Freeport-McMoRan Inc (FCX) — Q1 2019 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to the Freeport-McMoRan First Quarter 2019 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 is being broadcast live on the Internet, and anyone may listen by accessing our website homepage and clicking on the webcast link for the conference call. In addition to analysts and investors, the financial press has been invited to listen to today's call, and a replay will be available on our website later today. Before we begin, I want to remind everyone that today's press release and some of our comments on the call include forward-looking statements, and actual results may differ materially. Please refer 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; Red Conger; Mark Johnson; and Mike Kendrick. I will start by briefly summarizing our financial results, and then we will turn the call over to Richard, who will review our recent performance and outlook using the prepared slide presentation materials. As usual, after our prepared remarks, we will open up the call for questions. Today, FCX reported net income attributable to common stock of $31 million, or $0.02 a share in the first quarter of 2019. After adjusting for net charges of $36 million, or $0.03 a share, adjusted net income attributable to common stock totaled $67 million or $0.05 per share in the first quarter of 2019. Our adjusted earnings before interest, taxes, and depreciation for the first quarter totaled $778 million. A reconciliation of our adjusted EBITDA calculation is available in our slide deck. Our sales for the first quarter totaled 784 million pounds of copper, 242,000 ounces of gold, and 22 million pounds of molybdenum. As expected, our sales volumes were lower than the year-ago quarter, primarily due to the transition at the Grasberg mine in Indonesia. Our copper and gold sales were approximately 5% lower than the January 2019 estimates of 825 million pounds and 255,000 ounces of gold. This reflects the weather impacts and events at El Abra during the quarter, which have now returned to normal operations, as well as unscheduled maintenance at one of our North American sites and the timing of some shipments from Indonesia. Our quarterly average realized price for the first quarter was $2.90 per pound, slightly below last year's first-quarter average price of $3.11 per pound. Our gold realized price of $1291 per ounce was also slightly below last year's first quarter of $1312 per ounce. Our consolidated average net unit cash cost, net of byproduct credits, was $1.78 per pound in the first quarter of 2019, higher than the first quarter of 2018 average of $0.98 per pound primarily due to the lower sales volume from Indonesia. We generated operating cash flows of $534 million in the first quarter and funded capital expenditures totaling $622 million, including those associated with our underground development and the Lone Star development. In March, we redeemed all of our outstanding notes due 2020, amounting to $1 billion in debt redemption. We ended the quarter with $2.8 billion in consolidated cash and $9.9 billion in consolidated debt, with no borrowings and $3.5 billion available under our revolving credit facility. I will now turn the call over to Richard, who will refer to our slide presentation materials.

