Freeport-McMoRan Inc (FCX) — Q3 2017 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to the Freeport-McMoRan third 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 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, Red Conger, Mark Johnson, and Mike Kendrick. I'll start by briefly summarizing our financial results and then I'll turn the call over to Richard, who will review our recent performance and outlook and will be using the prepared slide materials that are on our website. As usual, after our prepared remarks, we'll open up the call for questions. Today, FCX reported net income attributable to common stock of $280 million, or $0.19 per share for the third quarter of 2017. The third quarter results include net charges of $212 million, or $0.15 per share for nonrecurring net charges that are detailed on VII of the press release, which include a $188 million charge or $0.13 per share associated with accruals for Peruvian government claims associated with disputed royalty matters, and a $64 million or $0.04 per share charge for adjustment to environmental reserves. After adjusting for these net charges, third quarter 2017 adjusted net income attributable to common stock totaled $492 million or $0.34 per share. Our adjusted earnings before interest taxes and depreciation or EBITDA for the quarter totaled $1.6 billion. We've got a reconciliation of our EBITDA calculation on the last page of our slide deck. For the third quarter of 2017, we sold consolidated copper sales of 932 million pounds, 355,000 ounces of gold, and 22 million pounds of molybdenum. Our average realized price for the third quarter was $2.94 per pound. That was 34% above the year-ago quarter of $2.19 per pound. Our gold price averaged $1,290 per ounce, which was slightly below the year-ago period average of $1,327 per ounce. Average net unit cash costs for the quarter were $1.21 per pound. Those were slightly higher than the year-ago period of $1.14 per pound, primarily reflecting lower copper sales volumes. We generated strong operating cash flows during the quarter, which totaled $1.2 billion and those exceeded our capital expenditures of $308 million during the quarter. We ended the quarter at September 30 with consolidated cash of $5 billion and consolidated debt totaling $14.8 billion. We had no borrowings under our $3.5 billion revolving credit facility at September 30 and a strong liquidity position. I'd now like to turn the call over to Richard, who will provide additional details on our results, operations, and outlook.

