Freeport-McMoRan Inc (FCX) — Q3 2019 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to the Freeport-McMoRan Third 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 today is being broadcast live on the Internet and anyone may listen to the call by accessing our website homepage and clicking on the 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 this call include forward-looking statements and actual results may differ materially. We would like to refer everyone to the cautionary language included in our press release and presentation materials and to the Risk Factors described in our 2018 Form 10-K. On the call today, we have Richard Adkerson, Red Conger, Mark Johnson, who is dialing in from Indonesia, and Mike Kendrick, who runs our molybdenum business. I'll start by briefly summarizing the financial results and then turn the call over to Richard who will be referring to our prepared slide presentations. As usual, after our remarks, we'll open up the call for questions. Today, FCX reported net losses attributable to common stock of $131 million or $0.09 per share in the third quarter of 2019. After adjusting for net charges of $123 million or $0.08 per share, the adjusted net loss attributable to common stock in the third quarter totaled $8 million or $0.01 per share. Details of the non-recurring items are located on page Roman numeral 7 of our press release. Adjusted earnings before interest, taxes, depreciation, and amortization for the third quarter totaled $564 million. We have a reconciliation of our EBITDA available on page 28 of our slide deck. The third quarter 2019 copper sales of 795 million pounds were about 4% below the July 2019 estimates of 830 million pounds of copper, primarily because of lower production from Cerro Verde and also the timing of shipments at quarter-end. This was partly offset by higher production and sales from North America. In the third quarter of 2019, our gold sales of 243,000 ounces were about 6% higher than the July 2019 estimate of 230,000 ounces. The copper and gold production exceeded sales by 59 million pounds and 90,000 ounces in the third quarter. These volumes were in inventory at September 30th and are expected to be sold in the fourth quarter. Our average realized copper price was $2.62 per pound, which was below the year-ago average of $2.80 per pound. The third quarter average 2019 average realized gold price of $14.87 per ounce was above the year-ago quarterly average of $11.91 per ounce. Our net unit cash costs on a consolidated basis, net of by-product credits, averaged $1.59 per pound of copper in the third quarter. That was slightly improved from the July 2019 estimate of $1.53 per pound. As anticipated, our average unit net cash costs were higher in the third quarter of 2019 compared to the year-ago average of $0.93 per pound. That reflects lower sales volume as PT-FI transitions mining from the open pit to underground. We expect that our net unit cash costs will trend lower as this ramp-up is completed. In the third quarter of 2019, we generated $224 million in operating cash flows, net of $146 million in working capital uses. Capital expenditures totaled $666 million in the quarter, which included investments in our underground projects and the new mine in Arizona that will be commissioned next year. We ended the quarter with consolidated cash of $2.2 billion and consolidated debt of $9.9 billion with no borrowings and $3.5 billion available under our revolving credit facility. I'd now like to turn the call over to Richard, who will be referring to our slide materials that you've been provided with.

