Freeport-McMoRan Inc (FCX) — Q2 2017 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to the Freeport-McMoRan Second 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 conference call today is being broadcast live on the Internet and anyone may listen to the call by accessing our website homepage and clicking on the webcast link for the 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 will include forward-looking statements and actual results may differ materially. We'd like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in our Form 10-K and subsequent SEC filings. On the call today are Richard Adkerson, Chief Executive Officer of FCX; Red Conger, President of our Americas business; Mark Johnson, President of our Indonesian Operations; and Mike Kendrick, President of Climax Molybdenum. I'll start by briefly summarizing our financial results and then will turn the call over to Richard, who'll review our performance and outlook using the prepared slide presentation. As usual, after our formal remarks, we'll open up the call for questions. Today, FCX reported net income attributable to common stock of $268 million, or $0.18 per share for the second quarter of 2017. The results from the second quarter include net gains of $27 million, or $0.01 a share associated with a number of special items which are detailed on VIII of our press release. After adjusting for these net gains, second quarter adjusted net income attributable to common stock totaled $241 million, or $0.17 a share. Our EBITDA or adjusted earnings before interest, taxes and depreciation for second quarter totaled $1.2 billion. We've got a reconciliation of our EBITDA calculation on the last page of our slide deck. Our sales for the second quarter totaled 942 million pounds of copper, 432,000 ounces of gold, and 25 million pounds of molybdenum. Our sales volume for copper was about 3% below our April 2017 estimates. That primarily reflected the impact of the worker absenteeism on our mining and milling rates in Indonesia. The second quarter average realized copper price was $2.65 a pound. That was over 20% above the year-ago quarter average of $2.19 per pound, and gold prices averaged $1,243 for the quarter. Our average unit net cash cost on a consolidated basis averaged $1.20 per pound of copper in the second quarter, that was lower than the unit net cash cost of $1.33 per pound in the second quarter of 2016 and it was also in line with our guidance. Operating cash flows during the quarter totaled $1 billion; those exceeded our capital expenditures of $362 million in the quarter. Year-to-date, we've generated operating cash flows of $1.8 billion, which have exceeded our year-to-date capital spending of $700 million. At June 30, our consolidated debt totaled $15.4 billion and we ended the quarter with $4.7 billion in consolidated cash. Net debt is $1.1 billion lower than the start of the year and notably $9.5 billion less than the start of 2016. We had no borrowings under our revolving credit facility and approximately $3.5 billion available at the end of June. At June 30, FCX had 1.45 billion common shares outstanding. I'd now like to turn the call over to Richard, who will be using the slide presentation materials on our website.