Thank you all for joining us on our call. Kathleen and I are speaking to you from Jakarta where we've made a series of trips this year to work with the Indonesian government on reaching a resolution of our issues involving our contract. Our quarterly results I believe clearly show the strength of our company. During the third quarter, we had strong cash flows generated by our operations which are characterized by very long-lived assets. We have significant growth optionality that I'll be speaking about during our call today. And now we have the ability to consider these in light of our company's improved balance sheet and the improved copper market conditions. This will enable us to consider future actions to build incremental shareholder value. We're going to approach this in a very disciplined way as producers are throughout the industry. But we have assets within our company that allow us to look forward to a period of future investment and future growth. During the quarter, we continued to advance our key 2017 goals. We're focused on safe and efficient operations, building long-term value through our operation of our business, production of our reserves, and focusing on our attractive portfolio of long-term copper assets. As I mentioned, we are working hard to resolve our long-term rights in Indonesia. During the quarter, we generated almost $900 million of cash flows from operations in excess of our capital expenditures. And for the nine months to date in 2017, we have approximately $2 billion of cash flows in excess of our capital expenditures. We are benefiting from the positive copper market that has resulted in higher prices than many expected. The analysts who were predicting the so-called wall of copper have capitulated. We were always skeptical about this looming supply, but there are just underlying factors in the industry that continue to constrain supplies. There's continued absence of major new projects, declining production from existing mines, exchange stocks remain historically low. And as we look forward into the future, there are looming significant deficits that will require substantial investments to meet the global demand for copper, and the prices required to meet that demand are significantly over $3 a pound. What's been a feature of the recent copper market has been positive copper demand globally. Around the world, manufacturing sectors are performing well. Chinese growth is exceeding expectations. And with the recent Congress of the Communist Party in China, the outlook for Chinese growth continues to be positive. Growth is continuing in Europe. And U.S. demand is solid with the prospects for future higher growth as the country addresses its tax situation and other regulatory issues that could unleash continued demand within the United States. Wood Mackenzie, one of the industry's analysts, estimates that 5 million tons of new copper projects are required over the next decade. The top 10 mines in the world today produce less than 5 million tons a year. So that shows the extent of the requirement for new copper projects to be developed. As I mentioned, new mines require sustained copper prices of well over $3 a pound. The lead time for developing new projects, which we know all too well, is in the range of 7 to 10 years, and there are very few truly world-class opportunities available. An emerging factor for demand in our industry is the electrification of automobiles. EVs are copper-intensive. They consume three or more times more copper than traditional petroleum-powered automobiles, and there's very strong potential for this marketplace. The world is now looking for expanded growth over the next decade. This will translate into significant incremental copper demand, and the prospects are there because of the economic and environmental benefits of electric vehicles developing much quicker than people are currently estimating. This is clearly on an upward trend and not only automobiles themselves, but the support infrastructure for charging and electrical generation will require copper in significant amounts. We are presenting a slide that we have historically presented. I don't think we've used it quite as often recently. But on slide 6, we show the world's largest mines in terms of reserves and in terms of 2017 estimated production. Our company has two of the top 10 in terms of reserves, three of the top 10 in terms of current production. But we always point out to note the dates in which these mines were discovered. There simply have not been recent discoveries of world-class mines. And when we look at the opportunities today, they're in the nature of brownfield expansions of existing resources as opposed to looming major new world-class mines being available to the industry. All of this is very positive for market conditions and supports the industry from a supply standpoint in a way that's not typical for commodity producers. When we look at our company situation, and look at the values that are available to us beyond our existing proved and probable reserves, we have optionality for future development, which will be driven by our assessment of value creation in a disciplined way. But these are substantial additional potential from assets that we already own. We're going to remain disciplined, but these are important to looking forward to what the future of our company can be. In the United States, where we benefit from low energy costs, a flexible workforce, and an improving regulatory environment, we have a very large footprint for our large undeveloped sulfide resources. These opportunities are supported by existing infrastructure, which would allow us to make expansions at a series of our mines in a low-risk, high-return environment. In South America, our large resource at our El Abra mine allows us to begin planning for a large-scale mill project to develop the significant sulfide resource we've identified over the last decade. Currently, we're advancing technical studies. And this would be a project that would, in scope, be similar to our Cerro Verde expansion that we successfully