Freeport-McMoRan Inc (FCX) — Q1 2017 Earnings Call Transcript

Thank you. Good morning, everyone, and welcome to the Freeport-McMoRan first quarter 2017 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 call by accessing our website homepage and clicking on the webcast link for the conference call. In addition to analysts and investors, the financial press has 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. 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 2016 Form 10-K and subsequent SEC filings. On the call today are Richard Adkerson, Chief Executive Officer; we also have Red Conger who heads our Americas business and Mark Johnson, who heads our Indonesian business with us today in the room. I'll start by briefly summarizing the financial results and then will turn the call over to Richard, who'll go through our slide presentation. As usual, after our remarks, we'll open up the call for questions. Today, FCX reported net income attributable to common stock of $228 million, or $0.16 per share for the first quarter of 2017. We had a number of special items that are detailed on VI of the press release. They net to an $8 million gain. After adjusting for these net gains, the first quarter 2017 adjusted net income attributable to common stock totaled $220 million, or $0.15 per share. Our earnings before interest, taxes, depreciation, and amortization, or EBITDA, for the first quarter totaled $1.046 billion. We have a reconciliation on the last page of the slide deck, which shows you how we calculate the EBITDA numbers. We sold 809 million pounds of copper during the quarter, 182,000 ounces of gold, and 24 million pounds of molybdenum. Our sales volumes were impacted by regulatory restrictions on PT Freeport Indonesia's concentrate exports, which began in mid-January, and that resulted in the deferral of approximately 190 million pounds of copper and 280,000 ounces of gold. As detailed in our press release, we do have approval to resume exports. We've begun to load ships and that commenced last Friday, April 21. Our first quarter average realized copper price of $2.67 per pound was over 20% above the year-ago period, which averaged $2.18 per pound. Gold prices of $12.29 per ounce approximated the year-ago period. Our consolidated average unit net cash cost for the quarter for our copper mines averaged $1.39 per pound of copper. That was essentially similar to last year's net cash cost of $1.38. We had lower sales volumes quarter-on-quarter and that was partly offset by higher by-product credits. We continue to focus on generating free cash flows. During the quarter, we generated operating cash flows of $792 million. Those exceeded our capital expenditures of $344 million in the quarter. At the end of the first quarter, our consolidated debt totaled $15.4 billion and our consolidated cash totaled $4 billion, equating to $11.4 billion of net debt. We ended the quarter with no borrowings under our $3.5 billion revolving credit facility. At the end of March, we had 1.45 billion common shares outstanding. I'll now like to turn the call over to Richard, who will be referring to the slide materials on our website.

