Freeport-McMoRan Inc (FCX) — Q4 2017 Earnings Call Transcript

Thank you and good morning, and welcome to the Freeport-McMoRan fourth 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. Our conference call today is being broadcast live on the Internet. Anyone may listen to the conference call by accessing our website homepage at fcx.com and clicking on the webcast link for the conference call. In addition to analysts and investors, the financial press has been invited to listen to today’s call and a replay of the webcast will be available on our website later today. Before we begin our comments, we’d like to remind everyone that today’s press release and certain of our comments on the call include forward-looking statements, and actual results may differ materially. We’d like to refer everyone to the cautionary language included in our press release and presentation materials, and to the risk factors described in our Form 10-K and subsequent SEC filings. On the call today are Richard Adkerson, our Chief Executive Officer. We also have Red Conger here, Mark Johnson, and Mike Kendrick. I’ll start by briefly summarizing the financial results and then turn the call over to Richard, who will be reviewing our performance and the slide presentation that is included on our website. After the prepared remarks, we’ll open up the call for questions. Today, FCX reported net income attributable to common stock for the fourth quarter of 2017 of $1 billion, or $0.71 per share. The results include net gains of $291 million, or $0.20 per share, primarily related to tax benefits associated with U.S. tax reform totaling $393 million, partly offset by charges for adjustments to environmental obligations. The benefit from tax reform principally relates to the repeal of the AMT and a refund of our AMT credit carry-forward. After adjusting for these net charges, the fourth quarter 2017 adjusted net income attributable to common stock totaled $750 million, or $0.51 per share. For the year, our net income attributable to common stock totaled $1.8 billion, or $1.25 per share, compared to a net loss attributable to common stock of $4.2 billion, or $3.16 per share for the year 2016. For the fourth quarter of 2017, our adjusted earnings before interest, taxes, and depreciation and amortization, or EBITDA totaled $2.1 billion and $6 billion for the full-year. A reconciliation of our EBITDA calculation is available in our slide materials on Page 37. For the fourth quarter, FCX totaled 1 billion pounds of copper, 593,000 ounces of gold, and 24 million pounds of molybdenum. For the full-year, we sold 3.7 billion pounds of copper, 1.6 million ounces of gold, and 95 million pounds of molybdenum. Our fourth quarter average realized copper price of $3.21 per pound was 29% above the year-ago quarter average price of $2.48 per pound. Our average unit net cash costs for copper was $1.04 per pound for the fourth quarter of 2017 and averaged $1.20 per pound for the full-year, compared to $1.26 per pound for the full-year of 2016. We generated strong operating cash flows in the fourth quarter totaling $1.7 billion, which exceeded our capital expenditures of $390 million. For the full-year, our operating cash flow totaled $4.7 billion and capital expenditures totaled $1.4 billion. We used our strong cash flows to improve our balance sheet. During the fourth quarter, we repaid $1.7 billion in debt, which included the early redemption of $617 million of senior notes due 2020 and open-market repurchases of $74 million of notes due in 2018. At the end of 2017, our consolidated cash was $4.4 billion and consolidated debt totaled $13.1 billion. Our debt net of cash at the end of 2017 was $8.7 billion, which is $3.1 billion less than at the start of the year and $11.4 billion less than the level two years ago. We ended the year with no borrowings under our bank credit facility and approximately $3.5 billion available. I would now like to turn the call over to Richard, who will be providing additional details on our results and our outlook.

