Freeport-McMoRan Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2022

Key Takeaways

  • Operating strength: Q2 production met targets with consolidated copper sales up 17% and gold sales up 56% year-over-year, delivering a unit net cash cost of $1.41/lb in line with guidance.
  • Copper price collapse: Copper plunged from near $4.87/lb to about $3.25/lb this quarter, triggering a $355 million provisional pricing adjustment and weighing on revenues and cash flows.
  • Robust balance sheet & buybacks: Net debt fell to $1.6 billion, well below the $3–4 billion target, with $754 million of debt and 48 million shares repurchased, and a $5 billion share buyback authorization refreshed.
  • Higher cost outlook: 2022 unit net cash cost guidance was raised to ~$1.50/lb from $1.44 due largely to lower by-product credit assumptions and higher energy and consumables costs, while 2022 capex was trimmed by $100 million.
  • Long-term copper demand theme: Management emphasizes tight physical markets, low inventories, and rising energy transition demand, while advancing a project pipeline including leaching initiatives, growth options at Morenci, Bagdad, Cerro Verde and the Indonesian smelter.
AI Generated. May Contain Errors.
Earnings Conference Call
Freeport-McMoRan Q2 2022
00:00 / 00:00

There are 13 speakers on the call.

Operator

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

Operator

Kathleen Quirk, President. Please go ahead, ma'am.

Speaker 1

Thank you, and good morning. Welcome to the Freeport McMoran Second Quarter Conference Call. Earlier this morning, FCX reported Q2 2022 operating and financial results and a copy of today's press release and slides are available on our website at tx.com. Our call today is being broadcast live on the Internet and anyone may listen to the call by 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 this call include forward looking statements and actual results may differ materially.

Speaker 1

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 SEC filings. On the call today with me, Richard Atterison, our Chairman of the Board and Chief Executive Officer Marie Robertson, our Chief Financial Officer Mark Johnson, Chief Operating Officer of Indonesia Josh Olmstead, Chief Operating Officer for the Americas Mike Kendrick, who runs our molybdenum business Corey Stevens, who leads our centralized technical Services, Engineering and Construction Rick Coleman, who's leading a number of our projects, including the smelter project in Indonesia And Steve Higgins, our Chief Administrative Officer. Richard's going to make some opening comments to start us off, And then I'll come back and cover the materials in the slide presentation. So now I'll turn the call over to Richard for his comments.

Speaker 2

Thank you, Kathleen. Good morning to everyone. Thank you for joining us. I'm going to open up with some brief remarks about where Freeport is as a company. 2nd quarter was truly a tale of 2 cities for Freeport.

Speaker 2

We had very strong operations and then we've had to deal with this sudden unexpected significant decline in copper prices. For our operations, we executed our plans. We met our production targets. We met our unit Production cost target as well of $1.41 That was really supported by the ongoing success we've had at Grasberg It's a 20 year effort to convert the open pit mine to the industry's largest underground operations. Grasberg has now returned as the 2nd largest copper mine in the world, the largest single gold mine in the world.

Speaker 2

It's 38% of our consolidated Copper sales at Freeport, our 2nd quarter unit cost at PTFI were below 0, Our goal revenue is fully funded, our total operating costs and the success in this operation is highlighted in the careers of all of us associated with PT FI. Our operations in America performed well. We maintained our positive outlook. As Kathleen will illustrate, I just could not be more pleased with our global team and the way we operated in the 2nd quarter. We executed the financial policy we established early last year.

Speaker 2

At that time, we set a debt target of $3,000,000,000 to $4,000,000,000 And an allocation of available cash flows between dividends, share buybacks and investments. We ended the quarter With a comparative debt amount of $1,000,000,000 there was $600,000,000 of Indonesian debt that's separately financed there. Our debt reduced to that level simply because we weren't able for timing reasons, Market reasons to spend money on expansions in accordance with the allocation. We've paid our base dividend And our supplemental dividend, we purchased FCX shares in the open market since we began that program. We purchased 48,000,000 shares.

Speaker 2

We retired $750,000,000 of debt in the open market at a discount. Our Board has now approved an increase in our buyback program authorization to 5,000,000,000 shares. We have roughly 3,000,000,000 shares remaining. Our financial policy It's solid and our execution is strong. But that's only one But it's an important one.

Speaker 2

The other side of the coin is markets. It's just striking how quickly and dramatically markets changed in the Q2. Part of this call, I went back and read analyst comments going into the quarter and the optimism was widespread. Copper prices approached $5 Many were expecting to go higher. We used $4.50 in our outlook, and now we have prices just above 3.25.

Speaker 2

Market sentiment reversed so dramatically. I read with interest the recent Bank of America Investor Survey of The usual investors where they described it as a full panic mode, the lowest expectation in the history of the survey going back to 1995 By investors, the economic analysts are debating on How significant in the duration of the downturn. At Freeport, we hope for the best, we prepare for the worst. Our management team is experienced and successfully managed past downturns, all of which have been followed by significant recoveries. This is not our first rodeo.

Speaker 2

We have our playbook. We've dealt with this before. But this time, importantly, we have a strong balance sheet And that will enable us to manage whatever we face in this marketplace. Our strong financial we will work to protect our strong financial condition to protect our assets, our growth opportunities for the bright future that lies ahead for copper. There is a disconnect in today's physical market and the current copper price.

Speaker 2

Our world in producing and selling copper For us, it feels about the same it did when copper was at $4.50 Customers report strong business, copper inventories are at historical lows. There has been to date no significant impact in physical demand. Today's market is tight. Our strategy of being the world's foremost copper company is intact and that's based on the long term fundamentals of the demand and supply for copper, but the reality of today's copper price stares us squarely in the face. It's a major impact on our revenues and our cash flows.

Speaker 2

The outlook is uncertain. Analysts are calling In a range from a near term major recession to a longer term stagflation, some see a less significant downturn with a near term recovery. If that happens, watch out. We at Freeport do not know what's going to happen near term. As I said, we hope for the best, Prepare for the worst.

Speaker 2

Whatever happens, the long term outlook for copper is bright. FCX is well positioned to be a major Beneficiary, this the world is becoming increasingly electrified with the demand for copper Growing as the world acts to reduce carbon emissions with electric vehicles and alternative power generations. S&P Global's Dan Yergin, A highly respected authority for many years in the Energy business recently published a report According to a doubling of copper demand because of the energy transition by 2,035 accompanied by huge deficits. I encourage you to read this report. With the established need For the copper to support the world's economy, future global growth, we're in a new era of copper demand With the energy transitions, supplies for new copper are challenged.

Speaker 2

There is no clear line of sight For mine development to meet future demand. The result is there has to be more scrap recovery, Has to be conservation and substitution, more mines and expansions, more mines to be developed expansions, but all this takes years To execute, as you can see from our company, the results will be higher copper prices. The current price for copper is unsustainable. Absent a global long term economic collapse, that is simply another. Now, Kathleen, I'll let you review the quarter And present the information we have in our slides.