Good morning, everyone. I'll refer you first to slide 3, where we have a picture of the cover of this year's annual report, the title is Driven by Value, which highlights our resolve to deliver value to shareholders. Last year, our annual report was entitled Prove Our Mettle, and in 2016 we did successfully address our excessive debt level going into the year and we're in the homestretch of reaching a target that we set at the beginning of 2016, that was a two-year target to cut our debt in half. We have a clear path to doing that now, and our focus is now generating long-term shareholder value. We strengthened our balance sheet and our liquidity. We executed our operating plans. We successfully completed the major development project at Cerro Verde, which was a significant accomplishment for our company and part of this long-term value proposition that we have before us. We refocused our business to be a leader in the global copper industry. We set out with the intent of reducing our debt but leaving ourselves a set of assets that would provide the basis for future profitability and profitable growth. The asset valuations that we were able to achieve in our property sales in a very tough market were attractive. And recent market developments reinforce our optimism about the long-term fundamentals for the copper markets and reinforce our focus on what we're doing. So, going into this year, we're focused on Indonesia. I'll be talking about that. That's clearly a challenge for us, has been for some time, and I want to make sure I address all of your questions about it and let you know what we're doing to face that challenge. With respect to copper markets, page 5, beginning in the second half of 2016, we saw copper prices rebound to higher levels than many in the industry and observers of the industry expected. That reflected improved market fundamentals, driven by Chinese demand, improvement in North America and Europe and supply-side issues returned to focus. We had a period of time before the current period where supply-side disruptions had been less than the historical experiences and we had several situations involving important mines, including our Grasberg mine, but also Escondida, the world's largest copper mine, which faced a lengthy labor strike, and these disruptions are a feature of our business and will be issues that the industry will face going forward. Underlying that is a real absence now of major new projects for the industry. After the recovery from the 2008, 2009 recession, several projects were initiated, most of which have now been completed. People in the industry, including ourselves, have deferred spending on new projects because of uncertainties in the global marketplace. Adding all of that together, you end up seeing a near-term situation where the market is balanced at best, and over time, without new projects coming on stream, and the falling grades of existing producing mines, a significant shortage for new copper is required. Wood Mackenzie estimated that 5 million tons of new projects will be required in the near-term to medium-term future at least. These new projects require copper prices greater than $3 per pound to make them economic. I'll just note that the top 10 producing mines today only produce 5 million tons a year. So that puts parameters around the extent of this shortfall. Projects require 6, 7 to 10-year lead times. The new greenfield projects are particularly scarce, so we have a looming significant deficit in this business, and the question is the timing for that deficit, which will be dependent on events in China and the global marketplace. Now, where we are situated is that our company has significant strengths in facing a market that's going to require new copper. We'll discuss our business in two basic segments now. One is our mining operations and resources in the Americas, in North and South America, and we'll address Indonesia separately. But looking at the Americas, we have a set of mines that have significant current production and long-term growth with long-term established proved and probable reserves and incremental resources of real significance. We have a lot of flexibility in the way we manage our operations and also in the way that we approach future development. All of these mines are operated by our company and that gives us significant synergies in managing the business and developing the resources. The investment opportunities that we see are competitive in looking at the marketplace. We have a flexible and skilled workforce. In the U.S., we have no unions. We have access to abundant sources of energy. Again, energy costs in the U.S. have dropped dramatically in recent years with shale oil and gas development. We can leverage our existing infrastructure. These future development projects will have relatively low risk associated with them. So we get strong cash flow generators. In the U.S., we have a very large $12 billion approximately net operating loss to shelter us from future income taxes. And so on this chart on page 6, you can see the significant reserves that we have available to us and also the significant cash flow generation from our properties with very low capital requirements because our assets today are fully developed. These opportunities that we have before us are significant sulfide projects shown on slide 7. We are doing planning activities. We won't commit capital to these projects until we have clarity on the global economy and direction, but we're preparing ourselves to take steps. They're listed in alphabetical order here. The first project that we will start on is the Lone Star resource that's adjacent to our existing producing Safford mine. We're planning a project to mine an oxide cover over a very significant sulfide resource at Lone Star. That will allow us to extend the production facilities at Safford while effectively stripping to expose the sulfide opportunity which would require significantly more capital. All these projects are ones that I believe will be required by the industry over time. They're in our inventory, and how we approach them will depend on market conditions. The next major project is likely to be either Bagdad or El Abra. Bagdad has the benefits of the competitive factors about the U.S. I mentioned earlier. El Abra has turned out to be a significant resource, and we are addressing it with our partner, CODELCO. The Chino opportunity is one we're developing and we're getting more information on as a very old mine in New Mexico. Morenci and Sierrita are long-term projects for us. So, we have internal development projects for a long-term horizon in the future. Now, turning to our important asset in Indonesia, the Grasberg mine in Papua, it's been a difficult year for us. In January, the Government of Indonesia issued new mining regulations that have caused us significant concerns. The impact of these regulations would require us to give up our contract work in return for the right to export. The government, through the 2009 mining law and these new regulations, says that you could only export if you have a license, a special license called an IUPK. The regulations stated to get the IUPK, you had to give up the contract. We weren't willing to do that and advised the government immediately after those regulations were issued that we would not comply and entered into a series of discussions trying to find a way to open up negotiations with the government to resolve this dispute. By mid-February, we had reached an impasse, and at that point, we began actions to adjust our operations and capital spending to reflect a business that could only shift domestically. On February 17, we issued a formal notification under the dispute resolution mechanisms of our contract of a series of actions the government has taken to breach our Contract of Work. That triggered a 120-day notice period, which extends to mid-June. After June, we and the government would have the right to submit this dispute to an arbitration process specified by the contract. We continued discussions with the government and by the end of March, the government, through its Energy and Mineral Resources Ministry, amended certain of the regulations issued in January to enable us to retain our COW to return to exports and to receive a temporary IUPK that would provide, through October 10, an ability to have negotiations, continued export and leave our COW in place. Last week, we signed a memorandum of understanding confirming all of this and exports are now, we're now loading ships to return to exports and we will begin negotiations with the government immediately. Each of us, the government and our company, have expressed a commitment to reaching agreement on a long-term solution. Those discussions will involve some significant issues. They will involve our objective of getting assurance of our ability to operate beyond 2021 to 2041 as provided by our contract on terms that provide stability and assurance on legal matters and fiscal matters. The government wants