustaining the largest and most profitable underground operation in the world. On the next slide, Richard touched upon the leach opportunities we have at Freeport. And this is a major initiative Ongoing that we had to extract more value from our historical leach stockpiles. This could unlock significant value for us By increasing production from material already mined and placed onto stockpiles. In the context of an industry where new projects Can take 10 years to develop.

Speaker 2

This is a significant opportunity for us to bring the equivalent of a new mine on stream In a fraction of the time it takes to develop with a fraction of the carbon footprint, very little incremental capital and Operating costs, a tremendous value opportunity for us and we're pursuing it with urgency. During the Q1, we commenced a process To insulate our leach stockpiles to retain heat, heat is proven to improve leach recoveries And work to date has indicated the potential to incrementally add to our production in the near term. In our processes with the use of data analytics, this tool is providing new insights and opportunities. We're working on internal technologies for additives as well as with third parties who have proprietary technologies. We're optimistic that these collective initiatives have the opportunity to add an incremental £100,000,000 to £200,000,000 of Copper across our Americas portfolio in the near term.

Speaker 2

Early success will enable us to optimize And expand this potential moving forward. As you'll see in the charts, we currently estimate £38,000,000,000 of copper in our stockpiles, which already has been mined, but this is not included in our reserves or production plans. A significant portion of this opportunity is at our flagship At Morenci Mine and our cross functional team of technical experts, metallurgists, mine planners, data scientists, Geologists, GIST and Business Analysts all working together to take full advantage of this great opportunity for us. The leach opportunity is just one facet of our growth and Richard touched upon what we'll be focusing on as we go forward. We have multiple options looking at Slide 9, multiple options for brownfield low risk growth across the portfolio.

Speaker 2

Recall we have over £190,000,000,000 of copper mineral resources in our portfolio in addition to the proven and probable reserves of over £100,000,000,000 of copper. We talked about the leach opportunity and the ongoing oxide expansion at Lone Star. These are near term opportunities to add incremental production in a 12 to 18 month timeframe. In the medium term, we're highly We expect to complete the feasibility study in the first half of next year and be in a position to commence construction activities. Longer term, we have the massive Lone Star Sulfide opportunity of £50,000,000,000 copper resource In our established mining area in Eastern Arizona.

Speaker 2

The Alaba project in Chile has a resource approaching £30,000,000,000 We've done a lot of work in identifying an operation that could produce over £700,000,000 of copper per annum. We're closely monitoring the developments in Chile and we'll defer our decision for the time being pending the results of the Ongoing constitutional work that's being done in the country. At Cuccing Liar in the Grasberg District, It's a natural extension of our operations. This will allow us to continue our large scale operation in Papua for decades to come. We believe the world will need our projects in the future.

Speaker 2

We have a long track record of Success in qualifying and developing projects in an efficient and responsible manner and this is enhanced by our industry leading technical capabilities, Our established license to operate in our strong franchises in our areas of focus. Looking at our sales profile on Slide 10, this is the annual sales for the next few years that we update each quarter. The outlook for volumes is largely in line with our prior forecast and the execution of our plans is on track. We have insignificant changes to our prior guidance for copper sales for 20222023 in the 1% range That principally reflects the COVID downtime experienced in the Americas earlier this year and some timing changes at Grasberg Between 2023 2025. After delivering a 19% increase in copper sales in 2021, We're projecting a 12% increase in 2022, reflecting higher production across the portfolio and further growth in 2023.

Speaker 2

We estimate about 36% of our sales for this year will come from our U. S. Mines, 27% from South America And 37% from Indonesia. On Slide 11, there's been a lot of discussion about cost Pressures in our industry, the cost pressures that we're facing, that the entire industry is facing this year, a well documented Energy and other commodity related inputs such as sulfuric acid, explosives, grinding media and other consumables Have increased. We'll continue to work to manage and mitigate these impacts to the extent possible.

Speaker 2

We also benefit From the fact that our byproduct credits, particularly for gold provide mitigation. We show a reconciliation of our prior unit net cash for 2020 2 estimates, based on our January estimates compared to our current We've updated all of our plans to incorporate recent commodity pricing and our latest operating plans. You'll see here that half of the unit cost increase is offset by stronger gold prices and production. Bottom line, unit cash costs are up about $0.09 per pound of copper or an approximate 7% increase. These numbers were built off a copper price assumption that was $0.25 per pound above the prior plan.