completed and began production on almost two years ago. Cerro Verde has a large footprint which will allow it to continue to produce for many years at high levels and low cost, and this would be true at El Abra. It would be an extensive project because we would need to desalinate seawater and transport it to the altitudes there, but it's a large opportunity for us that's very attractive in light of future copper projects. It will be some time before we go to our board for formal approval of this project, but we will continue to evaluate it. We had a discovery in Serbia where we farmed out an upper zone to allow a smaller company to develop it and in connection with that development, there continues to be drilling in the lower zone which is a large high-grade early-stage opportunity where we have a significant interest, and that has the opportunity to develop into a world-class mine. The Grasberg district in Indonesia, beyond its very large proved and probable reserves, has significant mineralized material that we will continue to evaluate and bring into our mine plans as we go forward as economics justify it. In Africa, where we sold our Tenke Fungurume mine last year, we retained an exploration project that was nearby called Kisanfu. We believe it is the largest undeveloped cobalt deposit in the world. It has been drilled, permitted, and we are considering it either as a stand-alone project or to be built and processed for nearby operations. So, we have this great portfolio. In the Americas, where we currently operate seven open-pit copper mines in the United States, along with two pure molybdenum mines in Colorado, we have two large-scale mines in South America. This is a really high-quality portfolio of assets. They currently have strong operating performance. We sold 674 million pounds of copper in the third quarter. The Cerro Verde concentrator averaged 379,000 tons per day. It's really amazing volume for this concentrator along with Escondida's concentrator. We're continuing to focus on maintaining our cost position and managing CapEx, but as I mentioned, we're advancing studies for future growth and looking at this opportunity that we have with Cerro Verde in Chile. In the third quarter, we had $719 million of cash flows above CapEx in the Americas alone, and as we look forward, and in the nine months, it was over $2 billion. And so, as we look at our business overall for the year, we expect to have roughly 3.75 million pounds of copper sales, and roughly 2.7 million pounds of that will come from our operations in the Americas outside of Indonesia. So, we've got a great business in Indonesia, but if you look at the operations in the Americas beyond Indonesia, you can see a business that has very substantial value in its own right. In the Americas with our Bagdad, our operations in New Mexico, at Chino/Cobre mines, the El Abra operation in Chile, the Lone Star/Safford resource that I'll talk about in Arizona, Morenci, Sierrita, this is a very unique portfolio. It's got 60 million pounds of 2P copper reserves – 60 billion pounds of 2P copper reserves that would be developable at $2 copper. And then if you look at the mineralized material at $2.20 copper, you'd have twice that amount, and looking at all of the potential that we have at these mines you get to a very large 266 billion pounds of copper. So, what we have here is a company with very strong current production levels, attractive cost levels, and then built into our portfolio future growth levels. Lone Star is a long-identified resource that lies adjacent to our Safford mine in Eastern Arizona. It's just across the mountain, 17 miles from Morenci. We have two aspects to this opportunity. The first is a significant oxide project, which we are proceeding towards utilizing the development of that oxide resource to use our existing infrastructure at the Safford mine where our oxide resources are being depleted. We've attained the regulatory permits. This has very low execution risk since we'll just be mining the oxide near-surface resource, transporting it to Safford where we'll use existing processing infrastructure. The estimated production is 200 million pounds a year. It has a 20-year life. The capital costs are estimated at $850 million, which essentially covers mine equipment and pre-production stripping. Estimated unit cost would be $1.75 a pound. When we begin, it will take about three years to get it in production. It has a $2.40 breakeven price with an 8% return and then a value of $1 billion or more at current copper prices. Now, besides being a good economic project for itself as the oxide resource, if you turn to page 14, you can see this schematic that shows that below the oxide cover, there is a very large potential sulfide. And you can see what our drilling to date has identified as a defined ore body. But note that we've drilled deeper core holes that continue to find significant mineralization. To date, the resource that we've developed shows a potential for 60 billion pounds of contained copper. And what's happening is this leach project through the oxides that we'll be processing will serve not only to generate profits by itself, but also serve to strip out the cover material for this sulfide operation and allow us to consider the development of a concentrator mill to take advantage of the chalcocite chalcopyrite sulfide resource that lies underneath the oxide cover, which is a tremendous opportunity. I mentioned El Abra a couple of times. It's a large, high-quality opportunity. The resource estimate is 2 billion pounds of 0.45% copper. Like Cerro Verde, a very large low-grade deposit that can be developed in a low-risk project. We're advancing technical studies. It would involve a 240,000 ton per day concentrator, which is similar to what we did recently at Cerro Verde. The production would be 750 million pounds a year, a 68-year lead time, including three to four years of feasibility study and permitting, followed by construction. We are looking at what we did at Cerro Verde, challenging our team to come up with ways of reducing capital and