Good morning, everyone. The first quarter for Freeport has been quite clear and straightforward. We are happy to share that we are progressing as planned with the objectives we laid out during our last earnings call, and our business operations are running smoothly. Consequently, we haven't made any major adjustments to our operational outlook, and our key initiatives for the two-year transition at Grasberg are advancing as intended. This marks the beginning of that two-year period. As we work towards ramping up Grasberg to sustainable levels, we anticipate a promising future for our company. Additionally, our new annual report is out, highlighting our assets and the strong quality of our diverse mining portfolio, which brings inherent value. Looking ahead, we have a clear strategy in place that we believe will enhance shareholder value. In recent years, we have made significant progress in strengthening our balance sheet and resolving longstanding contractual issues in Indonesia, which provides us with a stable operational foundation to achieve our goal of increasing shareholder value. Our priorities for 2019 are outlined on page 4 of the slide deck, and we are dedicated to executing these priorities while currently putting any significant capital investments or M&A considerations on hold, as we are confident that successfully achieving these goals will drive future value for the company. In Indonesia, the ramp-up of our underground mines is on track. I will discuss other milestones later in the presentation. In the Americas, we are focusing on productivity, cost control, and maintaining discipline throughout our operations. The accomplishments of Red Conger and his team have been commendable. Our Lone Star project is on schedule and, while it is not a major capital investment, it is proving to be profitable. We are encouraged by the results of exploratory drilling and analysis for this asset, which we believe has the potential to develop into a significant resource. We are actively studying and evaluating potential future growth projects to secure long-term value for the company. However, for the next couple of years, we will be in a phase of assessment rather than committing capital. The success of these initiatives, combined with a favorable outlook for copper prices, as recognized by industry consensus, will contribute to shareholder value. On page 3, we highlight our company's consistent strengths: we are a leading copper producer, a responsible operator, and we possess a high-quality portfolio of long-lived assets that operate within a competitive cost structure—attributes that would be difficult for others to replicate. Our current production capacity remains robust, which we can maintain by efficiently managing our existing assets. I have mentioned potential future growth options. Our history demonstrates a strong track record in executing major expansions successfully. Notably, the Cerro Verde expansion stands as a prime illustration. We have also successfully built the Tenke Fungurume mine in the Congo and expanded Morenci and our Climax mine. This success emphasizes our ability to execute and enhance mining assets. A significant advantage for us is that we operate all of our owned mines, enabling us to share expertise, replicate successful strategies, and allocate resources across the company effectively. Thanks to our efforts over the past three years, we now possess a strong financial position, which we expect will improve. Our outlook on the copper business remains optimistic, and we have not encountered any developments that would alter this perspective. Our strategy for increasing shareholder value is clear. I had previously referenced a slide on page four outlining our focus for this year and into next year: managing the transition at Grasberg, enhancing productivity controls in the Americas, advancing the Lone Star project in Eastern Arizona, and assessing long-term opportunities. We are confident in our initiatives. In terms of operations updates from North America, we are progressing in our management of productivity and cost control. We've implemented advanced analytics at our Bagdad mine as a successful test case. This initiative is yielding positive results as we leverage our data capabilities. We have engaged McKinsey and other experts in this project, and we are optimistic about the ongoing improvements at Bagdad, with plans to expand similar methodologies to Morenci. Overall, we are keen on utilizing data analytics to enhance our business efficiency, reduce expenses, and boost productivity. In South America, Cerro Verde continues to perform exceptionally. The mill, originally designed for 120,000 tons per day, is now operating well above capacity, and we see opportunities for further improvements. Our production volumes did see a decline in the first quarter, primarily due to conditions at El Abra, located in one of the driest regions on Earth. In fact, we experienced an unprecedented weather event, resulting in 10 years' worth of rain in just one week, causing a significant operational disruption. However, our team did an outstanding job responding to the situation, and by mid-March, operations were normalizing. We also contributed to local community support during this extraordinary event. Additionally, we faced challenges related to a turnaround at our Miami smelter in Arizona, which impacted our sales figures. A furnace issue occurred shortly before we were scheduled to shut down for maintenance, leading to a temporary disruption in operations. This difference between production and sales figures is associated with our inventory cut-off caused by this smelter event; however, operations have resumed normally, and we expect to see improved numbers moving forward. In Indonesia, we are finalizing the last stages of the Grasberg open pit, with