Good morning, everyone. Want to give you an update of where our company stands right now. I got to tell you, we've had a high degree of optimism about our business as we're here in the midst of 2017. As we do before every earnings call, we had our global operating team together last week. Red Conger is here, Mike Kendrick is here, and Mark Johnson is on the call. And our team is really focused, continuing to execute our plans, looking forward to the future and analyzing where our company is going to ultimately grow from this great set of assets that we have. But we've all focused on cost management and you can see the results of that, good achievement with that. We've got ongoing capital discipline. We've got a portfolio of growth projects that we're doing work to prepare ourselves for future investments, but we're not committing to projects now, which is common across the copper industry worldwide. There's still enough of an uncertainty in the global economy and that's keeping people from investing heavily in growth projects, but we've got a good set of them that we're going to be prepared to invest in the future and we're convinced that the world is going to need that copper. We have some issues to continue to talk about in Indonesia, but we've made a lot of progress there. And we do have a degree of optimism about our work with the government, about operationally how we're dealing with our labor issues that have been issues for us during the first half of the year and making progress. Kathleen pointed out that we have reduced our debt since we set our targets in early 2016. At that time, we said we were going to try to reduce debt by $5 billion to $10 billion over the two-year period ending year-end 2017. To date, it's been $9.5 billion. As Kathleen said, to date, we've generated significantly higher cash flow than our capital spending, well over $1 billion. So, we've already achieved our target. We're going to continue to generate cash to reduce debt. And now that our balance sheet issues, which dominated our activities last year, are resolved, we are focusing on operations and looking at safety issues, which have always been at the top of our list of things, being more efficient. The primary strategic issue we face is resolving the long-term rights in Indonesia and I'll be talking about that. But we're also focused on building long-term values in our portfolio of copper assets and we are optimistic about the future of copper as a commodity and as a future price. Very well pleased that after going through the efforts to reduce debt, we've retained a set of assets that are really attractive in terms of building our company around. We do have now $8.2 billion in liquidity, looking at our cash and our availability on our revolver. So, we continue to generate cash, allowing us to improve our balance sheet. Today is a good day in the copper market. I can't tell you how many days we've had earnings calls where we wake up in the morning and say, 'Oh, we wish we had a higher copper price,' but today is a good day. We're not surprised by this at all. The market fundamentals remain solid. What we're seeing is, in the face of a stronger U.S. dollar, Chinese demand is better than most expected during the first half of 2017 and now. As I was coming up in the copper business, we always talked about the summer doldrums. Historically, as you went into August in the copper industry, you typically saw demand fall off, inventory rise. We're in the summer doldrums. It's typically not a great time for demand in China. It's encouraging to see European demand improving, North America growing at a low rate. But the fundamental support for it comes from the supply side issues that are coming clearly into focus. We're seeing a return to more typical disruptions. We had a period of time where disruptions were lower than historical amounts. We're seeing now issues related to labor, technical issues, issues with government and so forth that are supportive from a supply standpoint. There remains a scarcity of major new projects available to the industry. The projects that are available long-term are lower quality than historically were available. Copper is very well placed among commodities because of the role of copper in the global economy, the supply side, and the emerging uses of copper that are developing in terms of alternative energy and the mechanization of the economy, including electric vehicles. So, copper has a solid fundamental outlook. Our company is well-positioned with the assets that we have. Wood Mackenzie shows that even with the modest demand growth of 1% globally per year, they estimate 5 million tons of new copper projects will be required to meet demand from the supply situation that we face. We're studying this every day, and we know that new copper projects and ours that we have are greenfield, brownfield projects, using existing infrastructure and low-risk execution projects. We showed what we can do with the Cerro Verde project, but we know that they require $3 plus copper to justify them. There's a 7- to 10-year lead time and greenfield projects are really scarce. There is a deficit looming, absent any significant disruption in the world's economy or in China. There is an inevitable deficit that will allow our company to profit from it. I've read some recent reports of people who have been bearish on the copper outlook for some time now that are talking about prices being required for new projects as being substantially lower than we see in our portfolio. We believe we have the best portfolio in the industry to go forward. Anyway, we're encouraged by that. Talking about the Americas operations, strong operating performance. The Cerro Verde expanded operations continued to perform well. We're looking at a project near our Safford mine in Eastern Arizona where we have an ore body that some of you recall us talking about in the past called Lone Star. As the Safford mine depletes from the oxide minerals that we have there, we're pointing towards a plan of producing oxide from the Lone Star deposit, which would make use of the facilities we have available and also expose a very large sulfide resource at Lone Star that underlies the oxide ore body. Using existing infrastructure, this project would be relatively easy to undertake and give us the opportunity for some significant investments in the large sulfide resource, both at Lone Star and at Safford in the future. In Chile, at our El Abra project, where we're partners with CODELCO, our exploration that we've done over the past 10 years – we just celebrated our tenth-year anniversary of the Phelps Dodge deal – have identified a very significant sulfide resource that we didn't know existed at the time of the transaction. This would be a Cerro Verde-type project, although it would require a desalination plant and pipelines to get the water to heights. It's a big project, but it's a very attractive project long run. We're working with our partner, CODELCO, and other resource landowners in the area to tee it up for future investments. And then in the U.S., we have a whole series of sulfide opportunities that we're studying. We're serious about this. We believe we'll make these investments in the future. We're just not making them right now because as we assess the markets, on slide 6, we have in alphabetical order these projects that we have available in the Americas outside of Lone Star. They are in the United States. The United States has strategic benefits today that it didn't have in the past, other than El Abra, because of the energy situation here, which is an advantage for the U.S. with shallow oil and gas development. The labor situation here is that we don't have unions in the United States. We have communities that support our business. It's an attractive place to invest and the resources, as you can see in these charts, where we've got significant currently identified proved and probable reserves, the mineralized material, and the resources beyond that are enormous. This will be where we'll focus the future of our company. In Indonesia, our exports resumed in April. We experienced a high level of worker absenteeism during the second quarter that actually began in mid-April and that had an impact on our mining and milling rates. Despite the lower rates, we have been mining higher ore grades, and we had the ability to sell from inventory that built up during the time that we were restricted from exports. We have had a significant reduction in our workforce there. Workers that were absent were given notice as required under our labor contract and under Indonesian law. Many of those did not return to work and they were deemed to have resigned. We are now in the process of using contractors to supplement our workforce by those significant number of people that are no longer employees. You read about calls for strikes. We want to say that there is no general strike. We went into the year with over 30,000 workers; over 25,000 of those were not involved in this absenteeism. They continue to work, and we are using this as an opportunity to really deal with some workforce issues that have been with us for some time. We're encouraged that we'll be able to do that. We've got support from the authorities; it's been peaceful, and we are working our way back towards normal operations. We are looking at ways of improving our operations through slope optimization efforts and we are looking at accessing what was designed to be produced from the underground Grasberg Block Caves through open-pit mining. We're feeling good about where we are now. Our team has done a great job managing this adjustment in our workforce. We had about 4,000 of these workers that were deemed to have resigned. Now, in terms of the contract issues, the discussions with the Government of Indonesia are very active right now. We're approaching a stage where both parties have expressed an objective of a near-term resolution. I believe we are seeing that objective being more clearly identified by the senior levels in the Indonesian government than we have seen in the past. Our team in Jakarta has been working in a process that we established back in May to have discussions with the ministries involved and our team. We are now at the point of moving those discussions to direct discussions with the lead ministers and with the government. I'm personally involved in those as I have been all along with the process. We're going to be talking about mutual objectives of extending our operating right, providing Freeport the required assurances about fiscal and legal terms that would give us the confidence to invest in these big underground projects that we have in our plans. We are being responsive to the goals of the Indonesian government about divestment and about smelter investments. We understand that any divestments we have would need to be at fair market value from our perspective and that Freeport would continue to have operational and governance control over the operation. We're moving to the next stage. We have a mutual sense of optimism that we can find an agreement. At the end of the day, it's in all our interests; it's the interest of the country, our shareholders, the workers, and the Province of Papua, and we are working on that every day. We do have an issue that we need to address that affected our outlook near-term. We're developing – we were starting up our most recent extension of our underground mine where Freeport had been conducting block-caving operations since the early 1980s and we keep going deeper. The recent ore from this section has come from a mine called the Deep Ore Zone mine called DOZ. We've extended that through our exploration activity to a lower horizon, and we call this new mine the Deep MLZ. As we've gone deeper, we've encountered a different rock environment than we had at shallower elevations. The rock is denser and harder. We're going deeper. In June, we experienced what we call mining-induced seismic activity, which is not uncommon in block-caving mines; we've had it in the past, but this was a more significant event for us. This has caused us to slow down the initial ramp-up to ensure we manage this rock stress safely and prudently to protect the people and the resources in our underground development until the cave is sustained in a normal fashion. We had a plan going into the second quarter for ramp-up that we are now slowing down as we deal with this situation. There has been nothing that affected the resource we're developing, and nothing has caused us to change our plans to ramp up this mine to 80,000 tons a day, which is very large for our block-caving operations by 2021. However, this is resulting, based on what we know today, in deferrals incorporated in our plans, which are reducing our metal by 100 million pounds of copper this year, 200 million next year, and also deferring gold as part of the component of this. A couple of points about this: This is an extension of an ore body that's not part of the Grasberg ore body, but an ore body we began mining in the early 1980s and have kept extending it at depth. The ore body underlying the Grasberg shares similarities with the ore body we're mining from the open pit, and its rock characteristics are much different. We are confident that this situation will not automatically transfer over to the Grasberg because of the nature of the rock differences. We are working with a world-class team of geologists and engineers, putting safety first, and we are looking for ways of advancing this. Once we get to the point of having the caving operating in a normal fashion, then we'll be back on track to our original plans and nothing has changed that. We'll be discussing the block-caving designs as we go forward. The Grasberg Block Cave is extraordinary in terms of its size. When this is completed, it will be the world's largest underground mining operation, and we're comfortable managing this. The Grasberg Block Cave has almost a billion tons of reserves with over 1% copper and 0.78 grams per ton of gold. It's an extraordinarily high return investment. The Grasberg Block Cave, for example, is bigger than the Morenci mine, which is our flagship mine here in North America. It's a state-of-the-art system. Block cave has complicated operations, but we're very experienced with this, and it will be a real source of pride for both our company and Indonesia in having this kind of development. This slide shows the history of block caving. This is a separate mineralization from the Grasberg Block Cave, separate from the original Ertsberg deposit, which Freeport began mining in the early 1970s. It began with a mine called the GBT, which was depleted by the late 1970s. In the late 1990s, we were developing the IOZ mine, which is depleted, we moved to the DOZ, and now this larger high-grade ore body called the Deep MLZ mine is where we're dealing with this startup issue. With our negotiations advancing positively with the government, we are dealing with a number of ministries. We're focused on the financial benefits to Indonesia that our operations provide. We've been there a long time; we've contributed $60 billion to the national Gross Domestic Product since our current contract was signed in 1992 – a very significant part of the region and the regency where we're located; we're over 90% of the economy and by far the largest employer in Papua, one of the largest taxpayers. We contribute through our community programs a significant amount, almost $700 million, since we started this 1% fund in 1996. Both sides are working constructively towards a solution. The challenge we're facing is to take this mutual objective of finding a solution and converting it into an agreement and supporting regulations acceptable to both parties. That is not underestimating that, but we are approaching this with a degree of optimism, and it's clear that senior government officials working with us have that objective as well. The 2017 outlook is presented on page 12, with the adjustments because of the Deep MLZ startup issues. We are now projecting copper at 3.7 billion pounds, gold at 1.6 million ounces, and 93 million pounds of molybdenum. Site production delivery costs are in line with our previous estimates, and after byproduct credits, we're now suggesting $1.19. Operating cash flows will continue to be strong, and capital expenditures will continue to be significantly lower than our cash flows. Sales profile is shown for 2016, 2017, and 2018 on slide 12.