to discuss divestment. Their regulations in January require a 51% divestment. Our contract has no divestment obligations. We have communicated that any divestment would have to be at fair market value. We've previously indicated that we would agree to divesting from the current 9.36% up to 30%, and so we will have discussions with the government on the divestment percentage, the process, and valuation. In addition, the government regulations require in-country processing of copper concentrates. Our company, with our partners, developed Indonesia's only copper smelter in the mid-1990s, the PT Smelting facility at Gresik, a large world-class copper smelter, which currently processes about 40% of our copper concentrate production, while the remainder is exported, and we will discuss with the government developing new smelter facilities. All these issues will be addressed as a package, and we will approach this in good faith. I'm convinced the government will too, and the objective will be to find a mutual agreement that both parties can accept. We call it a win-win objective, and that's our goal moving forward. In the first quarter, what we did was begin a reduction in our workforce. We had roughly 32,000 workers, including employees and contractors, involved in operations, logistics support, and capital projects. To date, we have reduced that workforce by about 10%. We've implemented efficiency programs for costs and capital spending. We slowed investments in the Grasberg underground by about a third and are currently spending about $40 million a month on the Grasberg Block Cave. We're prepared to suspend that if necessary. Doing that has some long-term negative consequences for all stakeholders, as it would delay the resource remaining there but would extend the ramp-up period. This delay involves cost and economic consequences for everyone. It would affect the workers, as total suspension would lead to about 5,000 workers being out of work, and it impacts local Papuan communities, as in the Mimika Regency, we represent over 90% of the GNP. Additionally, it affects numerous Indonesian suppliers, not only in Papua but throughout the country. The government has lost almost $500 million in taxes and royalties for the three months the exports were suspended during the first quarter of 2017. While all this transpired, we managed to generate positive cash flow at PT-FI during the first quarter. We have the ability to continue this, even if exporting is suspended, but it's in everyone's best interest to reach a long-term solution. We are approaching this with an objective and confidence that we will achieve it, but it will involve complicated discussions starting now. Looking at the Grasberg Block Cave, this is a remarkable opportunity for us. The Grasberg district represents one of the great discoveries and developments in mining history. Focusing on the extension of the resource from the open pit to its depth in our massive block-cave operations reveals a tremendous resource. It's got 964 million tons of over 1% copper and with 0.78 grams per ton of gold. The reserves and copper metal that we produce are about 50% larger than those out of Morenci, in addition to this enormous gold component. To date, we've spent about $3 billion on developing the Grasberg Block Cave and the common infrastructure to allow its production. We're just over halfway through the initial development for that resource. This transformation is state-of-the-art underground development and is a source of pride not only for our company but for our workforce and for the country of Indonesia. High-grade, low-cost resources represent an important part of our future, and we are working to find a way to make it so that all parties benefit from it, including the government. Under our contract, the Indonesian government has a very attractive proposition from operations. Our company just celebrated 50 years of business in Indonesia. Since 1992, when we signed our current contract, we've contributed $60 billion to the national GDP. We are by far the largest private employer in Papua and one of the largest taxpayers in all of Indonesia. We have contributed voluntarily—this is not an obligation—1% of our revenues to the local community through our Freeport Partnership Fund for Community Development. Over the past 11 years, this totals nearly $700 million of voluntary contributions to the local community. If we examine the contract, the government has received a majority of the cash benefits from operations, more than any other government in the world receives from mining operations. Over the last ten years, the government obtained 62% of the direct financial benefits of this business, not including the multiplier indirect effects on the Indonesian economy. When we consider the existing contract, future taxes, royalties, and dividends through 2041 are expected to exceed $40 billion. This is a substantial asset, not just for our company but for the government, and particularly important for the province of Papua. Looking towards our outlook, we've adjusted our 2017 projections. We had to account for the suspension of exports in Indonesia, which had an impact. In Peru at Cerro Verde, we've faced extraordinary weather situations. This is one of the driest locations globally, and they have experienced rainfall that has been three, four, or five times the annual average, causing substantial damage, injuries, and fatalities to infrastructure throughout the country, along with a strike that did not materially impact first-quarter production but did affect our mining rate and will influence production for the year. We've revised our outlook for 2017 from 4.1 billion to 3.9 billion pounds. Gold estimates reflect the situation in Indonesia at 1.9 million ounces. Molybdenum at 93 million pounds is roughly consistent with previous guidance. Our expected site production and delivery cost at $155 is up slightly, while our after by-product net unit cost at $1.08 was previously $1.06. Provided we can operate normally throughout the year in Indonesia at $2.50 copper, we anticipate $4 billion of operating cash flows for the year, with each $0.10 change representing a delta of $275 million. Our capital expenditures have been reduced from $1.8 billion to $1.6 billion. This includes $700 million on sustaining capital in the Americas and some in Indonesia, but $900 million on major projects, which includes $700 million in Indonesia, $200 million less than our prior guidance. You can see our outlook on slide 13 for 2016, 2017, and 2018, as well as our gold and molybdenum outlook. On slide 14, we present our EBITDA, averaging $5.6 billion to $7.4 billion over 2017 and 2018 for copper prices ranging from $2.50 to $3, and operating cash flows would vary from $3.4 billion to $4.7 billion over that price range. Our sensitivities for copper, molybdenum, gold, and currencies are shown on page 15 for your modeling. Capital expenditures on page 16 include those incurred in 2016, which comprised $1.2 billion of oil and gas costs and then set forward spending on continued Grasberg underground development and ongoing positive market conditions. The key issue is assessing the Grasberg blockage, which entirely depends on the progress we make in discussions with Indonesia. If we are successful, as we aim to be, then we will continue that project, as it is crucial for all stakeholders. If not, we have contingency plans to defer that project, which would significantly impact investment, employment, and future revenues. Page 17 reveals progress related to our balance sheet that I mentioned in my initial comments. Our net debt going into 2016 was over $20 billion. By the start of 2017, it reduced to $12 billion, and as we look forward to the end of the year, it is projected to fall below $10 billion depending on prices. Our goal is to achieve further debt reduction, improving our balance sheet for future market conditions and allowing us to consider investments in growth projects at that time, reinforcing our position of returning cash to shareholders through dividends and potentially stock buybacks. Our near-term debt situation is manageable. We reduced gross debt by $500 million during the year and have over $4 billion of cash. Our maturity schedule is favorable, providing access to capital. We are persistently seeking ways to improve our long-term liquidity situation by managing debt schedules. We are very pleased with our progress, recognizing we have much work ahead, and we will prove our mettle again this year by addressing the challenges we face. Throughout the last three years, we've maintained an industry-leading copper position, and I couldn't be more proud of our team for their operations and business development. As I have mentioned numerous times, we can undertake any copper project globally. We are financially stronger today following last year’s efforts, and we remain committed to maintaining financial strength and flexibility moving forward. With that, Regina, let’s open the line for questions.

