Freeport-McMoRan Inc (FCX) — Q1 2015 Earnings Call Transcript

Thank you and good morning. Welcome to the Freeport-McMoRan first quarter 2015 earnings conference call. Our results were released earlier this morning, and a copy of the press release and slides for today’s call are available on our Website at www.fcx.com. Our conference call today is being broadcast live on the internet, anyone may listen to the presentation materially. We’d like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in our Form 10-K and subsequent SEC filings. On the call today are Jim Bob Moffett, our Chairman of the Board; Richard Adkerson, Vice-Chairman and President and Chief Executive Officer; Jim Flores, Vice-Chairman and Freeport-McMoRan Oil & Gas President and Chief Executive Officer with several other senior members of our team in the room today. I’ll start by briefly summarizing our financial results and then will turn the call over to Richard, who will begin reviewing our recent performance and outlook in the slide presentation. After our formal remarks, we’ll turn the call over to questions. Today FCX reported a net loss attributable to common stock of 2.5 billion or $2.38 per share for the first quarter of 2015. The loss attributable to common stock included net charges of 2.4 billion or $2.32 per share in the first quarter primarily for the reduction of the carrying value of oil and gas properties pursuant to SEC for cost accounting rules and a related tax charge to establish a deferred tax valuation allowance. Our adjusted net loss attributable to common stock totaled 60 million or $0.06 per share during the quarter. Our copper sales during the quarter totaled ₤960 million that was above the first quarter of last year of ₤871 million. Gold sales totaled 263,000 ounces that was also above the last year first quarter of 187,000 ounces and oil and gas sales totaled 12.5 barrels of oil equivalents in the first quarter. Our realized copper price of $2.72 per pound in the first quarter was below the year-ago quarter of $3.14 per pound. Gold prices of 1186 per ounce were below the year-ago quarter of roughly $1300 per ounce. FMO&Gs average realized price for crude oil was $56.51 per barrel in the quarter, and that included about $12 per barrel of realized cash gains on derivative contracts. Operating cash flows during the quarter totaled 717 million; capital expenditures as we advance our projects totaled 1.9 billion in the quarter. We ended the quarter with total debt of 20.3 billion and consolidated cash of 549 million. As previously reported, we completed amendments to our bank loans during the quarter to provide more flexibility with financial covenants and to extend maturities under our term loan. At the end of the quarter, availability under the revolver approximated 3 billion of undrawn availability and undrawn availability under the Cerro Verde credit facility approximated $1 billion. I’ll now turn the call over to Richard who’ll be referring to the slide materials on our website.

