Freeport-McMoRan Inc (FCX) — Q3 2015 Earnings Call Transcript

Thank you and good morning. Welcome to the Freeport-McMoRan third 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. Our conference call today is being broadcast live on the Internet, and anyone may listen to the call by accessing our website homepage and clicking on the webcast link for the conference call. In addition to analysts and investors, the financial press has also been invited to listen to today's call; and a replay of the webcast will be available later today on our website. Before we begin our comments, we'd like to remind everyone that today's press release and certain of our comments on the call include forward-looking statements, and actual results may differ materially. We'd like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in our Form 10-K and subsequent SEC filings. Today on the call, we have Jim Bob Moffett, Richard Adkerson, Jim Flores and several other senior members in the room here. I'll just start by briefly summarizing our financial results and then turn the call over to Richard, who'll review our recent performance and outlook. As usual, after our remarks, we'll open the call for questions. During the third quarter, we had an active quarter of announcements on revised plans and cost reductions. We've got further announcements in today's press release regarding our Sierrita mine, which Richard will talk about in his presentation. Today, FCX reported a net loss attributable to common stock of $3.8 billion that was $3.58 per share in the third quarter of 2015. The net loss attributable to common stock included net charges totaling $3.7 billion, or $3.43 per share, primarily related to the reduction of the carrying values of oil and gas properties. After adjusting for the net charges, the third quarter 2015 loss attributable to common stock totaled $156 million or $0.15 a share. Our adjusted EBITDA during the third quarter approximated $940 million. We reported total sales of copper during the quarter of 1 billion pounds, gold sales of 294,000 ounces, 23 million pounds of molybdenum, and 13.8 million barrels of oil equivalents. Our average realized price for copper was $2.38 per pound, which was below last year's third quarter average of $3.12 per pound. Gold prices were at $1,117 per ounce, down from the year-ago quarter average of $1,220 per ounce. Our oil and gas realized price for crude was $55.88 per barrel, including about $11 per barrel of realized cash gains on derivative contracts. That was substantially below last year's average price of $88.58, which included $6.77 of cash losses on derivative contracts. Operating cash flows during the third quarter totaled $822 million and capital expenditures totaled $1.5 billion. We ended the quarter with total debt of $20.7 billion and consolidated cash of $338 million. We have information in the press release on our progress; on our after-market equity programs, to date, we've raised proceeds of $1.2 billion out of a total announced program of $2 billion. We ended the quarter with a strong liquidity position. We had availability under our $4 billion revolver of $3.5 billion and availability under our Cerro Verde credit facility of roughly $300 million. I'll now turn the call over to Richard, who'll be referring to the materials on our website.