Speaker 2

But we're looking today at $4.70 copper current market with a cash cost of $1.44 estimated for this year, which will generate very strong margins for us. We show on the next slide, Slide Well, the significant cash flow generation at various prices. This is a great strength of Freeport, A big exposure to copper markets and the large scale nature of our existing capacity. We're in an enviable position with our significant new production that we've brought online in recent quarters. And we show on this slide, Slide 12, the significance of cash flow generation using our volume and cost estimates And prices ranging from $4 to $5 copper.

Speaker 2

These are modeled results using the average of 2023 In 2024 with current volume and cost estimates and our annual EBITDA at these prices from $4 to $5 per pound, Prices are closer to $5 today than $4 would average over $11,000,000,000 at $4 copper To nearly $16,000,000,000 per annum at $5 copper and operating cash flows very strong ranging from over $8,000,000,000 To approach $12,000,000,000 at $5 copper. Also on the chart, we've got sensitivities to various commodities. We can't predict prices, but the long term fundamentals of our business indicate the prospects for higher copper prices. And as we go forward, you can note that each $0.25 per pound change in copper equates to over $1,000,000,000 in annual EBITDA. We generate significant free cash flow.

Speaker 2

We expect this to continue with cash flows significantly above our capital spending. And you'll see the capital spending on Slide 13. These are largely unchanged from our prior guidance. We're forecasting some offsetting timing differences between 20222023 and have also included some early equipment purchases For our Bagdad expansion project in 2023 as well as ramping up the Kuchun Liar project. Both of these projects are designated as discretionary projects for purposes of our available cash returns framework.

Speaker 2

We've got a tracking of the discretionary category included for your reference in the appendix. Roughly 25% of our capital spend over the next 2 years is associated with value enhancing projects. These projects all have solid financial returns and operational benefits and we'll use a portion of the 50% of free cash flow We are here marking for organic investments toward these discretionary projects. Also note and you'll see this in the slide, We've got a large decrease in spend on the Grasberg Block Cave and Deep MLZ from 2022 to 20 23 totaling $500,000,000 So as those projects are being fully developed, we'll see our planned capital expenditures coming down. The next slide, we provided an update on our activities for the smelter.

Speaker 2

We were engaged in detailed engineering and procurement and early construction activities are advancing With pilings and concrete installation, we've got about 2,000 workers now on-site and that'll grow to over 10,000 workers next year. We've got some updated photos for your reference in the appendix. And as we've been talking about for some time, This project is important for PT Freeport Indonesia and the Indonesian government. We are focused on completing the project as efficiently And timely as possible. Richard mentioned the successful bond offering we did earlier this month, Raised $3,000,000,000 to support the cost of the smelter, long term financing, average duration Of roughly 14 years and average cost of 5.4%.

Speaker 2

Richard mentioned the investor response. It was We're very positive and reflects the strength of TTFI's underlying business. The cost of this financing It's largely offset by a phase out of the 5% export duty. So the economic impact The smelter is not material. Turning to the balance sheet, It's a core focus of ours and has been for the last several years.

Speaker 2

We've made meaningful progress in reducing our debt And our whole financial policy is centered around maintaining a strong balance sheet. We reduced our debt just over the last 12 months By nearly $4,000,000,000 and our EBITDA continues to grow. Our free cash flow is significant as you've seen with growing volumes, positive And low capital requirements. We're in a fantastic position to execute the strategy of maintaining a strong balance sheet, Investing in our long term future and returning substantial cash to shareholders. Last slide That we'll cover is a summary of the financial policy.

Speaker 2

On Slide 16, we show a scorecard of our shareholder returns. Those have increased meaningfully, with a period of strong execution and balance sheet improvement. We began implementing the Board authorized performance payout policy in November of last year. The Combination of our share purchase program with dividends are designed to distribute 50% of our cash flow After capital expenditures excluding the smelter investments and discretionary projects. Since November of 2021 when we began to implement the program, we've utilized about a 1 third of the authorized $3,000,000,000 share purchase program.