Good morning everyone. Before we move on to the slides, I would like to reflect on our January call where we referred to 2015 as a bridging year. This year, we are completing our major copper expansion projects started in 2010 and transitioning into 2016 when we will start to see the ongoing benefits of these investments. These projects will lead to increased volumes at lower costs and capital expenditures, resulting in significant free cash flow that will not depend on rising copper prices. While we remain optimistic about the copper market's outlook, driven by global demand and the challenges in developing and maintaining supply, we are also aware of the near-term uncertainties in commodity prices. Therefore, we will continue to focus on cost control and remain adaptable to market conditions. We have already taken several actions to respond to these conditions and maintain our financial strength as we navigate through 2015 toward future years when our financial metrics are anticipated to improve significantly. We have made considerable progress in nearing the completion of our Brownfield copper development projects, which are among the most attractive in the world. As we finish these projects, we are positioned to achieve our deleveraging targets over time, increase cash returns to shareholders, and offer exposure to potentially thriving commodity markets in the future. Jim will discuss important milestones achieved in our oil and gas business since FCX acquired it in 2013. Our extensive infrastructure in the Gulf, coupled with significant available capacity for expansion and our strategic lease and development inventory, along with our team's experience in the Gulf of Mexico, places us in a strong position to grow our business, deliver attractive investment returns, and enhance asset values. We established an objective for our oil and gas business to be self-funding following the completion of our acquisitions, and we have achieved that through cash flows and asset sales. We are now exploring various alternatives for supplemental external funding for our oil and gas investments. Among these options, we are considering a public listing of a minority interest in Freeport-McMoRan Oil & Gas. A publicly traded Freeport-McMoRan Oil & Gas would allow us to value our oil and gas assets through market evaluation and expand financing alternatives for our operations independently. Depending on market conditions, this alternative could be executed by late 2015 after completing an SEC review of the necessary registration statement. The review of our business and outlook will demonstrate that we possess a strong portfolio of assets with attractive organic growth options, a dedicated and motivated management team, and a clear plan for managing our assets and finances as we pursue our strategy of providing long-term value for our shareholders. Turning to slide 3, we have our new annual report for 2014 titled "Value at our core," which highlights the substantial value of our assets, our growing production and cash flow profile, our favorable market exposure, our financial strength, our responsible business practices, and our experienced management team. On slide 4, the first quarter highlights include a significant ramp-up in our Morenci expansion and record quarterly sales at our Tenke Fungurume projects following the completion of our phase II expansion in 2013. The Cerro Verde construction project remains on track to become the world's largest copper concentrator facility. We are also entering phases of higher ore grades at Grasberg as we approach completion of the planned open-pit mining. Additionally, our oil and gas business saw positive drilling results, with substantial expansions in our resource base and new production stemming from the Lucius project coming online. By the end of the quarter, our production from various projects reached 25 thousand barrels of equivalents per day. We are advancing plans for external funding to develop these assets. Kathleen will review the financial highlights for the quarter in comparison to the first quarter of 2014. We are facing lower commodity prices, with copper prices about 12% lower and oil prices half of what they were last year. Nonetheless, our business operated efficiently and effectively. I recently attended the annual CESCO Week in Santiago, Chile, where many discussions focused on copper markets. Looking at our current position in 2015, the previously projected surpluses for the last few years have not materialized. Projects have faced delays, and production interruptions have prevented the market from entering a significant surplus. The attention of investors and industry stakeholders has pivoted to China, where lower growth and economic uncertainties have arisen. Despite this, the government is implementing economic stimulus, and China’s demand for copper will remain substantial, which is crucial in the near term. Our operations in the U.S. contribute over 40% of the downstream copper for the growing domestic market. Economic stimulus efforts in Europe and Japan are beginning to show growth in our business sectors. The industry is still grappling with supply-side challenges. While we acknowledge near-term price uncertainties, we remain optimistic about midterm and long-term business fundamentals, positioning our company to capitalize on these opportunities effectively. As visible on slide 7, during the first quarter, our mining business continued a strong focus on cost management. Our team has performed excellently in guiding our organization toward effective cost control. We achieved good cost performance this quarter, coming in significantly below our internal cost control targets. Customer growth in North America was also strong in Morenci, although production declines in South America were impacted by the Candelaria project sale, which produced just under 100 million pounds in the first quarter of 2014. Indonesia performed strongly this quarter, particularly in light of the export ban in early 2014, while Africa achieved record production. Looking ahead through 2015, we are well-positioned to take advantage of our expansions as we transition to lower capital expenditures and higher production volumes. In Indonesia, we are nearing the conclusion of our current mining phase and expect positive production growth while reducing unit cash costs going forward. We are excited about the significant progress made, with engineering and major procurements now completed. Once operational, we will process 360,000 tons of concentrate daily, the largest in the world. Construction remains on schedule at 70% completion, and we aim to finish in late 2015. We are pleased to see our project timelines and budgets aligning as planned. In Indonesia, we are engaged in active discussions with the government regarding the amendment of our operating rights. The government has acknowledged our need for certainty in our operational terms, and we are working cooperatively within the regulatory framework to achieve this. This operation not only benefits our company but also supports the economic development of Papua, and we share a long-term positive partnership with the Indonesian government. Currently, all our rights remain applicable while negotiations move forward. A memorandum of understanding was extended earlier this year to July 2015, which includes collaborations for planning the expansion of our smelter operations in the Gresik area of East Java, where Indonesia's only existing smelter, developed in the mid-1990s, is located. We have now completed access to our massive underground ore deposits and expect the DMLZ extension of the current DOZ mine to commence operations late this year. Development capital exceeding $3 billion has been invested, with $2.5 billion net to PT Freeport Indonesia, and we anticipate that PTFI's share of these costs will average $600 million a year over the next five years, during which we will continue advancing underground developments. Looking beyond our currently producing assets, we have expansion projects planned, although we are not committing capital at present. These projects will provide avenues for future growth for our company. For instance, a large sulfide resource at our El Abra mine in Northern Chile could support major concentrator development. Currently, our operations there focus on SX-EW processes, but we are exploring options for water, power, and tailings management in collaboration with our partners. Lower energy costs in the U.S. also present great expansion opportunities at our Arizona mines. The Bagdad mine has considerable sulfide resources that could more than double the milling capacity, and we are in the initial stages of project planning, including acquiring necessary water rights and tailings deposition areas. Additionally, at our Safford mine in Eastern Arizona, we have oxide resources that could extend the existing productive life of the facility. Near the Safford area, the Lone Star ore body has significant oxide and sulfide resources for future exploitation. At Tenke Fungurume, besides the oxide ore, we see opportunities for more production depending on power availability, as well as a high-grade mixed ore and sulfide resource being evaluated. Now, I will turn the presentation over to Vince to discuss our oil and gas business.