plans to complete this phase by midyear. We may have the chance to extend production due to high-grade materials, but our primary focus remains on long-term operations. The ramp-up of underground mining is progressing on schedule. On slide 6, we detail efficiency measures involving data innovation. The Bagdad team, which includes our metallurgists, operators, and process control experts, has partnered with big data specialists to enhance our mill's operation through improved technology. We've achieved a 12% increase in mill throughput and enhanced recovery rates without substantial capital investments. Now, we will apply these insights at Morenci, where a similar focus could translate to an additional 20 million pounds of copper annually with minimal capital input. The Lone Star project is developing well; its proximity to the Safford mine offers a strategic advantage as we can process materials from the leach oxide deposit while transitioning Safford’s resources. We have spent just under $400 million of the projected $850 million on this economically favorable project, expecting an output of 200 million pounds of copper annually, with further expansion opportunities identified. Importantly, this project serves as a precursor to developing a major sulfide resource beneath the oxide cover, which we begin exploring with promising drill results. This could represent another key asset, akin to Morenci, which is the centerpiece of our North American operations. Cerro Verde's mill continues to exceed expectations, currently processing 15% more ore than originally designed, enhancing its throughput. We are focusing on improving the efficiency of the ore transportation from the mine to the mill. We initiated this improvement plan three years ago, following a significant expansion project. Regarding the Grasberg transition, we have long anticipated this movement. I visited Papua for the first time in early 1988 during the original drilling phase, and we are now completing the open pit operations and preparing to transition fully to underground mining. By year-end, we will operate entirely underground with the Grasberg Block Cave, which holds approximately 1 billion tons of reserves at an average grade of 1% copper and 0.72 grams per ton of gold. We have been working closely with local partners throughout this process, and our team led by Mark Johnson has made remarkable improvements to the local infrastructure to support this transition. In the first quarter, we focused on expanding the Grasberg Block Cave and opening drawbells, successfully achieving 11 drawbells opened within the quarter, exceeding our schedule. Work is progressing on undercutting this new mining face as we have managed to establish two separate mining faces, enhancing our operational efficiency. Our extensive experience over 30 years with this ore ensures that we do not anticipate challenges associated with processing. Simultaneously, we are advancing development in the Deep MLZ mine, leveraging innovative hydro fracking methods to facilitate traditional mining processes. We've successfully conducted 14 fracking holes, positively responding to seismic activities, leading to the potential to standardize this process in our mining practices. We are excited about opening a new production block within the Deep MLZ mine, which will foster enhanced productivity while adhering to our timeline. We are well-positioned to ramp up our production targets and achieve our outlined goals. Looking at the underground ramp-up, we will finish mining in the open pit this year, and while Mark’s team is exploring opportunities for slight extensions, our main focus will be on achieving sustainable production levels. We expect 2020 to witness significant increases, with Grasberg Block Cave production potentially doubling from its current output, aiming for primary production to exceed 130,000 tons per day by 2023. In terms of market landscape, our recent interactions at CESCO reflect our unchanged positive perspective on copper market fundamentals. Despite slowing growth in China, the required copper demand remains substantial, especially as U.S. markets have remained tight. Emerging markets' demands continue to grow, particularly noticeable in Indonesia and other parts of Southeast Asia and Latin America. We remain optimistic about copper's demand driven by electrification trends and alternative energy usage. We believe the project pipeline remains thin, and aware of the rigorous demands of developing new projects, we maintain confidence in our assets' ability to capitalize on any underlying structural copper deficit, ultimately generating significant value for our shareholders. This year, our production targets are set at 3.3 billion pounds of copper, nearly 800 million ounces of gold, and close to 100 million pounds of molybdenum. Site production costs are expected to be higher than long-term sustainable levels due to the Grasberg transition. However, we anticipate our operating cash costs to closely cover our capital expenditure needs over the coming years. Our current dividend may see slight adjustments depending on copper prices, yet we are financially solid and have the flexibility to navigate through these changes. Looking ahead to our projected production over the transition period reveals promising potential increases in cash flows, especially with a favorable copper market. Our focus remains on maintaining a strong balance sheet and the opportunity to reduce our debt further, while ensuring a disciplined investment approach. We are committed to sustaining our current dividends until favorable conditions allow for future increases. Overall, it has been a productive quarter, and we will stay focused on executing our strategy efficiently. Now, we would like to open the floor for questions, and we look forward to your inquiries.