Speaker 2

We've purchased 27,000,000 shares common stock at an average cost of just under $42 per share. We also have a variable dividend component in our common stock dividends for 2022. This is double the base dividend And the first payment at this higher rate was made in the Q1 of this year. Our Board will have the opportunity to consider additional As we progress the program further, I mentioned in the Q1 alone, returns to shareholders totaled nearly $800,000,000 With a continuation of favorable market conditions, solid execution of our plans, we expect shareholder returns to continue to be strong. As Richard mentioned, we have exceptional opportunities in our business.

Speaker 2

As a team, we are meeting the challenges and embracing the opportunities. Our future is very bright and we at Freeport are electrifying the future and we're going to do this responsibly, Reliably and relentlessly. So that's a summary of our quarter and outlook. And now we'd like to take your questions.

Operator

If you have additional questions, please return to the queue. One moment please for our first question. Your first question comes from the line of Chris Laffamine with Jefferies. Your line is now open.

Speaker 5

Hey, thank you for taking my question. Hi, Kathleen. Hi, Richard.

Speaker 6

Thanks,

Speaker 5

Chris. Question about Kathleen, you mentioned the sensitivities and every $0.25 per pound change in copper is about $1,000,000,000 in annualized EBITDA. But then on the slide where you show the new 2022 cost guidance, I think it's a $0.09 per pound increase in guidance. And you said that There was a $0.25 per pound increase in your price assumption when you derive that guidance. So the question is, if we think about changes in the copper price, Should we assume that a $0.25 increase in the price fully translates into that $1,000,000,000 of EBITDA?

Speaker 5

Do we need to adjust that to some sort of cost increase And if we do, how much of a cost increase should we expect to reach $0.25 In other words, is that $0.09 per pound increase in costs associated with the 25 Percent increase in price kind of the way we should think about costs and prices moving together. I'm not sure if that question makes sense, but I'm just trying to understand the sensitivity to prices and costs.

Speaker 2

Yes, we understand the question. The sensitivities that we show are just in terms of the copper price without having Yes, changes in input prices. I think right now what we're seeing is increases That are unusual, correlations that are unusual, energy prices have risen, and some of these other commodities like sulfuric acid And explosives and things like that, all reflecting kind of a geopolitical I don't think the long term trends, if you look at the correlation between copper prices and some of these Inputs are as dramatic as what we're seeing this year. Time will tell and we'll see, but we don't expect to see these kinds of Yes, dollars 0.09 increases for $0.25 move in copper prices. It will depend on obviously the fundamentals of each commodity, Right now, some of the commodities are moving in a direction differently on a short term basis Because of what we're seeing in the Russia, Ukraine situation.

Speaker 5

And thank you for that. And just a follow-up to that and going back to the China cycle, obviously, many years ago, Was the cost inflation that you saw then very different from what you're seeing today? In other words, do you think that the war is having a disproportionate impact on cost inflation today? Or are we just seeing generally typical cost inflation that we get in bull markets and commodities?

Speaker 4

Well, if you go back, I talk about 3 years of copper demand, when copper was correlated 2 industrial production before China emerged in roughly 2,003 as a China era and now we're in a new era of copper prices. It's been various factors. Back when copper was cyclical and driven by industrial production In the developed world, there was a correlation between prices. But then when China emerged and copper prices went From a dip below $0.70 and went to $4 in a short period of time when nobody was expecting, there wasn't a correlation with prices today. It is affected by the dislocations caused by Russia and the situation in Ukraine, Particularly with oil and gas prices, I mean, and you'll just have to reach your own Judgment of how sustainable that is or how much is an impact of the current situation, but there are other commodities.

Speaker 4

It's having an impact on copper prices, but Russia was a relatively small producer of copper globally, 3%, 4% And regionally affected markets and the market is so tight, it has an impact. But other commodities Are being more effective than copper. As I said, many of these things, I believe, are transitory. So We're taking steps where we can to control prices. Copper prices are rising faster than cost for us.

Speaker 4

So Our profitability is growing and we're encouraged about that continuing into the future.

Speaker 2

Yes. Sounds

Speaker 5

great. Thank you very much.