Thank you, Richard. Good morning everyone. Before we start, we talked about the ore market commentary, you can see the WTI and Brent curves and HLS curves. Here on the graph the market obviously continues to be volatile as it goes to its price in market discovery of where all the wall ore needs to go and at what price. We see it as continue to be volatile; it was down 50% in the beginning of the first quarter, was up 20% at the end of the first quarter. So, as we bear through that as assets re-price both in accounting but also in the marketplace we continue to focus our operations and continue to do good things with the drill bit and follow through with our operating plan. We continue to see the ore market cleaning up if you will. The contango curve is always a positive event future oil prices on the Brent side and we continue to see the oil market under strain going forward as demand has really been the big story here in the first quarter as we’ve seen a lot of gasoline demand here in the U.S. and other parts of the world on the finished product side that we think is going to continue to increase as these current oil prices take hold of the marketplace. On Page 14, to put together just a chronological series of highlights from 2013 to 2014 obviously for Freeport-McMoRan Oil & Gas. When it was formed as the combination between PXP and MMR and acquired by Freeport in 2013, big adjustment period and the total oil and gas divisions by 174,000 BOE per day. It was a big increase from 2012. Get our hands around all the assets and also the corporate structure of Freeport. It was a big achievement for us in ’13 and put us on a growth path to develop all these assets and have the right personnel, the right equipment, and the right operating plan going forward was a key part of it. And when we look at our asset review in 2014, we saw what assets might not fit in the next five years for us building value over time. They were valuable at the time but they were not going to build value over time and be meaningful to Freeport in the Eagleford shale someone like category, which will end up selling for $3.1 billion and we were able to rotate that about $1.5 billion of that money into some significant assets well over time like Heidelberg, Lucius and our Vito project we’ll talk about. Then we continued to acquire leases and seismic to put our projects in the best possible position of bringing forward the exemplary results without failure and have been able to use the new seismic and additional acreage to add the resources to our existing infrastructure. For 2015 we started seeing results there through with our first production of Lucius development, a discovery we discovered in 2009 with Anadarko, and it came one netting us between 20,000 barrels a day to 25,000 barrels a day. We’ve successfully drilled wells at Holstein Deep and also King Marlin areas around our existing infrastructure that have validated our seismic and bought big resources there. We’ll show you the Holstein Deep progression of resources that we’ve identified there with additional drilling. And then also on our Vito area they’ve several joint prospects we drilled the first one that Richard talked about Power Nap that was successful, so we’re off to a great start there. And you go through – on top of that the Highlander discovery that we announced in ’14, we put in our production here in ’15 and it’s producing quite well down in lower St. Martin Parish Louisiana and we look forward to talking about developing that further going forward as gas prices rebound. So all in all we’re on the edge where rose spot in oil and gas business and then with the 145 projects outlined on Page 15 that there are about greater than 20 percentage strip in the Deepwater Gulf of Mexico; this is all because it’s attached to existing infrastructure or has infrastructure plan that has – it’s very cost-efficient in the Vito area. But the Keathley Canyon, Green Canyon, Mississippi Canyon is tying back to existing infrastructure that we own or we have an interest in. And the Vito area the reserves are so large that the returns are going to be excellent from the standpoint of size and the facility that we’re going to build with the operator shale and be in a situation to maximize our economics in that area. So with this deep inventory and so forth what we need to focus on is manage our cash flow, manage our capital whether inside or outside going forward to make sure that we achieve the copper objectives of FCX. In the first quarter 2015, Freeport-McMoRan highlights on Page 16; we’ve had continued steady production performance from California. We advanced our Gulf of Mexico growth strategy as I described. The Inboard Lower Tertiary besides the Highlander significant flow test and production at Highlander, we’ve had our Farthest Gate West well as a potential discovery we have completion underway that we hope to have that completed this summer, and I’ll talk further about that and we had about $100 million in net ore hedging realizations that helped buffer the volatile prices in the first quarter. And our deepwater Gulf of Mexico progress reports specifically area by area Green Canyon, Mississippi Canyon in the Vito area on Page 17 you can see there’s a lot of busy work going on and as we go through this process I want everybody to understand that our operations plan and our budget are risk and that’s everybody does this but as our operation plan outperform our risk basically we had an incredible two and a half quarters of excellent drilling results and so forth it also de-risked some of the capital and that’s some upside moving in our capital budget is strictly because of those who've risked it at 80% success for now, 100% success and so forth it may sound small but the numbers are big and so that puts upside pressure due to the success of all these projects. And you can go through the detail here. The big key here and everybody focused on the whole thing deep Great Canyon with the gross resources were initially 75 million barrels and now up to 280 million barrels because of the additional drilling and then the cash flow is going to get out of the Dorado King and KOQB area because of our seismic tie and the success we've had there is our Vito area, power discovery which is offset discovery to our victory area, very significant discovery for several reasons. Number one obviously, it is a large column of bore that is over extensive, a nice reservoir size; on top of that it has really helped us in getting confidence in all the additional projects and the next when we have to drill deeply that we are going to nearly move to after we finish our present logging operation at Parnell. And on the next page or page 18, you see the overall picture of our assets. We want to focus on hosting deep by like in the Great Canyon Parnell is for us two highlighted assets that we have. On page 19 the hosting facility, our hosting deep development, we’re drilling on the southwest side you can see phase 1 and it is called the Subsi 1, 2 and 3 and then you see the phase 2 development wells in lighter blue and even lighter blue is the phase 3 development and as we go around from the initial three well development that we’ve planned that will add 15,000 barrels per day in 2016 that’s on track and expanding the drilling results could add up to 75,000 barrels a day by 2020. So this project continues to drill out above the expectations and therefore its budget is going to be expanded. The hosting deep production profile on page 20 given representative if we talk about cash flows and timing for your modeling purposes but it’s a very significant project for the company going forward. On page 21 is our detailed area, the Power Nap discovery. The reason I’m showing the picture you see up in the top left corner of detailed development discovery show operates Power Nap just at the East of that two red dots is another discovery these are net DOE exposure to Freeport McMoRan oil and gas. And you can see just to the south of Parnell, deep sweep oil to the very depth part of the basin, which is kind of separated but the Parnell discovery and then we have our Sun project down for the southeast which is 240 million barrels in that project and is about 384 million barrels. All in all, I’ll skip ravioli in detail, it is smaller but it is about a billion barrels of oil net in the company and this is the most significant long-term play that the company has in its books today. You can see the extremely thick column at the Alan four stands upper and lower fence in our detail discovery well, it’s a great size and signature it takes all over the mini basin. So, when you pull up the page 22, you look at our plan going forward for the next 10 years. You can see production growing from various 130,000, 140,000 barrels to-date over 600,000 a day. The key about this line that we want to put in there is the estimated reserve refresh ratio for the next five years is 137% by any cost going forward $26 a barrel and $21 a barrel within your model is that all these assets are in hand most of these are all been discovered or have validation within the basin, all of our gas assets in Haynesville and Cretaceous as gas recovered later in this decade. California assets, specific Green Canyon, the Vito Area, there is no additional exploration. There is no additional outside business acquisitions in this model. This is all what’s in hand. So, just following our playbook, we can increase production at least three times through our company on the oil side. Now, we are talking right now internally and externally is timing because the assets are there, the equipment is there and so forth and the cost structure is there. When you look at our five-year finding cost structure at $26 a barrel and just take our average LOE forecast is about 15 bucks a barrel, it’s 18 right now, it's about 50 bucks going forward because our fixed assets have fixed costs. When you have more volumes you dilute the per barrel cost. Now if you take $26 and $15 is about $41 a barrel and you add $5 corporate cost, you buy $46 a barrel all-in cost for oil and gas business. In a $65 to $70 oil market, we make a lot of money in this business. There is very little risk because of the risk we're taking and the way we de-risk it with the drill bit, it's very little risk from the execution standpoint because the equipment and platforms are in place. So we're very excited about that, and we've been working all internally with everyone here at Freeport to figure out the best way to fund these assets going forward. On page 23, I just want to highlight two different ways to think about our business. #1, the current plan, which is what in our corporate projections of 2015, 2016 and 2017 production volumes and EBITDA's on the top right and then if we're able to bring in additional funding that would accelerate that business and get us up to a production level that would allow us to be self-funding at a much faster level. The model is in the lower right-hand corner, which is the growth plan assuming additional funding. And what happens here is because of all the wells we drill and so forth we're really talking about how fast we hook them up – how fast we put the equipment in to bring that production on and so forth. For us, we're going to be very stingy about it from the standpoint of funding. We've looked for funding sources in the first quarter. We found some that were wrenched in and anticipating or very expensive and we looked around that we found some others that make a lot more sense. And right now, the public sale or public equities for minority interest FMO&G is something that we're working on and we're going to probably have a decision on that here this quarter to where we file a document and get registrations as Richard said for the summer and look at raising some money in the fall our JV monetization and/or divestitures. Divestitures are they help patch the hole but they don't solve the problems. So, the IPO alternative of Freeport-McMoRan Oil & Gas on page 24 abides that an alternative fund of - way to fund the business, but the key thing we think it does is highlight the standalone value for the oil and gas business. There is a big disconnect between the value of our oil and gas business within Freeport-McMoRan today and the public market perception as stand-alone. I guess we have had more success than anybody with the drill bed in the last two years and it's caused more spending but it is also likely reflected in our equity. So the aspect of being able to get that visibility for the Freeport shareholder we think is an important part of it. FCX solely plans to maintain control in majority ownership of the business and the case study is obviously Freeport done as before the FCX IPO, we did it planes with planes exploration, we funded out of PXP – PLX and the best of our IPO that from ARCO in 1994 that really funded their deepwater discovery developments in 1994 when the deepwater was first showing up and which really is a big part of BP portfolio today. The timing might – it is early as late 15 or this market condition stabilizes. We are going to be patient from the standpoint and we'll continue to assess other alternatives and have other discussions in other areas in the interim certainly from that standpoint. Richard, back to you to talk about the 2015 outlook?

