Freeport-McMoRan Inc (FCX) — Q4 2016 Earnings Call Transcript

Thank you and good morning, everyone. Welcome to the Freeport-McMoRan fourth quarter 2016 earnings conference call. Our results were released earlier this morning and a copy of the press release and presentation material 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 this 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 2015 Form 10-K and subsequent SEC filings. On the call today is Richard Adkerson, Chief Executive Officer. Red Conger is here, Mike Hendrix is here, as well as others from our management team. I'll start by briefly summarizing the financial results and then turn the call over to Richard who'll go through the slide materials located on our Website. As usual, after our prepared remarks we'll open up the call for Q&A. Today FCX reported net income attributable to common stock of $292 million, or $0.21 per share for the fourth quarter of 2016. As detailed in the press release the fourth quarter net income included net charges of $59 million, or $0.04 a share reflecting estimated losses on assets held for sale and oil and gas restructuring related charges partly offset by gain on a redeemable non-controlling interest in plains offshore. After adjusting for net charges, fourth quarter adjusted net income attributable to common stock totaled $351 million, or $0.25 per share. Our adjusted earnings before interest, taxes, depreciation and amortization for the fourth quarter totaled $1.7 billion. As you'll see in the press release, FCX took aggressive actions during 2016 to restore its balance sheet strength and we had an active fourth quarter. We completed $5.2 billion in asset sales during the fourth quarter of 2016 bringing the full year asset sale transactions to $6.6 billion. Importantly, our net debt was reduced by $8.4 billion during the year and currently approximates $12 billion. Our sales for the quarter totaled 1.2 billion pounds of copper, 405,000 ounces of gold and 22 million pounds of molybdenum. And we sold 4.65 billion pounds of copper for the year, 1.1 million ounces of gold and 74 million pounds of molybdenum. During the quarter, we completed the Tenke sale in November and our previous guidance had reflected Tenke volumes for the full year. Excluding that variance, copper sales were approximately 7% below the October 2016 estimates reflecting lower mining and milling rates at PT Freeport Indonesia. Our fourth quarter realized copper price was $2.47 per pound, which was 13% above the year-ago average of $2.18 per pound. Gold prices averaged $1,174 per ounce and were about 10% above the year-ago quarter of $1,067 per ounce. Our unit net cash cost for the quarter was $1.20 per pound, which was lower than the year-ago period of $1.45 per pound, that reflects the higher byproduct credits and also the improved volumes and efficiencies from the Cerro Verde project and higher volume for PTFI. We generated operating cash flows of $1.1 billion in the quarter which exceeded our capital expenditures of roughly $500 million. For the year our operating cash flow totaled $3.7 billion which is in excess of our CapEx for the year of $2.8 billion. As previously reported, we completed the at-the-market offering of common stock during the fourth quarter and raised a total of $1.5 billion in gross proceeds through the sale of 116 million shares of FCX common stock. Our consolidated debt totaled $16 billion and cash balance at the end of the year was $4.2 billion, net debt was below $12 billion at year end. We ended the year with no borrowings under our $3.5 billion revolving credit facility. At the end of December, we had 1.44 billion common shares outstanding. I'll now turn the call over to Richard who will be discussing our outlook and updating you on current developments in referring to the slide materials on our website.