Good morning, everyone. Thanks for joining our call. 2017 results reflect really strong operating performance throughout our global operations, as Kathleen just described. It also reflects the success of our ongoing cost management and capital discipline efforts, strong cash flow generation, we restored our balance sheet strength, developed attractive organic growth options for the future, and we made important and positive progress for the long-term stability of our operations in Indonesia. Most of you have been here and watched our company for some time; just think about where we were two years ago. We had just lived through the significant drops in commodity prices as the industry faced challenges. The price of copper was just over $2 a pound, and many expected it to drop below that. We had the issue of $20 billion of debt following the misplaced oil and gas transaction that we did. We had restructured our Board, restructured our management team and were faced with deleveraging. At that Board call, one of you pressed us to say what do you expect your debt levels to be. We weren’t sure at that time. We said, we hope to reduce our debt between $5 billion and $10 billion over the next two years. We are under $9 billion as we ended the year this year. We were faced with the completion of our Cerro Verde project in Peru, which was a major project, often troublesome for the industry. We did not know what we were going to do with the oil and gas assets at that time, nor were there buyers in the marketplace in the first quarter. But we successfully exited that business. We thought we were going to have to hold all those assets for a period of time. Many who followed our company were skeptical of our ability to sell copper assets at reasonable prices, and we were working with our partners, Sumitomo and Morenci, as well as with China Moly, which turned out to be great partners to work with in the Congo. We were able to get reasonable values at the time; great investments for those companies because they recognized the long-term values and the value in the copper marketplace. We had to sell some equity, but we fought our way through that. In October 2016, I went back and looked at my notes from LME work. There were still people predicting a wall of copper supply, still predicting copper prices to be $1.80 a pound in October 2016. The price on the upside that we were above $2.50 a year ago, but we were blindsided by new regulations that came out from the government of Indonesia that raised questions about our contract there. They came out in January. Since that time, I’ve spent as much time in Jakarta as I’ve been elsewhere. Kathleen has been there on my last five trips. And we were pleased that after facing the prospect of a very contentious arbitration proceeding, which we talked about publicly in the first quarter, we have reached common ground for moving forward with the government of Indonesia. We now mutually want to get this resolved. We made a lot of progress and I’ll give you a report on where we stand and answer your questions. But in 2017, the price of copper came back. So today, we have a company with a really great set of long-lived, attractively operating cost profile, assets, and resources. I’m so proud of our team. I have Red Conger here, who runs our business in the Americas, Mark Johnson, who runs our business in Indonesia, and Mike Kendrick, who runs our Molybdenum business, Rick Coleman, who does our construction projects, is traveling. But these guys and their teams just had an exceptional year this year, executing our plan while we managed the issues associated with balance sheet management in Indonesia. We’ve got a great team, and this team has executed extraordinarily well. You can go back to the early 2000s when we had to deal with a severe balance sheet issue. The successful integration and repayment following the Phelps Dodge deal in 2007, where we successfully repaid all the debt following the highly leveraged transaction within four years after managing ourselves through the financial crisis of 2008, 2009. By 2011, we had a company with no debt, had an integrated team that was the best copper operating team in the industry. Metrics are shown on Page 11 and on Page 4. So the key thing that jumps out is free cash flow generation here in 2017. The first part of 2017 was tough in Indonesia. We were restricted on exports for a period and had significant labor problems. By midyear, we were exporting and expect to continue to export, and our labor relations issues made significant progress. There is new union leadership in Indonesia, and we signed a new two-year labor contract in December without any controversy or drama. But in spite of all those issues, we generated over $3 billion of operating cash flow in excess of our capital expenditures. You can see our cost structure. We maintained our reserves, and as I mentioned, we have significantly reduced our balance sheet. As we look forward to our plan for the next year, if copper prices remain at roughly current levels, the debt level, when I say, next year, this year, 2018, we should end the year, if we use all of our cash flows to reduce debt at a debt level in the area of $5 billion. So $20 billion to $5 billion is great progress. Copper market commentary is positive right now, as we have seen. Demand is growing throughout the world. For many years, China has been the sole source of growth globally. China is continuing to grow, their economy is better than people expected, as you’ve seen. They appear to have dealt with their banking