Good morning, everyone, and thanks for participating in today's call. I want to share with you the enthusiasm that I personally feel about all we are accomplishing at the current time. Two weeks ago, I made a trip to Indonesia and went to our job site to visit operations there. It was my first trip to a job site in three years, as we've been focused on our work with the government. I was truly impressed by the progress we're making underground and the morale and attitude of our team. I traveled to Jakarta, and while in Indonesia, I met with the senior ministers that we've been dealing with, with the CEO of our partner, Inalum, and spent an hour with President Joko Widodo to fully review our operations. I was gratified by the warmth of the conversations that we had and how positive everyone is about the arrangement we struck last December and how it's working to date. The Grasberg underground ramp-up is the most important of those initiatives, and one that's really key to our future. The ramp-up is advancing on schedule. My own personal confidence in achieving success with this transition was enhanced. This will achieve low-cost long-lived production from our underground ore bodies, and it will be a source of significant cash flows for the next 20 years plus. The significant mine development and infrastructure development is impressive, as I said. Much of this is already completed, and I met in detail with our team and observed their strength, technical capabilities, experience, and motivation to execute the plan. You will see that we have had very positive initial results as we are reporting today in the third quarter and year-to-date. All of this gives us strong confidence in accomplishing our ramp-up schedule. The designs of the two mineral zones, the Grasberg Block Cave and the Deep MLZ, are set to world-class standards. We are applying our company's experience over the past 35 years in block caving in the underground and using new technology to enhance the infrastructure techniques, undercut blasting, and cave management. I’ll talk some more about that later. The second of our three initiatives is the commissioning of the Lone Star project in Arizona. The current project to develop and mine oxide ores is within our budget and on schedule for copper production expected next year. The development is two-thirds complete and we have expansion opportunities that we've already identified in the oxide ore. The current project envisions using available capacity at the nearby Safford mine. But the need for oxide ore is a resource that is growing as we do exploration drilling and has the likelihood of being a major keystone asset for our company in the future. The third initiative is something that’s really exciting, and I congratulate Red and his team for what they're doing in this innovation-driven productivity improvements. This is a program in which we are using technology tools, machine learning or artificial intelligence, and a coordinated operating structure that's bringing together different capabilities within our company and applying it to basic operations to create value. We tested this at our Bagdad mine in Arizona and had remarkable success, and what was so encouraging for me is the enthusiastic way that our team has embraced this technology, which represents a quantum jump from the basic work of mining to using new technology techniques to improve efficiency. What it's allowing us to do is to increase production, decrease costs without making major capital investments. We are now expanding this to Morenci and our other mines in the Americas, and we have not yet incorporated these in our numbers. We'll do that next year, but we have set an aspirational goal of adding 200 million pounds of copper from these initiatives with very little capital investment. This would be a major accomplishment for us. Slide 4 addresses our strategy. I want to emphasize that our strategy, at this point in time, is well-defined and focused. It is focused on growing our sales profile, being efficient, driving costs down, and improving cash flow generation. We're going to do this with the three initiatives that I spoke of earlier, driven principally by the Grasberg underground conversion. Success in these would result in a 30% increase in copper, a 70% increase in gold, approximately 25% reduction in unit cost, and a 100% doubling of our cash flow generation. This is all within our grasp. It's up to us to execute, but that's our strategy. During this period of time built around the Grasberg transition, we are not looking to make major new capital investments, although we have great opportunities for the future. We're not pursuing M&A transactions, but building this up, because this will have such a major impact on our company. Much of the capital needed to achieve the results has already been spent. These are long-lived assets, which gives us a strong base for cash flows for the future. I personally believe there is potential for higher copper prices to exist within the time frame of this transition. If you look at a growing production profile at a time when copper markets may be improving, Freeport would have a very bright future in the near term. Slide 5 highlights the Grasberg site. We are in the final stages of mining the Grasberg open pit. Being there was almost a spiritual experience for me, especially when I looked at the image on the left. I visited over 30 years ago and took a Polaroid photo of the Grasberg exploration shack, where the second portable drill hole had just been completed, with no mine present at the time. To now stand at the edge of this site and witness what the picture illustrates—over 5 billion tons of material mined, 33 billion pounds of copper, and 53 million ounces of gold produced, generating around $100 billion in gross revenues, with 80% coming from the pit—is truly remarkable. While that history is interesting, the future lies underground, which is equally exciting. This is where our future production will come from. Our company is a leader in block cave mining, boasting decades of experience. The Grasberg Block Cave constitutes about 50% of our underground reserves. It is the same ore body we have been mining from the surface for nearly 30 years. In block caving, ore collapses under gravity in the caves instead of being stripped from the surface, eliminating stripping and mine waste. We will only need to mine about a third of the material historically mined and will produce more copper than we have through surface mining of 1.1 billion tons of ore, all without the costs involved in mining 5.2 billion tons of ore and waste. The gross revenues from our reserves at the two areas we will mine, assuming $3 copper and $1,500 gold, will total approximately $150 billion long term, which is about 50% more than what we have earned from the pit in the last 30 years. Our reserves extend through 2041 due to our government arrangements, but resources suggest production will continue well beyond that date. This is developing these underground resources is not a new project. We have been undertaking underground investment since 2003. Over two-thirds of the underground development meters have already been achieved. We've invested in underground infrastructure, large-scale crushers, rail transport, and a state-of-the-art autonomous underground rail system. Most of the capital cost of the Grasberg Block Cave and Deep MLZ are behind us. On slide 6, we list our key performance indicators. I'll refer you first to the chart at the bottom right, the ore extraction. We averaged over 20,000 tons from the GBC and