Freeport-McMoRan Inc (FCX) — Q1 2016 Earnings Call Transcript

Thank you and good morning, everyone. Welcome to the Freeport-McMoRan first quarter 2016 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 fcx.com. Our call today is being broadcast live on the Internet, and anyone may listen to the conference call by accessing our website homepage and clicking on the webcast link for the call. In addition to analysts and investors, the financial press has been invited to listen to today's call and a replay of the webcast will be available on our website later today. Before we begin 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. 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 2015 Form 10-K and subsequent SEC filings. On the call today are Richard Adkerson, Chief Executive Officer; Red Conger, President and Chief Operating Officer for Americas and Africa Mining; and Mark Johnson, President and Chief Operating Officer, Indonesia. I'll start by briefly summarizing the financial results and then turn the call over to Richard, who will be referring to our presentation materials on our website. As usual, after our remarks, we'll open up the call for Q&A. Today, FCX reported a net loss attributable to common stock of $4.2 billion or $3.35 per share for the first quarter of 2016. The loss included net charges totaling $4 billion or $3.19 per share primarily for the reduction of carrying value of oil and gas properties, idle rig costs, and other items. After adjusting for the net special items, the first quarter adjusted net loss attributable to common stock totaled $197 million or $0.16 per share. Earnings before interest, taxes, depreciation, and amortization for the first quarter approximated $873 million and there is a reconciliation of that amount on Page 32 of our slide deck. Consolidated sales totaled 1.1 billion pounds of copper during the quarter, just over 200,000 ounces of gold, 17 million pounds of molybdenum and 12.1 million barrels of oil equivalents. Our realized price for copper during the first quarter was $2.17 per pound, which was below last year's first quarter average of $2.72 per pound. Gold prices were slightly above last year’s average. In the first quarter of 2016, our gold prices averaged $1,227 per ounce. Our realized price for crude oil during the first quarter of 2016 was $29 per barrel, which was significantly below last year's first quarter price of $44.54 per barrel. We reported very good cost performance during the quarter and are on track to meet or exceed our cost guidance for the year. The average cost of production net of by-product credits for our copper mines averaged $1.38 per pound in the first quarter of 2016, lower than last year's first quarter of $1.64. We generated operating cash flows totaling $740 million in the first quarter and capital expenditures were just under $1.982 billion during the quarter. We ended the quarter with $20.8 billion in debt and our consolidated cash was $331 million. Richard is going to be talking on this call about our efforts to reduce debt significantly and our progress on our asset sale program. We ended the quarter with availability under our revolver totaling $3 billion at quarter-end and at the end of the quarter, we had 1.25 billion common shares outstanding. I’d now like to turn the call over to Richard, who will be referring to the materials in our slide presentation.