issues, which was a big concern, probably still a risk, but growth in Europe, growth in the United States, growth in Japan—just tune into the comments at Davos that’s going on right now. You hear the positive comments about the global economy and all that reflects into stronger copper demand. On the supply side, the issues still remain. Analysts and consultants following this business expect 2018 to be the first year of lower copper production after accounting for disruptions compared to the prior year; the first time that’s happened since 2011. The industry is facing a long period of under-investment, and even as we speak today with higher prices, we don’t see a wave of new investments being started immediately. There’s a real absence of major new projects on the horizon, declining production from existing mines, and exchange stocks are low. So, what McKinsey is talking about is the need to balance the market with 5 million tons of new projects over the next decade with long lead times. The few world-class opportunities with new usage for copper, such as transportation and power generation, are limited. The outlook for copper is positive going into 2018 and very positive for the long term. Now, slide 6 shows where we stand in the industry. Clearly, we are a leader. We operate all of the mines that we invested in. If you were to look at the production of our partners and mines that we operate, we operate the leading amount of copper production in the world. We have large scale and technical capabilities in all forms of copper mining, whether it’s SX/EW, open-pit, sulfide projects, or underground mining, particularly block caving, where we’ve been experiencing block caving since the 1980s. Our strong technical team is a huge benefit for our company. That’s a really strong competitive advantage. The supply situation is reflected on Page 7, where we have a listing of the largest copper mines in the world in terms of reserves and production. Notably, no mines on here have been discovered in the last 10 years. In the last 20 years, the only two mines are Oyu Tolgoi and Las Bambas. Everything else are old ore bodies now because we don’t have new greenfield projects of size in the imminent outlook for copper demand and supply, making it more significant these brownfield opportunities that we have with our ore bodies, which we’ll talk more about. Besides our technical capabilities, I think the real strength of our company lies in our current resource base—we have 2P reserves producing about 4 billion pounds a year. But looking at our proved and probable reserves of 87 billion pounds, mineralized material of another almost 100 billion pounds, and potential of 150 billion pounds, altogether, that’s 335 billion pounds. By the way, half of that is in North America. In North America, with the advantage of power costs, that has come about due to the shale revolution in natural gas and crude oil, and improved regulatory situations, and a very flexible workforce, we have support from states and local communities. This gives us a big advantage of investing in the United States, which, from a political risk standpoint, is still the best country in the world. And now with this new tax bill, that’s another advantage. We are not like most transnational companies in the United States; we were already paying higher tax rates outside the United States than inside. We also had a very large and we continue to have a very large loss carry-forward for the oil and gas business. So we don’t have the issue of repatriation. The new tax law has retained a percentage depletion for mineral resources. So even as we look out beyond this time, we have a long period with these loss carry-forwards. The new tax law will be a long-term benefit for us. So beyond our proved and probable reserves, we have a great deal of optionality for the future. The strongest assets in the mining industry are long-lived assets. Long-lived assets reduce investment risks compared to Greenfield exploration. We don’t need an acquisition, we have a resource base like one that we have that isn't limited to any single mine. We have a very large footprint with five operations in the United States that have very large sulfide resources identified. Over time, I’m convinced that the world is going to need the copper from those. In South America, we have an attractive project in Chile with our El Abra project, where we’re partners with Codelco to develop a very large sulfide resource. There’s lots of capital and a lot of studying to be done; we’re preparing ourselves for that as we haven’t yet committed to spending capital. We also have a couple of attractive exploration projects, including a project in Serbia, where we entered into partnership with Nevsun, which continues to do drilling on the Upper Zone, as well as the Lower Zone. We have a significant position here. While we sold our Tenke Fungurume project in the Congo, we still own an undeveloped resource in the area called Kisanfu, which we believe holds the world’s largest undeveloped cobalt deposit. It’s permitted, and we’re looking at opportunities to develop it or enter into partnerships with other operators in the area. In the Congo, we have a lot of interest from prospective buyers, but it also gives us a lot of options with this big resource. In the Grasberg district, while we have a clear-cut plan for developing and operating through 2041, there are significant resources that will come into play beyond that time. Looking at the Americas, it was a really strong performance. Congratulations to Red and your