doing this on a very efficient basis. And we'll be keeping you informed as we go forward with these studies. There's a schematic of this ore body that's on page 13. You can see what to date, the drilling has identified as a mineralized material pit shell, reserve shell, but also note we continue to drill at depth and have positive drill results for mineralization that potentially can extend this ore body. Another great opportunity. Now, moving on to Indonesia. At the end of August, after a series of meetings that we've been having during 2017, we, together with the government of Indonesia announced a framework for an agreement to resolve the dispute that we've been discussing for several years with the government. We are seeking and the government of Indonesia is seeking a win-win solution. We've been engaged in discussions on progressing this framework agreement. Both the government and our company are highly motivated to resolve this, to eliminate the uncertainty and bring long-term stability to our operations, which is in both parties' interest. In the interim, as you'll see, our operations have been going well, much improved over what we've had in recent times, and we're generating good cash flow out of existing operations. The framework agreement would involve converting our existing Contract of Work, which was signed in 1991, to a special license in accordance with the Indonesian current mining law. This is called an IUPK. But the IUPK that we are negotiating with the government would provide our subsidiary, PT Freeport Indonesia, with long-term operating rights through 2041, and it would provide certainty of fiscal and legal terms during the term of that IUPK. We have agreed to commit to construct a new smelter in Indonesia within five years of reaching a definitive agreement. This has been an important objective of the government of Indonesia, and we've agreed to meet that objective. We've also agreed to divest to Indonesian participants 51% of the shares of PT-FI. Again, this was a primary objective of the government, and we agreed to meet it, conditioned on our Freeport receiving fair market value for the interests that are divested and that it be structured in a way that we, Freeport, continue to maintain control over operations. This is a complex business; the development of the underground resources at Grasberg are of a scale that's never been done in the industry. It's located in a very remote place, in the highlands of New Guinea, in the province of Papua. Managing the operations, the capital project, environmental issues, and the social issues associated with this project are complex. For us to stay involved, Freeport is insisting that we maintain control of operations. Where we are today is that we're actively engaged in negotiating documentation for this framework. There are complex issues involved in those negotiations, and not all of those have been resolved. However, I am convinced that we have a mutual objective of reaching a resolution. The government recently extended our export ability through the end of this year, and we are operating under the terms of our current contract, operating very well, as you can see, in the cash flow chart presented on slide 14. During the third quarter, we generated almost $600 million of operating cash flows compared to $176 million of CapEx, and for the nine months this year, it's almost $1.5 billion of operating cash flows and less than $600 million of CapEx. So, this is a great asset for the partnership between the government of Indonesia and our company, and we are working hard to preserve that. The future of this company is going to be in the underground where we have had significant operations and have operated since the early 1980s. The big underground project that we are currently working on is the Block Cave resource that lies directly beneath the Grasberg open pit. Our plans call for us to complete the pit next year. From that point forward, all of the production would be from the underground. Our current project will allow us to begin block caving this resource in late 2018. We can't begin block caving until the open pit is finished. This will then lead to a ramp-up over five or six years to annual production levels of a billion pounds of copper and a million ounces of gold, truly a world-class operation. The reserves from the Grasberg Block Cave approach a billion tons of copper at a grade exceeding 1% and with significant gold grades of 0.78. So, this is a tremendous physical project, world-class in every respect, including long life, low cost, and economic returns. A schematic of the operations is presented on page 16. You can see the Grasberg open pit. The Block Cave is an extension of the resource we've been mining from the pit to levels that can most economically be mined underground. We are approaching this resource vertically to allow us to have access to it and process it. We have additional resources that are potentially in our future, the Kucing Liar resource that's adjacent to the Grasberg Block Cave; the Big Gossan mine, which is a stoping mine that we've been producing. And then, set apart from the Grasberg complex is an underground resource that we began mining in the early 1980s. We've been continuing to extend this resource at depth going from the original GBT block cave to the IOZ block cave that we began producing in the 1990s, to the DOZ mine in the 2000s. We started up the DMLZ mine two years ago and it's ramping up. This will be important supplemental production to the Grasberg Block Cave, which will provide feed for our mill at rates well over 200,000 tons of feed per day, approaching 240,000 tons per day. So, what does this mean for Indonesia? Despite the current controversy and some of the issues, operationally and with government regulations in recent years, this has been a very positive historical partnership. Freeport began operating there over 50 years ago. Since the new contract in 1991, we've contributed $60 billion to Indonesia's GDP. We are by far the largest private employer in Papua, and we're significant economically