Hi, Richard and Kathleen. A couple of questions from my side. Just in terms of the guidance for this year, is it right to assume that in 2Q you basically would sell most of the concentrate that was sitting at port plus what you produced in the quarter? Is that fair for 2Q?

Well, in general, that's true. There is a ramp-up that we have to go through. We also need to coordinate shipments with our customers who had to arrange alternative supply while we were shut down from exports. However, we do have a series of ships, one having loading completed as we speak. We had close to 100,000 tons of copper concentrate at our port site and storage facilities. These ships typically handle 20,000 to 25,000 tons. So we'll have a series of ships to reduce that inventory. We're beginning to ramp up and anticipate coordinating plans to ramp up our mine rate and return our mill to full production. There are, however, some labor issues we're facing in Indonesia at the job site. The union leader that represents PT-FI’s employees, comprising about 12,000 of our 30-plus thousand workforce, is undergoing a trial for corruption allegations in Timika, leading to demonstrations by workers in support of their leader. Recently, an incident with the police occurred, with some rubber bullets fired and individuals injured in the last three days. This has resulted in absenteeism at our workplace. Those labor concerns along with the union is also worried about our plans to downsize, which we share with them for the long-term impact. We are engaged with the union to encourage their return to work while receiving support from the government and the local police. During this quarter, the social and security situations at the job site, which was a concern during the suspension of operations, have been relatively peaceful; however, we currently face this unusual situation with the demonstrations and absenteeism. All of our projections rely on getting that resolved and getting people back to work.

Thanks, Richard. And just in terms of the longer-term profile, it looks like roughly you've delayed some of 2017 into 2018. But then looking at further out, the 2021, 2022 numbers look a bit different, particularly 2021. Is that just assumptions around where the underground is at or what’s moved those medium to longer-term numbers?