Speaker 2

Yes. We would Our diesel costs that we went into the year with our plan of roughly $2.50 a gallon, We've increased that in this most recent guidance by about 40%. And normally, we would not see that kind of Dislocation, and when we look at the long term trends of diesel prices and copper prices, we normally wouldn't see that. So Same holds for some of the fertilizers and we've ammonium nitrate, the product we use for explosives Has gone up a lot as sulfuric acid has as well. And we believe a lot of those are up just generally because of Commodity prices, but the Ukraine, Russia situation has exacerbated some of that.

Speaker 2

So we don't see it There's a long term cost in our structure at those levels.

Speaker 1

Thanks.

Operator

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

Speaker 7

Good morning, Richard and Kathleen, and thanks for the update. Good morning, Richard. My first question is a little bigger picture in nature and related to how you're thinking about growth. Perhaps how have increasing steel costs, raw materials, consumables and labor changed the business case, if at all, When you think about sanctioning brownfield and greenfield production longer term?

Speaker 4

Emily, those really aren't driving factors on our investment decisions. The The resources that we have are just economically not that sensitive Even these kind of price increases. So we our timing issue on The brownfield development projects is one related to engineering and permitting and community relations and Things like that, these are things that affect supply development across the industry and it's a double edged sword of copper. It's A major factor of why copper prices are so strong. So we will factor in the higher prices, but when we undertake a project, The investment decision is not going to be driven by those factors, but by others.

Speaker 4

For example, in Chile, we're Awaiting making investment decision on El Abra, which is a great project, but there's a lot of uncertainties about the Government policy towards mining in Chile, and so that's what we're monitoring before we make proceed with an investment decision there.

Speaker 2

And Emily, the leaching opportunity that we have, we don't have Exposure to steel and structural costs for that opportunity and that's why we're really pushing that with a sense of urgency Because that really is very low capital intensity and operating cost intensity that will translate right to our bottom line if We can crack that code. So, it's the equivalent of bringing on a new mine without having all the capital costs. So That is that would be a really, really strong thing for us as a company if we can continue to advance the leaching opportunity.

Speaker 4

In our position, how well positioned Freeport is to take advantage of that, those advancements. We're the largest leaching operation in the world. Morenci is the largest single mine from leaching and it's been part of our Company's experienced for decades, so we're really excited about it.

Speaker 7

Great. That makes a lot of sense. And just real quick, I And a follow-up on labor markets. And I appreciate any color that you have on the labor cost component there and some of that might be higher profit sharing, but Anything that you can share on the workforce outlook or labor availability would be helpful. I'll leave it at that.

Speaker 7

Thank you.

Speaker 4

Well, thanks, Emily, and I'll let Kathleen, follow-up. But we do have a special situation with our large workforce in Peru, where Under government laws and regulations, there is a mandated profit sharing plan. And so as profits goes up there, Workers automatically benefit in higher wages as part of that process. But Kathleen, why don't you follow-up generally on Labor calls elsewhere.

Speaker 2

Yes. The main thing that we're experiencing, Emily, In terms of labor is really focused more in the U. S, the main issue. It's a very competitive Job environment, as you've seen, we've got significant job openings in our U. S.

Speaker 2

Operations. We've been supplementing our workforce with outside contractors to help us with

Speaker 1

projects and capacity assurance.

Speaker 2

And so really you're seeing more And so really you're seeing more utilization of contractors right now, but we have made some progress in Hiring in the Q1, we've been and have had a number of openings For several months and we're starting to make progress in the Q1 in getting these positions filled. So, but I'd say it's more a matter of tightness in terms of availability of people as opposed to Really big increases in wage rates. We have increased our wage rates and we've provided some Supplements and incentives for people, but the main thing has been we've had to use Higher priced contractors, until we get all these positions filled. We aren't seeing the same kind of issues in Indonesia. And Richard mentioned the Peru impacts with profit sharing.

Speaker 2

We just signed a new contract labor agreement both in Indonesia and in Peru. And the labor situation there is much easier than it is in the U. S.

Speaker 7

Understood. Thank you.

Operator

Your next question comes from the line of Aras Willkodaw from Scotiabank. Your line is now open.