Deep MLZ combined in the third quarter, which exceeded our forecast. The Grasberg Block Cave has met and, in many cases, exceeded expectations, and the cave propagation in its mine advancements is going very well. The Deep MLZ is where two years ago, we experienced seismicity issues because of the incompetency of the rock. We have developed systems to monitor that, micro systems placed throughout the ore body, and there are procedures to help us understand where these events may be happening. Earlier in the third quarter, we used this system to temporarily suspend some advancement of drawbells and caving in one of the production blocks. But by using the hydraulic fracking approach, that's working successfully for us now, we achieved the desired shape of the cave, allowing us to resume undercutting in September. Going forward, in mining always, but in underground mining, there'll be pluses and minuses, it’s simply the nature of mining and planning. But we are now confident that based on our results today, we have faced the challenges of this rock situation at the Deep MLZ. I spent a lot of time with our team talking about the hydraulic fracking operations at the Deep MLZ. I observed the operations and equipment in use, and I was extremely pleased with the results. At our wrap-up meeting, I asked our team if we could now state that we've effectively managed seismic activity going forward, and there was a resounding yes to that question. This has been an exciting development for us. The Grasberg Block Cave will be our largest contributor to production following the ramp-up. It has reserves of over 1 billion pounds of high-grade copper and gold, 1 billion tons. The Grasberg Block Cave will have a very large footprint of 80 acres at full rate and 180 acres over the life of the mine. The size of the ore body and the different headings will give us the ability to produce simultaneously from five production blocks, providing scale flexibility and assurance of continuous and predictable production. It’s important to note that when we talk about this underground operation and these two mineralization zones at Grasberg Block Cave and Deep MLZ, we actually have multiple mines within these zones, and these mines share the same infrastructure. Our teams know the rock types from mining the same ore in the open pit for 30 years, mining the ore mineralization in the Deep MLZ for 25 years, and we've done extensive drilling underground to understand ground conditions. We are assessing ore at the Deep MLZ only 300 meters below the surface of the open pit of the Grasberg. As we continue undercutting and adding draw points, our expansion is estimated to accelerate to a ramp-up of 130,000 tons per day in 2023. At Deep MLZ, the ongoing hydraulic fracturing operations with continued undercutting and drawbell openings in two active production blocks are expected to enable us to achieve our ramp-up schedule for that mineralized area. We have a large inventory of drawbells already in place in Deep MLZ to support this ramp-up. At full rates, the production from these two ore bodies is projected to average 1.3 billion pounds of copper and 1.3 million ounces of gold per year. Higher ore grades from these deposits will enhance production in the early years. Average net unit costs are expected to average, at current cost levels, $0.30 a pound in the first five years of full rate. This is notable and rare for large-scale operations in this industry. We have the opportunity to deal with cost effectively through technology innovations in the underground as we go forward. The key to the future is to clean your undercutting to expand the caves and open up new drawbells to accumulate the ore. We expect to accelerate drawbell construction in 2020 as the cave expands, and we are comfortable that we are mitigating the inherent risks in underground mining. Turning to slide 7 and Lone Star. Lone Star is located adjacent to our existing Safford mine, which began production at the time of the Phelps Dodge deal around 2007, and is in the ore that is being depleted, although there is future potential sulfide development at depth there. We have available facilities allowing us to have a low-risk development with good financial returns at the adjacent Lone Star wholly-owned ore body, only 8 miles away from Safford, also 18 miles away across the mountains from Morenci. This is an $850 million initial project, two-thirds complete, estimated to have annual production of 200 million pounds, and will be producing copper next year. It’s oxide ore with low capital intensity and opportunities for low capital expansion available to us in the oxide. Our drilling at depth is really exciting because the sulfide resource continues to expand, which will be a big part of Freeport's future. Then to go back to this productivity project that we've been pursuing aggressively in recent months. This development project does not require significant capital. The results we’ve seen at Bagdad mine have increased production and improved efficiency simply by doing things better. We do things better by measuring activities, analyzing them quickly, using artificial intelligent methods which involves broad areas of our team, getting data back and changing operations really efficiently. We literally identify through data what the best operations can do and instantaneously know when we are not achieving that, making adjustments to get back to achieving those best outcomes. I can’t tell you how excited our team is about this and what it’s like for me to watch that enthusiasm spread through our organization. Copper markets today are clearly affected by the trade war and economic situation. But in my view, they are simply not sustainable. The demand for copper remains relatively strong worldwide, in China, in the US, and elsewhere. Copper inventories are low. The future is bright because of the fundamental uses and growing uses for copper in alternative energy generation, electric vehicles, and electronics. When you hear a mining company talking about measuring things electronically, think about how other businesses would be affected by this. Structurally, the copper market remains very supported. It is essential to the global economy and significantly supported by the scarcity of supply. Wood Mackenzie says it takes $3.30 to incentivize significant copper production. Economic activity is going to affect demand in the near term. But we remain very positive about the outlook for copper and are prepared to deal with whatever price we have to in the short term, believing we are in a great industry with great assets. So I'll close, before turning over to Kathleen, by looking at the reason there is I started out saying I'm enthusiastic about our company. We have a strategy that our Board and management team are committed to executing. We have a portfolio of high-quality assets. We look at our track record and our commitment to communities, environmental responsibility, and our technical capabilities proven with our development projects. We are the leader in our industry in terms of size, scale, and durability. We operate all the mines we have an interest in. We are able to share supply chain, technology, people, and resources. We expect significant growing production and cash flow profile, along with a doubling of our cash flow generation. Copper fundamentally is positive and increasingly so, and we have innovation driving value creation that will spread throughout our organization. Beyond financial results affected by the transition issues we have, this has been a great quarter for Freeport.