Slide 13, I'm sorry. You can see this is now net of the sale of our Tenke mine that we sold in the Congo to China Molybdenum and the incremental interest in Morenci that we sold to our partner Sumitomo. So that's what our sales look like. EBITDA and cash flows for 2018 now at $1,250 gold, $7.50 molybdenum and copper prices varying from $2.50 to $3 are shown on slide 14. You can see that goes from just over $5.5 billion of EBITDA to about $7.5 billion over that range. With cash flows going from $3.4 billion to $4.8 billion, we're highly leveraged to copper. Each $0.10 change in price is worth $280 million, and before this call, we were close to $0.10 up today. Capital expenditures show the termination of capital spending in the oil and gas business, and we currently continue to invest in the Grasberg Block Cave, which has for 2017, $700 million of investment and $750 million for 2018. With the agreement with the Government of Indonesia, we'll proceed with that. If we're unexpectedly unable to reach an agreement with the government, then we would take steps to stop that spending; it would be a major adjustment to our activities at PT-FI and would have a deferral in the ramp-up. In blockade mining, it takes a period to ramp up once you start the mining operations, which we can't do at the Grasberg Block Cave until we finish mining the open pit. Our current plan is to do this. If we're not successful in our discussions with the government, those CapEx would be suspended and would require major adjustments to operations, and we would be moving towards resolution through arbitration, which we don't want; the government doesn't want – that's why the momentum is to find the solution. Kathleen and her team did a great job amending and extending the Cerro Verde credit facility. The details of that are on page 16. As we go forward, we will continue to look for steps to manage our balance sheet and our maturities over long periods of time. It was a highly successful syndication, and it reflects the strength of this great asset. Possibly the best thing that came out of this asset restructuring and capital raising activity last year was that we kept Cerro Verde and we're building our company around it as we go forward in the future. You can see our debt reductions going from over $20 billion to net debt now being $10.7 billion, where that would move to with just using cash flows. We're no longer looking at any kind of capital raising through stock or assets. We'll do some small asset sales in the ordinary course of business, but as I said, we reached our goals with our balance sheet. Now we're focused on safe production from our current sets of assets with this great team of operators and development and we've got the financial strength to go forward. We're focused on resolving the situation in Indonesia, and we currently believe we're seeing good progress with that, and then looking for the day when the market will be such that we will invest in growth in our assets and look for opportunities outside our company. We're all focused on building shareholder value; that's all we're about, and we look for alternative ways of doing that because that's our job at the end of the day. So, with that, we will open the line for questions.