to the region. We're well over 90% of the GDP of the Mimika province where we operate, Mimika Regency. We're one of the largest tax payers in all of Indonesia. Since we began operating, we've generated significant taxes, royalties, and dividends. The government of Indonesia on the existing contract has gotten in excess of 60% of those revenues versus the dividends that have been paid to Freeport. This, by the way, is the most favorable deal with the government of any place we operate in the world and arguably the most favorable of any country in the world. In addition to that, beginning in 1996, to support the local community, we've been contributing 1% of our revenues through a special partnership fund for the local communities, and that has accumulated almost $700 million for community health, education, and welfare projects. When we look at the current contract, going forward to its end in 2041, future taxes, royalties, and dividends at $3 copper, $1,200 gold would exceed $40 billion. This is a major asset for Freeport, but a major asset for the country of Indonesia. We all recognize that, and the best thing for both parties is to reach an amicable resolution, avoiding the necessity of our having to try to enforce our rights through arbitration, which is our fallback alternative that neither of us wants to do. We have a great incentive to solve it. We just need to continue to work cooperatively to do that, and that is our goal. Turning to our outlook, we expect to produce 3.7 billion pounds of copper, 1.6 million ounces, 94 million pounds of molybdenum; this is consistent with our prior outlook. Our site production and delivery costs before byproduct credits at $1,300 gold, $8 molybdenum, would be $1.59. After byproduct credits, which are the gold in Grasberg and molybdenum in our Americas business, would be at $1.19. This includes, at $1,300 gold for the fourth quarter, net unit costs of less than $1 a pound. At $3 copper, this would generate $4.3 billion of operating cash flows; each $0.10 change in copper means $80 million to us. Our current capital expectations for the year are $1.5 billion, including $900 million for major projects, $700 million for the underground development at Grasberg, and $600 million for other mining, all roughly consistent with prior guidance. So, looking at our sales outlook on slide 19, last year, we had 4.65 billion pounds of copper. That included assets we sold: the Tenke Fungurume mine in Africa; and an additional interest in our Morenci mine to our partner, Sumitomo, in Arizona. Net of those volumes that were included in this number for last year we'd have been at 4.17 billion. You see our outlook for 2017 is 3.7 billion, 3.9 billion for 2018. The average for the next three years is 3.7 billion. 3.19 billion is a year of transition. It's expected to be below that average, and it would be about 3.5 billion pounds. As we complete mining the open pit, our gold sales will increase to 1.6 million this year, 2.4 million next year, and then the three-year average beyond 2018 would be 1.2 million ounces of gold. This would generate at copper prices varying between $3 and $3.50. As you can see on slide 20, $1,300 gold and $8 mo, EBITDA of $6.4 billion. This is an average of 2018-2019 of $6.4 billion to $8.2 billion over that price range and cash flows of $4.4 billion to $5.7 billion. Strong cash flows and to point out 2018 will be higher than this two-year average. You can see our capital expenditure management depicted on slide 21. Last year, it was $2.8 billion including $1.2 billion for our discontinued oil and gas business. This year, it's $1.5 billion, $2.0 billion, $1.8 billion for 2018 and 2019. This includes roughly $800 million a year for our Grasberg underground development. You will see that other mining has increased, as we were dealing with the financial issues associated with our high debt levels. Following the oil and gas deal, we really squeezed stay-in-business type capital expenditures, and we've got some catch up to deal with going forward. You can see that's increased from $600 million by $500 million to $1.1 billion in 2018. Now, a slide that I particularly like to see is how we've been successful in deleveraging our business. We went into 2016 with over $20 billion of debt. In our fourth quarter earnings call in January of 2016, when the price of copper was roughly $2 a pound and many experts were projecting it to fall below $2 and stay low for a number of years. We set a goal to reduce our debt level by $5 billion to $10 billion over the two years ending at the end of 2017. By the end of 2016, through our asset sales and raising some capital, we have reduced debt to $12 billion; at 09/30, it's less than $10 billion. By the end of 2017, at $3 copper, it would be approximately $9 billion. We will continue until we make decisions to do otherwise through capital investments or shareholder returns to apply excess cash to reduce debt. If we meet our plan, which we are confident in doing, and if copper prices average $3 or $3.25, you can see that by the end of 2018, our debt levels would return to very low levels. This, as I said, allows our board to consider disciplined reinvestment opportunities and we look forward to returning this company to a position of paying dividends, returning cash to shareholders. We have a very positive long-term outlook for our business. The thing that has sustained us through this concerning period of time when our debt was high and markets were weak has been a consistent positive long-term outlook for our business, our assets, our people, and the copper markets. That’s what we keep talking with each other about. We have a great morale within our company, great capabilities, great assets. We are an industry leader in our field with experienced people, operators, and developers. We've got a great long-life geographically diverse portfolio of assets. And now, we're once again financially strong. So, this optimism about our future is nothing but reinforced. Thank you for your attention. I know you have questions and we look forward to hearing them.