Hey guys, good morning. A couple of questions. First one, the 2021 outlook on costs of $1.30, what are you assuming for export duties out of Indonesia? Do you see them falling versus the 5% level right now? Or are you holding them at 5%?

Once we get to a certain level of construction progress on the smelter, they fall to zero. And so we're expecting during that period of time that our export duties will fall away in Indonesia.

So that would mean you likely reached the threshold that reduces these export duties to zero. Therefore, the construction or at least the progress on the smelter needs to start soon to stay on track with that timeline.

It's already started. We had a commitment to build the smelter with our December agreements. And with that agreement, we're full. As I said, I think at a conference we're full-throttle on the smelter development. We've got a site, we're working with engineers. We've met the initial targets that the government had set. So we are in progress with it right now. We didn't start it in earnest until we got the agreement with the government in December. So we had done some initial prep work, but now we're full-throttle into it.

We read that PT Amman, the owners of Batu Hijau, will likely go ahead with their own smelter, so they might be less inclined to partner with the PTFI. Is that something you would comment on? And if that's true, would you be open to other international partners?

The answer is yes to both of those questions. We have a great relationship with Amman people. We've known them for a long time. We had discussions about doing something together and we still may. At the present time, they've concluded they need to do something at Sumbawa. We looked at that and decided it didn't work for us. So we're focused on East Resik and continue to talk with them about whether they might join us there. At the present time, that's not the plan. And yes, we are talking with potential other international investors who might have an interest in the offtake.

And last one for me. The reduction in gold guidance in 2021, do you think that's largely just a rounding of the total? Or is that because of some changes to mine planning?

No, that's actually just a rounding change. We had just a slight – real slight change in gold output which rounded from 1.6 million ounces to 1.5 million ounces. So it wasn't a – and the same thing with the capital expenditures for this year. It was less than a $50 million change, but just because of the rounding it rounded up.

All right. Thanks for the color and all the best.

Thank you very much.

Hey, good morning Richard. Good morning Kathleen.

Good morning.

It's Matthew Korn here. You've outlined your cost expectations for 2021, but could you provide us with some insights regarding 2020? I’m reviewing slide 14, which shows the EBITDA levels. It appears that your expectation for 2020 copper at $3 closely resembles the average from the last quarter of 2019 and 2020. How should we consider that? Although we don’t anticipate significant volume increases from Grasberg, could we expect any notable cost improvements that would actually benefit us?

We expect to see lower unit costs in 2020 compared to 2019, although it won't reduce to $1.30 as we indicated for 2021. However, there will be some reduction in costs during 2020.

All right. And then I...

And I'll just say with having the new structural deal, with having this progress we're making on the underground advancement, Mark has been working with us, and his team is really going to be focused on cost efficiencies at Grasberg and we think there's some opportunities there. We know there are opportunities there, and we're going to find them.

Looking at the PT-FI plan and the expected production levels at Grasberg, it's reassuring to see that stability. However, I noticed some slight adjustments in the underground ramp for 2020. There seems to be a small decline in throughput per ton or ton per day, but this appears to be linked more to DOZ and Big Gossan rather than DMLZ. Is there a specific reason for this slight decrease in the amount of ore milled?

We update all of our outlooks quarterly, so you'll see changes from quarter to quarter. We aim to avoid large annual reviews without regular updates. The DOZ mine is very mature, and while Big Gossan isn't a Block Cave mine, you'll notice some adjustments to DOZ over its lifespan. It has faced challenges with wet muck, and we've been at the forefront of remote-control mining solutions for that. These adjustments are standard for operational reviews; fundamentally, nothing has changed. Mark Johnson is in Indonesia and on the call. Mark, do you have anything to add?

Big Gossan remains unchanged, and we continue to aim for an increase to 7,000 tons per day, which is its nameplate capacity, targeted for the third quarter of this year. For DOZ, we experienced a slight decrease in our production outlook. Based on our recent experiences with ramping up the automation systems, we've adjusted our peak from 43,000 tons per day down to 37,000 tons. However, we have made significant progress in this area, and we remain optimistic about how we are implementing the technology in DOZ. That said, we are taking a more cautious approach for the upcoming years.

All right, fair enough. That's very helpful. Appreciate. I'll pass along guys.

All right. Thanks, Matt.

Hey good morning Richard, Kathleen.

Good morning.

Good morning.