Hi, guys. A couple of questions from me, mainly relating to Grasberg, as you would expect. The first one just on the underground development, you'd hinted that was your plan of balancing act during the year of keeping enough labor in place so that you don't stop completely. When you say it's been slowed now, is there a different development compared to last quarter or is it more of the same? And then also, can you just speak a little bit more about the opportunity to mine from the open-pit part of what would have previously been in the underground?

Okay. So with your first question, I want to make sure that we're clear on this. There is the Block Cave underground development activities. And then there is the startup of the Deep MLZ mine, which is beginning – it's moving to its operating phase. The development activities now are focused in the underground Block Cave at the Grasberg mine underneath the pit. That's a major development project that we've literally been working on for eight years or so and developing access to it and getting that mine prepared to start up when we complete mining in the pit. We did reduce some of our capital spending when we were facing the issues with the government that emerged in January of 2017. But we've made a decision so far to keep spending on that development activities and nothing has changed during the quarter on that.

We cut it by about 25% earlier this year, Chris, but nothing has changed in recent months on it. We're evaluating it on a month-by-month basis.

And moving to your second question, as we continue to develop this and as we're completing mining at the pit, as you would expect, there are ongoing efforts to try to optimize the mining at the final stages of operations at the pit. Mark Johnson and his team are looking at ways of adjusting pit slopes – deepening pit slopes, looking at how we can take advantage of our existing fleet of open-pit mining equipment, the shovels and trucks and so forth. Some of that's been delayed by this issue of the export ban. There was a period of time in which the smelter in Indonesia was down earlier this year. So that's given us opportunities and time to see how we can optimize the final stages of mining from the pit. That's what we're talking about there. Then we move over to the Deep MLZ mine, where we had completed the initial stages of development. In block cave mining, ongoing development activities occur once you start the caving operations. We were in the startup of developing the draw points for the operations through a combination of undercut development and mining material from the draw points as they started out when we ran into this issue related to mining and seismic activity. We've stepped back from that for a period and we're sequentially approaching undercut development and mucking mining, which we were doing together before until we get to the point where the caves are operating in a normal fashion. This issue is separate from the underground development at the Grasberg Block Cave.

Okay, thanks, Richard, for the color. And then just in terms of the discussions with the government that you're still having, are you able to rank, I guess, from maybe the government side what they say is the most important, including the smelter, the final ownership status, timelines, taxes, royalties, et cetera? Like what's the key sticking point there?

Well, we agree that we're going to have a global solution to all of these issues. The keys from the government standpoint are exactly those you mentioned. They want to see divestment. Their objective is to have, over time, a point where we reach a 51% ownership by Indonesian interests. Currently, 9.36% is owned by the government. They've set a strong objective of seeing new smelter capacity developed in Indonesia and then preserving the fiscal revenues from taxes and royalties that the government has because that's important to us. Our objective is having the government approve our rights to an extension that we have under our existing contract. That goes to 2041 and, to have that approval, to have fiscal and legal terms that have assurances and a commitment by the government to those over time, so they can't be changed by subsequent laws and regulations. Any divestment that occurs – and we're talking at this final stage about we had originally agreed to 30%; the government wanted 51%, so that's a matter to be dealt with in the final negotiations. But whatever that comes up to, any divestment must be at a fair value for the divested shares. Freeport also requires operational and governance control over the operation. We've agreed to deal with them as a package, and that's what we're doing.