Hello, Richard and Kathleen. How are you?

Hey, Mike. We're okay.

Good. Good. A question on Grasberg and the negotiations with the Indonesian government. When you guys announced the framework, a lot of the reports coming out from the Indonesian government was that Freeport has agreed to sell down to below 50%. And when you put up the notice and said we're willing to sell down below 50%, obviously, at a fair market value. And there have been reports from the government talking about value shouldn't include reserves. And I'm just thinking about valuation parameters to get real value for Freeport. First of all, it's hard enough to come to a conclusion on what copper price to put in when valuing Grasberg. But how do you deal with a situation where, supposedly, the government is thinking about not including the reserves?

Well, the background for that, Mike, is in Indonesia the government owns the resources. Now, that's true with governments around the world. Governments own the resources even in the United States, of course. Significant resources are on federal and state lands, and all the oil resources in the offshore Gulf of Mexico or offshore anywhere are actually owned by the federal government. Governments give operators like Freeport in Indonesia the rights to operate and develop and produce those reserves. Any valuation we are talking to the government about would involve the value of our business today, including our rights to develop, operate, and produce resources that we've identified through our past exploration and development operations. For example, we have already spent, besides the infrastructure that we put in place to enable our operations to continue, in recent years, we've invested $6 billion of capital to develop these underground reserves that will essentially be produced beyond 2021. So, any view of valuation of our business would have to take into account the rights that we have from 2021 to 2041. In our discussions, the government recognizes that. You mentioned copper prices. We had this same issue of dealing with views of copper prices last year and our negotiations with China Molybdenum on Tenke Fungurume and with Sumitomo on Morenci that was during the first half of 2016 when the world's view of copper prices were decided more pessimistic than they are today. But many people were surprised that we were able to, in that environment, negotiate deals that were positive for our company in terms of the valuations that we recognized. We are approaching these negotiations in the same way. Indonesia is a country that has – it's a democracy now. It has free press. There are opportunities for many people who may be in government or of influence to speak to the press. Often, the comments you see are made by people who are not involved in the negotiations, just like you read comments in the United States on matters. You have to take into account the source of the comments. But I can tell you that we are working positively and amicably with the representatives of the government. At the same time, we are going to be relentless in representing the interest of our shareholders. And so, we're not in a position of where we have to concede to unreasonable positions, and we are not going to do that.

And assuming you could come to an agreement on value, it would seem that the raw size of that value to sell to the private sector would be enormous. Would the government buy that position from you directly and then sell it to the private sector over time? Because it seems like that would be a big chunk to sell to someone in the private sector today.

There – we're talking with the government now about not only valuation but the structure of the process for selling these interests. This includes the alternative of the Government of Indonesia through potentially a state-owned enterprise acquiring and holding this interest. There's also under consideration the provision of a portion of this interest for the province of Papua. The Indonesian economy has grown, Mike, as you know. There are substantial private business interests here, who have the financial capability of doing large-scale transactions. It's unclear whether all of this would be done to a single buyer. We have suggested to the government that the first step that should be considered in our view would be an IPO of the interest on the Indonesian Stock Exchange, which has developed into a large liquid marketplace. So far, there's been reluctance on the government to accept our suggestion. My point is that there are a number of alternatives to deal with this issue of the structure and timing of divestment, and that's one of the issues that we're having these current meetings about.

Okay. Thanks for taking my questions and, first of all, congrats on hitting the targets this quarter as well. Somewhat related to the previous questions. I did want to ask just a clarification on the wording of the press release and the commentary in Indonesia. It says the parties continue to negotiate documentation on a comprehensive agreement, and obviously, that goal is to complete the required documentation by 2017. So, I just want to clarify, will that documentation by the end of this year include definitive agreements and definitive plans on things like the structure and the timing of the divestment and the construction of the smelter, or is that documentation going to be something else?

No. The final documentation would address those issues, all of those. It would be a comprehensive conclusion to the issues that we've talked about with the August framework agreement, and we are working with the government to have a complete resolution of those issues. The current goal that we're both working under is by the end of the year. So, there's an agreement to take future steps like building the smelter and undertaking the divestment, but it would be a comprehensive and final agreement.