team. In the fourth quarter, we sold 666 million pounds of copper alone. I mentioned earlier, the Cerro Verde expansion, which averaged 374,000 tons per day in the fourth quarter. That’s just at 360,000-ton nameplate; I believe it’s the largest concentrator in the industry, and it is operating very effectively. We continue our focus on cost and CapEx management. Some factors are coming into increased costs at the margin. With higher copper prices, our margins are growing, but we continue to be disciplined in the way we spend money. We are advancing these studies for looking for future growth, and you can just see what a great business this Americas business is. In the fourth quarter, we had $450 million to $500 million of cash flow after CapEx, and for the year over $2.5 billion. Still, in our memory, the time when it was said that the Southwest copper district in the U.S. was dead. Now it’s profitable with major opportunities to invest capital and employ people. Our company supplies more than 40% of the copper to the U.S. district, and we will continue to take advantage of that. The sulfide projects in the Americas include five projects in the U.S. and the El Abra project in Chile. The reserve numbers we are using are still based on a $2 copper mine plan, meaning there’s significant upside at higher prices in both our reserves and resources. But we’re monitoring market conditions and will be very disciplined in deciding when to go forward with it. This is a strong aspect of our company. One project we are moving forward with is the Lone Star oxide project. We have known this resource for decades, and it’s located seven miles from our Safford mine, which is across the mountains from Morenci in Eastern Arizona. We are starting a project to mine an oxide cap above this big sulfide project. The current project has reserves of 4.4 billion pounds of copper with a capital investment of $850 million to be spent over several years. We are commencing free stripping activities in the first quarter of this year. This will be very profitable because when you transport that oxide material to the Safford processing facilities, it allows us to mine this oxide ore, providing production of 200 million pounds a year over 20 years at a unit cost of $1.75 with over $1 billion of NPV at $3.50 copper. It’s a good project, but it gives us exposure to the larger sulfide deposit lying underneath. The sulfate deposit contains 60 billion pounds of contained copper. This project will eventually involve the development of a big concentrator mill, but it’s an attractive way to gain exposure to that larger resource. In Chile, the El Abra sulfide project is a good project. This is indeed a significant undertaking. It is in our inventory and we’re working with our partners, who are engaging with other landowners in the region to establish cooperation. It includes a desalinization project and the transportation of high-altitude water. This will involve a significant investment, but it’s projected at 2 billion pounds with 4% to 5% copper. Our expectation is that this will entail building a 240,000-ton per day concentrator somewhere in the area of Cerro Verde, which could produce an additional 750 million pounds a year. This is a six to eight-year lead time, and we are engaged in pre-feasibility studies and permitting now; it’s something that will develop over time. We’re in no rush on this, but it’s going to be a great project for Freeport in the future. You can see results of drilling that have been done to date, the reserve pit identified, the mineralized material shell, and continuity of mineralization with deeper drill holes as we advance in Indonesia. Mark, I again want to congratulate your team for meeting the challenges we faced at the job site while managing negotiations with the government. I mentioned earlier our exports were disrupted and faced labor problems. The labor situation has greatly improved since we’ve had to deal with it; it has been better than in previous years since 2010. We’ve encountered some security issues, and Papua will always be a complicated area to operate. But in the last couple of months, we’ve seen great cooperation from the Indonesian authorities. The head of the police, who previously served in Papua, is now very engaged. I’ve known General Tito for a number of years; he is very well regarded in the government and he has committed to helping us. There’s a new head of the military as well, and they are collaborating with the police. You can see the results of that. I know there continues to be concern about uncertainties surrounding our contract and so forth. But the balancing deal we’re working on with the government is to progress discussions and take advantage of the high-grade ore that we have available as we mine the pit. My first trip there was in 1988, when we drilled our second drill hole at Grasberg. The deep pit measures a kilometer deep and 2.5 kilometers across since that drilling project began, and we’re nearing final stages of mining the pit, leaving very little waste material to move, yielding very high grades of core ore we will continue to mine for the next year or so. What that has generated for us this year, including the negative impacts we suffered at the first of the year, is over $1.5 billion of free cash flow, which is critical to our company. What is extremely important is obtaining rights to operate through 2041, and I’m pleased to report those negotiations are advancing in a mutually amicable way. We have a very good working relationship with the ministers assigned to