Speaker 1

Okay, great. Thank you, Richard. And, I'll cover the Presentation that's on our website and then we'll come back and take your questions. Starting on Slide 3, we summarize the highlights of the 2nd quarter. We achieved solid operating performance in the quarter and continued our momentum in executing our operating plans, Growing our production year over year and managing costs in a challenging environment.

Speaker 1

Our sales volumes for copper were 17 Higher than last year's Q2 and 5% above our recent guidance. We benefited from strong operating performance across the portfolio. Gold sales were 56% above the year ago quarter and 18% above our April guidance, reflecting the exceptional performance at Grasberg. Our consolidated average unit net cash costs for the quarter of $1.41 per pound were in line with our guidance. And notably, Grasberg's costs were net credit of $0.02 per pound in the quarter, meaning that the gold revenues more than offset All of our cash production costs at the site.

Speaker 1

We're actively engaged in cost management and efficiencies across portfolio to mitigate cost increases. We generated adjusted EBITDA of $2,300,000,000 in the quarter. This was net of a $355,000,000 reduction associated with copper sales recorded in the Q1, Provisionally priced at the end of March at $4.71 per pound, which remains subject to final settlement. The decline in copper prices during the Q2 resulted in a negative adjustment for these provisionally priced sales. Our adjusted net income totaled $854,000,000 in the 2nd quarter, dollars 0.58 per share.

Speaker 1

That excluded net charges detailed on roman numeral Page 7 of our earnings release totaling $0.01 per share. Operating cash flows of $1,600,000,000 in the quarter exceeded our capital expenditures of roughly 900,000,000 Capital spending in the quarter included $400,000,000 of major projects, principally associated with the Grasberg Underground And roughly $200,000,000 to advance the construction of the Indonesian smelter. We took advantage of weakness in credit markets during the quarter and opportunistically repurchased debt in the open market. To date, we have purchased $754,000,000 of FCX's notes in open market transactions at a cost of $718,000,000 including $582,000,000 in principal amount in the second quarter. The current market situation provides a great opportunity for us to reduce absolute debt levels at attractive prices.

Speaker 1

We also continue to execute our share repurchase program. Since starting the program last November, we have purchased 48,000,000 shares At a total cost of $1,800,000,000 an average approximating $38 per share. Since the end of the Q1, we purchased nearly $800,000,000 in stock, including $110,000,000 In July, which were executed at an average share price of $28 per share. Since reaching our net debt target In the middle of last year, in the range of $3,000,000,000 to $4,000,000,000 we have used approximately 50% of our free cash flow for shareholder returns. Today, we announced that our Board increased our share purchase authorization by $2,000,000,000 to refresh Availability on the program to the $3,000,000,000 range.

Speaker 1

The timing of our future purchases will be dependent on our cash flows And general market conditions, we'll continue our priority of maintaining a strong balance sheet and use excess cash to return to shareholders. As Richard discussed, the magnitude of the decline in copper in recent weeks was sudden and unexpected. We have the balance sheet, Asset quality and experience to successfully manage a volatile and uncertain market environment. Our net debt at the end of June was $1,600,000,000 that included $600,000,000 in net debt associated with the Indonesian smelter. Consolidated debt was $11,100,000,000 and consolidated cash was $9,500,000,000 We don't have requirements To raise capital in the current environment, we've been opportunistic in taking advantage of recent market weakness to repurchase our debt and equity securities.

Speaker 1

As we look forward, we will manage through the near term effectively and are positive about our strategy centered on being foremost in copper, The strength of our assets and our team focused on increasing value for all stakeholders. Moving to markets on Slide We show a graph of year to date copper prices. The price 4 months ago hit a high of $4.87 per pound With market analysts predicting multi year periods of price increases based on fundamentals of rising demand required to support the energy transition, Limited supplies and sizable deficits on the horizon. You've all read about the macro factors, which have manifested over the last several weeks, triggering recessionary concerns. In addition, concerns about the impact of COVID shutdowns in China And a strong U.

Speaker 1

S. Dollar have weighed on copper, which is viewed as a close proxy for sentiment on the health of the global economy. The reality is that this has been a financially driven anticipatory move in copper prices. Physical markets remain healthy As evidenced by the global exchange inventories illustrated on this chart, which remain at historically low levels. Our customers report solid orders And the industry continues to struggle to meet production targets.

Speaker 1

The current decline in price is below Wood Mackenzie's estimate A $4.25 per pound necessary to incentivize new supply under an accelerated energy transition. We'll also provide less cash flow to the industry to develop new supplies, making the projected deficits in copper more significant in the future. The long term secular demand trends for copper demand associated with electrification, decarbonization will be important demand drivers for copper. We see these trends being less economically sensitive than traditional uses of copper in the economy. We fully recognize the short term uncertainties, but have conviction about long term fundamentals for the copper markets.

Speaker 1

Richard mentioned the S and P Global report. Many of you have seen it. It was published last week, prepared by analysts at S&P Global and led by Dan Yergin, a well known energy industry expert, author and historian. The independent study, which is available on S&P Global's website, forecasts above trend copper demand 2,035 associated with electrification and the energy transition. The report projects long term structural deficits in copper and highlights copper's prominent role in the global aspirations of a net zero economy.

Speaker 1

It confirms the work of other reputable analysts on the future of Copper and will serve as an educational tool for governments and other policymakers on the importance of future new copper supply development. We recognize the short term macro was a different picture. And as we move to Slide 6, Richard highlighted this summarizes our experience in managing challenging environments. For those of you who have followed our company In industry for a long time, you know that our team is proficient in successfully navigating challenging circumstances. This slide on Slide 6 summarizes our actions in prior periods when we took decisive steps to adjust our operating plans, reduce costs, defer spending, protect liquidity and preserve our asset values for improved market conditions.

Speaker 1

Notably, we operate all of our mines and manage major capital and operating decisions centrally. Each one of these periods had its own unique challenges and our team proved its agility each time. We're prepared to respond To a weakening market environment if necessary, we're in a much stronger position than in past downturns with a significantly improved balance sheet And our successful expansion of the low cost production at Grasberg. Our team is resilient, experienced, professional and value driven in our approach. We can't predict the extent or time frame of the current situation, but as a responsible producer of scale And a strategy focused on copper with long life reserves, the prospects are bright for portfolio to become more scarce and highly valued in the future.

Speaker 1

On Slide 7, we provide some additional details on our operating activities in the quarter. In the U. S, the Lone Star Mine Continues to perform above design capacity. We're expanding further to take us to £300,000,000 per annum By 2023 with an investment of approximately $250,000,000 As we accelerate the mining of oxide awards, this will expose a much Larger sulfide opportunity at this site. We're also advancing and we're very excited about our leach recovery initiatives At Morenci and across the Americas portfolio using data analytics and new technologies to enhance our leach production.

Speaker 1

This is a significant value enhancing opportunity for us and we continue to gain momentum and expect to have success on this priority initiative. At our Bagdad mine in Northwest Arizona, we are advancing plans for the Bagdad 2X project to double production. Studies are advancing and we're planning to advance early initiatives in parallel with the studies. We're focusing on developing this Opportunity is a future growth option, but we'll be flexible on timing subject to market conditions. In South America, the teams have done exceptional work navigating the pandemic.