Good morning, everyone, and thank you for joining us on our first quarter earnings call. It's been a very active and encouraging quarter for us here at Freeport. We are just mailing out our annual report and the theme of it is 'Proving our Mettle', that is, the ability to face a demanding situation in a spirited and resilient way. I can tell you our team here couldn’t be approaching its work in a more positive way from that standpoint. I’m very proud of all that our team is doing. We have a clearly defined strategy that our Board has set and we are really focused on executing it now. We experienced strong operating results in the face of weak commodity prices and we made a lot of progress in achieving our strategic and financial objectives during this quarter. Our reported earnings were in line with our plans, actually a bit higher because we had somewhat higher copper prices during the quarter. We did have a significant additional impairment charge, which was substantially all in our oil and gas business. We have taken recent steps to restructure that business to reduce costs, and that is progressing well. We have a really good operating team there and some good assets, and we are focused on attacking costs aggressively. We are continuing to look for opportunities to sell or monetize assets in the oil and gas business but we are now working with – and this is a tough market, admittedly, a tough market to try to do that. But we are working with our operating team on new plans to preserve and enhance value of our assets for the future. With our mining business, we are performing well. The Cerro Verde startup is proceeding exceptionally well and we will talk a bit more about that. Mining CapEx are declining as we’ve been talking about in the past. Volumes are increasing. Costs are being constrained, and copper prices have risen from the lows in the face of an admittedly uncertain global market, but there have been positive movements recently. We are continuing with our efforts to improve our balance sheet and have increasing confidence that we are going to be able to do that in an effective way. After we get our balance sheet situation developed, we are going to have a – continue to have an industry-leading copper Company and we remain very positive about its long-term fundamentals. Regarding the copper market itself, the initial benefit came from monetary policies to encourage business activity in China. The dovish positioning by the U.S. Fed initially created a more positive environment for copper and other commodities prices. Recent data about China’s internal economy has been encouraging in the power grid business automobiles, but recognized that it is a mixed situation there; its construction remains subdued but there is improved market sentiment. Short positions have been closed, long positions have been taken which is just a function of the marketplace, and globally demand is improving modestly. Companies are reducing costs as we are and we are pleased with our progress there. There has been some curtailment not as much as might be expected; about 800,000 tons per year today, but the pipeline of new supply projects is declining as companies are deferring projects cutting CapEx and all of this is resulting in a longer-term outlook for a very positive copper price environment. We are focused on finding a way to structure our business to take advantage of that. On Page 5, we have a slide that illustrates the thing that I've been talking about for years. Existing base production is declining over the next 10 years. Wood Mackenzie predicts an 18% decline in production from just under 20 million tons a year to just over 16 million tons a year. If you take very modest outlooks for our global consumption growth, they use 1.7%, you end up with a shortfall of mine supply in relation to consumption of 7 million tons. Right now, Wood Mackenzie estimates that highly probable mine developments account for only 2 million tons, which leads to a 5 million ton shortfall that has to be made up by other projects. The top 10 mines in the world produce about that level, so that shows the extent of the shortfall in one-third of that 5 million has to come from new projects that are not considered probable. That’s over 3 million tons, and it’s going to be a lot of new mines developed. The selling price even in today's world for developing new mines is that prices are probably 50% higher than the current price. So that’s what we are in the business for and we remain confident about it. In terms of what we are doing right now, we are executing our strategy; we are going to strengthen our balance sheet, maintain a high-quality portfolio of assets, and position them for value creation. We've adjusted our mine plans to curtail some high-cost production, and we have contingency plans for taking further steps if need to be. That’s going well. We are completing our major projects with the Cerro Verde project, which is the completion of the third of three projects that we started in 2011, and all three of those are going well and will be beneficial to us in the coming years. We financially suspended our dividend. We issued $2 million of equity in 2015. Our asset sales progress, which we commented on in detail in our fourth quarter earnings release, is going very well. We are encouraged by the nature of those discussions. We’ve taken steps through restructuring our management in the oil and gas business, taking cost cuts to align that business with our corporate objectives of improving our balance sheet and reducing costs by approaching future investments differently. So that is what we are doing and what we are all about. In terms of cost experience in the mining business for the first quarter, you can see on Slide 7 that we’ve made progress; we are down – we achieved levels lower than our January guidance at consolidated $1.38. We’re reducing that further as you’ll see for 2016 as a year, particularly strong performance. Red Conger is here with his team in the Americas where we’ve come in below our fourth quarter numbers and our guidance for site production and delivery costs in the Americas and we continue to have our low-cost operations in Indonesia and Africa. Volumes were good, consistent with our guidance going into the quarter. So running the fundamentals of our business is important and our guys are doing great doing it. Asset transactions that we've announced to date includes the Morenci transaction and two smaller transactions, with good values in those. Morenci is scheduled to close in the second quarter, no hitches there. We recently announced a transaction involving the Serbia exploration project Timok, which we’re getting both good initial values, accomplishing some strategic objectives in getting initial development going on the upper zone while we retain a significant interest in operational control of the potentially larger lower zone. That is going well. We are advancing discussions on additional transactions and are very pleased with that project. We are much more confident today than we were early during the first quarter when the market was in such a concerning situation, but what we’re seeing here and we’re in advanced discussions is the scarcity of quality assets in the copper business is attracting significant interest from potential purchasers who share our longer-term positive view of the marketplace. We are confident that we are going to be able to achieve the goals that we set out. And beyond that, we have other opportunities available to us that we’re not currently pursuing but in which parties have stepped up and said they're very interested in those. So while we don't have specific transactions to report today, I am telling you that we are very optimistic and confident that we’re going to be able to meet our goals in a positive way for our Company and our investors. The reason we can do this is because of the portfolio of assets we have. We got pictures here on Page 9 of Morenci, recently expanded, the largest copper mine in North America very profitable with a long life. Cerro Verde, as we develop it, has the world's largest concentrating facility, and it is ramped up very well and without the kind of typical startup issues you have in terms of cost and schedule and mechanical issues going forward. It was a big project of $4.6 billion, and there has been a lot of support from the local community in the Arequipa region of Peru. We have a great team, and it has gone very well. Grasberg, where we continue to have discussions with the Government of Indonesia on our contract is a remarkable long-term resource, one of the industry's historically largest copper and gold reserves, and it's an asset that is very important to our portfolio, important to the Government of Indonesia, and important to the province of Papua. And then Tenke Fungurume is the most successful and largest mine in the copper belt region of Katanga and Zambia, operating extremely well and has a long life with very significant development opportunities associated with it. Coming back to Grasberg, we want to refer back to the important letter that we received on October 7 when the Mines Minister, in support of the President, indicated that the government would move towards granting our contract extension on terms that were consistent with our existing COW, in terms of the financial aspects of it and the enforceability of it. The revised revisions to the regulations that were anticipated unfortunately have not been adopted; instead, the country is now working on revising its mining law and the related regulations. Government officials continue to express