represent the government. The negotiations are at times challenging, as all negotiations are, but we have mutual respect, positive views about each other, and a mutual objective of achieving stability. We’re pushing for fiscal and legal certainty for our long-term mining operations, and that’s through 2041. That certainty means we’ve reached an agreement that secures our rights reserved so that they can’t be modified by future laws and regulations; the government has accepted that. We’ve agreed to jointly provide financial benefits to the government that exceed those of our current contract, primarily by paying higher royalties. We are redeploying higher royalties. We’ve also agreed to two things that Indonesian officials describe as non-negotiable. One pertains to building new smelter capacity, and we are committed to this in coordination with securing this extension. We are currently discussing a partnership with PT Amman, which acquired Newmont’s mine in Batu Hijau, and it makes sense for us to work together. We have agreed that within five years of signing the definitive agreement, we will commit to construction of this new smelting capacity efficiently. We’ve also agreed that dominantly, this is non-negotiable from the Indonesian government’s perspective; we would provide the government a 51% interest in the project as part of a joint venture operation between us and our joint venture partner. We communicated that as long as we receive fair market value for any divestment, it must be based on international valuation standards for resource assets, which the government has also agreed to. This is a very complicated business, and we’ve invested billions of dollars to this point. We will continue making larger multi-billion dollar investments as we move forward but must ensure that it’s appropriately managed. Our commitment is managing Freeport’s affairs in conjunction with the interests of the Indonesian government. I’m not overly stretching it to say it’s the most complicated mine in the world due to its location, and it will be the largest underground mine ever developed. Environmental and community challenges are significant. We will work together as partners with the Indonesians and provide them meaningful participation, but we must run this operation effectively. We are the best copper miner in the world, and the government’s state-owned business possesses some mining experience, but it does not compare with the scale or complexity we possess within the copper sector. So what we have now is Grasberg, and we are completing the mining of the open pit. Development started back in the early 90s in one of the great mining operations, most years we were moving 700,000 tons to a million tons a day and now it’s coming to an end, but it’s the same ore body that extends down to depths where it’s more economical to mine underground. We’re focused on developing the Grasberg block cave. Currently, we are producing from an adjacent mineral system that we began mining in the early 1980s and continue to mine at deeper horizons while expanding it. The mine we’re mining from is the DOZ; the new mine is the DMLZ, which we began production in 2016, and we will have the opportunity to expand this resource moving forward. Altogether, we will have to – our plans call for us to process through our mill from the underground at rates of about 240,000 tons per day for the long term, continuing to 2041. And even in the next slide, while all of this has been happening, our team has consistently concentrated on developing this Grasberg block cave infrastructure and has nearly completed it. We gained access to the underground, and we can’t start developing the block caves until we finish the mining of the pit; we’re currently finishing the ore delivery system. Ultimately, all these projects are underway. By the end of the year, we should be able to activate the underground operations. This has been an intricate and high-risk project, and Mark and his team have done an excellent job in focusing on that. I believe the risks associated with it are now behind us. Once we start managing the underground, we’re going to ramp up to where this mine will produce a billion pounds of copper a year, along with a million ounces of gold annually. This is going to provide an attractive cost structure. To put this in perspective, we currently have just under a billion tons of ore at just under 1.5% copper equivalent when you add in gold. In comparison to Las Bambas, it has just over a billion tons of ore, but a 0.8 copper equivalency. We project to produce over 30 billion pounds of copper equivalents, while they provide about 20. Overall, this operation will generate significant revenues. So the key milestones that we’ve reached to date are shown on Slide 19. We’ve accomplished 220 kilometers of development, mine access, shaft, ventilation, and rail connection, and we’ve got a good amount of work accomplished this year. To recap quickly, we’ll start glassing in the undercut toward the end of this year, with actual material being mined in early 2019. The cave should develop very quickly due to the portion of the deposit we’re starting from; this allows equipment to be run for management systems while the production from the open pit carries on. We also have been preparing to manage the water around the pit before the initiation of mining the cave. Last year, we documented over 30 kilometers of development, which will decrease a bit this year as we start the level of production to a degree of 2200 meters per month. We’re well-prepared for that.