Speaker 1

We've had a great highlight and significant milestone for the Cerro Verde team During the quarter, setting a quarterly record for concentrating of averaging 427,000 tons of Concentrating per day. At Cerro Verde, we also had some recent positive results On exploration, which has the potential to expand reserves and increase grades at this large scale operation. At Elabra, we've increased stacking rates and commencing leaching on a new leach pad. We continue to evaluate our alternatives to the long term at El Abra, including options for a new concentrator For an extension of existing operations subject to ongoing monitoring of the investment climate in Chile. At Grasberg, we sustained our large scale metal production after reaching our target metal run rate in the Q4 of last year.

Speaker 1

The cost position at Graspers is exceptional and the team there is doing outstanding work in managing and Standing the largest and most profitable underground operation in the world. During the quarter, we again achieved higher gold recoveries Compared with forecasts, which contributed to a favorable variance for the quarter, and we've now increased our outlook for full year gold production. At PTFI, we are advancing mill projects to provide additional capacity in the second half of twenty twenty three. We're diversifying our power sources and advancing the long term development for Kuchin Liar. The construction of the new smelter in Indonesia is advancing.

Speaker 1

We reached an important construction milestone during the quarter, which will enable us to begin to reduce export duties later this year. Turning to Slide 8, we provide a 3 year outlook for our volumes, which are largely in line with our prior forecast. We've made small changes to our 2022 copper volumes totaling about £40,000,000 or about 1% and increased our forecast for gold volumes in 2022 by about 5%. The execution of our long term plans is on track. After delivering 19% increase in copper sales in 2021, We are projecting growth in volumes in 2022 and further growth in 2023.

Speaker 1

For 36% of our sales volumes will come from the U. S, 27% from South America and 37 Percent from Grasberg. Moving to our cost outlook on Slide 9. As I mentioned, we're actively engaged in cost management and efficiency initiatives to mitigate the impacts of the challenging cost environment. We've updated our plans to incorporate recent commodity pricing, exchange rates and our latest operating plans.

Speaker 1

We're now estimating unit net cash costs for the year approximating $1.50 per pound for 2022. That compares with our prior estimate of $1.44 per pound. As you'll see from the reconciliation on Slide 9, The majority of this increase reflects the decline in byproduct credits associated with a reduction in assumed gold and molybdenum prices for the balance of the year. Our projected $0.03 per pound increase in site production and delivery costs reflects the assumption of higher energy prices In our second half in the second half compared with our prior forecast, higher consumable costs, together with the impact of Change in estimate for copper in the maturing leach pad at El Abra. And this was partly offset by the Favorable impact we have on labor costs internationally associated with weakening exchange rates compared to the U.

Speaker 1

S. Dollar. Historically, copper prices have been correlated with a number of our input costs. Should recessionary pressures continue, Historical correlations would indicate that we may begin to see a reversal of some of the cost experiences we've seen over the last 2 years. Moving to Slide 10.

Speaker 1

As one of the world's leading copper producers, our earnings and cash flows have significant leverage To the price of copper up and down. On Slide 10, we show model results for our EBITDA and cash flow at various prices I've shown a broad range of prices this quarter given the volatility ranging from $3 per pound of copper to $5 per pound of copper, We've updated our gold and molybdenum prices to reflect current prices. As Richard talked about, the current price is not sustainable long term given the cost structure of the industry and the need for new supply development in the future. We show modeled results on this slide using the average of 2023 2024 with current volume and cost estimates And holding gold flat at $1700 per ounce and molybdenum at $16 per pound. Our annual EBITDA Under these scenarios would range from over $6,000,000,000 per annum at $3 copper to $15,000,000,000 per year at $5 copper With operating cash flows ranging from $4,500,000,000 per year at $3 copper to over $11,000,000,000 Per year at $5 copper.

Speaker 1

We show sensitivities on the right to various commodities and input costs. We can't predict prices and are prepared to manage in a low price environment. Long term fundamentals of our business indicate that low copper prices Are not sustainable longer term providing increased cash flow as market conditions improve. We show the Consolidated capital expenditures on Slide 11. These are largely unchanged from our prior guidance.

Speaker 1

We've reduced the 2022 capital forecast by $100,000,000 which is a timing variance for 2023. And as you've probably noted, we've been spending capital during 2022 at a slower pace than our original plans. And in the current weak environment, we'll review opportunities to defer spending as we've done in the past. We have flexibility with Plans and benefit from the fact that the major investments required for the Grasberg transition are largely behind us and will begin to decline as we go into 20 23. On Slide 12, we show our future growth options embedded in our asset base.

Speaker 1

We have multiple options for Brownfield low risk growth across our portfolio. Recall we have £191,000,000,000 of copper mineral resources in our portfolio in addition to our proved and probable reserves of £107,000,000,000 of copper. The leaching opportunity is a major value driver opportunity for us and is not included in our reserves and resources. Success in this area would enable us to create the equivalent of a new mine with extremely low capital intensity, Low incremental operating costs and importantly a low carbon footprint. We're continuing to apply covers to our leach stockpiles The retention of heat is proven to enhance recoveries.

Speaker 1

We're using data analytics and evaluating various additives that can further enhance recoveries. We're initially targeting the addition of £100,000,000 to £200,000,000 of new copper per annum within a relatively short time frame and believe we can build on this target with initial success. We currently estimate £38,000,000,000 of copper in our stockpiles, which has already been mined, but not in our reserves or production plants. A significant portion of this opportunity is at our flagship Morenci mine, the largest mine in North America. A cross functional team of technical Experts, metallurgists, mine planners, data scientists, geologists and business analysts are working together to make Take full advantage of this exciting opportunity.

Speaker 1

We'll review the ongoing oxide expansion at Lone Star, which is progressing on schedule. Longer term, we have the massive Lone Star Sulfide opportunity, a £50,000,000,000 copper resource In our established mining area in Eastern Arizona. This project is right in our wheelhouse and is a valuable development option for the future. In the medium term, we're planning to double the size of Baghdad. We have a very large reserve position at this site.

Speaker 1

We expect to complete the feasibility study for this project in the first half of next year and would be positioned to start Construction activities as market conditions warrant. The Alaba project has a resource approaching £30,000,000,000 of copper and we've done a lot of work in identifying an operation that could produce over £700,000,000 of copper per year. In parallel with our evaluation of a major expansion, We're also considering investments in water, which would extend the life of the existing operation, while maintaining the longer term growth option. We continue to closely monitor developments in Chile and are deferring decisions for the time being. In Indonesia, Kuchinliar project is a natural extension of our operations there It will allow us to continue large scale, low cost mining there for decades to come.