Thank you, Richard. I'm going to start on Slide 12 where we summarize the production and sales data for the third quarter by region. Starting at the top, North America did better than our forecast, up about 12% compared with last year's third quarter. We're seeing improved production performance from our leach stockpiles at Morenci following initiatives we've put in place to reduce the particle size of the material placed on leach pads. We've also had some favorable changes in the chemistry of the ore. At Bagdad, as Richard was talking about, we’re continuing to see real benefits from the innovation and debottlenecking initiatives, and Bagdad has become a real model for this initiative as we drive it across the portfolio. In South America, Cerro Verde, as well as other mines in the region, were impacted by restricted access to transportation outlets associated with protests regarding the non-affiliated third-party development project. Our team at Cerro Verde did an outstanding job in managing the situation safely and efficiently under the circumstances, but production was below year-ago levels and about 10% below our forecast. Due to lower mining rates and changes in mine sequencing, we processed a greater portion of stockpile ore, which impacted grades and recoveries. The lower mining rate in the third quarter will also impact fourth quarter metal production, but this has been offset by better performance in the US than our prior forecast. We want to note that despite the disruptions, the Cerro Verde concentrator averaged over 380,000 tons per day during the third quarter, which is above nameplate capacity of 360,000 tons per day, and the team is optimistic the AI and innovation initiative will drive further increases in the future. For Indonesia, our sales in the third quarter were generally in line with our guidance. We did slightly better on gold and have increased our estimates for the year. We're continuing to mine a small amount of high-grade material from the surface. Our current forecast assumes we will continue this through November, but we ended September with a higher level of concentrate inventory, which we will be working down in the fourth quarter. We show a table at the bottom of Slide 12 presenting our consolidated production for the quarter, which exceeded our sales by 69 million pounds of copper and 90,000 ounces. This relates to timing of shipments of concentrate from Cerro Verde and also from Indonesia where we built some inventory in the quarter. This is a timing matter, and we expect to sell this inventory in the fourth quarter and get back to normal levels by year-end. On slide 13, we summarize our consolidated sales outlook for the periods 2019 through 2021. The projections are in line and broadly consistent with our previous estimates. Our copper sales are expected to grow by roughly 200 million pounds in 2020 and 900 million pounds in 2021 compared to 2019. This includes a scheduled ramp-up of production that Richard referred to earlier at Grasberg, along with the commissioning of our Lone Star mine next year. In 2021, about two-thirds of this copper production will come from the Americas, with the balance from Indonesia. This outlook does not include the opportunities being pursued with technology and innovation discussed earlier, and we're targeting the potential to add 200 million pounds of copper per annum through these initiatives. We also expect our gold volumes to rise over this period with high grades available in Indonesia. Recall that the district has high grades of both copper and gold in the same ore, making Grasberg a low-cost valuable operation. Our molybdenum sales are generally flat over this period, but we have significant optionality in our portfolio and can adjust production rates from our primary mines if market conditions warrant. We refer you to page 14 where we've modeled our EBITDA and cash flows at various prices to give you a range of the cash earnings and cash flow generating capacity of the company. You will note the significant positive leverage we have to improving market conditions on the slide. At $2.60 copper for 2019, we are in the $2.4 billion range for EBITDA for reference. This is a trough year for us, and as you’ll see from the result we would generate approximately $3.5 billion to over $5 billion in EBITDA in 2020 at prices ranging from $2.75 to $3.25. This grows to $6.5 billion to $8.5 billion in EBITDA for 2021 and 2022 averages. Our EBITDA is moving from $3.5 billion to $5 billion next year to $6.5 billion to $8.5 billion depending on prices. These added volumes we’re bringing in are expected to come at low incremental costs, providing solid margin expansion even at low prices. It’s about execution, and over the next few quarters achieving our key milestones will continue to derisk the plan. The story is the same for operating cash flows where we are expanding operating cash flow over the next few years, net of our cash taxes and interest costs presented on the slide. Our cash flows grow from less than $2 billion this year in 2019, ranging from $2.5 billion to $3.7 billion in 2020 as we continue the transition. For the average of 2021 and 2022, looking at $3 copper, it would range from over $5 billion to $6 billion at $3.25 copper for the average of 2021 and 2022. We show our capital expenditures on slide 15, which are broadly in line with our prior guidance. It includes sustaining capital of roughly $1 billion per year, and we have projects underway, including the underground at Grasberg and Lone Star that average about $1.6 billion per year in 2019 and 2020. As Richard mentioned, we're continuing to manage capital carefully and thoughtfully. The investments we're making now or at an advanced stage will strengthen our margins at low prices, enhance our long-term asset base, and provide leverage to improve markets over time. These amounts do not include the new smelter in Indonesia, where FCX will share 49% of the economics. We are completing engineering studies and we expect to have engineered estimates and project schedules in the first part of next year. We’ve been working with a group of banks on debt financing for the smelter, and we expect to debt finance the capital cost at the PT Freeport Indonesia level, which is expected to be non-recourse to FCX. We are advancing discussions with the banks and hope to have a facility in place to fund the cash outlays for the smelter. Currently, we do not expect dividends out of PT-FI, which will burden us during the construction period and particularly prior to 2023, when FCX receives 81% of the dividends from PT-FI. Turning to slide 16, we show the debt maturity profile for our senior notes, which totaled $9 billion over this period. During the third quarter, we issued $1.2 billion in new eight and ten-year notes, and those are shown in yellow on the graph. We used the proceeds to redeem debt with near-term maturities, also redeeming higher coupon notes. We extended our average maturity by a year. On the table, our weighted average maturity is roughly 10 years now, and we reduced our average coupon during this process. Our balance sheet is in good shape, and we don’t have significant maturities until 2022, and we have a strong liquidity position. In closing, on slide 17, you see our roadmap to our growth in cash flows to drive shareholder value. Each of these initiatives is advancing well. The momentum we have in each of these projects is real, and we are very focused as a management team on executing these plans effectively and have a clear path to substantial growth in revenues, margins, and free cash flow. Thanks for your attention, and Regina, we'll now open the call up for your questions.