Okay, great. Thank you for clarifying that. And then just somewhat related, can you remind us again, when do the capital spending deferrals/reduction decisions for the underground development, when do those really need to be made? How much of an impact would those have on the 2018 to 2022 mine plan that's been laid out, and when would that start to really cut into that mine plan?

We have, David – earlier this year, we cut spending in the underground by about 25%, and you saw the impacts of that earlier this year. We are continuing to spend at a reduced level to prepare the Grasberg Block Cave for startup when the open pit is completed late next year. Economically, that's what makes the most sense. As you can see from the numbers, the investments that we're making are less than actually the cash flows being generated from the business. So, the business is generating more cash flow than what we're reinvesting currently. But we could make a decision if we reach an impasse to suspend those investments, and those would have an impact on our production because the Grasberg Block Cave starts to ramp up during 2019, as Richard said earlier, if eventually it gets to over a billion pounds of copper a year and over a million ounces of gold. And so that would get pushed out. Economically, we're incentivized to continue to make those investments, but we're not going to make them if we reach an impasse and have to go in another direction. But at this point, our belief is that we'll get this resolved and be able to continue to proceed with our long-term investment plan.

Well, it's a continual thing, Dave. In other words, if we run into an impasse, which we don't expect before the end of the year, then we would take those actions. Our goal is, and the government is supportive of this goal, to resolve this by the end of the year. If we are continuing to make progress and for whatever reason it's not done then, then we'll assess that circumstance when it comes about. We've been talking about this for so long, and I recognize that all you have heard so much about this, but we really see the most positive objective that we've seen from the government in reaching a resolution.

Hi. Good morning. My question is around Grasberg as well. In the framework where you discuss divesting your ownership down, the PT-FI ownership down, I guess, to 49%, how does that work with the Rio Tinto JV, i.e., with their 40% kicking in, I think, around 2023. Does that mean you would drop down to an effective 29% stake starting around 2023?

Well, just for everybody's information, the project out there and the contract itself is actually a joint venture between us and Rio Tinto. It's a complicated joint venture agreement that was negotiated in the mid-1990s. Under that agreement, Rio Tinto has the right to come in now at roughly 2022 for a 40% joint venture interest. Rio Tinto faces a similar divestiture obligation that PT-FI faces. PT-FI's interest currently, the government has a 9.36% interest, so PT-FI has roughly over – FCX has roughly over a 90% interest in PT-FI which would, after Rio Tinto comes in, represent a 90% interest in 60%. After that, if we divest 51%, our interest would be in PT-FI's operations, 49% of 60%.

That's where the 29% is coming in. But one thing you should appreciate is the cash flows between now and that timeframe where it dropped to 60%, would essentially be close to 100% going to Freeport. So, there are differences between the two interests, and we're generating a substantial amount of free cash flow within that timeframe between now and 2022.

Okay. Thanks for taking my questions and, first of all, congrats on hitting the targets this quarter as well. Somewhat related to the previous questions. I did want to ask just a clarification on the wording of the press release and the commentary in Indonesia. It says the parties continue to negotiate documentation on a comprehensive agreement, and obviously, that goal is to complete the required documentation by 2017. So, I just want to clarify, will that documentation by the end of this year include definitive agreements and definitive plans on things like the structure and the timing of the divestment and the construction of the smelter, or is that documentation going to be something else?

No. The final documentation would address those issues, all of those. It would be a comprehensive conclusion to the issues that we've talked about with the August framework agreement, and we are working with the government to have a complete resolution of those issues. The current goal that we're both working under is by the end of the year. So, there's an agreement to take future steps like building the smelter and undertaking the divestment, but it would be a comprehensive and final agreement.

Yes. Good morning, everybody. So, Richard, you drew a couple of parallels to negotiations that took place in 2016 which were all market-driven, in my opinion. So, would you say you have agreed with the government of Indonesia on the set of assumptions that go into fair market value?

Not yet. We've agreed on a concept of fair market value, but that's been part of the process of getting to where we are now. The next stage is to deal with those parameters.