Speaker 1

The learnings and shared infrastructure from our Successful development of Grasberg Underground and the Deep MLZ really enhanced the value of this project at Huching Liar. We benefit from having a large pipeline of options and have flexibility on the timing of development of our projects, particularly The extensive options we have for development of new supply in the U. S. Where we own most of our land and fee. We believe the world is going to need our projects In the future, we have a long track record of success in qualifying and developing projects in an efficient and responsible manner, Enhanced by our industry leading technical capabilities, established licenses to operate in our strong franchises in the areas of focus.

Speaker 1

I want to turn to our balance sheet on Slide 13, which are financial policies centered around A strong balance sheet, the actions we've taken in the past have placed us in an exceptionally strong position, particularly in the context of current market weakness. We don't have a need to raise new capital for the foreseeable future. During the quarter, we took a number of steps which further derisked our balance sheet. We raised long term financing for the smelter. We repaid our term loans at PTFI in Cerro Verde and expanded our bank credit facilities for these subsidiaries, And we opportunistically purchased over $750,000,000 in senior notes at attractive prices.

Speaker 1

As we talked about, our net debt, Including $11,000,000,000 in total debt and $9,500,000,000 of cash. Net debt including the smelter net debt was $1,000,000,000 And below our targeted net debt of $3,000,000,000 to $4,000,000,000 providing cushion in a weak market environment. We have an attractive debt maturity profile as you'll see with easily manageable maturities. We can continue to be opportunistic on value opportunities to repurchase debt in the open market. Slide 14, in closing, we show a scorecard of our shareholder returns, Which have increased with our strong financial performance in recent quarters.

Speaker 1

We were active in the market in the second quarter And into July and have allocated approximately 50% of excess cash flows to shareholder returns since the Q3 of last year, And that consisted of $1,800,000,000 in share repurchases and common stock dividends totaling over $650,000,000 during this period. Our Board authorized a $2,000,000,000 increase in our share purchase program To restore $3,000,000,000 in availability under the program, we'll continue to prioritize our balance sheet as the Cornerstone of our financial policy and that will allow us to operate well in varying market conditions and drive long term returns for shareholders. The discretionary purchases of our shares We'll be dependent on market conditions and cash flow generation in the future and our Board will continue to review our financial policy on a regular basis. In summary, we're all focused on long term value and executing our plans responsibly, safely Inefficiently, despite the recent market conditions, we're optimistic about the value of our assets, The strength of our global team, the fundamentals of the copper business and the future prospects for the markets we serve. We appreciate your attention and we look forward to your questions.

Speaker 1

Operator, we'll now open the call for Q and A.

Operator

Ladies and gentlemen, we will now begin the question and answer session. The first question comes from the line of Emily Chang with Goldman Sachs. Please go ahead.

Speaker 3

Good morning, Richard and Kathleen, and thank you for the update this morning. My first question is just around the 3Q copper shipment guidance. It looks like that's a little bit lower on a sequential basis than 2Q before it moves back up again. But could you perhaps point to What region may be driving that? And is that timing of shipments or perhaps something to do with the mine plan for the Q3?

Speaker 1

Emily, it's primarily timing. We did sell more in the Q2. We produced more, but we also had some timing variances In the Q2 where we sold more in the U. S. Than we expected, In Indonesia, we also brought down our concentrate inventory.

Speaker 1

So it's mainly a timing. We're pretty much at run rates currently.

Speaker 3

Great. Thank you.

Speaker 2

And we do have challenges with timing Indonesia from time to time With the shallow water port that we have there, rough seas can just delay loading and we of course record sales At the time of loading, and so that's just something we've had to deal with over the years.

Speaker 3

Understood. That's very clear. Thank you.

Operator

Your next question will come from the line of Chris Lefebena with Jefferies. Please go ahead.

Speaker 4

Thanks, operator. Hi, Richard and Kathleen. Thank you for taking my question.

Speaker 2

Jeffrey, you mentioned

Speaker 4

historically or you mentioned your ability to kind of manage through the downturn deferring spending is one option. Historically, Freeport in declining price environments has taken high cost capacity offline. And like we've had a lot of cost inflation in mining, the cost curve appears Steepening pretty dramatically. I'm wondering how much further the price would have to fall before you would consider taking some capacity offline? That's my first question.

Speaker 1

I think, Chris, what we're really looking at is the physical markets. And Right now, the physical markets are tight. As Richard talked about earlier, inventories are We certainly do not want to produce at a loss at any of our operations, and we'd prefer to Keep our reserves in the ground for better markets in the future. But right now, the situation It's so dynamic. It appears that physical markets continue to be robust.

Speaker 1

We're going to be watching it And it will be a combination of factors, including what input costs do as well. But we go through mine by mine and look At overall production costs, capital costs, overall cash flows, We'll make adjustments as needed. It may be first adjustments be to defer some capital projects, Which do have an impact on copper prices on copper volumes longer term, but we're going to be looking at all these things and closely monitoring As I mentioned, we operate everything. So we control all these decisions and we can look very quickly across the Portfolio and where things stand and so we're prepared to make adjustments. I don't want to give a projection as to what number, but We have reduced copper production in the past, particularly when demand has fallen.

Speaker 4

And you talked about the market being physically tight. You can see that in the inventory data. It's a little bit perplexing though because the Chinese macro Got so bad in the Q2 due to the lockdowns. And presumably, Chinese demand materially weakened, underlying demand must have materially weakened there. There's been year over year in the Q2 fairly substantial supply growth from the 2 biggest mines in the world including your own had pretty big production growth year over year.

Speaker 4

A lot of companies are lowering their production guidance, but Q2 looks like a quarter where you had an increase in supply and potentially a collapse in Chinese demand, yet Inventories didn't really change. So I'm just trying to reconcile what might have happened. Do you think the Chinese may be buying copper For strategic reserves or is there something else going on in the market that would explain why it's staying relatively tight despite the biggest end market potentially seemingly imploding in the last quarter?

Speaker 2

Chris, in preparing for this call, I've made a concerted effort With my contacts in the industry, we're very knowledgeable of the business on the ground in China to answer your direct question there. That was perplexing out. I inquired broadly about were there inventories in China that were not visible, What was going on with Chinese commodity trading companies? And the word came back that Inventories were not building. It wasn't unusual trading.

Speaker 2

You're right, a couple of our mine and the other big mine Increased, but there was also supply disruptions in Latin America during the quarter. And it appears that, that In effect, balanced some of the Chinese demand issues. But we don't see our customers In China, we have a diverse customer base in Asia. We, by design, don't Sell all of our copper into China, but into Japan and South Korea and Taiwan, And we don't see any impact on demand. So I understand your question, And I just want to share with you what I've been able to find from it, but we're just not seeing it in our business.

Speaker 4

Thank you.

Speaker 1

Western World has been strong as well, Chris. So that's Been different than in past years.

Speaker 2

Right. Even in Europe, our business there is strong. And I know the uncertainty states in Europe over this energy situation, so I'm not diminishing any of that. It's just our business is strong as many customers over there are avoiding Russian copper. And So it is unusual as I talked about.

Speaker 2

It is a disconnect. It's a serious disconnect right now between The physical marketplace that we're seeing and what's going on with copper prices. All right. All right.

Speaker 4

Thank you for that.