Speaker 8

Hi, good morning. Just following up on the outlook for costs and specifically I was wondering if there is a big lag impact On seeing higher costs flow through and I don't know if that's from previous contracts that you may have for things for some of the input costs like explosives and fuel and whether there's still, I guess, this lagging impact that we should see If current costs stay where they are, whether we could see a fairly significant rise in your cost base As we approach closer to the end of this year.

Speaker 4

That's really not a significant factor. I mean, there may be a short term contract That gets renegotiated, but the cost you see are essentially the current costs that we're experiencing now.

Speaker 8

That's perfect. Thank you. Yes.

Speaker 2

And we so the outlook that you have reflects our current estimate. Each quarter we update All of our operating plans and cost input, so what you're seeing in the latest outlook for the year It's based on the market prices when we prepared this forecast just recently.

Speaker 8

Thanks, Kathleen.

Speaker 4

And while there's uncertainties, my expectation is we're facing kind of the height of dislocations From global supply chains to other factors, COVID shutdown in China and situation in Ukraine. So My personal expectation is rather than seeing costs going up in the future, we'll see them come down.

Speaker 8

Thank you, Richard.

Speaker 4

But time will tell.

Operator

Your next question comes from the line of Alex Hacking from Citi. Your line is now open.

Speaker 4

Hey, Alex.

Operator

Alex, we're going to reopen your line. Your line is now open.

Speaker 9

Hi. Can you hear me?

Speaker 4

We can.

Speaker 9

Okay. Sorry, Richard. I had a problem with my handset there. So let me just play devil's advocate on the growth side. If you look at your production profile, it does Peak in 2023 was some declines in 2024 to 2025 in Grasberg and elsewhere.

Speaker 9

Bagged ad leaching opportunities, are these more of keeping the production at the current 4,500,000,000 pound level or can they really kind of generate a growth CAGR? And here, I guess, I'm setting aside the multibillion dollar sulfide projects. Thanks.

Speaker 2

In the near term, Alex, you're right. I mean, in the near term, what we've got is these leach opportunities. And Like I said, it takes 7, 10 years to build a new mine. And so these leach opportunities really can fill in the near term. Longer term, we're really looking at growth coming from this big potential we have At Lone Star and also El Abra, we had made a decision on El Abra yet, but That's £700,000,000 plus of new production and the Lone Star sulfide Would be a meaningful amount of increase as well.

Speaker 2

But I mean, it's a feature of the copper market. It's very, very challenging to develop new supplies and it takes Many years to do it. We've had significant growth in 2021, again in 2022, But it's not common in our industry to see that kind of growth in copper production, and that's really what underpins the fundamental outlook for it.

Speaker 4

And Alex, that's one thing I've been trying to get across to policymakers and others who follow our industry, Just about how long term the copper business is, I participated in Cambridge Energy's The CERAWeek down in Houston with oil and gas companies and everybody was asking the oil and gas companies about the time for response to Production and they were talking about it. The executives with the energy companies were saying, well, it's a long term business. It takes months to respond. And I said, well, copper takes years to respond. And so that's why I pointed out at Grasberg And there was a lot of pressure on us to for periods of time to delay development of the Grasberg underground As we were talking with the government of Indonesia about our contract rights, but had we done that, we wouldn't have had this production available to us.

Speaker 4

And so what we're looking at when we talk about growth is growth from a very long term basis. And It's one of the reasons why we have a favorable copper price and why I believe copper prices are going to go higher. I mean, We're seeing companies across our energy industry today being challenged with meeting their production targets. We've done that, But it's going all of that's going to be supportive of prices. And as I said, I'm really struck by having Today's copper price in the kind of global market with headwinds that would normally lead to lower prices.

Speaker 9

Great. Thanks, Richard. Thanks, Kathleen. And congrats on being one of the few in the copper industry that's actually hitting your production targets.

Speaker 4

Thanks, Alex.

Speaker 2

Thank you.

Operator

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

Speaker 10

Hello, Richard and Kathleen. Good morning. Thank you very much for the update. If I could maybe ask on capital allocation and excuse me, M and A. One of your partners And Cerro Verde recently divested its minority interest in another gold mine in Peru.