support for the position in the October 7 letter. We have agreed as part of that to divest incremental interest in PT-FI at fair market value up to 30%. Press reports out today about a government position referring to replacement cost reflected a lower valuation than the $17 billion valuation we submitted in January of this year. The official letter from the government, however, did not give a valuation amount; it was in the press, but it wasn’t in the letter. They referred to regulations, not specifically replacement cost. I want to tell you that in all of our agreements with the Government of Indonesia, we have indicated that any divestment would be at fair market value that’s consistent with our contract, and that remains our position. Slide 10 shows the Cerro Verde project. You can just see how well this thing has ramped up. We began first copper in September, and month-by-month we've increased the throughput through our new Concentrator 2 project. In March, we hit above capacity, 373,000 tons a day. Strong performance on capital cost management startup, although that was an issue for us, that was our objective a year ago to talk to you about what we’re going to do in 2015 here is an example of how we execute. Since we did the Phelps Dodge deal nine years ago now, I’ve talked, I think, on every conference call about the strength of Freeport, which has been in our copper resources. We have very large proved and probable reserves, as well as substantial mineralized material at our existing mines that provide assurance of the opportunities to invest when the market is fit. The potential that is huge goes beyond that, so that’s what we still have, and this is what’s going to allow us to deal with this balance sheet issue by raising capital through property sales or otherwise and then end up with a very substantial copper resource-based company as we go forward. That’s our strategy and this provides the reason why we will be able to execute it effectively. Now, to show you – and I think those of you who follow us know we’ve got a great copper business beneath all these market issues associated with oil and gas investment. The Company has a remarkable copper business. This is shown in 2015, when we were still investing in Cerro Verde so aggressively and we had EBITDA that matched our CapEx. Going into 2016, as we were wrapping up Cerro Verde and copper, even lower copper prices averaging $2.17, EBITDA substantially exceeded CapEx. Looking forward to the year 2016, at varying copper prices from here forward, first quarters in the books, but at $2 for the rest of the year, we would have $4.6 billion of EBITDA; at $2.25, it’s $5.7 billion; at $2.50, it’s $6.8 billion, and our CapEx is only $1.8 billion as we’ve completed Cerro Verde and as we're continuing to invest in Grasberg underground while managing maintenance capital in a very effective way. We’ve got a business that is generating substantial cash flows to help us meet our financial objectives. Now in the oil and gas business, the debt level that we have of roughly $20 billion was created by the initial oil and gas investments and subsequent spending in that business on an aggressive growth profile. That was really upset by the fall in oil prices. When copper prices fell, it took away the ability of the copper business to support it with its own cash flows. That’s why we are having to take these really aggressive actions now to rectify our balance sheet. We have a new organizational structure in the oil and gas business. It’s now integrated into our Freeport-McMoRan corporate structure, being run as an operating division rather than a standalone corporate entity that it has been since the acquisition in 2013. This is allowing us to reduce costs. Last week, we reduced employment by roughly 25% and we are continuing to look for ways to reduce costs by looking at office facilities and other cost elements. We are winding down significant capital spending. We have recently completed a series of tieback wells to our production facilities, which will allow us to maintain near-term production without additional drilling. In the Holstein Deep area, we commenced initial production just this month. Two additional wells are coming on in the second quarter. At Horn Mountain and Marlin tiebacks, we commenced production on the D-13 King well in the first quarter. Kilo/Oscar and Quebec/Victory tiebacks are in progress, and we have four additional drilled wells in our inventory including Horn Mountain Deep, which we will be able to bring on production without drilling new well, which will allow us to maintain production for the foreseeable future. When you step back and look at these assets, they are very attractive. We began with the acquisition prior to the merger of three underutilized deepwater platforms in the Deepwater Gulf of Mexico: the Horn Mountain, Holstein projects, and Marlin. That's where our tieback activities are going. We also have interests in non-operating, new producing projects at Lucius and Heidelberg and a long-term development project in the Vito area in Mississippi Canyon. This is the structure of the business. We have significant production in California, but these are really good assets. We looked for potential buyers during the first quarter aggressively. The Board had special financial advisers. We worked with established bankers to canvas the market, and because of the conditions in the marketplace with low oil prices, with credit pressures on companies from the very largest through the business, with the lack of credit, we just concluded at this point that the values available in sale or monetization transactions simply didn't reflect the long-term value of these assets, and that's why we’ve taken steps to restructure our business. We have an operating team there that is impressive and well-recognized in the industry; they have a great track record, so we are very comfortable with our ability to manage this business effectively and realize long-term values for our business. Now turning to Slide 15, you can see the leverage to prices that our oil and gas business has, and at $35 Brent, we have $600 million; at $45, it's $1 billion; at $55, it's $1.4 billion, and $1.8 billion at $65. We’ve reduced CapEx for 2017 to $500 million. We do have some idle rig costs of about that amount that we are managing, but it is a business that is leveraged to oil prices. There are no guarantees, but there are certainly opportunities for oil prices to increase. We can maintain production. We continue to monitor the marketplace and look for ways of contributing to our strategic objectives of improving our balance sheet. We have updated our numbers for the outlook for 2016. This does reflect the closing of the Morenci transaction where we are selling an additional 13% interest, and so that's the basic adjustment for copper, with other adjustments being more in the nature of typical ongoing adjustments. I’ll point out that the unit cost for copper has been dropped to $1.05 consolidated, down from $1.10, reflecting some improvement in gold price by-products, but also the efforts of all our teams that reduced costs before by-products. Strong production cost has come in at $15 a barrel, $14 a barrel for our oil business which is down from $1.00 operating cash flows. As we talked about earlier, at $4.25 copper, and each $0.10 change in copper for the remainder of the year, the last nine months of 2016 represents a $340 million variance for us. CapEx were in line with our previous estimates. Sales – as we look forward to 2017, we will see copper at $4.6 billion, gold sales rising as we complete mining the open pit at Grasberg, molybdenum sales being adjusted for the market, and as I pointed out earlier, oil sales being maintained at the current level of close to 160 million a day. EBITDA variations are shown, and cash flow variations are shown on Slide 18, starting with EBITDA. This includes first quarter actuals and sensitivities for the remaining nine months in 2016 and 2017. At $2, it’s $5.6 billion; at $2.25, it’s $6.7 billion; and at $2.50, it’s $7.8 billion for EBITDA, and cash flows varying over prices go from $3.5 billion to $5 billion. Capital expenditures are dropping on Page 19; we have cut capital in half for 2016 and are cutting it another 50% for 2017. You can see how that splits out between our oil and gas business and our major mining projects. The remaining major mining project is the Grasberg underground development, along with what we’ve done with maintenance capital. I keep mentioning we are committed to improving our balance sheet. We are going to get this $20 billion debt level down. We are going to do that by running our business right, constraining costs and capital spending, and raising capital through asset sales. The improvement in our share price and our bond trading may give us some opportunities for capital markets transactions, but for the time being, we are really focused on these asset sales discussions that we’re advancing. We have a very manageable near-term debt maturity schedule. We have roughly $3 billion available under our $3.5 billion amended bank credit facility, have $300 million in cash, and virtually no maturities at least in 2016 and manageable maturities in 2017. So from a corporate standpoint, our near-term liquidity is very strong. Come back to say we’re focused on execution. We had a great quarter in terms of execution to begin the year off with. I am very confident we’ll continue that track record as we go forward into the year. So that’s a quick overview, and I wanted to run through it so we can have time for your questions.