Operator

Your next question will come from the line of David Gagliano with BMO Capital Markets. Please go ahead.

Speaker 5

Thanks for taking my questions. Chris, I just hit the one I was really trying to I wanted to ask about, which is the cadence. And if you look back historically, 'eight, 'nine, I believe if memory serves me correctly, copper prices went to like $1.50 when Freeport Active and then 2015, 2016 again off the top of my head, I think copper prices were kind of in the somewhere 2 to 2.50 range. Given cost pressures that we've seen everywhere, is it reasonable? Is sort of a $2.50 to $3 pound range or reasonable zone to start thinking about when we'll see more action at existing assets?

Speaker 2

Well, in response to your question earlier and we had about that, I think everyone understands that we at Freeport have a broad range of operations with different cost structures. I mean that was really the whole basis for putting together Grasberg with the top size assets. It allows us to manage those assets more efficiently when you've got a Asset Light Grasberg to support it. When times get tough historically, what we've done is we'll be able to use Grasberg All of our corporate G and A and our debt financing costs and then we challenge each one of our mines to operate As a minimum cash flow breakeven and we review this mind by mind and every mind makes that decision, Our decision is to support achieving that objective. But then within the larger mines, And I'll just use Morenci as an example, the largest mine in North America.

Speaker 2

There are layers of operations within Morenci that have different cost levels. So it's not just a question of focusing on individual mines, but what goes on in layers Within the existing mines and we're able to take steps when necessary to adjust operations To reflect the current economics, it's a balancing act Those decisions you make to do that have consequences that go on for years in the future. But we manage, as Kathleen said Couple of times now. We manage all these operations ourselves and we run our business in the Americas Essentially, it's a single business unit. So we all get together, we find out what's working, what's not, what can be done, what And we balance the longer term consequences with the need to meet current realities.

Speaker 2

And it is And as I said, we have the same basic team we've had that we've done this before. So we have a game plan for us doing it. And Now our operators are ahead of us in occasions. Everybody knows what to do. Everybody is pitching in and acting as a team to deal with our corporate objectives.

Speaker 2

So It's not an easy question to say, is there a price where this happens with this mine because it's an interactive process that cuts across All of our mines in the Americas, of course, in Indonesia, we're going to produce as aggressively as we can safely And consistent with our long term plans. And it's so great now to be ramped up to the extent we obviously got a couple of steps to do. But just 2 years ago, it was really scary when we were having volumes down there and the world was facing COVID. We're so much better positioned now.

Speaker 1

And David, You raised this in your comments and we look at a lot of the publications that show where cost support is for copper. Those estimates are dated. There's been a lot of changes in Input costs that the historical cost support for copper has been increased significantly. So 3.25 copper is not the same as it was 2 years ago. And so that's a factor as well.

Speaker 1

But reading tea leaves about how long this will last. We can move quickly. This has happened suddenly and we're starting a process to look at What we can do, particularly on the capital spend, that's the quickest way to increase cash flow.

Speaker 5

Okay. That's helpful. Thank you. And then just a quick follow-up. Obviously, the authorization increased the buyback from $3,000,000,000 to 5,000,000,000 At a time when copper is dropping, if copper kind of holds where it is, we don't see a lot of free cash flow, which by the way is no different from a company that reported I had also raised their buyback.

Speaker 5

My question is just really can you just speak to the thought process and the approach The buyback moving forward considering everything else that's going on in the market right now. Is there any and also is there any kind of Duration to the $5,000,000,000 buyback timeline was?

Speaker 2

So What we tried to do at urging of a number of our shareholders last year was establish a financial policy so that people Knew what direction we were going in. And so we worked on it for months and finally came up With a policy that was announced about how we were allocating available cash flows, what was our debt targets, how we're allocating cash flows between shareholder returns and investments. Cash flows between shareholder returns and investments. There's always a challenge in the investment side of it because it takes so long to do it. So anyway, that's just part of the function.

Speaker 2

But we felt that, and we discussed this with our Board, We felt that it was best to give the marketplace a direction since we've executed so much of our existing Authorization that we would have the availability to act for share buybacks when it was warranted by the marketplace. And I want to be careful to say this because I'm not predicting anything. I mean, clearly, My long career has taught me not to be confident in myself or others in predicting these short term movements. But David, there is a scenario here with the market being so tight And if things turn out not to be as dire as most expect now, There could be a dramatic recovery in copper prices and that would translate to a recovery in Freeport share price. And we want people to understand what we'd be prepared to do if the Circumstances change dramatically where they are now.

Speaker 2

We're for most to predict. We're still going to run the business With the primary goal of protecting our assets and protecting our future, because we believe the future Only believe we're confident the future of this company is so bright. Past actions by the company Put that in peril at times. We're not going to do that this time. We're going to have discipline about it, but we wanted Market to know that we have this authorization available to us for us to execute when it makes sense.

Speaker 1

Yes. I think another factor out there is, as you look at The copper price needed to support new mine development and compare that To where our shares trading and what's implied in our shares, it's attractive versus new supply development. And on the flip side, we are looking at this staring the situation in the face where new supply development is required. So There's some bunch of disconnects in the market right now, and we wanted to signal Positive. We're going to use excess cash flows to buy stock back.

Speaker 1

We've the lower copper prices gives us less cash flows to use, but we're going to continue to look at our plans and see how we might Modify that with this disconnect in where our share price is trading and what's needed long term to develop new supplies.

Speaker 2

I mean, maybe it's trite because most management say this, but our management and our Board Truly believe that the fundamental value of Freeport is substantially higher than what it stops trading now.

Speaker 6

Okay.

Operator

Your next question will come from the line of Lawson Winder with Bank of America Securities.

Speaker 7

Hello, Richard and Kathleen. Good morning. Thank you very much for the update again today. It is very nice As always, I hope you both are well. I just wanted to kind of dig down on your comments regarding the increase in the cash cost guidance.

Speaker 7

Kathleen, you mentioned it was a majority of the forces driving that were actually just a reduction in the byproduct price assumptions. I was getting to that too, though. I was getting to a very small majority, so almost close to fifty-fifty. Would you happen to have a specific number In terms of how that broke down between inflation and the change in the price assumption? And then maybe if you could just speak to some of the Key, I guess, unexpected inflationary items that you saw in the quarter.

Speaker 7

Thanks so much.

Speaker 1

Sure. Yes, sure. On Slide 9, we show a roll forward And you can see there where we've gone from $1.44 to $1.50 in the byproduct credit, because we're using lower gold prices in moly What we used in our prior forecast is down by $0.05 So We had a $0.06 increase and $0.05 of that is from reduced byproduct credits. The site production, the top line number, the site production delivery being up Delivery being up $0.03 The major factors there that impact are impacting our cost guidance is Energy, we used just for reference in our last forecast, we used $3.50 per gallon For diesel prices, just for one reference in our outlook, which was the price Around the price of the time, the price in the 4th quarter in the second quarter ends up being above $4 per gallon and that's declined somewhat to $3.70 So we're using current or at least prices as of last week for oil prices, for diesel prices, Roughly $3.70 a pound or a gallon in our outlook. Coal prices are also up from our prior forecast.