Okay, thanks, Richard. One final one, is there any update on Kokkola in Finland? What value you could extract there versus the original thoughts?

No. We have a lot of interest as you can imagine both with that and with the Kisanfu exploration, a property that's near Tenke, with the agreement we had with China Moly that they would have a right to negotiate with us on it. We weren't able to reach an agreement with them on valuation. There's been such a change in the cobalt market, of course, since we closed our transaction on Tenke. We've had a lot of incoming interest, and discussions with people, but we haven't established a formal process for how to go forward.

Okay, that's it from me. Thanks, guys.

All right. Thanks, Chris.

Hey, Richard and Kathleen. So, Richard, when you were discussing the Indonesia situation down at CESCO, you'd mentioned that you and the Indonesian government are not really starting from scratch and that the discussions are far along years, you've been discussing this. You're hopeful that the six-month extension is all that's necessary given the background and history of the negotiations. I was just wondering that was quite a laundry list of topics that you just listed out on what needs to be decided. So I want to see if you can give us an update on how you're thinking about the situation now. Do you see an ability to have something done by October and if anything has changed in your thinking since you presented that view to us down at CESCO?

Yes. From our perspective, this is not a big laundry list of items. It is divestment, smelter, fiscal terms, extension; it's really four items. There has been significant movement within the Indonesian government where I think there is a real objective of wanting to get this resolved now that we haven't seen in the past. We remain focused on getting an agreement done this year, and that is consistent with the government's objective. There's a lot of things going on within Indonesia and its economy, their geopolitical issues that we read about in the papers in Southeast Asia. There are political developments as always within the Indonesian government, and all those things are coming to bear. We're seeing a much greater interest by officials in the U.S. government to be supportive of businesses generally, particularly our situation in Indonesia. We're responsible for negotiating with the government, and that's what we're doing. There are circumstances leading us to a point where we're at the stage of working to get an agreement. If it can be done, now is the time to do it.

Okay. And the next step from that would be, I guess, arbitration?

If we're unsuccessful, then that's the recourse that each party has to resolve a dispute. We gave notice about the dispute earlier this year. There was a 120-day notice period that has run its course. Now, both parties are free to initiate arbitration proceedings. As you can imagine, we're doing a lot of behind-the-scenes work to prepare for that if it's something we have to do. We feel strongly about our legal position here, but we recognize that it's not desirable for either party to go that route. We're in effect reserving our rights, the government has rights as well, but we're working together to get this resolved and approaching it, I think, for the first real time with a consistent point of view about wanting to get it resolved.

Got it. And just one follow-up, Richard. You guys had mentioned you're taking steps to increase the workforce, or PT-FI is taking steps to increase the workforce. Curious if there is any significant lead time to train the additional workers to restore normal operating rates and if future strikes – potential future strikes would have an immediate impact or if the new workforce would have some sort of a buffer built-in?

What's going on as we're doing this is the activity in the pit is ramping down. Whereas once we were mining 800,000 tons a day, there were some days we even had a million tons a day, metric tons of mining in the pit. Today, our plan calls for about 100,000 tons. Less work is being done, and that's where this absenteeism was focused. We're working through contractors to hire people, often people who are experienced in coal mining and other activities for our truck operations and so forth. It is taking some time, but we're close to meeting plans with activity as we speak. All this activity has not had a significant impact on our underground development activities. That's a separate set of workers; they weren't involved in this absenteeism. While you read about a strike – there has not been a formal strike declared. The union tops have called for a strike, but the workforce did not go on strike; there were some workers that didn't come to work. Unfortunately, after notification, some of them have lost their jobs, and that's not good for anybody, but we've had to manage it to keep control of operations.

Got it. Thanks, Richard.

Okay. Thank you.

Yes. Good morning, Richard and Kathleen.

Hey, Mike.

Hi, Mike.

You got controllable and uncontrollable issues always. You guys have done a pretty good job on the controllable issues; you get a little bit of help from the uncontrollable with copper going up, but you still got to deal with this Indonesia issue, which is, in my mind, a big uncontrollable. And I think the main – one of the main things I hear Freeport say that they need is assurances that the contract of work terms which have gone on now to 2041 are upheld. But how do you really get assurances of that since my understanding of the original contract of work was that it superseded any changes in Indonesian government law when it was signed, and that included the extensions, which were basically up to you guys in 2021 and 2031 to bring up to 2041? So basically, what's really to stop the government from changing their mind a year or two from now even if they say, okay, we're going to uphold the 2041 term of the contract life? How do you get assurances that they don't break the contract again?