Thanks very much. Hi, Richard, Kathleen, Red and Mark. It's good to see the progress thus far.

Thanks, Tony.

I've got several questions here. The first one on Indonesia, and I was interested in the comments about capital spending deferrals. I was wondering if you can comment about that a little bit further. And then also, the mill issue that you experienced during the quarter and you applied a temporary fix to it. Just wondered if you could talk about that a little bit more and what you're doing there. I've got a couple other questions about different areas.

Okay, Tony. First of all, we have taken steps to reduce capital. Mark Johnson’s here – to reduce capital. We revised some mine plans, and we are reducing capital. What we have not done yet is defer the fundamental development of our underground resources. We completed the Deep MLZ extension of the DOZ mine; that's really a long-term extension from our initial Block Cave development beginning in the early 1980s. This is the most recent major extension on that, and it was completed last year and is ramping up. The underground development of the Grasberg Block Cave, which is really beneficial to the asset, beneficial to the Government of Indonesia, and of course, Freeport, requires us to continue with that so that when the pit is completed roughly at the end of 2017, we would have that mine ready to begin ramping up. And so we’ve been very reluctant, and remain reluctant, to suspend that, but that is drawn into question seriously by not having the regulations amended and getting our contract extended. We’ve been spending that money in expectation and confidence that we will get extended. Government officials keep saying that, but have not taken the actions that are necessary to document it yet. Roughly 75% or more of the production from the underground is going to be realized after 2021 when our primary term ends, so we’re currently engaged with the government to explain that to them. We also have the issue there with the smelter that we’ve agreed to develop, provided we get our contract extension, and we are unable to spend substantial money on advancing this smelter project without having the contract extended. So those are the big issues we face; discussions are ongoing as we speak, and our Board is considering what actions we should take. With respect to the mill issue, Mark, why don’t I let you explain that briefly?

Okay. Yes, Tony. In late January, we had a bulk sale in our 38-foot Siemens wrap-around mill. It’s a gearless motor, and it failed; it ended up shorting out about seven of the coils, there are about 648 coils that are part of the stator. As you mentioned, we initially were able to bypass that damaged segment, and we’re able to run the mill fine, about 5% derated. Since that period, we’ve evaluated the longer-term repair and got prepared for it, and we determined that we should take it down in April, which we did just over eight days ago. We took the mill down, we’ve got Siemens there to help us, along with some other contractors. We’re just eight days into the repair, but it’s going very well. We’ve scheduled about 32 days of downtime for this repair, but we are pretty confident where we sit right now that that will be closer to 24 or 25 days. In addition to repairing the mill, we are going to look at some of the issues as we think we can address any of the issues that might have caused that bolt to fail in the first place. We’re also obviously taking advantage of this downtime to reduce some opportunity maintenance throughout the plant.

All of these things are reflected in our outlook, in our cost, production volumes, and so forth. This is the first time this has happened in 20 years of operation of this mill, and it’s happened in other places. We’re confident in getting it fixed on schedule that Mark talked to you about.

Thanks, both. Richard, just a follow-up on Indonesia. From a bigger picture standpoint with respect to the negotiations and discussions with the government, is it still the biggest log jam there? Is that still the refusal at this point for the government to want to discuss this extension only until two years before the original COW is due to expire?

Well, that is the current regulation. Our legal position is that regulation doesn't apply to our contract, but so far the government has not taken steps to revise that regulation. My observation is that there is a wider recognition of that being a problem not just for Freeport, but for the mining industry in general, and the anticipation by many is that it would be addressed in the revision to the mining law and the related regulations. That is a current issue for government officials. We thought it would have been resolved by now, it has not been, and so now the government is working with the DPR to address it that way. That has an uncertain timeframe for getting done and you have to admit uncertain outcomes because of the different political views, so anyway we are continuing to work with them.