Good morning everyone. As I thought about my presentation today, I remembered a comment from Jack Welch years ago, advising against celebrating early when there's more to come. I know everyone is concentrating on Indonesia, which is a priority for our senior management team as we move into 2017. I'm proud of what our team accomplished over the past year. A year ago, our share price was below $4, and we faced high credit costs and uncertainty about our future plans. We were completing the construction of our Cerro Verde project, a significant $4.6 billion investment, which has been challenging in our industry. We're happy to report that we finished construction successfully, and Cerro Verde is now a key asset for generating cash flow for our company. We've managed costs and capital effectively, achieving a 19% reduction in consolidated copper production costs year-on-year, along with a 56% decrease in capital expenditures. Last year, I mentioned a goal of reducing our debt by $5 billion to $10 billion without setting a specific timeline. Since then, we've managed to reduce our net debt by approximately $8 billion from last year to the end of 2016. Under our restructured Board of Directors, we've centered our business on mining and copper. We've emerged from our asset sales and capital-raising efforts with a strong copper portfolio that positions us to create long-term value for our shareholders. In the first quarter right after our year-end call last year, we announced selling an additional stake in Morenci to Sumitomo for $1 billion, and in the fourth quarter, we finalized the complex Tenke Fungurume transaction, addressing uncertainties tied to it within the Democratic Republic of Congo. We've also closed on the sale of our oil and gas assets, albeit at lower prices than what we originally paid, but they were reasonable given the market conditions. Regarding our cost management, we saw a 19% drop in unit costs, ending the year with a net unit cost after byproduct credits of $1.26. Our free cash flows increased, and capital expenditures decreased as expected, particularly due to completing the Cerro Verde project and our exit from oil and gas, where we invested approximately $3 billion in capital in 2015 and over $1 billion in 2016. In the copper market, we've been pleasantly surprised by the recovery in prices during the fourth quarter, with copper rising about 17% for the year. Positive market sentiments were backed by improved fundamentals in both China and the U.S. There's still constrained supply growth, and toward the end of the year, we started seeing more supply disruptions. The cost to develop new copper supplies is around $3 per pound, with Wood Mackenzie suggesting an incentive price of $3.30 in real terms. Given the current prices, the industry is not pursuing new supply development projects, which could lead to reduced supply in the future. On the demand side, things appear better, indicating a hopeful future for copper. Currently, we have low inventory levels, and deficits are expected in the market. The timing and extent of these deficits will depend on the global economy and events in China, but we remain optimistic about our copper outlook and our ability to capitalize on it. Looking at the world's top copper producers, we rank behind Codelco in terms of net production interest, not accounting for Tenke and adjusting for our stake in Morenci. Our operations are comparable to Codelco when including minority interests. We own seven copper mines in North America, providing around 40% of the U.S. copper supply, alongside two in South America—Cerro Verde in Peru and El Abra in Chile, which has significant growth potential. Our resources are well-diversified across regions. Our molybdenum mines are in the U.S., and we also have byproducts in both the U.S. and South America, with gold sales tied to our ore at Grasberg. Cerro Verde started operations in September 2015, reaching full capacity in early 2016. Our cost per unit for this large-scale project dropped 19% year-on-year, a significant success for which our team deserves commendation. As for our reserves, they're evenly distributed by region and we've identified substantial mineralized materials, totaling 100 billion pounds of contained copper, with more potential currently being qualified. This indicates a long-term solid future for our copper business, allowing us to initiate growth projects once the market signals a need. We don't need to rush into mergers and acquisitions; with our balance sheet and the promising copper price outlook, we are well-positioned to engage in the market as buyers or sellers as the situation unfolds. Our significant development projects are listed and include major sulfide opportunities for concentrators, most of which are in the U.S. Investment in the U.S. has become more attractive due to favorable energy costs tied to shale oil and gas developments. Our labor force is more flexible without union constraints, and we enjoy community support. This stands in stark contrast to the last 15 years when the industry seemed stagnant here, and now presents great investment opportunities. El Abra is included in our development plans, with substantial resources under advanced planning for consolidation with our partners. The project's size gives me confidence that it will ultimately be necessary for meeting global copper demands. Turning to Grasberg, we’ve faced ongoing issues related to our workforce in the Grasberg pit. With its known depletion point moving to 2018, we are currently mining the deep ore body via our underground operations. We've operated large-scale block cave operations since the early 1980s, and we are technically proficient in this area. However, ongoing grievances have affected productivity, which we are actively working to resolve. While there's currently lower production, it’s extending the life of the pit rather than