Speaker 10

And it just got me wondering With Freeport, would you guys be open to increasing your interest in Cerro Verde should the opportunity emerge? I'm asking particularly in light of the political situation there. Thank you.

Speaker 4

Yes, we would. It's just such a great asset. Funny historical story before the Phelps Dodge deal, I called the Phelps Dodge CEO when he sold down originally interest in Sara Verdi At a time when they needed production, I said, what are you doing? I wish they had kept a greater production. We got great partners.

Speaker 4

But yes, it's such a great long term asset and those kinds of quality of assets are really, really scarce in our business. And while that's a project that we can enhance growth at the margin, it's not a project where there's going to be a Step change in volumes in the future. We got some leaching opportunities there. We can be more efficient. We can overcome some of the issues that COVID has caused us, but It's just a great long term asset with our positive view of the copper markets.

Speaker 4

We're glad we have it and we wish we own more.

Speaker 10

Okay. That's fantastic. And then if I could maybe just sneak in a follow-up question, if you don't mind. Just in terms of the total capital return this quarter, I mean, it appears to be in excess of 50% of available cash flow. Maybe I'm looking at available cash flow incorrectly, but I mean, if this is the case, Is it something you could expect to continue going forward or just something that was sort of even out over time?

Speaker 2

Yes. We're looking at it on an annual basis really and we had a big working capital Big working capital item in the Q1, and so we're not varying our returns On a working capital change like that, that's not expected to continue through the year. So really it's a We're looking at it as an annual and we're having to make some estimates and that kind of thing, but we're trying to have some consistency In the share buyback program.

Speaker 4

Yes. And the facts are because of these Time challenges in pursuing investments. With strong copper prices, cash is going to come in faster than it's going to go out. So that's something our Board is going to have we'll be considering going forward.

Speaker 10

Okay. That's clear. Thanks very much both of you.

Speaker 4

Yes. And the 50% was a guidance For investors to understand what our thinking is, but it's not any sort of fixed in stone situation.

Operator

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

Speaker 11

Thank you. Good morning, Richard. Good morning, Kathleen. Thanks a lot for the presentation and your remarks. My first question is on Peru.

Speaker 11

So Peru is seeing a significant upheaval right now across several mines. Cerro Verde has been immune thankfully over the last 12 months or so. Have you seen any signs of disturbance at Sarawadae given what's happened more recently?

Speaker 4

No, not really. We've worked really hard with the local community in Arequipa And have established a positive relationship. We did some really important things in terms of community investment over the years. We built a Freshwater system for the city and 2nd largest city in Peru. And then we developed a For a city that didn't have that was just dumping its wastewater into the River Chile, we developed a wastewater collection And processing facility and so the ecology of the river has really improved, which has been very positive in many levels with agriculture interest and so forth.

Speaker 4

So We've done a lot. We paid people well. We managed through COVID effectively and it was challenging. But fortunately, we have a really positive relationship with the local community and we work hard to preserve that.

Speaker 11

Thanks, Richard. If I could sneak in another one. This is a question on the new Leach Technologies, which you and Kathleen discussed. You mentioned that it was it's very low capital intensity, which is great to hear. But the question I have is, in your view, how easy it is to implement It's across other operations owned by other mining companies.

Speaker 11

And a bit of a long shot here, but How much do you think it could increase overall production by globally?

Speaker 4

Well, it's we're advancing and it's still early days. We're working with a group of different technologies. Some of it's proprietary, some of it's with outside contractors and some is in joint ventures with other companies in Latin America. So we're excited about it. But we haven't yet been able to forecast What we believe will ultimately be a significant incremental production.

Speaker 4

Kathleen mentioned £200,000,000 a year is a target we're currently working for. That's focused on our existing active lead stacks, But there's other opportunities if this works as we anticipate it would with some old historical inactive lease stacks And potentially be an alternative to investments in concentrators to process sulfide ores. So it's I get pumped up when I talk with our technical team about it and they brief me on what's going on because of this excitement they're expressing. But we'll keep you informed, keep the market informed as we're able to get more visibility about Incremental

Speaker 11

production. Got it. Thank you very much.