Speaker 1

Purchase power costs are up slightly. We had some offsets in Currencies, the stronger dollar results in lower operating costs in our international locations. And so We've reflected that. We've had some contractual consumable price increases, which are rolling in, which We've brought into the forecast. We had also a and this is more of an Accounting deal, but we also had as we are transitioning at Alabra From a former leach pad to a new leach pad, we had some changes in estimates In our estimates of what copper is remaining in that leach pad.

Speaker 1

And so what that does is basically, If we reduce the amount of copper available in leach pad, it increases our cost for the remaining pounds. So That is not a cash item. It's essentially we've already spent the cash, but it will roll through our unit net cash costs and that was a factor as well. So But headlines, energy, materials and supplies, This deal at El Abra, which is more noise, offset by a stronger dollar and profit sharing and other Costs that are driven by copper prices. So net of all that, We were $0.03 on-site production and delivery and our export duties and royalties went down by 2.

Speaker 1

So the biggest factor you can look at this and say it's by credits, which we were using $19.50 for gold in the prior forecast and now we're using $1,719 somali in the prior forecast, which is what it was and that price has declined to 16.

Speaker 7

Thank you.

Speaker 2

And growing volumes in Indonesia. I mean, With that cost structure, when it gets to be a greater proportion of consolidated numbers, That's a huge benefit.

Speaker 7

Maybe as a follow-up, I find it remarkable that you did not mention labor among all of that. Are you just not seeing signs of any meaningful labor inflation? And I guess, you're obviously confident that you don't expect to see any going forward?

Speaker 1

We had already updated in our second quarter In the Q2, in our Q1 results in April, we had already updated our labor costs For inflation, we've also in contract labor that we're using, our labor costs actually in this forecast A little lower because of this currency factor that I mentioned and that doesn't affect our U. S. Operations. But when you look at South America and where The Peruvian and Chilean currencies have moved relative to the dollar. That helps Because our costs are in those countries for labor are principally denominated in the local currency.

Speaker 2

Thank you very much, Shadi. Well, thank you. I want to get a shout out to our Supply chain team that's just done a remarkable job in working with our suppliers in a difficult environment, Not only from a cost standpoint, but from a delivery standpoint. And They've just done a great job in working directly hand in hand with our operations We do what we can to offset these challenges that are broadly across all businesses.

Operator

Your next question will come from the line of Carlos De Alba with Morgan Stanley. Please go ahead.

Speaker 8

Yes. Good morning, Richard and Kathleen. Thank you very much. Couple of questions, if I may. First one, it seems that the leaching technology could be a very attractive return on investment So I wonder if you can give us maybe a little bit more color as to what is the current status there?

Speaker 8

What are some of the work that is still pending to do? And if you have any sense of a potential timing for that investment to materialize? And then The other is clearly a lot of volatility, as you mentioned, and copper prices have suffered. But since you are quite constructive on the market, this might be an opportunity. So this is maybe a So this is maybe a sensitive topic, but what is the rationale of keeping Cerro Verde as a publicly traded company, I mean, wouldn't potentially be that also a good investment for Freeport shareholders?

Speaker 1

Carlos, regarding the first question related to your comments on leaching, It is our best project in the portfolio and is Something that's a catalyst for us to really add value to our business. As you mentioned, low capital intensity, Very low operating costs and particularly in this current environment, we are highly motivated. We've got teams, we're running it like a project. We've got teams highly focused on this. It's our number one priority.

Speaker 1

It's got An element of research and development associated with it. So it's not just execution. It's got some science Associated with it, but we are advancing our understanding of the science. Our company and its predecessors have been really leaders in this area and We've got a team of people who have a lot of experience in the science of this as well as some new approaches That are going to allow us to be successful here. Corey Stevens is on the line who is leading this effort And with Josh and the whole Americas team and Corey, I don't know if you want to make any comments in addition to What we said earlier, but Corey's phone rings quite a bit because this is We do see this as being a real value opportunity for us to create value for Our business and shareholders.

Speaker 1

But, Corey, is there anything you want to add that wasn't covered?

Speaker 9

No. Thanks, Kathleen. Yes. So, reaching really does offer a number of compelling advantages on a number of fronts. The analytics capabilities is really unlocking a more granular look at all the different aspects that we see In terms of recovery and it's enabling us to decouple static recipes that we had in the past To more dynamic recipes that maximize value as we go forward.

Speaker 9

But that's just one bucket and it's very organic. We're At Morenci, there's a lot of center of our attention right now. We're executing to the moderate volumes We've put into this year's forecast building confidence into a sustainable what that looks like going forward and then have a number of Going to add even more with a very large backlog of a number of alternatives that we're pursuing.

Speaker 1

Thanks, Corey. So it's data analytics, additives, which we're exploring, As well as heat, which we're applying covers across all of our stockpiles and we're well on our way to doing that. And as we Retain heat in the stockpile, the data shows that recoveries are greater. So it's a multifaceted approach to it. We're focused initially at Morenci.

Speaker 1

Chino is the 2nd largest one in the U. S. And we're moving with data analytics there. We're trying out some additives at Sierra Rita. We've got some third party activity going on at our Bagdad mine In Arizona, so we're trying a bunch of alternatives to enhance our understanding and We're gaining confidence that we'll be able to have some we set this target of £100,000,000 to £200,000,000 over a 12 to 18 month timeframe.

Speaker 1

And we're increasing our ability to our confidence in our ability to get to that. And once we get to that, that will open up some Iterations that will allow us to expand it from there, but we got to get the first success. And we've had some early successes. It's just We've got to get to scale on it. So stay tuned.

Speaker 1

Yes. Sorry, second question on Cerro Verde.

Speaker 2

Kathleen, Let me just add, the real focus is what Kathleen and Cory talked about is Taking advantage of our lease our existing lease operations, but the with success, the future beyond that It's really exciting about what we might do in terms of mining sulfide awards and processing them With this technology or looking at historical lead stacks, it is really exciting. Our whole team is really pumped up about it. Very good to see. Our project is called Leach to the Last Drop.

Speaker 1

And just to circle back on Cerro Verde, we monitor the share price there, the public share price there. The Public float is a historical carry forward that has been in place for a very long time. Well, we do monitor the trading conditions, opportunities if they arise and being able To repurchase, it's a different scenario than in the U. S. Where we can have active share purchase programs, but we are in tune With the market there and with certain of the investors and we'll look at that on an opportunistic basis as we compare Uses of cash flow with other priorities at the corporate level.

Speaker 8

All right. Thank you very much. I appreciate the color.

Operator

Your next question will come from the line of Michael Dudas with VRP. Please go ahead.

Speaker 2

Yes. Good morning, everybody.

Speaker 1

Good morning, Michael.