Okay, Richard. And then I want to ask a question with regard to the asset sales process. I think you mentioned in your comments, you mentioned something about other opportunities, and I didn't quite know what you meant by that?

Let me address this, Tony, and then we are going to need to let others come on and ask questions.

Okay, understood.

But all I'm doing is refering back to my original comments in the first quarter—the fourth quarter year-end earnings release—to convey to the market that we’re putting our highest priority in fixing our balance sheet and looking for opportunities involving any of our assets. What we've done since then, as we focused on transactions that would help us achieve our transactions in a positive way. We are going to work, and I believe we will get those transactions completed, but beyond that we have other assets that are not part of our current transactions that we would turn to if we are not successful with this initial round of discussions. I am telling you I believe we will be successful with the initial rounds of discussions, but if for whatever reason we are not, we have other alternatives to turn to.

Understand Richard. Let's appreciate that and I'll get back in queue. Thank you.

Thanks, Tony. I just want to say you got to appreciate that these are confidential discussions that take time and due diligence, and a lot of issues go into it, but I'm feeling much better today than I did in January.

Hi, good morning.

Good morning, Evan.

I had a question on Cerro Verde. There's been some reports out that the water allocation issues with Rio Chile, and it seems like from your guidance that you're managing to move you through this without any sort of issue. I'm just wondering if there's any risk to that?

Well, the reports came about because the El Nino effects have weather consequences throughout areas where we operate, and there was a drought period there; the river was affected because of the upstream downs. There was some allocation deals—there have been replenishing rains and we’ve worked this out; we don't anticipate that being a problem at all.

Got it. Thanks. And then one question on Heidelberg. Cobalt had put something in their 10-K that I picked up on, something about the appraisal well leading to them, I can't remember the exact language, but concerns that there could be a material downgrade to a plan. Is there anything that you can comment on there as far as what you're seeing out of that?

Sure, first of all, when you look at these earnings releases of different companies, they acquired their interest in different ways, and so their book carrying values are going to differ company to company. The geology at Heidelberg is being analyzed, and some of the locations of the wells are being revised. Our team still has confidence about the resource, and this will be handled, so what you’re seeing now is the effects of some of the initial development wells having to be relocated in terms of where they're being drilled to access the reservoir. I visited with the team last week and they feel confident that it's not a detriment to the overall resource available there.

Okay, thanks. Just maybe one final one, if I may. At the last half of the year, at the market equity raise, the stock price was actually lower than where it was trading today. I'm just wondering, given the rebound in the equity, if that's something that you may consider following up on.

Yes, I made a brief reference to that, to the fact that our share price is up, and the trading in our bonds has really improved over the last six weeks. So that opens up consideration for other types of capital raises for us. We currently believe that it's beneficial for us to first look to asset sale transactions because we believe that we're going to be able to accomplish those in a positive way and hopefully, the market will be driven by many factors, and we’ll be well received by the market, giving us opportunities in the future to do better. So that’s kind of the strategy of what we are looking at. Kathleen’s giving me a note just to remind everybody that the basic source for our mill water at Cerro Verde is not from the river or the dams for the expansion at least, but from this wastewater system that we put in for the city of Arequipa. The issue that Evan raised was the downstream water was affected by this lower flow through the river and that was what led to it. Our water is coming from the wastewater system for the expansion.

Great. Thanks for taking my questions. I just wanted to drill down a bit more on the divestment plans on the mining side. First of all, in Indonesia, what are Freeport's alternatives if for whatever reason the Indonesian government doesn't agree to Freeport's expectations regarding the fair value of that ownership interest? That's my first question.

Let me answer that, Dave. The ultimate resolution mechanism that we have is international arbitration. That’s a provision that’s in our contract, and based on all the legal advice that we've gotten over the years and recently, our position in an arbitration proceeding would be very strong. The contract is available on file with the SEC; you can read it straightforward. It has been in place since 1991, and we believe it's ironclad. We are trying to avoid that; it’s such a long-term asset, and we are trying to avoid going into a legal proceeding like that. But that’s our ultimate fallback. Under our contract, we have no obligation to divest, which was acknowledged by the government in Indonesia in the mid-1990s in a letter that we have on file. All of our discussions since then where we voluntarily offered to divest, to try to be responsive to the new mining law and the aspirations of the government, has always been at fair market value.

Okay. Is there just as a follow-up to that, is there any specific deadline or timeline that we should be thinking about here for this, or is it an open-ended negotiation?

It is not a specific timeline, but we are spending so much money, together with Rio Tinto, we are spending about $1 billion a year on this underground development, and we simply just can't keep doing that without bringing this issue to a head. The government wants us to proceed with this smelter; the best-case scenario for constructing a smelter based on global experience and all the smelters built in China is that starting all out today would require us to go to 2019 to build a new smelter. Without having contract assurance beyond 2021, we simply can't do that as a practical business matter, and that’s the message we’ve been conveying to the government.