Operator, we can take questions now.

Hi. Good morning, Richard and Kathleen.

Good morning.

Regarding Grasberg and the potential that the government might buy the 40% stake from your JV partner, Rio Tinto, how likely do you think that outcome is? Is that now the most likely outcome in your view?

It’s at a stage of negotiation. So you don’t want to get ahead of those negotiations. It appears to be the desire of both parties to do that. I would characterize it as a most likely outcome.

Okay. Thanks, Richard. And can you remind us of what Rio Tinto’s CapEx commitment is to developing the underground? And would you expect that in the scenario where the Indonesian government buys Rio Tinto's stake, they would also assume that share of CapEx commitment? Thank you.

Yes, we have an understanding with the Indonesian government that in the event that they reach a deal with Rio Tinto, Freeport’s economics under the existing joint venture agreement would be preserved. Alex, you understand what I say? Am I saying that clearly?

Yes, yes. Okay, thanks. That’s clear. I’ll let somebody else ask the question, and I’ll hop back in the queue. But thank you very much.

Okay, Alex, thanks.

Okay, great. Thanks for taking my questions. Just stepping back for a minute. Obviously, the balance sheet is significantly better than it was. Stabilization in Indonesia, at least, seems to be heading in the right direction. And it’s like quite a bit of free cash flow generation potential. Way back when the management team, the Board did payout this free cash flow in dividends and special dividends; pretty big ones at points. And with your opening remarks being focused on highlighting the projects, I have a high-class problem type of question. As we move through 2018 and 2019, is there a preference to spend that cash on developing projects, or is there also consideration toward giving some of that back to the shareholders?

These projects are very long-dated, Dave, I think, as you know. We’re not likely to be spending significant amounts of capital on these projects in 2018 and 2019. We’re now building into our CapEx numbers this Lone Star project, which is a good project, but not huge. With positive cash flows, my expectation is that we’ll be looking at our long-term tradition of returning cash to shareholders.

Okay, that’s helpful. Thank you.

And we’re going to be very disciplined about all these projects. They’re big and low risk, but there’s still risk to the global economy as we all know, and we’re going to keep our finger on it to see how it’s progressing, how China is doing, and how the rest of the world is doing. But my expectation is, we’re going to be generating cash, and I believe our Board will be predisposed to return to shareholders when we can.

Hey, good morning, Richard and Kathleen. Thanks for taking my questions. At Grasberg, an operational question now given all the challenges in the last several quarters in production, could you remind us if nothing had changed from the current situation of the government? When would Rio’s 40% stake kick in? Would that be 2022, 2023 now? And once the whole Block Cave ramps up, assuming everything is as it should be, what kind of production delivery cost do you expect once we get there and are settled on the ground?

The answer to your first question is 2022. The timing within 2022 could vary, but it’s going to be expected to be then. Our net cash costs at $1,300 will be…

Low $0.50 a pound.

Okay. Alright. Got it. And another thing that’s come up as we talk to a lot of companies is that now that there’s no tailwind from currency, from oil or other kinds of improvement, people worried about wages, labor, capital goods. I’m curious if you alluded to your capital spending over the next couple of years, how much of that is on yellow goods? And how much of that would be exposed to, say, prices that aren’t completely locked up or PPI-linked, or are you still don’t have complete visibility there?

What we do have in our capital plans accounts for maintaining and replacing trucks. We tend to do a lot of truck rebuilds ourselves, with our dealers on part. A significant portion of that includes maintaining our equipment and replacing our equipment. We are seeing some past inflation from oil-related prices. But our team is very disciplined about spending, both operating and capital, and timing it in a way that we’re not in a rush to get the equipment. We’ll do it in a smart way and be disciplined, again, just in trying to use what we have on hand and making new equipment purchases as well. But there is some cost inflation coming through both on operating and capital.

Yes, there’s definitely some correlation between some of our input costs and copper prices. We’ve had trucks in Indonesia, and more are currently on the way. Red, when’s the last time we bought a new haul truck?

2008 was the last new haul truck.

The last new haul truck we bought was 2008. So we’ve been experiencing our rebuild program. We’re working on extending tire lives. It’s a constant effort. We need our senior management team's commitment working with our mine operators, so we can find ways of offsetting cost increases with efficiency gains, which is really remarkable. We use a lot of diesel, but power for many of our operations comes from sources other than petroleum. Anyway, we’re set to offset a good bit of that. However, it is going to be a factor for the industry. We’ve been Caterpillar's biggest customer for many years. I had a chance to glance over their earnings release early this morning. You can see what’s happening, along with potential labor issues. This year, we’re facing many labor contracts coming up in 2018. Expect these negotiations to be challenging; they could support the supply side. Codelco has significant challenges maintaining production. All of these are challenges for the industry, but they also support supply.

Got it. Thanks for the comments. Good luck with everything.

Thanks, Matt.

Yes. Thank you very much. Just a question on Grasberg there as well. You mentioned that the Indonesian government has agreed to pay fair market value or that they consider the divestment at fair market value. It always seemed that they had agreed to fair market value, but their estimate was always much lower than yours. Would you say that effectively, you have now agreed on a fair market value for the divestment, or are you still somewhat apart on that issue? That’s the first question.