resulting in a loss of resources. I also want to address matters related to recent regulatory changes by the Indonesian government affecting mining operators, which have implications for the industry and us. Freeport signed its initial contract in 1967, followed by a new contract in 1991, ensuring legal and physical certainty until 2041, underpinning our substantial investments since then. In the mid-1990s, we partnered with Rio Tinto on developing Grasberg, significantly enhancing our capabilities. We committed to building a smelter in Indonesia when it was economically viable, fulfilling this obligation with Mitsubishi, resulting in a smelter in eastern Java that has operated effectively for nearly 20 years. The new mining law passed in 2009 mandated that existing contracts continue until expiration while encouraging amendments to align with the new law. Since 2011, we've engaged with the government in negotiations, although we've yet to reach an agreement reconciling our contract with the new law. The law guarantees that our contract remains valid. In early 2014, concentrate exports were suspended due to new regulations, leading to significant losses for both the government and us. We resolved this in July through an MOU covering key topics like exports and smelter development, which promised negotiations for legal and physical certainty through 2041. However, after a government change in late 2014, our MOU was extended in 2015, yet the discussions continued without resolutions. We received a letter of assurance regarding our contract stability and investment from the government, which allowed us to proceed with our investments in underground resource development. However, in January, new regulations mandated contract holders to convert to special licenses for exporting. We've been unwilling to forfeit our existing contract in exchange for merely a license without the same level of assurance. Our contract provides for potential 10-year extensions beyond 2021, which we have applied for but not yet received approval. It also guarantees our rights to export and states that the government will not impose laws that negatively impact our operations. Recently, the government issued new mining regulations that require conversion to a special license for exports after previously allowing exports under our existing contract. We are negotiating this transition while requesting permission to export during the discussions. Preliminary indications suggest that we may retain our export rights while finalizing this license and stability agreement within three months. If we’re denied the ability to export, the repercussions for our company could be severe, given the volume of copper and gold involved. We would need to make substantial cuts, possibly resulting in significant layoffs and reduced capital spending. However, based on recent talks, we don’t anticipate needing to take such drastic measures. To conclude my remarks on Indonesia, I want to emphasize our long history and strong investment relationship with the Indonesian government. We've successfully operated one of the most technically challenging mines while fostering a positive partnership with the government. Our operations have contributed over $50 billion in economic benefits to Indonesia, and our tax and royalty contributions currently exceed what other countries would receive if we relocated our mine elsewhere. Reaching a fair resolution for both Freeport and the government is paramount and I believe both sides recognize this need. I’m optimistic that we will find an agreement that satisfies all parties involved. In 2017, we expect to produce over 4 billion pounds of copper, 2.2 million ounces of gold, and 92 million pounds of molybdenum, assuming we can continue exporting from Indonesia. Our site costs are projected to be about $1.50 before any credits; after credits, approximately $1.06 for the year and $1.15 for the first quarter. At a copper price of $2.50, we anticipate $4.3 billion in operating cash flow, with sensitivities indicating that every $0.10 fluctuation in copper prices affects us by $385 million. Our capital expenditures are projected at $1.8 billion; $1.1 billion of that is allocated for major projects, primarily our underground development in Indonesia, alongside $700 million for sustaining capital. Our sales profile for the coming years shows a slight decrease from last year's 4.17 million pounds to 4.1 million pounds this year and about 4 million in 2018. Gold production will rise as we complete mining the Grasberg pit, while we’re managing what we sell of molybdenum to respond to the market's needs. Our EBITDA and cash flow models project $5.5 billion to $7.5 billion between $2.50 and $3 copper. Operating cash flows will range from $3.5 billion to $5 million. With the decline in capital expenditures and a focus on carefully considering new projects, we expect to keep our financial health robust, bringing down net debt from $20 billion to $12 billion last year, with hopes of dropping below $10 billion soon. We’re committed to maintaining a strong balance sheet to safeguard shareholder value, enabling us to invest when appropriate while managing existing operational risks. We are much better equipped to handle current challenges than we were a year ago, which is a significant achievement. I am excited about our future; we hold a leading position in copper, which I believe is an excellent commodity. Our exceptional team of operators and developers can handle any industry project effectively. We have a geographically diverse, long-lived, attractive cost structure and are financially strong to manage our operations successfully. Act I is complete, and we are diligently working on Act II to maintain our business’s safety, generate volumes, and control costs. Thank you for your attention; I felt it was essential to provide this context given our current situation.