Speaker 10

Hi. So Richard, we've had this dislocation over the last 6, 7 weeks, Which is perplexed to a lot of folks. And on top of the S and P report, the year ago report that came that you cited that was published a couple of weeks ago, Historically, these types of like corrections or uncertainty in the market, will it Lead to exponential delays in decision making and getting some of the supply to the marketplace. Is there going to be just or is this like, well, We know longer term comp is going to be great, so we're going to go through with these discussions. Obviously, you're looking at it in one very measured way.

Speaker 10

Historically, as the industry, we're going to see further pressure on inventories and deficits because this type of nervousness could lead to Further delays in the needed investment for the product?

Speaker 2

Yes, unquestionably. I mean, you just think about The impact on corporate strategy, the amount of financing that's available for smaller projects, This is just another element of this series of barriers to supply development that the industry had already faced. And unquestionably, I mean, it was pointed out earlier in the discussion that for a company like ours is We got this really great project in Chile that's being delayed by The political situation there and uncertainties about taxation, when you balance that out with a company like ours and Potentially being able to buy your stock back so cheaply, that's going to have an impact. Investment in this industry is just so long term. It's so long term even for A project is straightforward as doubling our concentrator at Baghdad.

Speaker 2

That's a multiyear effort to Go through the permitting, the planning process, procurement process. So it's the long term nature of this business And a head spinning move in prices like this is going to have an impact on those investment decisions. I don't know of any company It's just going to close their eyes and say, says, you know that the market is so good in the future, we're just going to ignore this. You can't ignore it. I mean, it's been such a dramatic decline and there's still such uncertainties as to what's going to happen That all of that is going to delay production investments And there was just such a limited number of investments available out there anyway.

Speaker 2

It's just building towards this coming huge deficit in the copper markets. Thank you, Richard.

Operator

Your next question will come from the line of Timna Tanners with Wolfe Research. Please go ahead.

Speaker 11

Hi. Thank you. I guess I'm just trying to kind of Square that what we've been discussing in terms of Freeport Slide 12, in terms of all those projects, What does it take that you need to see to, from the Chilean politics to get more confident in Alabra? And, what does it take in terms of Copper prices just generally to proceed or are many of these still very attractive at recent prices? Thanks very much.

Speaker 2

Timna, thanks for your question. It's and looking at our situation, there's a lot of balancing Of competing economics for these projects that come into play. The uncertainty At Al Arab where we have a 50% 51% interest and we operate it because Elfo is our partner. Just means that that is a burden on that project, whereas investments in the U. S.

Speaker 2

Where Kathleen mentioned, we own substantially all of our land and fees, so there's no royalties Where we have favorable income tax situation that's partially due to the tax legislation that's In place now and partially due to net operating loss carry forward we have from the oil and gas investment And all the issues around community support and what you have to provide in international operations affects that balance That we have. And Couture is different because it's just a clear cut fit into our long term plan for managing the available ore at Strasburg. And by the way, I might mention, Emily, You had in your report today a question about extending the 2,041 deadline there. We're In early discussions, I think we have a pathway forward, but we have to proceed with that. And that It's something that would benefit all stakeholders and also open that whole area for further exploration, which has been limited because of the 2,041 Deadline under our existing operating rights.

Speaker 2

So it's not an easy question to say, But it's a balancing off on all these things. And right now, the lease Focus is not being it's going to be affected by economics, timing of Baghdad, maybe the Lone Star Project, the near term expansions are going well. We may have some more opportunities there. The sulfide is longer term and the Nel Arbor is the one that's really Beyond that, we have further opportunities in the U. S.

Speaker 2

At Morenci and at our other mines. But What I really like about our company is we have this huge pipeline of projects. The nearest term will take time other than leaching, which will come quicker. But beyond that, We have such great resources that are available to us beyond reserves. And over time, those will come to reserves.

Speaker 2

And so this company is sustainable for a very long period of time Without having to do anything else, without having to do anything else. But the decisions about timing and when to commit and so forth There's a lot of moving parts and that got it's just gotten more complicated by seeing this 30% drop of copper prices And not knowing what's going to happen in the next 2 to 3 years globally. So it had an impact on us and it will have an impact on Other companies.

Speaker 1

Okay. Great.

Operator

Thanks for that context. Appreciate it. Your next question comes from the line of Abhi Agarwal with Deutsche Bank. Please go ahead.

Speaker 6

Thank you. Good morning, Richard and Kathleen. I just had a question on inflation. So in terms of inflation, where do you see the biggest upside risk into the year end 2023? And you did talk about using spot gasoline prices and including labor in your forecast.

Speaker 6

But does the Q3 and the 2022 guide reflect the spot consumable prices you are seeing? That's my first question. Yes.

Speaker 1

The first answer is yes to that. We're using spot prices for our energy inputs.

Speaker 2

Yes. And that's just our philosophy in planning overall. We don't like we develop an outlook and a plan based on Current prices and then we look at a number of different scenarios for what might happen if that varies. But We don't go into any kind of economic analysis ourselves. We're coming up with predictions on the future.

Speaker 2

I'm sorry, long ago, that's a dead man's game. And so we just use current prices and then look at scenarios of I will say this, for those of you who follow the company a long time, you've heard me say About the correlation between our input costs and copper prices that's been there and that's One of the rationales we've always used for not hedging, this current market has disrupted some of those Longstanding traditional relationships, energy is the most significant one That's changing and every day you see that changing. So we're just having to approach this with prudence, With an overall goal of protecting this great set of assets we have and protecting the future that I think is going to be so great for our company. So we're going into that mode that we followed before of really aggressively managing our business As the world around us changes.

Speaker 1

And to your question about where we see the most Risk or opportunity either way, I'd say energy is the one that's the most uncertain. As Richard talked about the correlation, what we're spending on energy, if we did historical Correlations going back over a long period of time, our energy costs correlated to a $3.25 copper price That would be 40% lower or greater. And so but yet people are talking about Potentially energy prices spiking again because of what's going on in the world. But if we really do get This recession really comes through, maybe it's a scenario where historical correlations start to fold in More than they are today, but our current plans are not based on historical correlations. They're based on the current in the current market conditions.

Speaker 2

But you know, and this is obvious, already the biggest risk to our business right now is, is the future demand Going to drop off a cliff because of a global recession. And that's what the market is pricing that in large part Right now, because that's what the expectation was. I mean, look at that Bank of America Survey that they did, 80% of the people were rejecting bad times, But we haven't had that yet. But that's the risk to our business. If the dire expectations about recession occur, demand will fall off.

Speaker 2

We can adjust to it. We're not going to put our company at risk. And that's why we're going to be very prudent about the way we Manage capital, manage operations, we manage our financial policy. I'm such a big believer in copper. I have this urge to be a lot more honest than you're about it.

Speaker 2

But history has taught me we need to be really prudent to protect ourselves in case things happen That might put us at risk. We're not going to do that. We're just not going to do it.

Operator

Your next question will come from the line of John Tumazos with John Tumazos Very Independent Research LLC. Please go ahead.

Speaker 12

Thank you very much.

Speaker 2

Hey, John.