Repeating some of the things you said, the contract was signed in 1991. It had a 30-year primary term and it contained provisions giving us the right to two 10-year extensions of that contract. It wasn't like renogotiating a contract, and that came about because Indonesian law allowed at that time. Under the Indonesian law of 1991, they only had the right to issue a 30-year contract. What you have in Indonesia, and any other country, is a sovereign government that has the right to adopt whatever laws and regulations they decide they should adopt. Indonesia passed a new mining law in 2009, which triggered the current controversy between us. The protection we have under our contract and the protection we are insisting be preserved going forward is that if in fact the government changes its mind, we have the right to go to international arbitration, a legal proceeding that is structured to be fair, not something that goes through the Indonesian court system, and we would have the right to financial compensation for actions taken by the government. We have that right now because the contract says very clearly, the government can't restrict exports; well, the government has restricted exports in the past. The government is obligated to give us this extension. They haven't approved the extension yet. We've tried to find a way to preserve values for shareholders and be responsive to the aspirations and desires of the government and find a compromise. As part of that compromise, we also insist that we retain the rights to international arbitration and the rights to financial claims if the government subsequently doesn't honor the contract.

Okay, understood. Is there any way for you to estimate what your results for the quarter would have looked like if none of this would have happened in terms of the contract would have never been questioned from 2009 on and you are operating under the contract of work? How different would your results be today?

We would have completed mining the open pit last year, in 2016. If you go back and review what our plans were, we would have had an extraordinary year in 2015 and 2016, over 3 million ounces of gold and large copper billings. But for 2017, we would have completed mining the pit and would be ramping up the Deep MLZ. Remember we used to talk about that falloff; the wedge, and how to offset that through stockpiles and things. I will answer your question but I don't allow myself to go back and say, 'would have, could have, should have.' We're in the here and now. We can control a lot of things including some of the issues with the government, and we're working hard on them.

But the would have, could have, should have, if you don't get a deal with the government and go to arbitration, I would assume some of the would have, could have, should have would factor into your estimate of what you've lost in value.

No question, no question. I mean we would have – and this arbitration claim, again, I want to emphasize because I know my friends in Indonesia are listening to this, I want to be clear, we don't want to do that. We want to find a mutually agreeable solution. But if we don't, claims will be very large.

Sure. Yes. I would imagine.

Because it's a big asset.

Yes. Huge asset. Huge difference in performance under the contract of work to what's happened. And how would that transpire assuming you don't get an agreement, you go to arbitration, you win the arbitration; what happens next in terms of how do you receive proceeds or value consideration?

It gets to be an obligation of the Government of Indonesia. That's an obligation under their law. Steps can be taken internationally to enforce that as well. There has been some precedent for that, where other countries had significant changed circumstances impacting their operations. Indonesia had a case several years ago, as well, and so there's processes to follow. As a member of the G20, Indonesia, as a country that has done economically well, will face pressures to resolve this in a way that helps them with their bigger picture economic goals and international goals. It's not just Freeport representing our shareholders that has objectives of resolving this; there will also be pressures on Indonesia to resolve this, and that's becoming more apparent to them.

Right, okay. Thanks a lot, Richard.

Thanks, Mike.

Hi, everybody. I was wondering in terms of your projects and potential expansion projects that you showed in your presentation. If copper were at, say, $3 a pound, and it went to $3.10 or something like that for a couple of months, do you feel like you currently have the balance sheet to start any of those projects, or would you like your balance sheet to be better in terms of your net debt position to start, I guess, you guys haven't mentioned how big these projects would be, but say, a $1 billion expansion project?

The short answer is, yes, the balance sheet is okay, we could do those. But these projects aren't $1 billion projects. The Cerro Verde project, which was a major expansion, was a $4.5 billion to $5 billion project. It was well situated to do this, the El Abra project would be bigger.

Yeah, that's less than $1 billion, but it's spent over multiple years.

We could look at the start going on the Lone Star/Safford project in that range. I think we are on a path towards starting it. It's not in our numbers now, but I think it will be fairly shortly. But for multi-billion dollar projects like we would look at, at Bagdad and expansion at Sierrita and the sulfide in Safford, you’ll need to get copper not just for a month or two. You need a clear view that the world economy is developing because there are uncertainties that currently overhang the economy in significant ways.

Right.

Before that happens, I believe there will be a shortage of copper, and you'll not see prices. We just need to look over our shoulders and remember times we had copper at $4. We are headed towards a world where I believe that could even be more than that because of the uses for copper.

Right.

Again, I'll get off my copper soapbox. That soapbox is, at one point, I was a lone prop. Now there's a choir singing my song. Yet, don’t see people jumping up to invest in new projects, new projects are very scarce. Some are being completed, but the wall of copper that was supposed to come about in 2016 didn't show up. To justify the wall of copper, some people are talking about developing these new mines at $2.50 or less, and that just can't happen.

Right.

When our friends at home – Kathleen is telling me to stop, so I'll halt.

Okay. No, sounded good, the choirs singing sounded good. But so, right, so what you're saying now Richard is that you can, at your current balance sheet and current copper price, be able to approve the Lone Star oxides; replace some of the assets that have been depleted at Safford from what I understand. But these big projects like El Abra, you think you have the balance sheet to complete those, but you wouldn't embark on those unless you saw runway for copper being above $3 a pound and going higher. Is that pretty accurate?

That is exactly accurate. And I'll mention one other factor. With everything we've faced through the years, we've built strong relationships in Asia, especially China, Japan, and Korea. I can't tell you the number of people who want to partner with us as Freeport's earned their respect; we are operators of all our projects, and we've done every kind of project that can be done. The people in Asia are hungry for copper and want to be our partner. So, financing is going to emerge as a matter of evaluating alternatives.