First question is just with regard to I guess the hydraulic fracking at Deep MLZ. You talked about adding a third unit there. Can you just talk about what the I guess the milestones you expect to achieve there over the next several quarters? And then you mentioned starting to produce in Block two over the second mine area which extends the radius. So, I mean is that is effectively that giving you more cushion in terms of hitting your production targets? Or if you could just elaborate on kind of exactly how that provides confidence to the target? Thank you.

We have taken important steps to ensure we meet our plan. We have initiated this process and are now experiencing positive results, which we will continue to pursue. We encountered a maintenance issue, but we addressed it by acquiring a new unit to integrate into our operations. All these efforts contribute to our ability to fulfill the plan. Currently, things are progressing as we anticipated. To achieve our targets, we must maintain consistent daily progress, and we are optimistic about this. While I wouldn't describe it as a cushion, these actions have positioned us well for the plan, which is our expectation. We are confident but aware that we need to demonstrate our capability to meet these goals. The good news is we have started the year strong in the first quarter, working toward this objective. I'm not sure if that fully answers your question, but Mark might address any specific concerns.

No. Yes, that's helpful. And then just second question on I guess how you think about sort of your resource base and portfolio where there's a lot of strategic interest and relatively high private-party valuation multiples that's being paid for assets. Is there any potential that you see for monetization of assets or reserves or JV arrangements that could accelerate the deleveraging targets you have?

We are quite satisfied with our current balance sheet. Given our bond trading and banking relationships, we don't feel the need to further reduce our debt. If copper prices hold strong or improve, we will have cash to pay down our debt, but that's a decision based on cash flow, not a reaction to pressure. We value these resources for our company's growth opportunities. At El Abra mine, we have a 49% partnership with Codelco, while we own 100% of several properties in the U.S. A significant advantage for us is that we won’t be facing income taxes on production in the U.S. for quite some time, thanks to a tax loss carryforward from an oil and gas deal and the new tax framework. This gives us a unique opportunity with development projects that have no tax implications, especially compared to the higher tax rates seen internationally. Occasionally, we evaluate potential partnerships if they align with our interests, but we haven't made any decisions yet. We remain open to opportunities without feeling any urgency to act, as we are comfortable with our financial position.

Great. Thank you.

Hi Richard and Kathleen. A couple of questions from me. Just firstly on the second quarter numbers that you've guided towards. Those are down a little bit I guess on the update for the 4Q 2018. Can you just talk through some of the moving parts on that and the slight push out to the second half of the year? I think it's around El Abra, Grasberg et cetera. Is it around the export delays on Grasberg? Just a little bit more color on the second quarter. thanks.

We've got some concentrate inventory build at Grasberg planned during the second quarter. Potentially, some of that could shift from the third quarter to the second quarter. As it stands, our shipping schedule indicates a concentrate build during this quarter, so it's really more about shipment timing than anything else.

Thanks, Kathleen. Regarding the comment on the export permit and the attempt to increase the amount, would that only affect things early next year or something similar? It's not a limit on the monthly shipments, right? It's an overall total for the year, correct? Could you provide some additional details?

It's a total amount for the year, set based on the plan we submitted to the government last fall. The quota is currently lower than historical levels due to our transition, but we believe we can exceed that quota this year. We plan to seek a revision, which is part of why our shipping schedule is organized as it is — to allow time for this change. We're not expecting a significant revision, but we want to incorporate some flexibility because, as Richard noted, Mark and the team are exploring ways to maximize output from the open pit this year. We'll be evaluating this on a weekly basis. We see potential for an upside to the numbers, but we will need a revision to our export quota. While it's an annual figure based on last year's plan, we now see opportunities to enhance it.

We wanted to see the results of our analysis regarding what we might achieve. The recent presidential election in Indonesia influenced our decision to hold off on any new filings until after that. This is one of the reasons we haven't yet adjusted the plan in response to the positive news about increased production.

Okay, thanks for that. And then the last one from me. You spoke about the smelter, I think in one of the earlier questions. But what should we expect in terms of any announcements on that in terms of financing or key developments for the Indonesia smelter? Thanks.