Okay, thanks Jim. We want to give you this overview of our assets and make sure that you can sense what our degree of excitement is about the scope of our assets of both our mining business and our oil and gas business. And I want to talk about how this comes together financially for us as we move forward with our plans for developing them. First of all looking at the near term for 2015 we are looking at sales of 4.2 billion pounds of copper, 1.3 million ounces of gold, 95 million pounds of molybdenum and 52.3 million barrels equivalent of oil; 67% of that is oil. The operating cash flows that would be generated at $2.75 copper would be 4.4 billion and we’re highly leveraged to copper for the rest of the year $0.10 changes in copper is $250 million. The unit cost is an attractive $1.53 for copper and as Jim said $19 a barrel for oil for this year. Our capital expenditure reflects a $500 million adjustment for our oil and gas business at 6.5 billion as we move forward and you can see as we look beyond 2015 as we go to Slide 26, the volumes increase significantly as we talked about earlier both for copper, gold with support from molybdenum in our oil project where we will be preparing for longer-term growth through our investment activities there. Our copper sales for the quarter will be growing as I mentioned earlier throughout the year and that information is presented on Slide 27. Our 2015 operating estimates for our unit cost for copper shows the effects of the higher volumes with continued cost controls. We’re now looking at projections of $1.53 a pound consolidated for copper and you can see our sales are divided by region. The EBITDA models and cash flow models that we present each quarter are presented on Slide 29 as an average for the next for 2016 and 2017. Average EBITDA at various copper prices would go to $1,200 and oil at $70. This approximates the current strip for ’16 and ’17. You can see EBITDA ranging from $250 copper at $8.6 billion to $13.7 billion and $350 and operating cash flows range from $6.6 billion at $250 up to $10.3 billion at $350. The sensitivities for our different commodities and currencies are presented on Slide 30 for your use. Our capital expenditure plans as they current stand are shown on Slide 31. You can see declining from $7.4 last year to the new estimate $6.5 this year, $5.6 and $5.1 and we’re going to be evaluating these as we go forward but this is what our current plan is as we stand now. We are committed to maintaining financial strength and we have a strong track record for doing that. Our large resource base gives us strong cash flows and we will exercise capital discipline in how we invest for the future with taking significant steps to reduce costs and capital expenditures, increasing volumes, declining CapEx that’s going to help our existing credit metrics and we are advancing plans for external funds as Jim just talked about. We have available liquidity under our FCX revolver and we have a facility at Cerro Verde that together provide us $4 billion of availability at the end of March. So our key priorities as we go forward is to maintain our financial strength, manage our operations and our CapEx to maximize near-term cash flows in an uncertain commodity market, but to look forward to this great set of assets that we have for future growth, future value creation we’re really going to be focused on executing our plans for our near-term mining projects in our oil and gas investments and to generate values for our large resource base. Before we turn the call over for questions, Jim Bob’s here and he has some comments to be made about our company’s culture and how we’re approaching the current environment based on the successes we’ve had over many years in the past.