Okay. That makes sense. And then just my separate question related to the divestment plans, just regarding the comments about discussions on additional transactions. Which of the mining assets specifically are currently being negotiated for sale or JV, et cetera, aside from Grasberg? Obviously, not looking for anything other than just the assets that are currently under negotiation.

Dave, because these discussions involve multiple parties and we have multiple alternatives to consider, I just don't think it's an answer I should publicly state right now. I know all of you want to have more details, we want to get this thing done, and we have a real sense of urgency for it. I’d just comment to you, the process involves a lot of complicated details and negotiations for the transaction and the people conducting due diligence. These mining assets are complicated. We’ve got great assets and lots of support for values. All I can tell you is I feel real good about where we are. Now, I wish I could share more details, but I simply can’t.

Okay. I appreciate the position you're in. All right, thanks very much.

All right. Thank you.

Hey, good morning everyone. Thank you for taking my question as well. Question on the copper market. We had CESCO a couple weeks back. Most folks seem to come out of there with a sense that the copper industry really sees cost-cutting and not curtailment of supplies, as the best path to take in the current market. I was wondering, Richard, if you believe we're going to need any more cuts in production over this next year to help support pricing given some projects ramping over the rest of the year and given Grasberg ramping up. For you, would you consider maybe fully idling any of the assets where you're currently at half rates or so?

Well, thanks, Matthew. The reality of this, and I’ve been through a number of these cycles, and it’s complicated because decisions to shutdown mines are very complicated because of the transition cost incurred in having to do it. Not only is there an issue of employee severances, but it also often triggers reclamation obligations and shutdown obligations because a mine is an operational system. When you operate that system, you're able to manage a lot of environmental issues in a particular way by the way you process material. Shutting it down might require new systems to address water flows, and so forth. That’s one of the challenges we faced at Sierrita. Those are complicated. Barriers to shutting down mines stem from transition costs that can be economically significant compared to losses at marginal profitability, even losses.Full shutdowns are often complicated decisions that need to take into account such transition costs. As prices continue to drop, more pressures will arise, leading to potential shut-ins, and there are considerations at the mine levels on a case-by-case basis. For example, we cut back production at our Morenci operations during the downturn in 2008 and 2009 but maintained a segment that remained profitable even at lower prices, which highlights the dynamics of the situation. Actions to reduce production in adjustable ways can be driven by market conditions.

Thanks for that. That actually leads to my next question. Given your position as a leader in the industry, how important is it for you to maintain operating control over that asset? I'm wondering whether that has limited the opportunities and the potential buyers, who may not be interested if you're only discussing minority stakes.

Well listen, if you just listen to what I just said, you know how bad I feel about selling any of our assets. I mean we put together a great company ahead of a diverse set of assets, and now circumstance has led us to have to do some, and we really don't want to do. So that answers your question, it varies asset by asset. When we look at our business there are certain of our assets, and we create a lot of value by having them managed together, using shared equipment, technology, people, and resources, which is a huge benefit for us. So one thing we are looking at is how we can do transactions that retain the ability for Freeport to create value. Other assets which we don't want to sell, but we have to look to sell would involve a transfer of ownership. There are certain companies in the world today who would only do a transaction if they can be operators. You read about it every day in the paper so we are looking across the board for that. At the end of the day, we are looking for transactions that are executable at acceptable values, in ways that help us meet our financial objectives.

Got it. Thanks so much and best of luck.

Thank you so much, Matthew.

Hi. Thanks very much for taking the question, and certainly good job on costs this quarter. In terms of just – in terms of the asset sales process, I guess you've announced $1.4 billion since mid-February. Obviously in your release, you noted that you expect to show additional progress. I think specifically in Q2 was what was mentioned. I know there's a springing collateral and guaranteed trigger that was added, which basically means I think you need to total $3 billion in aggregate announcements by mid-year. Assuming my math is correct, that's another $1.6 billion or so in announcements in the next couple months. Do you feel comfortable with the timeline and maybe just conceptually how would you sort of describe activity level relative to your initial expectations in terms of just parties at the table? Any big picture color would be great? Thanks guys. Bye-bye.

The answer is yes, we really expect to meet that springing collateral test in the second quarter, very confident about that. I've tried to get across and have done my best to talk with you today knowing that I can't meet the hopes that many had that I could give you specifics, but to tell you how much more positive I am on this call than I was on our call for the year-end earnings release. This year started really tough, and I’m not telling any of you that it started out itself with uncertainties in the global commodity space and uncertainties about China and copper—many unknowns populated our initial assessments. Internally, we thought we would get good receptivity because of the high quality of assets. Now we know we are getting good receptivity, so we know it internally. I am confident we are going to get this done in a reasonable way and now we’re going to be charged with executing and reporting to you the results as we go forward.

Richard, that extra color is very helpful. I'll turn it over. Thanks very much.

Okay. Thank you, Jeremy.

Hi there. Just a quick question. Most of my questions were answered. In terms of cash management when you do realize the proceeds from the sales of Morenci and your JV with Reservoir, do you intend to buy back some of your higher yielding bonds at that point, or are there covenants in your credit line that would require you to hold a cash balance to pay that down first?