Right now, we are doing the engineering, the front-end engineering work. We've contracted with a third-party to do that study for us. We're doing some ground improvement work at the site. And we are evaluating potential partner and financing plans for the smelter. We don't have a significant amount of capital to invest this year. It starts to increase next year. So we'd like to be able to have some sort of financing plan in place by the end of this year, but those discussions are ongoing.

Right. Thanks. Thanks, Kathleen and thanks, Richard.

Thanks, Chris.

Hi. Thank you for taking my questions. I wanted to focus on the North American operation. These assets have been around for quite some time and are typically very predictable. However, this quarter, volumes were low while costs, especially for slag, were high. There seems to be an issue with the smelter in Miami, along with some unscheduled maintenance potentially linked to it. You also mentioned setting productivity targets and efficiency measures, and from what I see in the full-year targets, there is an implied rebound of about 10% in volume over the next three quarters. So, to get to my question, could you elaborate on the main issues affecting North America? Are we facing more challenges, or are there specific reconciliations that are arising? Thank you.

The production figures compared to sales indicate a problem at the smelter, which was an unanticipated issue that arose just before a scheduled shutdown. While we continued production as planned, we could not sell the products due to the smelter situation. These smelters are intricate operations, and similar issues have occurred globally. This problem was unrelated to the quality of the ore, which remains good. We've made operational improvements, and previously, we had significantly reduced maintenance capital and pushed our team. Now, we've addressed that by increasing our capacity, particularly in North America, where performance is strong. However, we did experience some maintenance challenges at our Chino mine in New Mexico, which is an older site. Five years ago, we doubted Chino's future, but recent drilling shows potential for a major expansion. Still, we faced a 15-day downtime in our concentrator there. Such issues can arise in mining, yet overall, our operations in the Americas are solid, with grades and models performing well. The production numbers reflect improvements, and the sales drop was a temporary consequence of the smelter issue.

Dave ...

It was down 40 days by the way so.

We'll say just going back not just this quarter, but going back several quarters in North America you do see a trend of costs going up. And that really reflects the mining rate increases that we've done back in 2015 and 2016. We took mining rates way down to try to maximize cash flow during a tough time in the copper market. We've been ramping back up. Our mining rates and milling rates, and that's had some impact on costs. As we look forward, we're really focused on bringing in efficiencies and containing cost and using technologies to arrest any increase in inflationary pressures, et cetera. So, we're really focused on this cost management, particularly in North America. We did have some diesel price increases and that's reflected in our updated guidance. The diesel price was up 10% 12% from our plan number. So we factor that into our new guidance and we factored in some of these issues which Richard was talking about in maintenance that we experienced in the first quarter. But this cost thing in productivity is really what we see being able to drive value in the U.S. because the more we can contain costs there the larger the resources. And that's why we're investing in these technologies to have lower cost better productivity and ultimately more value.

Okay. That's helpful. Thank you very much. Just switching gears back to Indo and the smelter. The CapEx guidance, I think we've talked about this in the past. The CapEx guide 2019/2020s exclusive of funding for the smelter and given where we are now, can you just comment a bit on what you think CapEx will be in 2019/2020 for the smelter Freeport portion of the total funding?

Yeah. Well, just the 2019 ...

One thing I want to clarify is that when we mention Freeport, we are referring to the smelter being financed by PT-FI. Our current plan might allow for a joint venture scenario, but we do not expect FCX to require any equity capital for the smelter. The investment will occur over several years as a PT-FI investment, and we are a shareholder in PT-FI along with INALUM, which is where the funding will originate. If the project is completely debt financed, as is likely, this could lead to an increase in consolidated debt for FCX. However, all cash requirements will come from PT-FI and will be included in our December agreement with the government. So go ahead, Kathleen.

The spending for this year for ground improvements and front-end engineering is under $100 million. For 2020, we anticipate the amount will be around $500 million, though we won't have a specific figure until the front-end engineering design work is completed. As Richard mentioned, we expect this to be financed either through PT-FI or in partnership with others. PT-FI would have its own financing arrangement, or a new project company might set up a separate financing structure. Therefore, we do not expect these costs to be covered by FCX.