Thank you, Richard. On Slide 34, you can see that in 1981 we conducted an IPO of FCX, which was based on a major geological find. After our drilling efforts, we discovered the largest oil body in the world, along with copper, gold, and silver. In 1990, we initiated gas pipe development and learned to manage that business, having made a significant discovery at 13,000 feet, which included $6 billion in used resources and mortgage-backed securities. We transitioned to gold bonds and silver bonds, after which we made a pivotal change that focused on maximizing shareholder value while giving up some future reserves. The $6 billion acquisition of FCX not only led us to become the largest publicly traded copper producer but also leveraged our geological instincts to drill successful wells. Imagine doubling our reserves; this perspective comes from my early days as CEO along with Jim’s leadership. We lacked the advanced techniques for profiling oil and gas prospects back then and had to reject some oil and gas leases due to various challenges we faced. We've made significant discoveries, as Jim mentioned. Our oil and gas properties in the Eagle Ford are worth over $4 billion, and we have successfully executed our intentions. Our focus now is on capitalizing on our growth potential, which has been a historical strength of our company, while tackling the challenges of completing major projects. Remember, our acquisitions were strategically planned, and we've had substantial assets for several years. This history of geological engineering and managing large projects positions us to utilize our resources effectively. The company is starting to take advantage of economic improvements, especially in Asia, where copper prices were once below $1 and gold was around $400 an ounce. Today, we’ve completed a $20 billion expansion, demonstrating our capability in managing some of the world's largest oil and gas projects from both clinical and financial perspectives. We’ve consistently proven our ability to manage risk and successfully handle projects, regardless of their remoteness, placing us as leaders in the industry. With our current asset base, we are now poised for a promising future. Our entire team comprises oil and gas experts. Thank you.

Thanks Jim Bob. And we’re ready to open up the lines for questions.

I’ve got a couple of questions here. First of all, I think many people on this line today are surprised to see an increase in CapEX especially after the nearly 85% dividend cut and obviously at a time when you’re burning a lot of cash. Have you exhausted all opportunities to cut costs and CapEx elsewhere, and if 2015 is the bridge year, why not take on some additional debt here instead of diluting shareholder interest further?

That’s a very complex question. I’ll tell you we have gone through an exercise of looking at our capital costs across our business and coming up with a plan that we believe reflects the objective of limiting costs in the current environment while protecting our assets and positioning us to take advantage of them over the long term. So we’ve clearly done that now and we can respond in more detail about that Tony. The issue of funding more debt is we started with a strong objective which we communicated with the market following both the announcement of the oil and gas deal in December 12 and the closing of the transaction in mid ’13 was that we were going to be focused on reducing our debt because of our belief that the nature of our assets can best be managed and positioned for growth with a balance sheet that’s strong. We have a strong balance sheet. We are an investment-grade-rated company, and we want to take actions to protect that investment-grade rating. We believe that’s important for the credit markets, for the equity markets but also how we manage some of our reclamation obligations where we’re able to use corporate guarantees as an investment-grade-rated company. So you mix this all together and our view has been that we should take steps not to grow debt, but to position ourselves to reduce debt over time and then our board made the decision to reduce our dividend for now. We’ve reduced it in 2008 as you recall and as markets recovered we aggressively increased it as the markets changed. My view is that’s what’s going to happen in the future, but we needed to take into account the uncertainties of the near-term market conditions, position our company for future growth and for delivering our balance sheet in years beyond 2016. We do not have current plans to issue equity for the parent company. As Jim talked about, this issue of getting highlights on the value of our oil and gas business, the idea of potentially issuing equity at that level, we could see it has benefits both in terms of highlighting those values but also giving us the opportunity to look at a broader range of funding within that entity as a public entity. So we can see some benefits for it by the nature of doing that it takes time. You have to file a registration statement with the SEC, go through the review process, and for us to have that alternative, that filing would be required that doesn’t mean that we would be fully committed to doing it; that will be based on our view of all the alternatives we have and how the markets develop as we go forward with one of our fingers in the markets at all places and we’re going to evaluate all alternatives and take the actions that are best for our shareholders.

Okay and then again, just as I switch gears for a moment. Just the production at a couple places. First at the Grasberg the production was 20% below your January guide or estimate mainly due to lower mining. So I’m wondering and you kind of indicated that it will improve through the quarter. Could you bring update where you were at quarter’s end in relation to capacity there?

Yes, one of the things to keep in mind is that we are ramping down the mining of waste there; in fact by the end of this year we will essentially have mine all of the waste in the Grasberg pit, that’s the material that allows us to get to the bottom of the pit and as we go forward we’ll be mining ore and some low-grade material that we’re stockpiling to provide throughput formula as we ramp up Grasberg blockage. So for you Tony and those of us who have been following this for a long time, we need to adjust our view of what mining rates are there because that’s not part of the Indonesian government issues or the labor union; this is just the normal mine plan. Now we did have a work stoppage that was not a union action during the first quarter, and some of the labor issues within our workforce continue to be complicated. But that did not last long, and by the end of the quarter we are essentially operating in a normal fashion and so that had an impact not only for a very short period of time when we had a work stoppage, but it’s affected some absenteeism issues, it affects some productivity issue, and we’ve been dealing with these labor issues now since 2011. But we now are back to a normal fashion; we have negotiations with our unions coming up this year, and we have confidence going into that, we got our union contract completed 2 years ago, and it’s relative straightforward fashion, and we’re building more positive relationships with the union. But there are other issues within our workforce that we’ll have to continue to deal with. So one is look at where we are with our commandment in the fit with money rates going down and we are working with some ongoing labor issues that had an impact in the first quarter and we’re going to work hard to minimize that impact and we think we can going forward in the 2015 going in the last 3 quarters.