Good morning, everyone. What we're going to talk about here today is what our company is doing to respond to the current weakness in the commodity price market. Almost all of you have heard me talk in the past about how positive the long-term market is for copper. I continue to believe that. But we recognize the need to prudently manage ourselves in the short run, and we've taken some really important steps to allow us to do that, so that we can maintain our financial situation and liquidity and our assets for what we believe is going to be a very positive market for us in our business as we move forward. We have taken and continue to assess very aggressive steps to control costs and limit capital expenditures. We have, as we will show in a later slide, a very positive view about our free cash flow generation, particularly beginning in 2016 as we get the benefit of the expansion projects, the project at Cerro Verde. In this quarter, we've made some really positive steps for our company, the things we worked on for a very long time. The Cerro Verde start-up is going well, and I’m really proud of our team there, it's coming up very quickly. Our costs are under control. It's good to see where we are as we complete that project. We received a letter of assurances from the Indonesian government about our ability to extend our operations beyond 2021 and a commitment from the government that we'll do so on terms consistent with the existing rights on fiscal matters and enforceability matters that's in our existing contract of work. Jim Flores will report on our continuing positive drilling results as we execute our development activities in the deepwater Gulf of Mexico. As Kathleen said, with reluctance, we made a decision to raise some equity for FCX to strengthen our balance sheet, provide insurance against unforeseen potential negative situations, and we've executed that in a very efficient manner. Just two weeks ago, our board announced that we are undertaking a strategic review of alternatives for our oil and gas business. There are some alternatives out there; the market is undoubtedly difficult right now, but we have an overriding goal of managing our business under these alternatives in a way that funds itself with its cash flows or outside financing. On the copper markets, copper averaged $2.39 in the third quarter ranging from $2.21 to $2.62. I just returned last week from the LME event in London where we got a full perspective on the financial markets' view of the situation in China and the declining growth outlook there. Chinese consumption of copper remains significant. Our physical business there, actually globally, is relatively strong – stronger than the sense you would get just by looking at the financial markets' view of the situation. Consumption in China continues to increase, admittedly at a much lower rate. The U.S. and Europe are recovering slowly, and certain sections remain positive, particularly in automobiles and construction. But the price volatility undoubtedly creates short-term demand uncertainty that we're considering as we run our business and manage our financial affairs. Global macroeconomic conditions are weaker than many expected right now. I mentioned that we are realistic about what we face here. But underlying that in the copper business, the industry continues to be supported by mine supply limitations. We've announced and are making new announcements today about curtailing high-cost production throughout the industry. Companies are limiting CapEx, resulting in reductions or deferrals of investments in long-term development of supplies, which is going to be positive for the market as we move forward. As we go through this time, existing mines continue to decline in grades. We're going to be moving underground at Grasberg and others in the industry are, in South America, converting from open-pit operations to underground operations. Some very important ore bodies are still being stymied by environmental concerns, community restrictions, or government issues. Our copper commodity continues to be supported by the supply-side situation. So, let's go over what we're doing as a company to be responsive to the current conditions. We made a 20% reduction in our 2016 consolidated CapEx, and we're continuing to review the CapEx currently in our plans for further reductions. In the mining business, as we did in 2008, we've gone through on a mine-by-mine basis to optimize cash flows, considering low prices. As a result of that, today we are announcing a 50% reduction in our mine rates at our Sierrita mine in Eastern Arizona. This mine goes back to the 19th century. It has very low grades of copper but significant byproduct molybdenum, and we're reducing its rate by 50%. I'll explain that in a few minutes as to why we're not doing 100%. Aggregating together with previously announced cuts, we're cutting our annual copper production by 5%, and with other actions we're taking in the molybdenum business, due to very weak prices recently, we're reducing our molybdenum production by 20%. We reduced mining CapEx by 25%, including a 50% reduction in sustaining capital. Our major project CapEx will be dropping off in 2016 as we complete the Cerro Verde project. We're seeing a significant reduction in our unit site production delivery costs, down 20%; that's going in 2015 from $1.78 to $1.45 before byproduct credits. The way we've approached this on a mine-by-mine basis is we had Red Conger and our other team members look at each mine and review their operations with a $2 copper assumption to ensure they can be cash flow profitable at $2, including sustainable capital. I mentioned earlier that we're undertaking this review of our oil and gas business. We're reflecting a $1.8 billion reduction, over 30% of CapEx in 2016 and 2017. We deferred investments in several projects and included acceleration of production. This review we're undertaking is going to focus on eliminating the cash flow shortfall that exists between this level of capital spending and our cash flows at low crude oil prices. So, here's what we've done with our mining operations. In North America, we've taken steps to cut mine rates at the Tyrone SX/EW operations. We've suspended all mining at Miami, where we're engaged in significant reclamation activities, and we've reduced mining at Morenci and other North American operations. That aggregates at an annual rate that will come into play over time because it takes time for the reduced placement of material on SX/EW stacks to affect production, resulting in about a 50 million-pound reduction annually. The previously announced reduction in stacking rates at El Abra will result in a 100 million-pound reduction in 2016. We've had a 35% reduction in molybdenum production at Henderson through adjusting operations there. And today, with this reduction at Sierrita, we're looking at another 100 million pounds. We're continuing to look at the possibility of a full shutdown at Sierrita. Currently, the barrier to that is we have weigh stacks developed in the 1970s, where we need to capture water coming off those weigh stacks, which we use in our mill to operate it. If we shut the mill down, we will face cost issues and operational challenges as related to that water. So, we're looking at alternatives to that. In the meantime, we're using the water and operating the mill at a 50% rate. On the costs, we've deferred projects. We've reduced our workforce in connection with this cutback. We're aggressively managing capital, operating, and administrative costs. We're keeping our finger on the market and in each of our operations, and we're prepared to do whatever it takes to keep our operations generating positive cash flows, protect our liquidity, and hold onto these assets for a better day. Slide Seven shows what we are looking at going into 2016, which we've been pointing to at times, as it reflects the benefits of investments we started to pursue at the end of 2010 as we emerged from the 2008-2009 crisis to invest in very high-return businesses. We've spent or will spend roughly $7.5 billion expanding our operations in the DRC at Tenke Fungurume, at the projects completed now at Morenci, where we made significant mill additions and other improvements, and now with completion of the major project at Cerro Verde. I want to make a couple of points because there's a lot of focus on this. Aggregate capital was $7.5 billion, funded out of cash flows plus a $1.8 billion bank line at Cerro Verde. This will be repaid over a relatively short period. So, it is not a scenario where we are leveraging the company to invest; we are funding it out of cash flows, and these project economics were based on the possibility of the current economic environment. They establish a long-term base for future production, and we're going to give ourselves increasing volumes in 2016, where we’ll go to over 5 billion pounds consolidated a year at a net cash operating cost of $1.15 a pound. You can see that decline in unit net cash costs after byproduct credits, roughly at the $1.50 level now, going to $1.15 next year. The combined impact of higher volumes and lower unit costs will double our cash flow from operations next year from $3.3 billion this year to $6.8 billion. At the same time, CapEx will be falling from $6.3 billion to $4 billion. That's roughly half in oil and gas and half in mining. Sustaining capital bonuses at $600 million, and the $2 billion of oil and gas cash flows – oil and gas CapEx will be under review as part of this ongoing process. We've had exceptional execution of these projects at Tenke, Morenci, and Cerro Verde. Tenke achieved full operating rates early in 2013, Morenci in mid-2015, and Cerro Verde is ramping up now to become the world’s largest concentrator facility, tripling output by early 2016 without facing community opposition, as many projects do in Peru. Our team has done a great job on community projects, including providing fresh water to Arequipa, the second-largest city in Peru. We're sourcing water from a wastewater collection plant and modernizing it, which has improved the ecology of the river. Turning to Indonesia, our underground development is a major long-term project for us. As we complete mining from the open pit scheduled by the end of 2017, our future operations will be all underground. We have an existing mine called the DOZ, where we began block cave mining in the early 1980s. We're starting a recent extension of that operation, which has very positive grades of copper and gold. When we finish open-pit mining, we'll move to the Grasberg Block Cave, which we will ramp up in 2018. This is an exceptional project. Hence, we've invested $3.5 billion in capital on these operations. The share of this project, a joint venture with Rio Tinto, requires spending capital of $800 million a year for successive years, including power and processing facilities. Moving forward, in the first 10 years of this underground operation, we will achieve approximately 1.1 billion pounds of copper and 1.5 million ounces of gold a year. Thus, the capital spending aligns with securing our contract rights, conditional on governmental approval on acceptable terms. The important step has been made in getting documentation of these contract rights on a basis that's acceptable to us and the government. Jim Bob met with the President in Indonesia and collaborated with the mine minister to secure this commitment. We are also progressing with our negotiations with union officials and expect to finalize our new CLA imminently. Looking at our worldwide, large-scale mines, we have a group of mines globally with the potential of generating 1 billion pounds of copper per annum. Our goal, when we acquired Phelps Dodge, was to establish ourselves as the premier company in the copper mining industry, and we’ve achieved that. We have resources to sustain this goal. For instance, the Morenci mine and future expansion opportunities at Cerro Verde are being completed. Tenke Fungurume is performing well, generating cash and returning capital. We have identified growth opportunities with very positive exploratory drilling intercepts expanding our knowledge and giving us future growth potential. The Grasberg mine, with its underground development is another promising project. Additionally, we have significant greenfield exploration projects in Serbia, which have shown robust intercepts with indicated volumes and high grades, both copper and gold byproduct. To be clear, after we complete our current projects, we will not proceed with further investments until the market warrants it. We will plan future investments, but will first realize the benefits of cash inflow, improved costs, and deleveraging our company. Meanwhile, underlying growth opportunities will be vitally available as the market conditions improve. Before turning off – handing the ball off to Jim, let's discuss our oil and gas business. Earlier this month, about two weeks ago, we reconstituted the FCX board in response to discussions with shareholders. Previously, we had a board with 13 members, including three management members. Now, we've reduced it to six independent members and two management members. We've added two representatives, including Carl Icahn who has a stake in our company. Going forward, we will work collectively toward increasing shareholder value and enhancing our share price while managing the business prudently. Our objectives with this oil and gas review, announced during the board reconstitution, are aligned with our original goal of achieving self-funding for that business. The current market is challenging; therefore, we will evaluate various alternatives for enhancing value to FCX shareholders. Our assets are high-quality with appealing opportunities for low-risk development growth over time. We have significant existing Deepwater Gulf of Mexico infrastructure with large excess capacity, allowing us to drill resources that can be tied back to these facilities in a cost-effective manner. We have a talented and experienced team led by Jim, committed to achieving results. Our alternative considerations may include potential ideas for separation; we've talked about an IPO. We have gone through the SEC process and are strategically positioned for this opportunity, should the market permit. Although a challenging market exists, we're also evaluating joint ventures or other transactions for funding. We recognize the necessity for plans reducing spending, ensuring self-funding under any circumstances while waiting for market improvement. Jim will now provide a report on where we stand operationally in the oil and gas business.