Hi, Richard and Kathleen. Thanks for taking my questions. The first one just relates to the grade reconciliation. Firstly, I was wondering if you could just talk on gold for the full year? You've increased that. Is that just a timing issue or are you getting better reconciliation? And then, for the underground, you talked a lot about the development, but how is the grade reconciled in copper and gold on the underground development? Thanks.

With respect to the first question, the increase in gold for 2019 principally relates to the open-pit ore. We've extended the mining of the open pit through November and we're doing this on a limited basis, but it does have high grades. There is a potential that we could extend the pit longer, but our real focus is on getting the underground ramp-up, which is going well. We haven’t had any issues with respect to the grades. We've got good grades, higher than reserve grade coming from Deep MLZ in the early years, which part drives the metal production. Mark's on the line. Mark, I don't know if you have anything to add about the grades, but we believe we're in good shape on that front.

For all of the new major underground mines, Big Gossan, GBC, and Deep MLZ, the grades we've gotten are very much consistent with the reserves. In GBC and Deep MLZ, we are just beginning to touch the bottom of the columns, and sampling through some of the drawbell periods and some of the initial primary fragmentation is a bit challenging. We get a lot of big material, but everything we've seen so far is consistent with what we would expect. The ore bodies are very well drilled, like Richard mentioned earlier. These are extensions of ore bodies that we've been mining for years. So we haven't seen any issues there.

For those of you who follow the Grasberg open pit for years, you will remember that we always had this high-grade core of gold. That's the way the mine was designed to access that, and that's why we're doing the surgical mining. When I was there, there were only two shovels working at the bottom of this pit. We mined out the haul road, so it's single-lane haul roads going down and coming up. The reasons for doing that and trying to extend this is the ore, we are getting such extraordinary high-grade gold. So the whole reason we're continuing to do it is we’ll do it as long as we can until the development of the Grasberg Block Cave pit. Eventually, geotechnically, we will be required to get out, and we’ve got procedures to get out very quickly, and we're monitoring with due diligence. But as long as we can reach that high-grade gold, we're going to do it. And that's what you're seeing, Chris.

Okay, thanks for the color on that. The second question, just on slide 17, when you are stepping through the future of the Company, I just wondered if you could comment, once you get through the ramp-up period of Grasberg and then have more decisions about future projects versus potential capital returns, can you just rank those? Are you trying to do both, or is it one over the other? I just wondered if you could talk through what the priorities are for the medium-term investor? Thanks.