Let me address that, and those who are veterans know this. Multiple things arise in the Indonesian press, including comments by someone either in government or business not directly involved in the process. Be cautious in overreacting to such things. We have not engaged in a negotiation entailing exchanges of values with the Indonesian government on divestment values. What we have agreed to is recognition that negotiations should adhere to existing international standards regarding resource valuation. This notion of confining valuation to our 2021 contract termination does not apply here. The government has assigned internationally recognized financial advisors to assist in this process, and it has been productive. While we haven’t negotiated an exact value yet, I feel confident about the reasonableness of the eventual negotiated values.

Thank you. That’s very clear. And just a second question, I’ll talk about something else aside from Grasberg. In your Americas operations, we did see a bit of a drop in lower grades and recovery rates, as well. Could you give us a sense of whether this is mostly just one-off or if there is sustainability to it on the operational side? Thank you very much.

Yes, Andreas, this is Red. We did see lower recovery primarily at Cerro Verde in the last quarter. We took ore from stockpiles in an area were the material was oxidized, but it didn’t recover as well. We don’t see that as ongoing in the future. We’ve also seen some changes in mining rates contributing to fluctuations in our numbers right now that will normalize.

As we look at guidance going forward for the Americas, our numbers are relatively flat in terms of copper production, which is sustainable over years.

Exactly; we’re bringing up Cerro mine now and, with higher moly prices, its cost structure is attractive. I pointed out in El Abra, where we curtailed production a few years back, we’re rebuilding that, and the Lone Star Project costs are relatively similar to our current levels. Overall, we’ve had robust cash flow, and if that positive trend continues, it provides us with strength for additional projects.

That’s clear. Thank you very much.

Hi. Thanks a lot. Just first quick question is just relative to this potential framework you’re talking about with Rio Tinto and the Indonesian interest and having that 40% stake post-2022. Just to be clear, it seems that even if something were to be agreed to, say, in the next few months, Freeport would still have the right to 90% of the economics of Grasberg until 2022, or whenever Rio’s stake would kick in, right?

Yes. That’s not a certain percent; that varies due to the existing metal strip concept in their contract. However, I can assure you we’ve maintained our economics for Freeport embedded in the joint venture structure.

Okay. Great. Thanks. And just a quick question about Lone Star: So, you've made the decision to proceed with the project at $850 million and around 200 million pounds of copper a year. Could you describe your thought process relative to how you assess this in terms of IRR or overall NPV relative to the project economics versus others? What overall considerations do you take when assessing the capital to invest in Lone Star, and how might this apply to future projects like El Abra?

It was a much easier decision to approve Lone Star than what we will face with future decisions. The reason being we had unused underutilized processing facilities in Safford that are nearby. That made capital significantly less. This project involves near-surface oxide material so you merely need to ascertain how to access transport; the rates of return are attractive. It also exposes the larger sulfide underlying that oxide deposit. Today, a lot of newer deposits tend to carry much lower grades—the significant oxide projects have been developed; our sulfide projects involve substantial upfront investments—whether in terms of development or ongoing operations. We consider various price projections beyond a single price; we’ll discuss and analyze all of them. It’s all about how much risk could impact the overall investment levels. If we can manage those without incidents, we can ensure excellent long-term returns. I always state that if companies get too formula-driven, they begin to overlook the larger picture. So our process is more about constant collaboration among operators and corporate members; we emphasize working closely together as my experience is that the formalities do not paint the complete picture.

Right, right.

Along with the ore flow project, we have synergies in the Safford and Lone Star teams. One of the aspects we examine in qualifying project decisions is resource size and project life; projects yielding short life relative to NPV multiples aren’t exciting; we’re more interested in long-term multiples on NPV.

Right. Thanks a lot, guys.

Yes.

Yes, good morning, Richard and Kathleen.

Hey, Mike.

A couple of questions on Grasberg. First, just congratulations on the de-risking of the balance sheet; the work over the last couple of years has been significant.

All right; thanks, Mike.

Looking back to Grasberg, I wanted to clarify what I heard you say before. So in terms of your agreement with the government, has the government formally indicated that if your stake were to fall below 50%, you would still maintain operating control?

Yes. I want to be clear about this. I would prefer not to discuss this issue but recognize that we’re obligated to inform you as shareholders about our current position. The Indonesian government must report to the parliament so that all involved have to discuss these items publicly when they're not finalized. I’ve only described these as understandings because while we agreed on a framework, we don’t yet have formal agreements with the government. There are still issues under discussion, and we’ve been clear about our position. We believe we have attained a level of understanding with the government. However, various views persist within the government. Maintaining control is significant; this mine's nature requires disciplined investment decisions that cannot dissipate value.