Speaker 12

Peter, are we in such a strong position at Freeport And given the 2 big capital projects, the Smelter and Cu Ching Le Er are basically non discretionary, That we really don't need to make too many changes layoff geologists, swing CapEx around a lot And that there's less risk of a double mistake of making all these cuts and then the market recovering, panics Start and stop so fast. It's so hard for you to manage. You think it's very likely we're steady state at Freeport?

Speaker 2

Well, let's see. You mentioned people. We made Substantial cuts in personnel, just over 2 years ago with the COVID issue. We did that. We always treat people fairly.

Speaker 2

It was mostly between incentivized retirements or incentivized Terminations and so forth, and we are very effective with doing that. By the way, we have carried over some Really efficient benefits in our G and A cost and what we learned during that period of time about not needing to travel as much And working efficiently with our people. I encourage all of you to go back and look at the history of Freeport's G and A and just see what progress we've made with it. John, we're actively looking for technical people. I mean, we're not talking about cutting back technical people at all because This opportunity with leaching, with data analytics, which is Used in leaching, but in the rest of our business, my experience has shown you find good technical people, you can They'll create value for us.

Speaker 2

So, steady state, maybe that's one way of saying it. You know now that With Grasberg being where it is with its ramp up, we're still working on a mill enhancement there, power issues. We're dealing with our power plant there and We have some other investments made, but we're at our run rate. And Clearly, the expansions are being affected by today's copper price. So, yes, we're just focused on staying In a strong financial position, keeping all of our options open and being prepared to act when time makes sense.

Speaker 1

We raised the capital we need for the smelter. That's an important part of our agreement with the Indonesian government. And we raised The capital we need both in the bond and the bank markets earlier this year before things got And so we're in good shape. That's an execution project. The Cuching Li, it's a complicated But it's an execution project.

Speaker 1

The Cuchin Liar project is investments over a long period of time. We can have some pluses and minuses as we look out in the plan to tweak it, but it's a long term investment. The places where we do have opportunities to look at is In the short term, some of the funding that we were planning in the Americas for various projects to build capacity, To build capacity assurance, to sustain higher mining rates so that we could keep our production levels high, Those kinds of things as we've done in the past, we can look at if we need we will look at if we need to essentially cut spending. And the reductions in mining rates help current cash flow. It makes it harder in the future To get the flywheel going again as we've just now doing with the cutbacks we did in 2020.

Speaker 1

But, as Richard said, it's something that our team has experience with. We do it in a disciplined way. I think the important thing for the market to understand is that As we do these kinds of things, they don't the switch doesn't get turned on quickly. So they have lasting effects. Not you don't lose value.

Speaker 1

It's not lost, but it's deferred for potentially an extended period of time. So we take all that into account when We make these decisions on modifying operating plans.

Speaker 2

And the timing of that PT FI $3,000,000,000 finance It was very fortuitous. And I was just looking at this morning and what we issued it with and what today's Interest rates are for those bonds that are trading. And it was great that Kathleen and her team got that done when they got it done.

Operator

Our final question will come from the line of Jatinder Goel with Exane BNP Paribas. Please go ahead.

Speaker 6

Thank you, operator. Good morning and good afternoon. Just a question on inflation, but from a different perspective. A number of other companies in the sector are highlighting CapEx inflation being higher than OpEx inflation. Interestingly, encouragingly, your CapEx guidance is almost unchanged For this year and next year barring some $100,000,000 shift, what's driving that?

Speaker 6

Are you seeing any CapEx inflation? Or is there any deferral of activity Keeping that absolute $3,100,000,000 average CapEx, you are unchanged, but it's at the cost of some lower activity level?

Speaker 1

Yes. I think it's a function of where we are in these projects. In Indonesia, a large portion of our capital budget was Related to the underground development. And so we were well advanced in this project. The last part of it really is this increase in our SAG milling circuit which is coming on in 'twenty three.

Speaker 1

So, but if we're starting projects today or in the last 6 months, I think that's a fair assumption and that also goes into the calculus of, is this the environment that you want to Undertake major new projects in because not only do you have the costs up, but the availability of labor to someone's question earlier, The risks are higher. And so the current copper price doesn't Appropriately reflect what is required to get new projects developed. And that's the thing Richard was talking about earlier, We're we've got a big disconnect. But our capital projects that we're doing today have been in progress for a long time. So and we've got a core amount of sustaining projects and we do have Some higher equipment and parts and those kinds of things, some of the parts have affected OpEx, But we're not given where we are in our capital cycle, we don't have the inflation that someone brand new starting a new project would have today.

Speaker 2

Yes. It's the nature of what we're spending money on and like Kathleen said, where we are, where we are in the cycle. And you know, Supply chain issues are still real too and that would be a very The only thing to think about is you were undertaking a $6,000,000,000 $7,000,000,000 new project in this industry. All of you keep coming back that the supply chain, I mean the supply barriers To develop copper to meet this demand are really significant. You just you think about we've had high copper prices now for 20 years And just look at what the industry has tried to spend and what's been developed.

Speaker 2

And now you got these new things that are coming in. You can't wipe away community environmental concerns Just because the world needs copper, you have all these social issues that are competing for Populations in Latin America and problems, we in the U. S. Benefit Because we have greenfield expansions, but you see the problems of trying to build I mean brownfield expansions. You see the problems in trying to build greenfield expansions here in the U.

Speaker 2

S. They're just selling. I've just never seen anything like it and it's just so clear to me after looking at commodities businesses, Natural Resource Businesses now for all these decades about where the copper business is and what the future lies ahead for us. That's why I'm so excited about what our company's what our company will benefit from, assets, people, Experience how we do things. It's going to be a great future.

Speaker 6

Excellent. Thank you. Just a quick follow-up. On the smelting CapEx, the only change has been in the precious metals refinery side Is all of the remaining CapEx on existing smelter expansion plus the new greenfield smelter all locked in and there is no risk of escalation there just to be sure?

Speaker 1

No, it's not.

Speaker 2

Not at all.

Speaker 1

Yes, we agreed with the EPC contractor To a target price and we both share some risk in that and we've got some contingencies. A good portion also is to think about the labor costs, local labor costs And where the dollar is, so that will help us if things stay with the way they are. But it's not a Fixed price contract, it's got some risk sharing between the parties.

Speaker 6

Understood. Thank you so much, Richard and Kathleen. All the best.

Speaker 2

Thank you very much.

Speaker 1

I'll now

Operator

turn the call back over to management for any closing remarks.

Speaker 2

Let me just say, you all know how I feel and what's the basis for our company strategy. So If any of you and I'm asking this question broadly within the industry with all my contacts, but if any of you on this call who follow our If you have a different view about the fundamental outlook for the business, Just call me directly. I'd be very interested in hearing it. One thing the reality is that I certainly recognize Is that even with institutional investors, their views of their investments are much more short run than what Freeport's View is of how we have to invest for the future of this copper business. But I'm really interested in hearing contrary views if any of you I'd like to share them with me.

Speaker 2

And with that,

Speaker 1

I want to thank everyone for

Speaker 2

this safety setting. And we look forward to reporting in the next quarter and seeing how this world Both. It's going to be very interesting. Thank you all.

Operator

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

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