Operator, we'll take questions now.

Hi Richard, a couple of questions from me, just trying to cut out a few of these more details on Grasberg. Maybe to start on the underground development you're going through with the deep MLZ zone and most of it the Grasberg block cave. At this point, has there been any slowdown on that? I'm just looking further out to some of your guidance and comparing it to past periods. I think the 2019 guidance for example has changed a little bit, have you changed anything there or are you still waiting for resolution on the near term before you make any decisions?

That's a good question, Chris. There are two key factors to consider. First, the extension of the pit due to labor productivity issues has delayed the ramp-up of the Grasberg block cave. We are making good progress with the block cave development, and these labor issues haven't impacted our underground or mill operations. We are currently on schedule, though we have slowed things down a bit to conserve capital and align with the pit's mining completion. Regarding the Grasberg block cave development, we won't begin cave activities until the contract issue is resolved, which is expected to happen between now and 2018. Once we start caving, it's crucial to maintain that process to avoid losing resources. We're synchronizing underground development with the completion of the pit and examining the contract situation before advancing to actual caving operations and production. The deep MLZ mine development is finished, and there's one cave in operation with several active draw points. We’ve encountered issues related to underground stresses from cave advancement, necessitating more extensive ground support than initially planned. This has caused delays in production we originally projected for 2017, 2018, and 2019. While there's been a slight slowdown in mine development to ensure safety for the underground support, this isn't resulting in lost resources. It involves some additional costs, but since we identified the issue in the fourth quarter, we are taking necessary steps to ensure safety and long-term production capability.

Thank you, Richard. Regarding your current production, could you provide some guidance on your storage capacity and when you'll need to make decisions about it? Is there a period during which you can continue operating before encountering losses?

Yeah, coming into this January 12th date, we scheduled shipments to take into account the potential for a delay in granting of the export license. So, by mid-January, we had shipped our exports out under our previous license authority and shipments for the upcoming weeks are scheduled for the Gresik smelter. Now Gresik smelter is undergoing a strike and is currently having to deal with that. So, that has an impact. We have a limited amount of storage space, as I indicated, and we would need to take steps no later than mid-February, if in fact we're not granted a license. So, it is something that looms in a very short time horizon.

Okay, thanks. And then just the last one for me on the CapEx. Just noticed into 2018 the part that’s not the growth capital, I assume that's the sustaining capital, the 0.9. Is that representative of the business now that you’ve divested most of the oil and gas, or are you under-spending there or can we look at that as more of a steady-state number?

Well, we are aggressively constraining spending. Our team was just here last week with all of our mine managers, and necessity is the mother of invention, but we’re sharing inventory, sharing equipment, sharing people and doing every step we can do. This is not going to be sustainable at that level forever, but we're not having to increase it in the near-term horizon. But this is an aggressively constrained level of maintenance capital spending. But it is one that we can meet our production targets with.

Okay. Thanks for the color.

Thank you very much and congratulations on the fantastic job on deleveraging last year. That was certainly quite impressive and I don't think it was a small thing at all. At the risk of being slightly predictable I also have a question on Grasberg. You've obviously highlighted your willingness to potentially convert to an IUPK assuming you get the fiscal and legal certainty attached to a CoW. If you assume for a second that you get this fiscal certainty but the government digs their heels in and says no, you still have to divest 51% ownership. Would I be right in assuming that you will not commit the vast amount of CapEx to Grasberg if you can't have majority control of the mine? Is that the right assumption?

The government currently owns 9.36%, and that goes back prior to the 1991 CoW. In terms of negotiations with them over the past five years, it was an element in the 2014 MOU; we agreed to divest up to 30%, which was roughly another 20% over the current government's ownership with the proviso that that divestment be at fair market value. A year ago, in January we supplied to the government a valuation of PTFI based on the valuation parameters of that time, consistent with the negotiations we were having with Morenci and ultimately with China molybdenum on the Tenke sale, which valued PTFI at that time at $16 billion. We have not had any interaction with the government to review that valuation and clearly today copper markets are more positive than they were a year ago. The government has expressed over time an interest in having Indonesian ownership over 51%, but they have indicated they would want to see Freeport continue as the operator and to be in control of operations. The thought process as I understand it with the government is to have Indonesian nationals in some form owning 51%, but not to be in control of the business. Now we believe we have gone a long way to meeting their aspiration by agreeing to this 30% and at current time we've just noted our opposition to the regulation that requires 51% for all companies, but in our case, our contract requires no divestiture. We have documentation from the government supporting that. There's no question that had we had a requirement to divest 51% from the start of this contract, we would not have invested in this way. While there have been indications that certain government officials accept the fair market value concept, my point is, you just don’t develop an asset and sell it to somebody else at a fair market value at certain point in time. That remains a matter of disagreement between us and the government. If that were a requirement, it would negatively affect our future investments for this business.