Okay. Great. And do you have a sense as to what kind of IRR on a project you'd be looking for to get it off the ground?

We don't specifically set a hurdle rate. The saying here is, while figures don't lie, liars figure. We look at scenarios for our investment, how it fits in with the rest of our portfolio, factors for gain if prices are higher, risk management if prices drop. You need good attractive rates of return because these projects bear risks.

Yeah. Okay. Great. Thanks, Richard. Thanks, Kathleen.

Thanks, Chris.

Hi. Good morning. I still have a couple of follow-up questions on Grasberg. Specifically, I realized the major issues for both you and the government have kind of been known for a while. But what gives you confidence, for example, in terms of divestment criteria that you can actually get fair value for selling any interest in Grasberg? Has something changed in the last three months to give you more confidence in that?

What's changed is that I've said over and over. I think there is a real objective of getting a deal done now from the government side, as it is from our side. While the government says we have certain requirements to get a deal done that relate to smelters, divestment, and financial issues, we have requirements to get a deal done. I am clear with the government that our shareholders will not accept us not getting fair value for any divestment. I hear that over and over again because they see our rights in arbitration. We know our legal case is strong. There is that recognition.

Your comments suggest you're actually seeing movement in the bid/ask spread here in terms of negotiations. Is that fair?

Yes, that's fair.

Your comments about working towards a resolution by the end of the year, that's passed, I think, the October temporary export permit. Would your expectation be that it would just be renewed to keep negotiations going in October?

My expectation is that we will get it done within the six-month period. I expect it to be done by October. There are many people on this call who have heard my expectations unfulfilled in the past, so realistically, there are a lot of circumstances that are occurring in Indonesia, including a 2019 election coming up. All those factors point to getting a resolution this year.

Okay. And just finally, you mentioned in respect to Grasberg production that you're looking at accessing a portion of the Grasberg Block Cave through the open pit. Can you give us a sense of how much additional copper production that could give you in 2018-2019?

We'll know more as we mine through some sections. Mark Johnson is on the line, and he can add to this. But we will identify access to ore that would have been mined underground over time. The benefit of taking it from the open pit is you can get it now as opposed to getting it over years in the future. It's on the order of a couple hundred million pounds of copper and 500,000 ounces of gold. Mark, I don't know if you want to add anything further to that.

The one thing I would add is that we've had a successful campaign on our perimeter blasting. We do presplitting for our final walls. Our geotechs and engineers are gaining confidence that we can continue to leverage this experience. We're putting additional resources at that to ensure the quality of those blasts are such that we maximize this opportunity. We don't expect any other concerns on the high wall. This will be something, as Kathleen mentioned, we'll know more month-by-month. We've changed some blasting practices and are applying that to the area we've blasted. As we have opportunity to observe the results, we'll be able to add more clarity about the upside.

Okay. And what would be the expected timeline to update the mine plan moving forward?

We'll do that every quarter.

Okay. Thank you very much.

Thank you.

Sorry about that. Good morning, Richard and Kathleen.

Good morning.

Hey, Alex.

I have two questions. The first question is at Deep MLZ, the geotechnical issues there, you mentioned the impact on production profile. Would you expect any impact on future OpEx and CapEx there? And then the second question is also like Grasberg. I've been clear that Freeport needs to keep both operational and governance control. Do you believe – is there a structure that you could put in place to divest 51% while ensuring that you maintain governance and operational control, or are those two things mutually incompatible?

With respect to the last question, we suggest to the government that the optimal way to proceed with divestment would be to start with a listing on the Indonesian Stock Exchange. That listing would probably be on the order of a 10% interest. The Indonesian Stock Exchange has become a fair market. International investors participate in it. There's discussion within the government about how to proceed with this divestiture deal, but there are ways, legally, that we're advised that they are working with government-owned to achieve this objective while maintaining control over governance. It basically comes down to the ability to elect the majority of the Board of Commissioners. That happens internationally with many companies, and it's not something unique to Indonesia. The second question is about OpEx and CapEx. It's more of a question of timing. We're going to do some things sequentially rather than concurrently in undercut development and mucking ore. It doesn't fundamentally change the cost structure at all, but there is a timing impact, and that has some consequences. We believe that as we get the mine positioned, the caving will start in a normal fashion, and we will revert to the plan we had all along.

Thank you, very clear.

Thank you.

Yes. Good morning and thank you for taking my question. Richard, you just mentioned how you would approach the question of obtaining fair value for a 10% stake of PT-FI. What do you think is the bid/ask spread on that specific point, and how would the Government of Indonesia address that question?

We haven't really engaged in negotiations on fair value. In early 2016, we voluntarily submitted a valuation of PT-FI to the government at that time, but there has been no formal response to that. You see some comments in the press, but we haven't gotten to a point of having a bid/ask.

When do you think this will come up in the negotiations?