I can't wait until we face that. Here's what I think will unfold, and it's going to depend on the economics of the world. We will be generating cash and we will use that cash to manage our debt level on our balance sheet initially and then return to our shareholders. Shareholders will have been patient, and they deserve to be rewarded for that. So we will focus on shareholder returns. With that in mind, we’ve traditionally emphasized dividends, but we will look at share buybacks and dividends. We'll also be looking to see if markets warrant disciplined investments in some of these undeveloped resources of Freeport, which I think is a great asset for our Company. But in any event, if we pursue those, it will be disciplined. Those investments in our industry are undertaken over time. We have lots of people who would like to partner with us, and we'll assess those opportunities. Success with the transition and these initiatives will lead to greater cash flows. We are confident of that. I believe copper markets will be better, as I don't think today’s prices are sustainable. The world is geared for a brighter future, and that will equate to a lot of cash. We will use some of that to probably pay down debt, focus on shareholder returns, and fund longer-term investments.

Okay, thanks, Richard. The last one from me, maybe for Kathleen. Just on the timing of the sales versus the production, do you expect most of that to be caught up in Q4 or will you still have any imbalance heading into 2020? Can we expect a really big catch-up in this quarter? Thanks.

Yes. We expect our inventories to be at normal levels. We usually have some inventories at sites, but generally, our production matches our sales. In the fourth quarter, we expect to sell more than our production and get inventories back to normal. You always have from time to time some shipping, weather-type issues, but we're not expecting anything out of the ordinary, and most of that is reflected in our guidance to expect that to be sold in the fourth quarter.

Okay, thanks. That’s it from me.

Thanks, Chris.

Good morning, Richard and Kathleen. I just have one question. You mentioned in the slides there has been some seismic activity at DMLZ. It’s slowed some of the undercutting rates. Obviously, underground mining is not necessarily as linear as open-pit mining and there are issues that crop up from time to time. My question is, are you comfortable there is enough production blocks and draw points in place so that if these geotechnical issues arise over time, you won’t have significant impacts on production? Thanks.

I've spent a lot of time talking with Mark and the team about this and asking that very question. The more I get into it – I try to emphasize the point that this is multiple mines that we are developing in these mineralization areas with multiple headings. In comparison to open-pit mining, where we had a lot of access available because the pit was in high-grade ore, as we went further down in the pit, the pit widened and we had fewer options for dealing with changes. So, at underground, having different headings will provide comfort that if we do have issues, we can manage them. It helps diminish any potential downside when we encounter wet muck or other complications because of the number of accesses. We will be able to have confidence in operating regularly and maintaining relatively predictable production. You make a point there is some risk in underground mining, but with the scale of ore bodies and access at multiple points, we can avoid risks that would occur with single underground mines.

Just to clarify, the slowing of the undercutting in one of the production blocks of Deep MLZ during the quarter was not related to seismicity. It was designed to achieve a desired cave shape. We're managing the seismicity issue. It wasn't a seismicity-driven issue. It was simply to get the cave shape in a manner that we thought was right. Mark can comment further on that. I just wanted to clarify that it wasn't a seismicity-driven issue.

What was encouraging about this was that our team was able to detect a buildup of stored energy before we experienced any significant seismic events. They determined the cause. We had a relatively flat cave angle. We focused on mucking in the cave front area, and within a month we had the cave shape back where we’d like it. We resumed undercutting, and some of these indicators were back in line. What we strive for is to develop an estimate for our forecast that has a 5%-10% upside. Some advantages in the underground, like in the GBC with our manless autonomous train system, can lead to further upside and maximizing ore flow.

Thank you. Thanks everyone. Very, very helpful.

Hey, good morning everyone.

Good morning.

I wanted to — I know this has come up a few times, but I also wanted to follow up on the DMLZ. Specifically, looking at the number of drawbells by year-end 2019 and 2020, any long-term conclusions that can be drawn from this slight reduction? Just would appreciate that clarification. Thank you.

Mark, you want to take that?

Yeah, we had about three fewer drawbells than we planned for the quarter, which is around 3% of our total drawbells. We don't see that as significant. It didn't impact our ramp-up. The amount of material we pull from each draw point in Deep MLZ is conservative. When we had 80 drawbells in the DOZ, for instance, we produced 30,000 tons a day. We’ve been able to pull more per draw and continue to see that, which is upside compared to our production ramp-up. We haven’t yet pulled any material affected by the hydrofracking; that’s just slightly above where we’re pulling. So we’re optimistic this will affect the fragmentation as more comes toward the draw point. It’s a relatively minor change, and we feel our production schedules or tons per draw point are very much in line and well below what we experienced in the DOZ.