That’s very clear. Thank you very much.

Thanks very much. Hi, Richard and Kathleen. I also want to congratulate you on Act I as well. And Richard, when I listen to you detailing the articles in the contract of work and the specific areas, I couldn’t help but think that I was hearing increased frustration as to be expected in your voice. And my goodness, you look at all these details in the articles and how it’s been violated over time, and just your response to the last question about this 51% divestment stake and so on and so forth; the question is about operational control and all these types of things. And I clearly heard you say earlier about this very critical date, as you come upon mid-February, which is not that far away. If these issues in Indonesia persist, would you consider, in addition to reigning in investment there, could we see Freeport look seriously at perhaps restarting some of your idled capacity elsewhere in the world?

Well, I really think that those are independent decisions. I don’t think we would start idled capacity just because something was happening in Indonesia. We’re going to look at the idled capacity and investing in developing new resources based on market conditions. One of the advantages of having a stronger balance sheet, which a year ago, we were really dealing with the situation in Indonesia and risks in other places we operate from a position of weakness. Now, our canons are loaded, and we can represent our shareholders much more strongly than we could have a year ago, and that’s really significant. We have the rights to pursue claims against the government in the form of international arbitration. Our legal team advises us that our case is very strong in doing that. We have consistently represented to the government that we don't want to do that; I don't believe that would be advantageous for us, but it would be very negative for the Government of Indonesia. As long as we have the opportunity to resolve these matters in good faith, we'll continue to do it through amicable negotiations; but if we reach that point where we can’t, we'll be left with no choice and we're prepared to do that.

Richard, just on the labor situation you mentioned; I was unaware that the Gresik smelter was dealing with a strike situation. Your situation there as it relates to the mining operations, is there a labor contract that expires this year? It seems like they renegotiate every two years.

We have to begin negotiations for a new CLA agreement with our labor union at Grasberg this summer, as it is required under Indonesian law every two years.

Is that the expiration on that Richard, is which date?

September.

End of September, and that's to all of the workers at the mine, mill, everything?

Well, our total workforce is 30,000 to 34,000 people. Half of those, roughly, little less than half are employees, and a majority of employees are members of one union, and that’s the contract we're discussing. Others are contractors, and certain of those contract companies have separate unions and separate negotiations, but for the major employee union, that's the contract that we've just been talking about.

Hi, good morning, more questions on Grasberg, specifically your guidance for 2017. Just curious what throughput rate that assumes at Grasberg, because obviously it’s been tracking kind of below expectations given the productivity rates that you talked about.

Orest, this is Kathleen. The main contributor to our metal production in 2017 will be the Grasberg open pit, and we are estimating an average mine rate of 140,000 tons a day. In the third quarter of 2016, we averaged about 170,000 tons. We had projected 160,000 going into the fourth quarter, but faced some work stoppages and productivity challenges, which brought our average down to 122,000. We believe that the 140,000 estimate for 2017 is achievable, although it could be impacted by further productivity and work stoppage issues; however, we think we might even exceed this target.

In your guidance reduction for 2017, is that solely due to productivity issues or is the current export ban also affecting it?

It’s principally related to the lower mining rates and to the delayed start-up or ramp-up at deep MLZ that is affecting 2017. We do have some allowance for the concentrate delays, but we’re expecting under this plan to be exporting in February.

I see. And finally on Grasberg, Richard mentioned earlier your relationship with Rio Tinto. Can you please explain how the 40% interest will work with Rio Tinto starting in 2021 and how that relates to their stake in PTFI or at the asset level and how we should understand that?