Thank you, Richard. On page 15, we have our third quarter 2015 highlights. You can see that 61% of our sales were in the Gulf of Mexico, which remains our most important asset area, while California continues to be a strong steady producer, with the remainder from our gas business onshore in Haynesville and Highlander area. We had an EBITDA of about $0.3 billion for the third quarter and a trailing 12 months of $1.3 billion. We continue to achieve positive drilling results in the Gulf of Mexico and are derisking our business plan. The Horn Mountain Deep well and the King well represent tremendous reservoirs and producibility. We remain cautious with our development drilling as we strive to manage costs and CapEx effectively. At the same time, we didn't plan for 100% success in our development activities; achieving that success demands completion after drilling that we do not plan to capitalize. Therefore, we must orchestrate cuts and deferrals of projects while still adding daily production value in 2016 and beyond. Our plans include a 25% increase in crude oil production from 2015 to 2016 with a CapEx of $1.8 billion in 2016. This 25% increase can be maintained flat into 2017 at a $1 billion of spending. The capacity to maneuver capital spending will provide flexibility due to existing drilling rig contracts, service contracts, and commitments rolling off. The $1 billion of CapEx in 2017 marks a 65% decrease from capital spending in 2015 during our ramp-up in the Gulf of Mexico. The field developments for Heidelberg and Holstein Deep are on track for first production anticipated in mid-2016, thanks to our operator, Anadarko. The announced CapEx reductions recognized by Richard for 2016 and 2017 will continue to expand through deferring projects and aligning our business with a long-term oil market of $45. While that isn't a forecast, it serves as a basis for adjusting our business, and we hope oil prices rise, allowing shareholders to profit moving forward. On page 16 is a familiar slide of our assets. This remains where our high-margin barrels are located, costing us about $20 per barrel to drill and hook up our wells to these facilities. That’s about 25% the cost of a new build, with $12 in LOE (lease operating expense) in the Gulf of Mexico currently, plus $3-4 or additional G&A and interest. Altogether, we are talking about a full-cycle cost of roughly $36-$38 per barrel, permitting a profit in the $45 range. The Deepwater Gulf of Mexico focus shows our assets' distribution. You’ll see the red dot on the Power Nap discovery that we discussed previously, although we’re working with regulators to finalize our development plan for that area for the longer term. On page 18, we have the production that will come online from our 100%-owned fields in 2015, 2016, and 2017. You will see that 2016 is a significant year with projects like Kilo/Oscar, Québec/Victory KQOV, and Holstein Deep contributing to our oil production increases. In 2017, we can bring on Horn Mountain Deep, Horn Mountain Updip, King D-3, and King D-9, although under the $1 billion CapEx scenario, we will only bring one area online, delaying another until 2018. This shows the balance of operations and flexibility we maintain while managing capital and providing shareholder returns.