That's very helpful, I appreciate that. And then two quick follow-up questions. The first — the 200 million pounds kind of efficiency-related output potential, when could that be coming through? A sense for the timing on that. Secondly, you have a large portfolio of undeveloped assets. Could you speak to the extent those might be candidates for monetization? I would appreciate your thoughts. Thank you.

We are planning to open new plants in the first half of next year. Our teams are currently reviewing new mine plans to include the improvements and insights gained from this program. We aim to implement these plans early in the year. Regarding non-core asset sales, we will keep exploring the market and engaging in discussions to generate cash during this transition. We have a few non-producing assets that we may consider selling as we evaluate our options. However, this is not part of our current strategy. We have announced plans to sell a portion of our cobalt refining business in Kokkola, which we expect to finalize in the fourth quarter.

We have substantial interest in the Serbian and DRC assets, and we're assessing whether we can get to those values. If we can, we're likely to proceed with those, but there is interest in them.

That's very helpful. I appreciate all the color and continued best of luck.

Thanks. Appreciate it.

Hi, thank you. Hi, Richard. Hi, Kathleen. Thank you for taking my questions. I have two different questions first relating to Grasberg and second, relating to the Americas. I’d start with North America. One thing that may get lost in the mix with Freeport, because we’re also focused on Indonesia, is a very consistent and predictable operational track record in the Americas. In fact, the third quarter was no exception; you had very strong production there. In regards to unit costs in North America, while not paying taxes, that’s helpful, but unit costs despite strong production in the quarter crept a little higher versus the second quarter. How should we think about the cost progression in both North America and South America over a multiyear horizon? It could lead to some cost reductions. The cost creep is just a function of grades? Or is there something else going on that could lead to a material change lower over time? That’s my first question.

That’s one of the real benefits of the program Red is leading. Over time, we have done a lot with low grades at present to maintain a competitive cost structure for the improved productivity and that will drop unit costs. We did have an increase year-over-year in North America. The biggest driver was Morenci where the cash costs were higher year-over-year from an accounting standpoint. But when you look at the underlying cash spent to produce those pounds at Morenci in the quarter, it was actually the same as last year. However, we had costs with stockpiles inventoried on our balance sheet, and since we drew — we were getting better recoveries out of the leach pads, some of those costs were in inventory on our balance sheet but coming through the income statement. So from a cash standpoint, when we manage to exclude those prior period costs, the net cash costs were relatively akin to the year-ago period. The real benefit as we talk is to drive those down through productivity; this will stabilize and galvanize the cost in the Americas.

Let me add one other fact that's been part of our situation the last couple of years. When we were focused on debt reduction three years ago, time when copper prices were very low, we deferred some things and we've had to catch up with mine rates that did add some volume-type cost to our business, which is mostly behind us now. I think one of the points we're making is we're not seeing significant increases in input costs. Energy costs are what they are, but our energy sources are diversified. The things that keep copper prices low are keeping our input costs low. What you're seeing is some of these accounting-type issues Kathleen referred to, some degree of catch-up in employment, mine rates, and so forth, but the fundamental cost structure of our business is not changing. We sit down before this earnings call, we go through input costs with our supply team for our operations, and we manage our suppliers, who are responsive to us.

Thanks for that. Quickly on Grasberg, there is a lot of focus among mining investors and our investors in general about ESG issues. Can you discuss the changes in the environmental impact at Grasberg as you move into the underground? I mean we’re moving less material, obviously making less waste. How do we think about the environmental impact from the operations going forward?

I should have mentioned this. I am so glad you asked this question. Besides being thrilled with what I saw with our underground transition, I spent a day taking a helicopter tour over our tailings deposition area; then we went down on the ground. There are two aspects to waste management. One is the waste material we mined from the pit that is placed around the mine. I was at the area called the Wannigen, which is one of our major waste dumps, and I’ve seen how effective it is in managing waste at that site. We also mixed waste rock with limestone to control acid runoff, and the results are remarkable. Then we get to the tailings area, which is something I'm making with the government and President. This tailing system we set up in the mid-1990s was controversial at the time. It was a natural river transporting tailings contained in a dike system within this designated deposition area. Today, we have a demonstration project in that deposition area, where we’re actually growing crops, raising fish, and raising cattle. What’s even more remarkable is throughout this area, when the tailings move away, a natural slime develops, and natural grasses and trees are growing. Over a majority of the area, a natural re-vegetation is occurring without assistance from us. Our team estimates that at the conclusion of mining decades from now, this area will return to a natural state, requiring remediation for only 20% of the area. It visually verifies the decision made 20 years ago that this was the right system. We’re not defensive about it, and the government is now agreeing.