Okay. They do not have any stake in PTFI. The operation, even though we call it all Freeport, is actually a joint venture between PTFI and Rio Tinto’s Indonesian subsidiary. They own no shares of PTFI. The numbers we present are proportionately consolidated; they exclude Rio Tinto’s interest in current operations, which is very small. When we report reserves and resources that’s net of Rio Tinto’s interest. They have an assignment of our CoW, and so it is really a joint venture and they had a varying level of participation from the time it began when production began in the joint venture in 1998 until 2021. There have been some extensions of that date for force majeure items. After that date, they will have a 40% interest.

When you previously discussed reducing your stake by 20% to the government, did that include a proportional share from Rio Tinto or was it only Freeport's share?

That’s strictly Freeport share. We only negotiate with the government with respect to Freeport’s interest. So, if we were to divest, we would only discuss our interest, not Rio Tinto's.

I see, and is Rio funding its proportionate share of the underground CapEx and the future smelter?

With respect to the CapEx at Grasberg in the underground development. Several years ago, we reached an agreement on how those capital expenditures would be shared. Certain of those costs are deemed replacement capital, shared on the same basis as operating costs. Some costs are considered expansion capital and their share is at 60:40.

Like the deep MLZ.

Certain projects involve common access to deep MLZ and Grasberg, and we have an agreement in place for sharing. The capital figures we present are net of Rio Tinto; their costs are currently small but will increase to 40% once the conversion to a 40% interest takes effect.

Okay. Thank you very much.

Good morning Rich and Kathleen. Thank you very much for the update. Just got a couple of few questions, I don’t want to beat a dead horse, but talking about Grasberg again. Obviously, from that mine rates in Q4, it probably had something to do with labor as well as mine sequencing. Can you just give us some context about how much does the workforce flex down as you guys transition to the block cave?

It's more of a transition than a flex down because actually underground mining is labor-intensive, and over time as the open pit moves towards completion, mine rates drop, and we’re moving much less waste material now than we did in the past. There is less equipment, fewer people, and we sought to transition workers from the open pit to the underground through training where we could. We also will have ongoing activities in the waste management of the waste material taken out of the pit and placed around it. And we have to manage that for long-term reasons. We have ongoing issues where we have a tailings disposal area that requires management to execute our tailing management plan. This is more of a transition.

Second question was about you talking about a surface water tax; what was that about? Can you give some color on that and if that was to be paid? Would that come this year? I realize you haven’t made provisions for it, but what's the background of that? Is that the government sort of playing games?

This is a clear-cut example of why we have to protect our contract of work. Our contract says we’re only subject to taxes that are specified within it. What happened here is the provincial government has sought to impose a water tax on us, which we've resisted because it’s not part of the contract. We didn’t pay it; the provincial governors sued us, and it’s gone through the Tax Court now. A very recent ruling favored the provincial government. It's one of these situations we face in other countries; the amount of the tax, I think was less than $200 million. However, there are penalty provisions that have grown that total to $350 million to $400 million. We have taken steps to appeal this Tax Court decision. We believe it’s wrong; we are considering submitting this matter to arbitration. But that’s what would happen to us if we went from a license to a license. Under a license, you’re subject to prevailing laws and regulations. Governments need funds these days, and operations like ours are attractive targets, so we must resist opening the door to having taxes imposed that’s not part of our contract. We’ve made very significant voluntary contributions to the Papuan community beyond what we’re required to pay under the contract. We began to voluntarily contribute, along with Rio Tinto, 1% of our revenues to a Papuan development fund that has accumulated to $650 million; it's one of the largest community development funding activities globally.

Thanks very much. I've got one more, and it’s not in Indonesia, how about that? Switching to North America; obviously copper prices have rebounded. Is there a point at which you will start looking at your other operations considering the balance sheet has been fixed? Is there capacity in North America you could bring back on in time?

We had an interesting situation with our scale back operations. We went through and evaluated each project and Red Conger has led this effort with Kathleen's oversight. We reviewed every operation when copper prices dropped low to see what would be cash flow positive. We did this in 2008-2009, and while we were planning to curtail production in Miami-Globe area, we're not going to bring that on again. At our Serrida mine in Arizona, it is a low-grade copper deposit with a significant molybdenum component. Because both prices dropped, we planned to cut productions by 50% or more, but once we were into it, the team started finding ways of reducing costs that we didn’t cut back as much as initially intended. We’re not currently enhancing production; we’re monitoring it. In South America, we did cut the mining rate in half at El Abra, and that remains curtailed. We’re looking at future development opportunities, but we don’t see steps to increase production at copper prices expected for 2017.