Chris, this is Kathleen. We have agreed to a cash flow asset sale cash sweep to our term loan lenders; 50% of asset sales, and if our leverage is greater than six times, which we’re not currently, they would get 100% of proceeds. So we'll have opportunities we believe to not only repay term loans, but also look to repay other debt in the capital structure and take care of the upcoming maturity. That is what we're thinking at this time. As Richard said, the debt levels and the trading levels have improved from where they were earlier in the year, which opens up other opportunities for us, but we’re focused on absolute leverage reduction and giving ourselves enough runway over the next several years in terms of maturity schedule.

Okay. Great. Thanks a lot, and good luck with the asset sales.

Chris, I can’t tell the frustration of looking six weeks ago where our bonds were trading, where our stock was trading, and not having the money to buy them.

Thank you. I was studying slide 23, which has the oil and gas output price realization and direct cost. It looked like the margin was $7.96 per BOE times the $12.1 million, or $96 million for the quarter, if I'm reading it right. Put a different way, a $0.09 upswing in the copper price would give you as much cash flow as oil and gas has in the March quarter, admittedly probably at the bottom of the oil price, we all hope. Do you think it's worth just shutting in all the oil and gas output and preserving the resource and waiting for a better day after the market gives us $0.25 of upside on copper?

Well, you know John, that’s a kind of scenario analysis; in hindsight, you could say maybe that would have been the right answer. We can’t live in that world. The nature of oil production is such that you just cannot make decisions like that and preserve the reservoir. Running these kinds of assets is not like managing a portfolio of stocks and bonds. You can’t just sell something and get out of it; you have to manage many complicated operating factors in doing it. I understand your financial analysis; the practicalities of it are such that we can generate some cash to help meet our obligations that we have. We’re cutting these costs aggressively now. We’ll continue to do that and we’ll take the actions to preserve these assets and create some incremental value over time. We are working on contingency plans now, for example, how do we look forward in terms of drilling some of the really attractive tieback opportunities. We’re not going to spend money now, but we’ll be prepared to as markets increase to help arrest the natural decline. There is a big difference in these average numbers that you talk about between California, which is significant production, and the deepwater. The California doesn’t have the decline issues that the deepwater has, and we’re able to breakeven out there and preserve all of the resource but continue to operate it. Shutting down that California production means you have to address the nature of the way that it is produced. So the oil and gas business is in tough shape. It’s just in tough shape because our plan was to have it fund its own CapEx, and there were commitments made to fund an aggressive growth. The legs were cut out of that by the drop in oil prices. Now that business has committed costs, which are well beyond its current resources; we know that because we just tried to sell. So we got a profitable copper business. We must manage this oil and gas business differently to reduce costs, focus on preserving value because the offshore depletion will happen at some point in the future—not in the next period of time because the success we’ve had in drilling. It’s a challenge; I’m not going to pull any punches on it. We’ve got a good team. I’m really enjoying getting to work with these guys directly. They’ve got a great record and we’re going to find a way to get value out of these assets.

Thank you. If I can ask a simpler question about the accounting: Over the last six quarters, the oil and gas charges have been about $22.9 billion. Is there only about $5 billion in carrying value left? And what was the 12-month average oil price for the March quarter for full-cost test? You’d think that at some point the balances would wind down and the charges would pretty much be de minimis.

John, it’s Kathleen. If you look at the balance sheet, we separately identify the capitalized cost for oil and gas. At March 31, we have roughly $3.4 billion. That includes $1.7 billion that’s subject to amortization as part of this full-cost ceiling test that you referenced, and we’ve got just over $1.7 billion not subject to amortization, where we don’t have proved reserves at this point. In terms of the 12-month trailing average that we used at March 31 for the ceiling test write-down, it was $46 a barrel WTI.

Thank you very much.

Hi, guys. I’ll try to be quick. You’ve obviously talked about asset sales and mentioned your views on equity raisings. What are your thoughts around streaming or royalty transactions?

We’ve had many discussions about that recently and over the years. I mean going back 25 years or more, we’ve looked at doing that. The asset where we have the biggest streaming opportunities is Grasberg with the big gold component associated with it. Yes, that gold component is what makes Grasberg such a strong strategic asset for us and reduces our cost, but it is not an inexpensive place to operate. We have 30,000 plus workers there, and one of the world's largest mills that will be the world's largest underground development, with complicated environmental issues to maintain, complicated community support issues and logistics issues. We’ve concluded and thank God we didn't succumb to that idea in past years because today that would be a bad decision. But we really believe having the gold component of Grasberg, together with high copper grades, makes it such a great strategic asset for us. So we look at that; we watched what’s going on in the industry; we talked to companies involved in banking, and if something makes sense, we would be open to it. Today, we’ve concluded that it has not made sense.

Okay. Thanks very much. And just a final one. Given the importance of the second half of Grasberg and the mill issues you've highlighted, can you remind us what the mill split between the open pit and the underground for 2016 and 2017?

This is Mark. Right now, the underground provides about 45,000 tons of ore out of 200,000; the remainder is coming from the pit. That will change next year. In 2017, the pit starts to wind down a bit and the underground ramps up. It’s more like 130 and 70—130 from the pit and 70 from the underground.

Okay, thanks very much.

We vary that from time to time based on the nature of the material in the pit.