Alright, Richard. So strip ratios improve as you go through or should allow more normal or lesser rate of absenteeism. So lower unit cost and the other question I had was on server day and in the text talked about higher repair maintenance expense and higher mining cost. Is that all and preparation for the expansion?

Yes, we are proceeding according to our plan. We are nearing the areas where we will be mining. This year, we are focusing on the mill and some low-grade material that we are stockpiling to ensure mill throughput as we finish mining in the pit and begin ramping up underground operations. This is our approach regardless of circumstances. Before I pass it over to Reed, I want Kathleen to follow up on the discussion about dilution. We are able to fund the plan you see with our current revolver, which has $4 billion in availability at the end of the quarter. We need to manage the commodity prices, whether they are high or low, which requires us to adapt. However, we can temporarily borrow under our credit facility, and if we generate cash flows in 2016 even at today’s prices, we expect that facility to be fully available to us again. So, we are not obligated to seek external financing to implement our current plan. Our focus is on leveraging our oil and gas assets to support funding opportunities that are distinct from our overall corporate financial strategy.

Tony just quickly, we’ve brought additional trucks down from our other operations, 10 trucks this year that again is one of the strengths of our company where we could do that with support from other mining operations and our good equipment availabilities. So we're advancing the mining, they are making sure that, that fits in great shape and able to defeat this new big concentrator that is being built on schedule as Richard pointed out. So, we have taken some of the mining equipment to help with the construction of the starter temporarily and again to do all of that and achieve to facility, so it did cause a variance in the first quarter.

If we look at where we are today, we have spent $20 billion planning and trying to assess oil and gas. Throughout the year, we identified $4.5 billion worth of assets, which we need to focus on this year as we make the right moves. Historically, we've utilized debt, but more importantly, it's impressive for a company of our size to have $20 billion during this phase of expansion.

May be this question is meant for Kathleen, but where are we right now with the carrying value or the book value of your oil and gas assets as of this latest write-down and if you could just give me both the 100% book value and then the net to Freeport.

Okay. Jorge, if you look you can find that on our balance sheet; we've got those details so you can see what the balances were at the end of the quarter compared to where it was at the year end. The full cost accounting rules which we talked about in the past require that we assess the ceiling each quarter. And it's important to keep in mind that that formula we are using approved reserves. So, we've as Jim talked about during the comments we have really expanded our resources; those haven’t been converted yet into proved reserves, and SEC requirements under full cost accounting requires to use a 12 month trailing average for oil and gas prices. So that's why you saw that charge in the fourth quarter and a subsequent charge in the first quarter. The trailing number for oil is roughly $83. So we could have oil prices stay below that we could have additional charges in the second and third quarter until the 12-month trailing averages are trued up. But you can see here we've got on the balance sheet we’ve got $6.7 billion in the oil and gas property that’s essentially the proved reserves and then additionally $9.7 billion that's not in the full cost ceiling, and that's the net of depreciation.

This is Jim, just on an operational basis, oil and gas areas like Holstein Deep are detailed base, and our Highlander. All those are not in our approved category yet, and that’s how we can manage our funding costs at our proved reserves growth from. We have a huge pipeline of projects that will become proved this year and next year and the following year already established.

I’m just trying to sort of get out of ahead of what a book value could look like for this unit at the time of IPO and we’ve just run a quick sensitivity if we just hold a Brent crude constant over the next 4 quarters and just kind of see what the trailing 4-quarter historical looks like. It looks like you could still be in for but another $3 billion of write-downs in 2Q maybe a billion and a half in 3Q and that’s not including the stock you are proving up that you are mentioning that’s not in your book value yet. But I’m just trying to get an idea of if those kind of orders of magnitude seem correct to you and what kind of book value do you actually see having by 4Q that the present takes?

That looks high to us. If we were to have calculated our full cost sealing test at the end of March using the current strip prices there would have been approximately a $2 billion incremental higher write down at the end of March, SEC rules wouldn’t allow us to do that and because we’ve to use this 12 month average. But if you were to go forward and say the strict prices would be realized over the forward, the numbers would be closer to $2 billion than $3 billion and $3.5 billion.

I’m sure that’s because as you were seeing spot health constant not the forward strip. But that is helpful and then to Jim’s comment earlier, could you give us an order of magnitude of what you think the offset that could be coming against those futures write-downs would be by the proving up or the conversion of resources to reserves?

The aspect that is going to be fully engineered and I strictly feel at this point all right that the difference is of having so much of it discovered in the last 2 years and not hitting the approved category; the price function, the actual operating function and we push to our capital like we’ve been pushing our capital that slows down the proved booking process. So there is, If I can figure out exactly what capital we have, where the external going forward, what the acceleration of those developments were and what prices were, I can answer your question a lot more closure than just saying it’s a positive trend. I think it’s the best way to talk about it because the inventory is full. It’s just a matter of all those factors coming together and what actually gets booked and what don’t. But the resources are there.