And is that something that you may want to convey in terms of an announcement later? Do you need to progress with your colleagues or is it something immediate, just in terms of whether sustainability is factoring in overall planning?

We have and I think we've commented on this in previous reports. We have ongoing work that Red and his team are doing looking at each site to see if we can change pit designs to reduce costs and get more production. This isn't an easy exercise but something we are currently pursuing that doesn’t require significant investments but is crucial for high returns.

Thanks very much, guys, good luck for 2017.

I just had a question on the divestment valuation; I've heard conflicting reports out there. I know you were hoping to get clarity on whether you could use an IPO on the Indonesia Stock Exchange and it seemed like maybe that wasn't going to work out. Today, there was a report suggesting that maybe that could be an option. I've seen reports about the government only having to pay for replacement costs and none-entity ore and so forth. How likely could you get most of the acquired divestment done through an IPO?

Well, Evan, we believe an IPO would be an attractive step in our divestment plan as it results in a market-based valuation of the business. The Indonesian Stock Exchange is growing; from discussions with investors, there would be people interested in investing in an asset like Grasberg. We think an IPO would be 5% or slightly more than that; we would work with the bankers and all of that is dependent on market conditions at the time we launch it. Regarding the comments about replacement costs, there were some articles earlier this week claiming we wouldn’t get any credit for underground reserves, which was a wild statement. All of those reports are speculative; we have not interacted with the government to review our valuation. We have always included a requirement for fair market value and would not enter any divestment without achieving that.

Thanks for that color. And maybe just one follow-up with respect to Rio Tinto and them taking their 40% stake. As you look past 2021, how do discussions evolve with respect to the IUPK? If one of the paths would include divestment to 51% for protections, how would Rio fit into that picture?

The way they fit in is there is one CoW; they have an assignment in it and for any changes to that CoW, we need to reach an agreement with Rio Tinto. We talk with them, and any decisions we reach would be within that framework. I want to go back and repeat: divestiture discussions we've had to date and the $16 billion number, all that pertains to PTFI, which is an entity Rio Tinto has no interest in. They’re a joint venture partner just like Sumitomo is at Morenci, and Codelco at El Abra. We manage Grasberg; they have rights with respect to operations, which we work with them and reach sequenced plans together.

Would they have a say in the conversion from a CoW to IUPK? Since most of their rights are with the CoW, would you need their sign-off?

Absolutely.

Thank you very much for taking my question. Richard, could you clarify the production rate at Sierrita? Is it more like half the capacity, 75% or 100%?

It’s about 75%.

Could you tell us among the six possible sulfide mill projects which one or two are more likely to go forward first, and whether we’re talking about things that are?

The first one, John, that we would pursue would be the Lone Star project, which is adjacent to Safford. This is an enormous sulfide resource with an oxide cap, and the Safford operation itself is facing the end of its resource life. While there is a deeper sulfide project there, what we can do as an initial step at Lone Star is mine the oxide cap using the Safford oxide production facilities. That would serve as a stripping of the material for a long-term sulfide project, which would include the sulfides at Safford as well as the sulfide at Lone Star; that would be a major mill investment. So, we're expecting to start mining the Lone Star oxide, which would not require the major capital expenditures a sulfide concentrator would demand.

It’s essentially a stripping project and would utilize the infrastructure currently in place at Safford.

Beyond that, you start getting into trade-offs between Bagdad and El Abra, which would be the next two competing for the first step.

Thank you very much.

Just a quick question on North America. How would a change in corporate tax rates in the U.S. potentially affect your cash taxes paid out of your North American operations? And would a change with a new Republican administration change your decision process regarding any of these potential expansion projects going forward?