That’s great, Jim. Thanks. Our current outlook for sales for 2015 is $4.1 billion, $100 million lower than our previous outlook, largely due to Indonesia's challenges from the severe El Niño event. Ironically, where rainfall ranges from 200 to 400 inches a year, we face water constraints because of El Niño. Our production cuts will unfold over time due to the nature of adjustments in operations. Our goal was set down 100,000 ounces due to Grasberg. We previously mentioned operating cash flow numbers where each $0.10 shift in copper price for the fourth quarter represents impact of $110 million. I’d like to comment on unit cost and capital expenditure adjustments, with changes reflecting no shifts from our July projections and oil CapEx under review. Sales by year are presented showing the influence in 2016 from Cerro Verde’s completion and access to high-grade ore at the bottom. We will drop mining rates with minimal stripping and access very high-grade ore—this will be highly profitable and will positively impact our gold production in 2016 and 2017.

Well, Jorge, I think you can see the press releases that both S&P and Moody's made during the quarter. Their commodities team updated their outlook for commodities across the board including copper. They reviewed Freeport, and both agencies affirmed our ratings, with the outlook changing from stable to negative. We’ve been in close conversation with S&P, Moody's, and Fitch, walking them through our debt reduction plans and showing how we expect to achieve this with rising volumes and lower costs. As such, we expect improvements in our credit metrics over 2016, and we remain focused on executing these plans to restore our outlook to stable.