I’m sure you understand this but just to be clear, once you write something down even though prices may come back, you have future reserves, you don’t write it back up under our accounting system. The book value stays there; what higher prices or higher reserves would do - and it’s important to note that reserves are a function of prices as well. As prices go higher economic limits extend and reserve volumes increasing, lower prices put limits on how much reserves you can add at a particular point in time. But that could tend to offset this $2 billion number we’re talking about. It wouldn’t result in a write-up of our past right now.

And you are going to see our rate in the oil & gas unit because of the write-downs be more critical to our final cost going forward and will be an ad reserve that finding cost which will be beneficial or pair with our DD&A rate versus what’s it been at the end of last year was $40 plus; and this could be $20S doesn’t the write-down I guess going forward.

When you talk about resources if you look at the map in detail. Resources you see there drilled and undrilled; the important part of that would the green color for resources and red color for reserve. We have much in this category right now.

Fully understood and I appreciate the extra color and just lastly Jim on page 22 at the PowerPoint are those projection for the potential tripling of your production based on the assumption that you are self-funded or is that assuming extra capital comes into the company?

That’s a lot assuming, extra capital comes in the company. What it does, it will just – if it does and we self-funded ourselves that just means it’s a slower slope and it would extend the peak cap beyond 2025. So everything just shifts forward into the future years at a slower pace but we can accelerate with the additional funding that comes in. And let me just say everyone these forecast accounting rules are complicated and logical in certain respects in today's world. If you have questions call David and he will answer them or he will arrange for our people to walk you through. So, we’ll make sure everybody understands what this is and what it is.

I have two questions regarding capital spending, and you may have already addressed some of this, but I'm still unclear. On the oil and gas side, capital expenditures increased by about a billion, while volumes only rose by 10% in 2017. My questions are related to slide 22. How much of the growth from 2018 to 2020 in oil and gas on that slide is now accounted for by the updated capital spending plans, and how much additional capital expenditure would be necessary to reach the target of 400 million barrels per day by 2020?

We don't have the information you're focusing on because we haven’t really discussed it.

The capital we're spending in 2015 is 3.7 that’s the same as what it was before. Actually we've taken down CapEx in 2016 and 17 by a total of 300 million.

I think that we got that one backwards. So that’s helpful. That answers that one. Okay, and then on the oil and gas side?

Kathleen, keep going.

David, we have two types of capital: drilling capital and completion capital. We anticipate a reduction in costs this year, estimating decreases of 10%, 15%, 20%, and eventually 30% as we progress into 2017, provided that costs continue to decline. However, a significant factor is the timing of our completions and the completion capital, which is our variable discretionary capital. It's crucial for us to determine how much to spend early in order to achieve a production response that allows us to be self-funding, rather than delaying investment and accumulating a deficit. If we slow down our program, we could reach a self-funding position within two years at a $75 oil price, increasing production and closing the gap mentioned by Brian. Alternatively, we could take four years at a slower investment pace, still reaching the same point while continuing to address the deficit. We have flexibility with our assets, and that’s a key consideration we’re evaluating at Freeport to determine what is best for our shareholders. This is why we are contemplating an external option, such as an IPO, to expedite the self-funding process compared to a prolonged investment approach with slower returns.

Is there a way to provide a figure for the incremental capital required from 2018 to 2020 to reach the 400 million barrels, or is that not possible?

The incremental capital is a function of how what, there is some base plan to what we're talking about, the current plan or the high growth plan without high capital. That would be easy thing, be from this what forward; it would be as reflected in the numbers here on page 23, it would be the 3.8 billion in 16 and $3.5 billion in 17 on a aid x basis, and depending on what's been it's the delta between that would be the additional capitals. We were projected 2018 through 2020 and be self-funding through the EBITA growth. I know how that the EBITDA growth and or the EBITDA in 18-20, but it's not a negative number, it’s positive.

Jim I wanted if you can address what incremental CapEx would be under the funding scenario, looks like you're looking for about 1.5 billion of incremental spend, in ’16 or ’17 and can you also talk about why you think an IPO would be more preferable to try to structure either JV or a partnership on a project basis.

It all depends on the market conditions. Currently, we see a market with some joint venture capital, but there are many projects underway and limited discretionary capital, making it quite expensive. The private equity market is also costly as they focus on recapitalizing existing businesses. We are seeking the best form of capital since our business has a strong growth profile. We have taken risks with our wells and we are not willing to give away our assets simply because we are hesitant to borrow money. Our goal is to identify the most cost-effective capital that offers the best benefits, which include providing visibility to our shareholders regarding our achievements and the performance of our oil and gas business. We believe that leveraging equity for Freeport McMoRan through SMLG is a sensible option. We are currently evaluating this process, which appears to be favorable since the industry has recently issued $8 billion in equity in a dynamic environment. Thus, this is a viable option for us, and we are encouraging investment banks to explore it.

These three platforms that we have that are pushing in you deep water side are the best. You should imagine those as magnets. These people including our sale. We have a market for this; we are toting with people; the only difference is the diamonds if they made a facility.

Okay, thanks. Richard just a question on the need can you comment on kind of how the discussions are going with the MOU and specifically what the plan would be for these sell down of PTFI. I understand I think the new mining were acquired some additional 19% to 20% stake reduction with the government having the first right to acquire that, so I’m just curious on where that stands and how do you think that could be resolved actually.