It's really a slowdown of the Grasberg Block Cave compared to our prior assumption. And these assumptions rely on a continuous slowdown of the Grasberg Block Cave throughout 2017. As Richard discussed earlier, the timing of that will be contingent on the progress we make with the government regarding our long-term agreement.

So Chris, our long-term plan for several years had been to finish mining the pit in early 2016. Now, with the issues we faced over the last five years regarding the government and strikes, that timeline has extended to 2018. The ramp-up of the Grasberg Block Cave is a six-year plus event. The longer this is delayed, the longer the ramp-up occurs, so it's crucial for us to reach an agreement with the government to expedite completion of mining resources in the pit. While we haven’t lost any resources throughout these deferrals, accelerating the Grasberg Block Cave development will economically benefit us all.

Okay. That makes sense. And just the last one on the CapEx, just to be clear. The latest number that I had seen for the smelter if you were to go down that route is $2.5 billion. Is that correct? Also, in your guidance, is there any CapEx included in future years for that at this stage until you get resolution on the ownership agreement?

That's correct. No CapEx is included. Our plans are to finance this on a project basis, and there would be other partners involved. We would pursue project-type financing for it, which requires us to have a contract for PT-FI's operations, as that is the source of the profitability for the smelter. The $2.5 billion figure includes working capital requirements and is estimated to be between $2.5 billion and $3 billion, depending on that. We have conducted preliminary engineering work with the Japanese construction firm that designed our initial smelter and have performed site studies and analysis, but we haven't entered into contracts for the timing of spending new capital, which depends on reaching a long-term agreement with the government. The government acknowledged in the MoU we signed in 2014 that financial incentives would be necessary due to poor investment economics.

Okay. Thanks, Richard and Kathleen. I'll leave it there. Thanks.

Hi. Good morning. Richard, just curious on your statement earlier. What gives you any confidence that the Indonesians are willing to negotiate beyond the initial terms that were set out under the new mining laws around Grasberg?

My direct discussions with senior government officials give me confidence. I have been in continual conversation with them, and they’ve made public statements. Indonesia is a democracy with freedom of the press, and for those who read the media there, you know there are plenty of opinions expressed, some informed, some less so, but in terms of my direct discussions with government officials, we've committed to approaching this in a fair manner to reach a resolution. In fact, we are beginning those discussions immediately, and I plan to spend considerable time in Jakarta on these engagements. Last week, Vice President Michael Pence visited Jakarta and discussed our situation with the President, which I have been told was a positive conversation according to reports I've received. We have had tremendous support from U.S. government agencies in bilateral relationships.

And does that mean you are holding off pursuing international arbitration to protect the COW?

While I remain optimistic, we are not overlooking the challenges. We have significant disagreements on some of the issues. We have invoked the 120-day notice required by the contract, which continues to run. After mid-June, either party has the right to commence arbitration proceedings. Our hope is to avoid that pathway, but it remains a fallback as we evaluate the discussions.

I see. And in your disclosure, you mentioned a potential significant reduction in capital spending development at Grasberg if there's no resolution. Would we see that impact as early as 2018, or when...

You could potentially see that in 2017. The next major step we would have would be to suspend the Grasberg Block Cave spending, which is currently $40 million a month and involves around 5,000 people who are contractors.

Orest, we've taken the number down by about 25% for the Grasberg Block Cave, which is the reduced number Richard discussed, and we have the option to lower that to zero. While we prefer not to take that path due to the adverse impact on production schedule and NPVs, we are evaluating the progress with the government weekly and monthly for our contingency plans.

I see. Just one final question if I may. What percentage of the 2018 and 2019 copper production can be attributed to the Block Cave here?

Very little during that timeframe.

So it's primarily later in 2021 and 2022?

That's correct. The ramp-up period is roughly six years plus from when we begin. We will still be mining the open pit into 2018. We cannot start that ramp-up until mining is completed in the pit due to subsidence issues; thus, it won’t significantly affect production during the timeframe you referenced. Capital will have to adjust if we operate with lower cash flows.

Thank you very much.

Thank you.

Hi. Thanks. I have a question that continues along the same lines in terms of the longer-term mine plan at PT-FI. I'm looking at the slide on page 26. For 2022, it shows no change versus 2021, obviously down a little bit – well, anyway 2020, 2021 down versus previous. But my question is: Does that include, I don't think it does, Rio Tinto’s interest?

No.

This is all net to PT-FI.