Operator

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

Speaker 3

Yes. Thank you very much. Good morning, Richard and Kathleen. So the question is for me on Gransberg. I know that the changes weren't that significant, but if you could give us a little more color On the sequencing changes that you guys experiencing or that you project now in Grasberg, that would be great.

Speaker 3

And also if you could comment if this might impact in any way your cost outlook or profile for the operation and therefore for the company?

Speaker 4

No, these are just normal mine plan adjustments That come up as conditions change. When you look at the numbers from Grasberg, it looks like it's almost Like an assembly line process, but we're constantly dealing with changes In geology and other conditions, but there's nothing unusual there and it's certainly nothing That has a fundamental change in the low cost operations there. Mark Johnson is on the line and he's You know our long time Head of Operations there at Grasberg. And Mark, why don't you make a comment in response to this question?

Speaker 12

Yes, Richard, I think you addressed it pretty well. Most specifically in 2023, This little bit of a swap in metal production for 2023 to 2024 It was due primarily to Deep MLZ, where we continue to learn and apply The deposit specific cadence parameters and what we ended up doing is slowing down the cave advance a little bit going to the west And that deferred a little bit of higher grade metal from 2023 into 2024 2025. At the same time, we're able to increase our milling rate and the additional tons At the middle allows the mines to ramp up and so that more or less offset any of the change that we made at DeepMLC.

Speaker 3

All right. Excellent. Thank you very much. And then just on Cerro Verde, if I may, very quickly. When do you expect that you might get back to the £1,000,000,000 to £1,000,000,000 level of production?

Speaker 2

We're getting close to that this year. And next year, we expect to be and it Changes modestly on the margin with grades, but we're getting close to the £1,000,000,000 mark this year and we'll be there next year.

Speaker 3

All right. Excellent. Thank you very much. Good luck.

Speaker 2

We did in terms of the gold at Grasberg, We did experience some higher recoveries in the Q1 of this year and we've increased our gold volumes Slightly for the year for 2022, we haven't incorporated any of these increases in the out years. And so we do Potentially have some benefits for gold as we look forward that we haven't incorporated, but we'll have to see how the experience goes as we go through this year.

Speaker 3

All right. That's encouraging. Thank you, Kathleen.

Operator

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

Speaker 2

Good morning, Mike.

Speaker 1

Good morning, Kathleen, Richard, and welcome, Marie. You're going to get this fun going, Colleen. And Kathleen is not too quick Anyway, so, Rich, I was as you mentioned in your prepared remarks, Yes, the market price for copper is not eliciting the investment demand or the supply response that I think you would have suspected on the cycles. I just want and you talked about some of the issues, but given that it's not just copper, but other Metals, given the expectations on EV and net zero is booming. It appears that Mining investment may be constrained across the board, which is going to keep this pressure on pricing.

Speaker 1

How best to So the market is signaling to get more copper into the marketplaces if the price isn't seeing what it's now?

Speaker 4

Well, I mean, there's just things are just piling up that's adding to the supply constraints. I mean, That's a story 20 years ago when China emerged, there was a general expectation that there would be a major supply response As there always had been in copper before that, but then people started Looking hard and it's been going on for 20 years now. Copper has been at the top of the strategic objectives of the major mining companies ever since then. And it's a combination of geology. The quality of deposits are much, much lower than they were For they're in much more challenging jurisdictions often, their grades are lower, many are underground.

Speaker 4

And so that's been a factor that's overriding everything. And now with 40% of the copper coming from Chile and Peru And those countries going through political discussions about the direction of how they're going to be treating the industry That's clearly a factor that's out there. And as things get delayed, Because of the amount of time that requires to develop even a straightforward project like this mill project we have at Bagdad is about as simple A project as you could have, but it's taken several years to get engineering and permit at this. It's just a question of building a new mill, Building some tailings facilities, I mean, there's nothing really that complicated. But when you start looking at projects that are really Okay, that are really in challenging jurisdictions.

Speaker 4

You can see around the world communities opposing new developments. While we benefit in the U. S. Because ours are brownfield, we have good relationships with communities that we worked hard to keep. People are trying to build new mines in the U.