As we complete negotiations, that process for divestment will be part of the ultimate agreement on the items we have. It won't be an issue of agreeing on a valuation, but the process of getting to a fair market valuation. The government recently commented positively about having natural resource companies listed on the Indonesian exchange. Again, that in our view is the fairest way to determine the value of this business. Let us reach an agreement that settles things, pick an appropriate time, and go out and have a fully marketed interest. I know from discussions with investors there would be interest in investing in this asset, providing a market-based determination of fair market value.

That's helpful. Thank you. Regarding CapEx, you mentioned a $700 million spend on underground development that depends on a resolution of the PT-FI long-term rights. If the status quo persists hypothetically through the end of the year, would you still expect to spend $700 million, or does that figure rely on resolution?

The $700 million is our current spend rate, and you can anticipate that as we progress through the year and engage in our discussions, unless it falls apart, which I don't expect, you can anticipate that we'll be spending that $700 million now, we got $750 million booked for next year, and that's dependent on getting the agreement.

Great. Thank you.

Thank you, Lucas.

Thank you very much. Weather.com says the next 15-day temps in Safford vicinity average 96 degrees Fahrenheit highs and 74 degrees Fahrenheit lows, which I guess is a big cool wave. How did you manage to produce copper when it was 123 degrees Fahrenheit highs and 95 degrees Fahrenheit lows? Did the power grid fail on any days? How do you manage equipment utilization and human safety? And second, when will you define a mineral resource for the Lone Star sulfides, where only oxide has been mined so far? Engineering the project requires having a resource.

Operating in the heat in Arizona is kind of like operating in the rain in Indonesia, that's been part of the business. Red, am I right in saying it’s hotter in Phoenix than it is typically in Safford and Morenci because of the altitude? Actually, when we have operational issues, it’s generally unexpected rainfall because a little rain can cause that.

Just one thing to add, John, we work diligently with our people on hydration and avoiding heat stroke, knowing the signs of overexposure, providing ample fluids and air conditioning in equipment.

So, the regional utility didn't have any failures when it was 123 degrees Fahrenheit in Phoenix?

No, we did not.

You don't lose power; they don't call you up and ask you to turn off the electricity at your mines so that it can air condition houses?

No, that didn't happen. Our operational issues arise when facing monsoon rainstorms. One last quick comment on the sulfides: we have an active drilling campaign underway to further define sulfides in that district.

When will you have a resource at the Lone Star sulfides?

We have a resource defined. It's interesting to debate; Red and his team need to justify when the funding for drilling this resource is sufficient to classify it as reserves. We feel confident that simply the resource size indicates opportunity for our development. It is not resource-dependent.

John, on page 6 of the slide, you can see it's the biggest resource next to Cerro Verde, with a total of 266 billion pounds of copper.

Right.

But it's the possible; it's like not...

Yes, potential.

Right, right. So, you've got to give Red the money to do what he's got to do.

Yes, we haven't added any reserves yet for Lone Star. All right, so you're on that side of the debate.

We just want you to talk with facts; not, geology inference is a little bit like having dreams.

Right. No take-backs here. Okay. Thanks, John.

Thank you. I'm sorry to be direct.

No.

Good morning, Richard and Kathleen. Just quick questions, not about the regulatory on Indonesia but more on the operations side. In terms of milling grades, I've read some articles quoting whether correctly or wrongly that you are targeting 200,000 tons per day run rates with about 140,000 from the open-pit, 60,000 from the DOZ. I want to know what you guys really are targeting, particularly at the open pit, before it starts the ramp-down process.

That's roughly what our plan calls for, what you just mentioned.

And would it be towards end of Q3, later this year or in terms of timing, what are you guys planning?

We've had some recent days of where we've reached 200,000 tons a day. We faced the worker absenteeism, which affected the Grasberg operations and keeping to our targets. However, the mill is aligned and has a capacity of around 250,000 to 260,000 tons per day with three separate mill lines. We're preparing that mill to operate at higher levels as we achieve Grasberg Block Cave underground ore in the Deep MLZ.

Okay. Thanks, Richard. A quick question on CapEx. Looking at the other mining CapEx to increase about $300 million to $1 billion in 2018, could you give a little bit more color around where that's being allocated? Is this the result of under-spending and sustaining CapEx in the last couple of years?

That's the point I want to make. We have been making significant cuts on maintenance capital and projects since entering 2016 and even before the price drop and facing the financial obligations made in oil and gas investments. We've worked hard to defer maintaining capital and projects, and our guys did an excellent job of managing equipment resources. Now we're at a point where we've got to go back and attend to things we had deferred. That's all it is. We meet every quarter. The team is focused on what needs to be done to maintain safe production. We're needing to spend money on catch-up type initiatives, but we are closely monitoring expenditures.

Great.

To the extent that we can defer it and maintain efficiencies, we continue to look at opportunities to do that. But as you see here, in 2017, we're spending very little on sustaining capital in the Americas and have things we plan to do for 2018. The teams are focused to ensure we maintain the integrity of our equipment.

Richard, this is Mark. Just wanted to add to the ore qualities we are currently running. You're right; we have run at least over 300,000 through the mill. The type of rock we'll run for the remainder of the year will be averaging nearly 200,000. There will be days it might be at 220,000 or 230,000, while maintenance could see it drop below that, but fourth quarter will be around the 195,000 range.

Thanks, Mark.