While we operate broadly with Indonesia under the name PT-FI, the operation is a joint venture between Freeport subsidiary PT-FI and a Rio Tinto subsidiary in Indonesia. All financial numbers in our presentation reflect Freeport's subsidiary numbers, and currently, that subsidiary is owned 9.36% by the government with the rest owned by FCX.

Okay. I’m still trying to figure out the economics. Can you provide a bit more clarity on the economics associated with continuing the underground capital development at Grasberg, given that by the time it really ramps up, the ownership switches over to Rio Tinto? Is there any insight into the upfront CapEx?

They are very attractive.

Even with the reduced...

The rate of return—when you say it shifts over—I mean, we still own 60% of this business, and I mention just how large the resource is. While I haven’t reviewed every economic analysis for future development in our industry, my sense is this is perhaps the most attractive rate of return investment in the mining sector today.

Okay. Understood. Thanks.

And I understand that all of this has been a moving target and change. What we plan to do once we complete our long-term agreement with the government is hold a face-to-face session with analysts and investors to walk them through this in detail to ensure there is a clear understanding of the business value. We haven’t done that yet due to our focus on resolving the issue with the government, understanding that all values depend on that resolution.

Okay. I appreciate it. Thanks.

Thanks for your questions, Dave.

Hi. Just a quick question along those lines of the premium with Rio Tinto. Under the current contract, how much would they have to spend on this underground capital development in Grasberg to maintain their 40% stake, and have they committed to that? I’ve read in the press that they were questioning their commitment to Grasberg at this point?

The capital expenditures are split based on replacement versus expansion capital. The Grasberg Block Cave is classified as replacement capital, so Rio Tinto’s share of those costs is relatively small. They pay the same percentage of that as determined by their share of revenues and operating costs, which have been relatively minor to date. The Deep MLZ project is a growth project, so they pay 40% of that. We previously entered into an agreement that the common infrastructure used to develop both those resources, along with the Kucing Liar resource, is shared 50:50. They make capital commitments consistently. The bulk of capital is funded by Freeport under the current circumstances. We maintain a solid working relationship with Rio Tinto and continue to engage them, ensuring transparent communication, as they have the right to approve any contractual changes adversely impacting them.

Okay. So, over the next—sorry.

We manage the development of these ore bodies based on the aggregate 100% economics. We decide on what’s best for the overall operation and refrain from assessing who funds a small or large percentage and what each gets in return. We manage for the total NPV of the revenue combined, which has proven beneficial over time.

The agreement also includes a do-right provision, and over the years, both of us have approached it in the right way. While this is a complicated contract, we value the relationship and take our responsibility to represent their interests seriously.

Okay. Great. Of the $1 billion that you expect to spend on underground development over the next few years, how much of that per year do you think would be Rio Tinto? I understand it depends on if you are in the DMLZ, but do you have a sense of how much they have to spend?

It will vary to some extent, but it’s roughly $200 million a year.

Okay. Got it. And moving to Safford, you have about a year left in your reserve life at Safford now under current reserves, and the Lone Star would extend the life of the Safford mine. Would it be able to produce at similar rates at approximately 200 million pounds of copper a year? What kind of IRR are you expecting from the project, and what can we infer, in terms of your required IRR for future expansion projects?

Red can add to this, but the Safford production goes out to 2021. It will decline over that period, but we are essentially bringing in ore from the adjacent Lone Star mine and utilizing the same infrastructure and tank house at Safford. Most of the cost is stripping, which makes it an attractive project due to low capital intensity. We expect to receive permits mid-year to start development and undertake early mining.

Red Conger runs our operations in the Americas. Red?

Yeah, Chris, we are currently producing around 60 million pounds per year, and as Kathleen said, that will extend for another eight years. This gives us ample time to get the stripping work done and maintain operational continuity. So it’s an attractive project, and we expect to have the necessary permits mid-year to initiate early mining.

Okay. And that project, to your question about IRR, is promising at that level, but what we’re really doing is exposing the longer-term resource at Lone Star, which is enormous. This will generate cash flows and a return on investment, opening the door to a substantial future sulfide resource that we can explore for further investment opportunities. So, it's part of a long-term strategy for the district. Would we expect to see feasibility studies on any of the development projects you mentioned, like Bagdad, Chino, or El Abra, so we could get parameters around the economics based on salaries and other factors as you complete these studies?