This is Richard. I think without question, they're recognizing our efforts in deleveraging after the Phelps Dodge deal and how we managed the crisis in 2008-2009. They are evaluating our commitment to execute a disciplined approach moving forward.

Jorge, we’re required to use SEC price deck which represents a trailing 12-month average. The forward curve is actually lower than the SEC. If oil prices remain in the $40s or $50s, you may still see future reductions. In October, it has been a few dollars below the SEC average used for reporting purposes, and these adjustments carry over.

Good morning. First question is just on Indonesia. It sounded like the government may be seeking higher royalties. Can you speak to that? And regarding guidance, how much of a wage increase is reflected in those numbers?

Thanks, Brian. We agreed last year with the government under a Memorandum of Understanding to proceed with restoring exports and set the stage for further discussions regarding higher royalty rates in line with the government’s goals. Those rates are fixed and not subject to further change. Regarding wage negotiations, we have made assumptions but it wouldn't be appropriate to disclose specifics at this point, as discussions are ongoing.

Got it. That's helpful. Maybe the second question is just on oil and gas. With your plans for an IPO or spin-off, is there a specific cash amount you plan to commit?

That's really what we're reviewing now. It depends on alternatives and marketplace changes. We will ensure whatever we do supports FCX’s financial position while separating in a manner sustainable on its own. We're approaching this with a sense of urgency.

Thanks for taking my questions. I want to drill in a bit on Indonesia. Can you elaborate on the thought process behind pushing the underground development out, including timing on when we should hear more?

The numbers reflect our adjustments in longer-term mine plans. We have reduced annual spending on the joint venture from $1 billion to $800 million. This relates to how we mine and process ore that contains pyrites. Altering the mine plans allows us to defer capital investments necessary for processing facilities, which we are developing to avoid wasting ore. This tactic could bring us benefits in the future.

Thank you very much. I have a question about Indonesia. If you divest from 90% to 70% in Indonesia, will Freeport be responsible for funding the entire $800 million average full-year CapEx budget, or would the buyer be responsible for its share?

The divestment we are discussing relates to shares in PTFI that would not require further funding from FCX or new shareholders. Funding will occur from cash flows that PTFI generates, rather than additional capital investments. Everything you mentioned about electric cars and alternative energy requires substantial copper. The demand is still there, driven by ongoing climate change discussions and the necessity for oil and gas to maintain economic stability globally.

Thank you for your decisions over the past 90 days. I have two questions. If you sell down from 90% to 70% in Indonesia, would Freeport be required to fund the entire $800 million CapEx budget, or would the buyer be required to pay its share? Secondly, have your commodity long-term price expectations changed recently as everything has fallen? Thank you for your positive decisions.

For divestment from PTFI, funding will come from cash flows, not from FCX or new shareholders. Regarding long-term expectation changes, I emphasize that electric vehicles and energy investments require substantial copper.

Thanks for taking my call. My first question is about how you are thinking regarding paying dividends, especially seeing that you are issuing stock and it would appear you're free cash flow negative right now. Is there a potential that this dividend could be cut? And secondly, regarding equity raises, how much more do you think you need to raise to buffer what might transpire in the commodities market?

Regarding the dividend, we made a significant decision to reduce it earlier this year. While maintaining a small dividend for institutional requirements, the board will continue to evaluate that. Regarding equity raises, we're set for the $2 billion amount approved by our board and will remain vigilant this year depending on our cash flows, particularly in 2016.

Good morning. I'd like to revisit the Grasberg longer-term situation. You mentioned deferring pyrite ore; does this push back guidance, or will you be delaying further capital investments accordingly?

Brian, delaying the pyrite ore changes how we execute arrangements in long-term mine plans. The Grasberg Block Cave’s near-term production will not see significant delays as we commence mining the Block Cave, getting back to mill operations of 250,000 tons per day.

Thank you. One last question on oil and gas. You mentioned a 25% increase in oil production, but I’d like to know what's happening in California. It appears production is declining. Should we expect this to bottom out or how should we view reinvestment at this point?

In California, we've cut reinvestment considerably. We will need to start reinvesting in late 2016 or early 2017 for production to remain stable going forward. However, the current production level should maintain sustainability through the initial adjustments.

Thank you again for your interest. We look forward to reporting progress moving forward. If you have any follow-up questions, please reach out to David Joint and we will ensure the right person addresses your inquiries. Thanks everyone.