Got it. Understood. Okay. That’s helpful. Thanks very much.

Thanks, David.

Good morning. Regarding Grasberg, I noticed your mine plan for the next couple of years shows a significant increase in 2021, with a projected 300,000-ton rise in copper production compared to the previous year. I'm curious about how realistic this target is and whether such a year-over-year increase has been achieved in any block cave operations before. It seems quite ambitious to me, and I'd like to understand what gives you such confidence in this target.

It is entirely realistic. Frankly, we wouldn't include it in our plans if it weren't. We have experience operating large block scale mines, managing pits since the early 1980s. This is not just one mine; the Grasberg Block Cave will have three phases. We have modeled this based on what we achieved at our DOZ mine, which was the third phase of the ore body’s development, whereas the Deep MLZ mine represents the fourth phase. This process began in the mid-1990s when we brought in Rio Tinto to replace the depleting IOZ mine, demonstrating our capabilities over time. The Grasberg Block Cave consists of multiple phases going forward. It’s important to note that we are mining the same ore we have mined before, and it isn't located deep beneath the surface like the Deep MLZ mine. We are essentially repeating past successes. The Deep MLZ mine has two phases, and this second phase will help us achieve our goal of reaching full-scale production by 2021. The critical component for us is the fracking needed to precondition the rock, enabling it to cave as planned, which we are currently working on. This has been successful in other locations, and although it's our first time implementing it at Grasberg, I suggest rather than viewing this as a single massive mine—which could seem overly ambitious—it might be better to see it as five different mines we are developing. Mark, could you share your thoughts on this?

Yes. And I think going back to what you initially started with Richard is, the ramp-up for each of these phases, GBC really is two block caves that share one set of infrastructure. Deep MLZ, as you mentioned, we have two phases that we'll be advancing at the same time. Both of them are based on actual ramp-ups that we experienced in the DOZ, as we ramp it up from 20,000 to 50,000 tons. It's very much driven by the undercutting rate and the number of draw points that you can develop. And all of these, both the GBC and Deep MLZ, as we ramp them up, are following those empirical or historical experiences that we had. We are getting more efficient at both the undercutting and the draw point development. So we feel that we're well-positioned to ramp them up. The other thing, when you look at the volumes, is just, particularly in the Deep MLZ, as we ramp up the tons, we're really in the very sweet spot of the ore body. As we ramp up the tons in 2020 and 2021, copper grades are 1.65 to 1.7. So you're seeing not only an addition of tons, but the grade of those tons are quite high. GBC also is in very good grades as we ramp up in the initial years.

Thanks, Mark.

Thank you for that. And just as a follow-up, more of an accounting question. Your environmental obligations and shutdown costs, there were $42 million this quarter. They seem to be kind of jumping around a fair amount. I'm just wondering if you can give us an idea of what we should anticipate those going forward on an annual basis.

If you refer to the press release, it indicates that we recorded a special item, specifically an accrual for our legacy costs in the first quarter. If you adjust for that figure, the remaining balance would represent a typical run rate. Occasionally, we encounter legacy items related to an indemnification from an asset Phelps Dodge sold long ago, which has now reached its limit, necessitating this accrual. However, if you exclude that, you will find that this is the expected run rate, aside from these unpredictable one-time items.

Okay. Thanks very much.

And this is just like our mine plans. We review all of these legacy liability issues and our reclamation activities every quarter. We have a separate team with outside experts that's involved with that. So they will, like mine plans, get adjusted as new conditions come into place. I will say that going into the Phelps Dodge deals 12 years ago, that was a huge concern for us. People wanted us to do an unfriendly deal. We decided not to, until we can do some due diligence on it. Over the 12 years, we've managed those costs to be less than in aggregate than what we anticipated. But it's a constant fight and issues come up all the time that we have to deal with. It's a major part of our business. So, it's a reasonable question for you to ask.

Thank you very much.