Yes. We’re evaluating our entire portfolio now. We’ve got a preliminary feasibility study on El Abra that will be updated shortly. We’re reviewing the rest of the portfolio in the Americas to define each project's specifications. We’re also challenging our team to discover ways to minimize capital costs. While we have previously focused on keeping operating expenses low, we are pursuing methods to develop projects on a lower capital cost basis, given that many of them require copper prices of $3 or higher to be viable. This isn't applicable to the Lone Star oxides, but for some larger projects, the high capital costs of mills necessitate higher copper prices. So, these projects are for the long-term, Chris, and we’re not spending much currently but are preparing for future investments.

Okay. Great. Thanks a lot.

And I don't want to extend this too long, but this has been a strong point of our business. We’ve historically been leaders in developing efficient mines, such as during the Phelps Dodge days, particularly at Candelaria. PT-FI has been a leader in developing large-scale SAG mills, and high-pressure grinding rolls, applying our experience to our recent expansion project in Morenci, where we initiated a new mill design, as well as the recent expansion at Cerro Verde, employing new mill technology. We aim to build on that success, working with our suppliers and contractors, as Kathleen discussed, to unlock the potential for improved economic and energy efficiency.

Okay. Great. Thanks.

Hi. Good morning, Richard and Kathleen. My first question is just returning to Indonesia. Is your sense at the moment that you’re negotiating against a single party there or are there still a lot of divergent viewpoints on the table on the Indonesian side?

I’d say yes to both perspectives. The Minister of Energy and Mines is the lead in this matter and has been authorized by the President to represent the government, engaging with us on negotiations. He has a solid business background, allowing for straightforward candid discussions. The Minister of Finance is also deeply involved, but Indonesia has differing views present, and our challenge will be to find an agreement that satisfies the Minister and the President, and remains beneficial for us.

Okay, great. Thanks. Just a following question. You mentioned that you've entered into an MoU recently in Indonesia. Does that MoU have a set term, or is it indefinite?

Yes, it’s for six months. The temporary IUPK lasts until October, so we need to finalize a long-term resolution during that period.

And at the end of that period, would your contract award still be valid?

Yes, the MoU clarifies this. If we do not achieve an agreement, we will revert to regulatory restrictions impacting our export rights; however, the contract remains in place as a foundation for our business.

Sorry, just one final question, if I may. Are you— I think you answered this earlier, but just to clarify, are you still allowed to pursue arbitration according to the terms of the MoU, or does it restrict your rights?

The MoU does not address arbitration, but the notice period has been invoked, which will run through the end of June. Under the terms of the still-in-force contract, either party can advance to arbitration following mid-June.

Hi, Richard, Kathleen. Thanks for the update. More short-term questions on Indonesia in our models. What do you foresee going back to on a 1,000 tons per day basis the operation in the next sort of— in 2Q and maybe 3Q given the dip this quarter?

Are you talking about mill rate?

Yes, this is Mark Johnson. Our expectation is that pending resolution of issues with our workforce, we would be nearing 200,000 tons a day once again, producing upwards of 10,000 tons of copper, but averaging around 7,500 tons for the quarter.

And then, is that 200,000 in 2Q or more throughout 3Q and 4Q?

It's primarily for 2Q and then for the remainder of the year. Work is largely dependent on the hardness of the material from the mines, but we expect more or less normal operations as previously seen. The mill has performed over 300,000 tons a day at a peak, normally falling within 200,000 to 220,000 depending on material types.

And we manage our business based on metal output rather than mill rates alone, and the rates may vary depending on the material we are processing. Presently we are handling high-grade material, so we need to optimize our operations.

Although our average will be lower, less than 200,000 in the second quarter as we are currently ramping up since resuming operations on April 21.

So, you would expect to be at that rate by the end of the second quarter?

Correct.

Well, you had strong recoveries last quarter in both copper and gold. Do you expect that to continue going forward?

That will depend on the quality of the ore. We achieved over 92% recovery on copper, which is strongly driven by the high-grade portion of the Grasberg that we’ll be mining consistently to the end of the pit.

Okay, so that would persist through 2018. That’s a positive, good. Okay. And then, this is a bit of an unusual question, Richard, so bear with me on this. But for modeling, your price realized for molybdenum of $8.70 was much higher than we had expected. Are we missing something there when looking at spot prices?

What you must consider is that we sell a significant portion of our molybdenum output in chemical form rather than looking solely at the quoted metal prices. The chemical product yields a higher overall value. We made investments over many years that enable us to do this and have entered into supply agreements with refiners that utilize this chemical-grade molybdenum, providing superior realizations compared to metallic molybdenum.

Alright. Thanks very much for your insights. Bye.