From an economic standpoint, if you assume Rio Tinto signs a deal with the government, is it understood that from an economic perspective aside from the smelter, is your understanding that the economics of your current agreement will remain unchanged?

Yes, we had good discussions, and we explained this to them. Thus, the acquisition of Rio Tinto's interest would not modify our economic structure. As we establish the long-term agreement framework, our financial benefits to the government will be heightened. These things can be reshuffled and reorganized in certain ways; however, they preserve the fundamentals of efficiency.

The final question on Grasberg: Can someone provide us with the overview of the after-tax situation?

Sure, Mike. Well, our U.S. operations consolidate income generating in foreign markets through respective tax laws, plus foreign tax credits, which, under this process, will lead to a positive outcome. The updated tax law provides some benefits.

Fine; thank you, Richard.

Hey, good morning everybody, and congrats on the progress in Indonesia. I was on another call early, this may have been addressed, but I wanted to touch on the net sum. I remember there were export royalties in place while negotiating the new structure with Indonesia, and I wondered to what extent this is currently being covered in those negotiations. And Kathleen, when you gave the $0.50 per pound cost guidance for 2022, would that include those royalty costs, in case they’re applicable?

Yes, we are currently paying export duties and expect those rates to phase out once the smelter achieves a certain percentage of domestic processing. So post 2022, we’ll handle all concentrates domestically and won’t impose a duty, but those duties will be in our current guidance for 2018 and 2019.

And could you remind me of approximately how much per pound those duties amount to?

For the export volumes, we’re currently paying roughly 5%, and you can see that in our operating summary, where we paid $0.34, including royalties and export duties.

Lucas, to clarify, roughly 40% of our production at Grasberg is processed at the PT smelting facility at Gresik that we built in partnership with Mitsubishi and other Japanese investors—there’s no export duty on that, only on our own exports. Regarding royalties and export fees, we face royalties that are assessed on all production unrelated to exports; and then we have a designated 'export duty' which has remained contentious over the uncertainty surrounding regulations.

By the way, our export duty is anticipated at roughly $200 million for 2018.

Very helpful. Thank you. And then maybe just to tie up some loose ends, I recall that was a $350 million Cerro Verde royalty dispute; has that been settled? Can we have an update on that?

There isn’t any update since our fourth quarter release from the third quarter. We continue to negotiate with government officials for a settlement that will waive penalties and interest associated with that dispute. Those discussions are ongoing.

Alright, I’ll leave it here. Thank you very much and good luck.

In conclusion, that $200 million reduces our taxable income; it's a pre-tax figure.

Thank you very much. Richard, I wanted to follow up on your thoughts related to the transition from the pit to underground; you seemed much more confident about the army in the de-risking. What are some of the achievements made, and what should we expect as we look into the fourth quarter of 2018 and for the first half of 2019 concerning progression and flow?

Certainly; that’s why we added the slide; I think it’s the first time we’ve used it. What was the slide number?

On the milestones?

If you look at Slide 19, Mark, do you want to elaborate?

Yes, a lot of the challenges in the Grasberg block cave, as Richard indicated, the rail systems are finished, the conveyors are in place—the crushers have been placed. The conveyors will be complete all the way up to the mill by May this year, creating six months of accessibility to start production. We’ll be mining about 6,000 to 7,000 tons a day just in developing drifts. The access to the ore body is extensive at the undercut extraction level and service level, with ventilation already in place for easing access. We are preparing ourselves to go. We’ll start to blast in the undercut at the end of the year and commence taking draw bells at the beginning of 2019. The cave should develop quickly, given where we start drilling in the initial portion of that deposit. Some overlap exists now, and we have worked with our consultants that we can achieve about a three-month overlap of ongoing pit operations while the block cave starts. We have laid out a plan for managing the water from the pit and have documented significant efforts for groundwater control, minimizing impacts associated with operations. Last year, we completed 30 kilometers of development, and this will improve this year as we build the defining area's development, focusing on safety.

Operator, are there more questions?

Thank you. I appreciate everyone’s questions; we value your participation. We’re focused on ensuring that our progress continues effectively and efficiently. The company is very well-positioned for future success. If you have follow-up discussions, please reach out to David.