We are looking at the highest value material we send to the mill, so that drives that determination.

I visited there and went to the team, and I’ve been around since the initial development of the Grasberg. To see the technology advances in what we are able to do underground is remarkable through remote mining equipment, safety factors of that, but also the efficiency we have. We are working very well with our contractors and our team is doing that. So this is, you know, at this point in time, we're looking at having a significant reduction in mill throughput as results go on the ground. Now we look at it, and we are going to be able to keep our mill build. We have to make some, actually some enhancements over time in the mill. The resource is just grown and the economics of mining, large-scale underground mining have become much more attractive than we would've thought in years past.

Hi, everyone. I just wanted to ask, there's been— I know you're laser-focused on asset sales and it seems like you're pretty confident about hitting that June 30 deadline to avoid the springing collateral, but—and I probably shouldn't ask this as a credit analyst—but what's so bad about secured debt? I mean, if I'm an equity holder, I think I'd rather grant banks security over some assets rather than giving away a chunk of future earnings.

Well, I think as an investment-grade company, we worked hard to have a structure of flexible capital structure where everyone was secured. Our objective, as Richard just talked about, is to takedown leverage very significantly. We think over time, we have the ability to commence the rating agencies of the strength of our assets. We like to return to investment grade and we also see the benefits of having a non-secured capital structure. Having said all that, we recognized the relationships we’ve had with our bank group and the commitments they've had to support our business, and we are going to work cooperatively to ensure that all lenders are protected but also to ensure we have ongoing continuation of bank relationships that allow us flexibility to navigate through this situation in the near-term. We worked hard to get to a completely unsecured structure, and we want to improve our balance sheet and restore its strength that we had previously. I know it’s a tall order, but we are very focused on taking the steps to get there.

Okay. And then I think just one more follow-up. I think earlier on the call you said that the proceeds from Morenci, you obviously have that 50% cash flow sweep, but that you could look elsewhere in the capital structure. I think in the press release when you announced it, you said that FCX expects to use the proceeds to repay borrowings under its bank term loan and revolving credit facility. Is that still the thinking for that $1 billion of proceeds?

Yes, we have, as you saw, we had $500 million drawn roughly at March 31 under our bank credit facility, and we've got the mandatory prepayment on the term loan; we will use the balance to reduce borrowings under the revolver.

Okay. And then just sort of lastly, just real high level on this whole asset sale versus secured debt question, because I get it a lot, and it's something we talk about a lot in the credit world, is obviously there's a disconnect between the way your securities are trading when we see the spot copper prices and where strategic assets trade on a future basis with obviously a much higher longer-term price deck. Is the tradeoff do I sell assets at this valuation versus a secured debt deal that could clear my runway for a number of years? What's the tradeoff there?

Just to be clear, we’re not doing these asset sales to avoid secured debt; that was just a provision that we agreed to in our bank facility. We’re doing the asset sales to repay debt and restore our balance sheet strength. So it has nothing to do with secured versus unsecured; it’s simply the reality of us needing to accelerate our debt reduction and that's what we’re focused on. We are looking for ways to do it in a way that reflects long-term values in these assets, not the kind of spot pricing that’s currently reflected in the market but long-term values for these assets; as you saw with the Morenci transaction, we were able to demonstrate very significant value reflective of the long-term asset and resource there and the price view of other participants in the industry, not to use spot pricing but a longer-term view of prices.

Okay. Thanks for the perspective. Just one last, real quick: Is the priority overall debt reduction over sort of just clearing the deck for the next four, five years of maturities?

Yes, Matthew, let me just make a broader comment. Our company is over-leveraged, especially in an industry where you have such high operating leverage from commodity prices; you should not be this leveraged, because when conditions unfold as they do from time to time and your revenues drop because of global commodity prices, having this kind of debt is a killer. Unfortunately, we’re in position that we're in. We have great assets, and we need to get back to where we have a balance sheet that does not place us in an over-leveraged situation. That's what we’re focused on fixing. So all the other issues about managing maturity levels is part of the tactics on how to achieve that. But at the end of the day, we have good assets, and we can create a strong company. We have to give up some of those to get us to a position of not being over-leveraged.

All right. Thanks very much for the perspective.

Thanks. I'll make it quick since it's been a long time. Just on Kathleen, on the working capital comments in the press release, you said that based on certain price assumptions, the Company expects $4.8 billion of operating cash flow this year, including $800 million from working capital and other tax payments. My question is how sensitive is that $800 million to pricing, i.e., if we have a different price deck than you guys, could we assume that most of that $800 million might still materialize? Because that number was a much larger gain than what we had expected. I just want to know how much certainty we could have around that number if our price deck is different.

Yes, it wasn’t materially different, Justine, at $2 copper. We’re getting—and we’ve received some already—but we’re getting refunds: tax refunds in 2016 related to payments made in previous years. Also, with our international business, the timing of when we pay taxes based on the prior year has an impact on it. But we did, going into the year, expect a working capital source, and it’s somewhat price-sensitive but not significantly price-sensitive.

All right. Fabulous. Thanks very much. End of Q&A.

Once again, thanks everybody for your interest in our Company and participating in the call. We look forward to our next opportunity to get together.