Thank you very much. Thank you, Kathleen and Richard. I’ll keep it brief. Regarding if you choose to suspend block-cave investment, how quickly could you reverse that? If you get momentum that leads to demobilizing that group, would that involve a lengthy process of remobilization?

That’s an important point, and this has led us to be cautious about shutting it down. This is a skilled workforce involved in block-cave development, thus if we disperse that team, a significant time frame would be needed to remobilize them and get the workforce back to work. This is a multi-month process, rather than just a few weeks.

Understood. I appreciate the clarity. Another follow-up for you, Richard: As you consider 2017 in the market context and facing labor issues yourselves, do you foresee increased negotiation challenges among peers and competitors as labor becomes more emboldened?

When attending recent discussions within the industry, I noted a correlation between copper prices and labor issues. Consequently, as copper prices rise, the labor force seeks improved terms, creating a tendency for labor issues to be contagious. This is evident with Escondida and our situation as well as Southern Copper, where unions are vocal about their conditions everywhere.

Understood. Thank you for sharing your thoughts, Richard.

Thank you for taking my question. It appears that mine output declined at each of the copper mines, and I tried to adjust for this sale of 13% at Morenci and 56% of Tenke, estimating a continuing output drop of around 11% or 89 million pounds. Could you speak to the rebound in tons and grade at the mines, other than Grasberg, to meet your 3.9 billion pound forecast for the year?

Indeed, there was some impact at Cerro Verde due to inclement weather and the strike situation. The main impact will be longer term, as we managed to run our mill during the quarter but experienced cuts in our mining rate. In March, our rate was about half what it had been in the first two months. We have since returned to those levels, but this will affect production moving forward. However, regarding the Americas, John, we don't show a significant change, as the first quarter output appears consistent with expectations for the year due to Indonesia being the primary differentiating factor. Overall, we anticipate steady results.

Thank you.

Hi, Richard and Kathleen. Thank you for taking my questions. I was curious if the Indonesian government has backed off the divestment requirement at replacement costs, or if there have been any developments?

That was one of the subjects covered in the January regulations, which remains in place and will be a core discussion point as negotiations unfold.

Got it. Two other quick ones—can you provide some insight into Cerro Verde's production profile over the next three years, along with the stability you anticipate there?

We expect to produce just below 1.1 billion pounds this year, maintaining a stable profile for the subsequent years.

Great. Lastly, though it’s a small component now, any guidance you can provide regarding oil and gas production concerning revenue or costs?

In oil and gas, our production is now minimal, primarily based out of the Gulf of Mexico. We also have some onshore production in the Gulf Coast region and offshore California. But overall, from an EBITDA standpoint, it represents a very small contribution and was slightly negative in the first quarter.

Great. Thank you.

Additionally, our more pressing concern revolves around managing abandonment costs that have arisen from the business. This aspect is receiving significant focus and we are making progress in unwinding some of these commitments as it relates to certain facilities and office spaces.

Hey. Good morning, Richard and Kathleen.

Good morning.

So, just one more on Grasberg. One of the key sticking points seems to be this 51% number. I know in the past you've been somewhat resistant to giving up majority ownership of PT-FI. Would you be more open to that than in the past, or is that an issue you plan to push back harder on?

Evan, the worst thing I could do is get out ahead of the negotiations in responding to that question. The divestment issue is certainly on the table. The discussions will cover a range of aspects including the percentage of divestment, the divestment processes, valuation, and related factors about operatorship and governance of PT-FI. My overarching goal is to protect the asset’s value for our shareholders while also seeking to reduce the uncertainty hanging over this situation, providing long-term stability necessary for investment. We have operated this business productively for many years and the government has cooperated by making provisions for production extending beyond 2021, so we need clarity in the situation.

Thank you for that. Maybe a more straightforward question: In the agreement with China Moly, there was a provision for later negotiation regarding selling Freeport Cobalt's Kokkola operation. Has that happened, or is it still underway?

That negotiation has not yet taken place, and considering the recent dramatic changes in the cobalt market since finalizing our deal with China Moly, that matter is currently under discussion. Let’s just say it hasn’t happened yet, but discussions are ongoing.

Does this imply the potential for retaining that operation, or have you already committed to selling it?

We did not commit to sell it; we agreed to grant them a negotiation opportunity for it, and no firm agreement has been established on either party's part to fulfill that transaction.

Got it. Thanks for that. Thank you, guys.

Thank you. We appreciate you all joining us today.