Speaker 4

S. Are running into really serious delays and sometimes brick walls about not being able to go forward. So these things are just pyramiding and absent some really significant Global economic event, I'm just hard pressed to see where we're not heading for an environment Where copper prices are going to be very high and it's going to be real challenges as people try to substitute, get more scrap, Develop new projects, all of those things have barriers. So as I said at the start, I'm really confident about our strategy of being a copper company. And I think we're really well suited to benefit for our stakeholders by Being good at execution as we've shown by being focused, by doing things the right way, by building relationships, we mentioned Peru, Same way in the U.

Speaker 4

S, same way in Indonesia. We learned long ago, and our experience in coming up and developing the Grasberg in Indonesia You cannot turn a blind eye to the local people. You have to give them jobs, opportunities, benefits. And so we've learned those lessons and it's paying off for us and I think it will continue to pay off for us.

Speaker 1

Excellent, Richard. Thank you.

Operator

Your last question comes from the line of Alex Darren Hsu from Stifel. Your line is now open.

Speaker 6

All right. Good morning, everybody.

Speaker 12

I just wanted to circle back on

Speaker 6

some of these the growth options here, In particular, the Lone Star and Alabrous Sulfides. I know these are long lead time projects, but is there Anyway you can kind of just lay out for us the timeline or schedule? Or another way, is there any way you could kind of see these coming into production, say, within a decade? And then also you talked about Al Abra £700,000,000 I know the oxide is currently being mined

Speaker 11

and it's effectively like a

Speaker 6

pre strip. But You think that would they would you have some overlap with the oxide leach and the sulfides? Or would it just basically transition to a sulfide operation?

Speaker 4

Yes. Well, El Abra and Lone Star are different. And when we acquired Phelps Dodge 15 years ago, El Abra was viewed as a Declining short term asset and it was through our exploratory drilling that we discovered this large sulfide deposit and it's very large, But it's at altitude, it requires desalination energy and so forth. So it would be an Expensive project, but certainly one that would be economic with today's and Current process and so it's just a question of seeing what Chile does and then doing all the work we have to do to get ready for it. The stripping side of things, and I'll let Josh say a couple of comments about it, is really What's happening at Lone Star, which is adjacent to our historical Safford mine just across the mountain ridge from Morenci And again, a place where we have great community support to do what we're doing.

Speaker 4

But there, we are expanding this oxide production and it's serving As a stripping towards a sulfide resource that we're continuing to evaluate and sort through how to development, The 10 year Josh, why don't you make a couple of comments about it and

Speaker 2

then give them a

Speaker 1

little bit more color?

Speaker 2

Yes, not just a comment on the part before we go there is Just on the concurrent, we could have concurrent leach for a period of time at the LIBOR alongside of the Concentrating same as Lone Star. We have that in many of our operations, including Morenci, where we have concurrent Leach operations and concentrating operations. And yes, to answer your question, these projects could be within the decade. But it takes a very long time as we've all been talking about on this call. Sorry to interrupt.

Speaker 2

Go ahead, Josh.

Speaker 13

Good morning, everybody. Just a few additional comments. I think Kathleen touched on it. I think we can get those projects would be able to be done within a decade depending On timing with respect to Alabra, as far as Lone Star, as you indicated in your question, the oxide stripping or the oxide mining is really One of the things that we continue to discover as we do additional drilling at Lone Star is that that ore body What I would classify is, well, not the same as Morenci, it's going to be a district similar to Morenci in the sense that It will be a combination of leaching and milling sulfides as it goes forward and gets put into place. And so it would be a Concurrent operation and production of both, it wouldn't be a pure oxide than transitioning to a pure sulfide, but rather an ongoing combination Of the 2 which will allow us to really maximize the value of the resource and the pound on an annual basis.

Speaker 6

Great. That's great. Thank you.

Operator

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

Speaker 4

All right. Well, thanks everybody for your interest. And I'll just close and say, I hope to see both Lone Star and El Abra's projects You kicked off. So that will give you some time frame on it. And we are really proud of our team and Really feel good about where we are and where we're going.

Speaker 4

So thank you for your interest and we look forward to reporting our progress in the future.

Operator

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

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Earnings Conference Call
Freeport-McMoRan Q1 2022
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