Hi Chris, that's a very complicated question, with broader implications for Freeport. Let me just talk about a couple of things related to Freeport. You start out by saying, because of losses from the oil and gas activities we had, we're not paying cash taxes in the United States, and we have a large carry forward that would shelter cash taxes for a significant amount of time. One thing we're watching in this tax reform is whether they are going to do anything with carry forward. That’s a complex question. There is a debate over tax reform; this border adjustment provision they're discussing could have interesting implications. We supply 40% of copper to the U.S. market, which results in taxable income that is currently being sheltered. Under the structured adjustment, if we export the copper, we pay no taxes on it; if we buy a Caterpillar haul truck and use it at Bagdad, Caterpillar would have to pay taxes on that. If we bought it for El Abra, we could deduct it in Chile. The bottom line is that a simple change in the corporate tax rate in the U.S., given our situation with NOLs, wouldn't impact us.

Right, right. Okay, great.

We're also not one of the companies affected by offshore cash that has been taxed. We pay more taxes outside the U.S. than we do in the U.S.; the typical case is reversed. So, we don't have that issue facing Freeport.

Okay, great! Thanks a lot.

First of all, I’d like to start by saying, I agree with some of the comments earlier. It’s unreal to me how the Indonesian government is constantly changing agreements and rules over the years. On that note, I actually have two Indonesia follow-ups for clarification. The first one: does the investment stability agreement that Freeport would propose to the Indonesian government, which my understanding is would be core to converting from the contract of work to this IUPK; would that investment stability agreement include basically the same six articles that are included in your slide deck that are included in the contract of work now, or how would those differ?

We go back to this October 7th letter, this is a slide deck as well. In that letter the government reassured us and warranted or guaranteed that under the new regulations, we would get the same level of assurances on legal and fiscal matters that we had in the contract of work. That’s the starting point and the endpoint from our perspective. So, yes, it would continue all the important provisions related to fiscal and legal certainty that are in the CoW; they would now be in the stability agreement. We believe the government has the authority under the laws to enter into this sort of agreement.

Okay, great! Thanks for clarifying. For my second follow-up on Rio Tinto: One more clarification; if Freeport was required to divest down to that 49% ownership, after Rio Tinto comes in beginning in 2022, does that essentially mean Freeport would go from having rights to essentially 91% of Grasberg’s volumes today down to about 9% by the beginning of 2022, or am I thinking about that the wrong way?

If you look at it, today, as we sit here, PTFI has virtually all the interest through 2021. Rio Tinto has a small piece of that. After 2021, Rio Tinto has 40%, and Freeport has 60%. Freeport owns 90% of PTFI, so it would be 90% of 60%, or 54%. If we divest 20% in Indonesian interest, Freeport would then own 30%; FCX would own 70%. Therefore, FCX would own 70% of 60%, or 42% net interest. If we divest 50%, FCX would own 50%, or 35%.

Okay, all right! That’s helpful. Thank you for that.

Thank you for taking my question. I apologize for repeating myself, but I want to ask about Indonesia. Richard, you mentioned that you are ready to pursue arbitration depending on whether you receive the export license. Can you clarify the timing? For example, if a month from now, in mid-February, you still don’t have the export license, is that when you would initiate arbitration? Also, you indicated that arbitration could have negative repercussions for Indonesia. Could you explain what those might be? Thank you.

I don’t want to establish a strict boundary here. If we reach a situation where the government is arbitrarily refusing to grant us an export license unless we agree to convert to an IUPK without conditions, our only option would be to pursue arbitration. However, I am optimistic that we will receive the export license and will have time to negotiate these matters. The concerning scenario is if the government chooses not to engage in negotiations, leaving us with no options. From the perspective of the Government of Indonesia, there are advertisements that promote foreign investment, indicating their need for international investments to meet their economic objectives. I have paid close attention to President Joko Widodo during his visits to the U.S. and at APIC, and I feel very encouraged by his investment philosophy. Engaging in a public dispute would be detrimental for both Freeport and the government.

Okay, thank you very much for that clarification, I appreciate that, good luck.

Thank you very much Lucas; for those of you still on, thank you for your interest. I appreciate your questions about Act II and you can tell how focused we are on it. It's good to be in a position where we can focus on our company; it was a priority in the year. I was just back there and will stay with trying to resolve problems, targeting next year for Act III with a focus on investing in our resources. Thank you for your interest.