Got it. That's helpful. And then, here we are kind of at the midpoint between the framework agreement in late August and the end of the year. What progress would you say has been made since the announcement of the framework agreement?

Let's see. Kathleen is going to kick me, but not as much as I'd hoped for. I think the clarity of the government's desire and sense of urgency for reaching a deal has – that was my hope when we announced the framework, and I think that is coming into play. We've made a good bit of progress fixing the financial and the fiscal and legal terms for the extension. We're still having discussions on the form of that. We are working to get that documented in a contractual agreement between us and the government that gives us the ability to defend that and not be subject to future changes in laws and regulations. So, that's the place where we've made the most specific progress. We still have to firm up the form of that. But the big issues on divestment, the valuation issue we've made progress in dealing with this issue that was raised earlier about not considering reserves, I think Mike Gambardella raised in the first question the issue about whether it's from 2021 to 2041. All of those things we've made progress with the teams we're taking to with Indonesia.

Thank you, operator. Hi, guys. Just in terms of the capital spend that you are deciding, whether Grasberg gets resolved or not, it’s good to see that there's other projects that could surface value within the company. Kathleen just mentioned 2018, 2019, and 2020 for CapEx in Lone Star, is that based on a go-ahead or not go-ahead decision in Grasberg?

No. We are at the point now with our improvement in our debt levels and our balance sheet, that that's an independent decision. So, going forward on Lone Star is not dependent on having success with Grasberg.

I was just going to say it fits in with the timing of the declines in the Safford and how to best maximize the NPV of the project in connection with the expected production at Safford because what we're doing really is leveraging the existing infrastructure. So, as long as that infrastructure is being used for already developed reserves, we're better off deferring the spending at Lone Star. But we're getting to the point now – and we've gotten the permits, et cetera. We're going to the point now where we can see line of sight in terms of when those two intersections will cross. We will be considering with our board the timing of that project.

Hi. I'm thinking about dividends as I ask the question. In terms of the Kisanfu exploration project, the Serbian deep stuff, smelter in Indonesia, the heap leach at Lone Star, the sulfide mill at Lone Star or the sulfide mill at El Abra. Are all of those things likely to be 2020-or-later outlays that really don't influence the decision as to how much of a dividend to pay in 2018? And could you just talk to the question of dividends. Happy days are here again.

The answer is yes to your first question. Those are 2020 projects and beyond. The big issue on dividends rests with our success in reaching a resolution on this Indonesian question. As we go forward, with success on that and with copper markets which we believe will be positive, we'll be looking at debt levels with potential for capital spending. Our board will be very positive about paying dividends when the stars align.

Hi, Richard and Kathleen. A couple of questions from me. Just in terms of the export license that you've renewed until the end of 2017. Just curious on that, normally it's a six-month renewal, I think going back over the last couple of years. Was that your call or the government's call to try to just lock that in? I assume that's to try to push the agenda along on settling this dispute. Is that how we rate it or how did that come about?

That's exactly right, and it was a mutual decision.

Okay. And then you've touched on the Grasberg CapEx, what you're spending now, and then going forward. Only a couple of questions earlier, and it doesn't look like you've changed the guidance at all for that. But based on the 2Q presentation and the 3Q, there's a small adjustment down in 2019. It's only minor from 0.8 billion pounds down to 0.7 billion. Is that just around the edges or has there been any change, I guess, in the last three months to what you're actually spending on the underground or is it still, like Kathleen said, about 25% down on the start of the year what you're expecting?

Well, we go through a process every quarter. We don't have an annual planning process. We have a detailed review of capital allocation, capital spending every quarter. We meet with all of our mine managers and review results and outlooks. We challenge people on capital spending, and we defer wherever we can. So, particularly in Indonesia, we want to – we're making efforts to minimize capital spending to the maximum level we can while achieving our objectives of moving forward these projects so that we could begin caving at the end of next year.

But the production change you're talking about is just around the edges, rounding numbers change in 2019, and over the five-year period, there really wasn't a significant change in the overall copper or gold production or a significant change in spending.

Okay, great. Thanks very much and good luck with the approach in Indonesia.