That is one of the points discovered in the MOU and the government has regulations that applied to different types of mining arrangements they have to existing mines so forth with in terms of our working with the government and reconciling our contract of work which requires no divestitures and the governments new regulations. The MOU reflects a mutual agreement that we would increase the current 9.36% interest owned by the government to 30% over the time and as you said the way that would be approached that would be part of the set of points that we would agree to and getting the extension of our rights to operate under except gold. Physical terms is that within the pursued over time in steps. The agreement is that the sales would at fair value and the first step would be offering it to the government we’ve talked about having a piece of that ultimately through a listing on the Indonesian stock exchange and the government officials have expressed positive aspects of that. The province of Papua has indicated an aspiration to own symmetry and we do some financial structures to accomplish that. All of this would come in to play as part of reaching a resolution of the long-term operating rights that we have but the MOU covers the extent of the future divestiture.

Just I wanted to get back to the – in general want to get back to oil and gas question that couple of people asked and if I may, increase your CapEx from 15% to 17% by 1.6 billion with that increase in CapEx will we get to again – slide 22 has approximately 225,000 barrels a day which my math is about 82 million barrels a year of oil equivalent. Can we assume that that’s the figure that you’re looking for in 2018?

Out of the growth plan, yes with additional capital, that’s correct. So, if this is not something that is committed to all the future growth plan, it’s an opportunity for us and we’re going to assess whether – what we’ve given you in our budget plans that’s part of the presentation is where we are today with our capital spending plans. We have opportunities provided we can get capital through a variety of sources. Cark mentioned the joint venture opportunity with other companies whether there is financing at a property level, whether there is financing available at the entity level. And if we’re able to – possible to get funding on the reasonable basis to pursue the growth plan the chart that you’re referring to as what would be achieved under that plan. If we aren’t able to, if we conclude that the cost of capital is too expensive then we will give you guidance as to how that would work out under our base plan and the opportunities won’t go away, it’s like the projects we suspended in 2008 in our mining business. Cerro Verde was previously pursued; before that we suspended it. It didn’t go away and now we’re developed it later. We have rights to these resources that are long term and we will be managing how we spend money, how we finance that spending in a way that responsive to market conditions, and market conditions are changing as we speak and so we’re going to have our fingers on all of these sources of financing, and we’ll make decisions and we will advise the market as to what the consequences of those decisions would be as we go forward.

Okay. Maybe if I ask the question this way. On slide 31, you have oil and gas expenditures in 2015, 2016 and 2017 at $2.8 billion, $2.9 billion, and $2.9 billion. This is compared to the last presentation is $1.6 billion more. So, you presenting in 2017 oil and gas fields of 63 million barrels. So, with additional capital that we've increased from last time we talked in the conference call to now, will that give you additional production of oil and gas in 2018? I assume so and I’m just trying to assess what’s the level? Is the level the one that you’re showing in slide 22 and I can appreciate that there opportunities.

That’s slide 23; that’s the current plan on top with the current; our current funding reflects on page 31. It reflects in the current plan and this is what I was talking about. If we continue to put off the completion and hookup of facilities need to add new production as we drill it, as we’ve already drilled it in the last two years than we will not see a show up in the production numbers. It will, in the current plan, their production aren’t going anywhere like we’re just talking about, and it will take longer years forward to get all that production. So on a three year outlook you’ll miss some of that production if we raise the additional fund and we’re able to put the wells on that we’ve already drilled on a timely basis then you will see the graphs at the lower portion when gross 1.43 to 2.17 and the additional funding required and our variable funding is the completion dollars which affects the timing and that’s when I think it was David heard whatever I wanted 18 to 20 will tell you where you can see the reflection basically in the current plan we would hit the same 217 of a few year further out because of this delay of spending in that funding.

May be this question is meant for Kathleen, but where are we right now with the carrying value or the book value of your oil and gas assets as of this latest write-down and if you could just give me both the 100% book value and then the net to Freeport.

Jorge, you can check our balance sheet for details on the balances at the end of the quarter compared to the year-end figures. The full cost accounting rules we previously discussed require us to assess the ceiling each quarter. It's crucial to remember that the formula we are using is based on approved reserves. As Jim mentioned, we have significantly expanded our resources, but these have not yet been converted into proved reserves. According to SEC requirements under full cost accounting, we need to use a 12-month trailing average for oil and gas prices. This explains the charge you saw in the fourth quarter and another in the first quarter. The trailing average for oil is around $83. If oil prices remain below that, we might incur additional charges in the second and third quarters until the 12-month trailing average is adjusted. On our balance sheet, we have $6.7 billion in oil and gas property, which reflects the proved reserves, along with an additional $9.7 billion that is not included in the full cost ceiling, factoring in depreciation.

This is Jim, just on an operational basis, oil and gas areas like Holstein Deep are deep and our Highlander. All those are not in our approved category yet and that’s how we can manage our funding cost at our proved reserves growth from. We have a huge pipeline of projects that will become proved this year and next year and the following year already established.

If you examine the map closely, you'll notice both drilled and undrilled resources, with the key distinction being that green represents resources and red indicates reserves. We currently have a significant amount in this category.

Okay. Great. Thank you very much for that color, that’s helpful.

Listen we appreciate everybody’s participation. I think a record-setting length of a conference call, but we had a lot to talk about today. We want to make sure that in the context of these commodity markets and the changes in our plans that you understood what our assets are that we have to work with, what options we have to do, how we’re approaching it. We’re going to have as I said our fingers on all aspects of the markets for commodities and markets for capital that are available to us and we’re going to find the right alternative to go forward and achieve our strategic objectives. Bring value out of these assets being alone.

Thanks Jim. We're done and we’re now concluding this conference call.