Thank you, operator, and good morning, everyone. Richard in your prepared remarks glad you mentioned that you're going to take a sturdy mode for the next two years and then deploy – deployed additional capital for your older opportunities. As you're thinking through that where does adding value to shareholders in whether it be a special dividend or buyback how does that play into your thinking now?

It's a use of cash. I mean, as we look forward with the strategy of not committing new capital now, if we have a scenario, which many people think reasonable where we have a good copper market two years out from now and we're ramping up production at Grasberg you see just how much our cash flows would increase with success in that ramp up. Even if we decide to sanction a new project after that time, and I say after that time any new project's going to take a number of years to invest in. And so in that scenario, we would have substantial excess cash for our company as we've had in years past. And we would look to further reduce our debt and then make decisions about where to set an appropriate long-term dividend. And if there's additional cash behind that, we have paid special dividends in the past or buy stock back. But it's the use of cash Oscar rather than have a planned strategy going into it. It's going to be based on the circumstances that we face in.

That's clear. Thanks very much. Then you piqued my interest with this additional production out of Grasberg in 2019. And I was under the impression that after the – you depleted the open pit that would be it. So I was wondering, if you can provide a scope of the increase that you could have in 2019. Does this go forward to 2020? And how do you achieve that? I believe Mark referred to grades in some of the block caves.

Okay. So Oscar, don't think of this as open pit being depleted. I mean, depleted is when you have an ore body and you've mined the whole ore body. This is the same ore body that's going down below the limits of the open pit. We worked on this in the mid-90s. The design and optimal shape of the open pit. So as we make this transition the ore is still there in the pit. It's just in the future that ore is going to be mined in the Grasberg Block Cave. And so as we're pulling out of it, we have these geotechnical issues of the shape of the pit how to be safe, how to make sure that as we wind down mining there we're not putting anybody at risk. At the same time, we've already started promulgating the block cave in the Grasberg Block Cave. So this is a bit of a cat and mouse game. If we can get that ore out of the pit, as we're starting up the Grasberg Block Cave that's gravy. I mean, it's very high-grade. We're literally mining the road ramps that come out of that pit. The marketing guys they're going to – and we always knew this was going to be the case at this time. They're going to see what they can scrape out of that pit of high-grade copper and particularly gold ore. We've given you our best estimate. This would all be done. I don't think Mark there's any thoughts that this was extended beyond 2019, right? We're looking at potential excess in the second half of this year. Isn't that right?

Yeah, that's true. It's very small scale mining. We're doing 30,000 to 35,000 tons a day in this extension of the pit. As you mentioned, we're taking the ramps that were left in the final pit that were 40 meters wide and we're narrowing those. Those ramps are all in good grade ore, so it's a relatively small scale boutique-type mining that extends the life of the pit. The one thing that we're managing and we have excellent monitoring capabilities is as the cave develops at some point we're going to see some reflection of the cave activity in the high wall of the pit. And that is what will drive us away from this continued ramp removal. If it were not for the block cave underneath, we could do this conceivably into the early part of 2020. Our best estimate is that and what we've reflected in the forecast is the ramp removal will end in June. We've got plans that, if the monitoring shows that it's safe to continue we would continue that on a month-by-month basis beyond as long as the monitoring allows us. We don't intend to slow down the block cave development to try to maximize the potential from the pit. The value is truly in the block cave longer-term, that's our focus. The open pit mining is an auxiliary opportunity during the interim.

Okay. Great, Mark. Super helpful. And then the last thing if I may. In one of the notes for your 2019 operating estimates you state here that the 2019 sales assumes Indonesian government approval or increase of PT-FI export quota. Could you provide like a number for that additional scope? I think it was – you have a permit for 180,000 tons?

Yes, what we have in our plan is quite similar. We currently have a bit more in the plan, around 40,000 tons of concentrate. It's not a significant amount, but we want to maintain some flexibility for the matters Mark mentioned. However, to fulfill our existing plan, this number is not substantial.

Thank you. It's a fair point.