Thank you for that insight. It’s great.

Beyond that point, we also learned from early on that we had to work with local people to be successful. With sensitivities between the province and the central government, under President Joko Widodo, there is more awareness about improving the situation in Papua. A greater share of our taxes and royalties paid to the central government are coming back to Papua. We work hand-in-hand on security and community issues, which will continue to support our operations. This transition will have a major positive impact.

Hi. I had a few small questions regarding guidance on Grasberg, one being the CapEx. There’s a mention in the release about the four-year period 2019 through 2022, where it looks like CapEx hiked a little bit. On slide 15, it doesn't look like Grasberg CapEx is up. Should we assume that 2021 and 2022 CapEx has increased a little bit, and if so, what's driving that?

When we did the average last quarter, it rounded. I mean, this is a rounding thing; it rounded to $920 something million, and now it’s $950 million round. It looks like a difference but not significant. We did have some increases in 2021 and 2022, which were modest, related to some mill improvements; some revised engineering estimates on a new SAG included in some other minor changes. They weren’t significant.

Okay. And then just on 2021 gold, guidance came down a little bit. It’s a small change, but I think you guys started the year at 1.6 million ounces, and now it’s down to 1.45 million ounces. I’m just wondering what that — do we expect to see that in 2022, or is that ore body understanding, or what?

Let me just say, these are Kathleen's questions, and she’s going to answer them. We at Freeport don’t have an annual planning process. We update our plans every quarter. We step back and meet with our best estimates; there are changes like this. But rather than like my experience with other companies that give constant guidance, they all have this big announcement how they planned. So those changes just reflect hard work that goes in. As you get closer, you get more specific planning done, and the numbers change a bit. But...

We do update our mine plans every quarter. We had a 25,000 ounce change in the gold estimates for 2021, which were minor and rounded differently. We keep this updated and don’t want any surprises; that’s why we’re routinely updating every quarter.

Hi, good morning. Just a follow-up on unit costs. They bounce around at Grasberg, based on volume, but looking at site delivery costs at Grasberg in total, trend up this year, averaging about $500 million a quarter or about $2 billion annually. Is that a good guide moving forward? Certainly up from last year, which was about $1.7 - $1.8 billion. Is there something this year with this transition that will drive that up or will it come back down? Thank you.

Actually, our costs at Grasberg are lower this year, reflecting lower mill rates than we’ve had in recent years. Next year, we don’t project significant changes in costs from this year. A lot of it is fixed, with some variable costs associated with mill rates. We have a core team managing operations now. No significant changes are expected, and they are down from prior year. Mark's team leads the underground transition to drive efficiencies. Grasberg has strong production; costs have been less of a focus. His team is focusing on driving aggregate costs and looking at costs and capital together. We’d be happy to call you and review your question. But we do see Grasberg costs trending lower this year compared to previous years.

Okay. I'm not sure I actually got it, but...

Yeah, last year total cash production cost at PT-FI was $1.9 billion, and we’re less than $1.8 billion this year.

Thank you. The 40 million pounds decline at Cerro Verde in Q3—would you expect that to catch up in Q4 with the blockade of another party being over or were there other operational items that might have contributed to the decline? Secondly, could you give us a flavor of the productivity and cost issues you manage daily, such as day-to-day cost per ton, day-to-day recovery rates, travel expenses, exploration expenses, or bypassing some low-grade areas? I know you’re working hard to have a net profit rather than a small loss.

I’m going to ask Red about the Cerro Verde situation. Practically, we aim to operate all out. We don’t really project make-up in the current quarter, though some inventory in our numbers will be made up. Overall, we focus on maximizing cash flows and doing things efficiently, but we aren’t deferring maintenance or capital expenditures for short-term results. Red?

Going from the issues Kathleen discussed, there will be carryover into Q4. Our mining lines didn’t advance to the areas we thought we would. We’ll use more low-grade stockpile material to offset that timing of ore. That material is there—we haven’t lost it, and we’ll mine it next year. We’ll see a minor effect in Q4 from that.

Production and sales for Cerro Verde are expected to be higher than Q3 in Q4.

Along the lines of your concerns, John, we talked about having a focused team managing cost aspects, especially as we ramp down mining from the open pit. Equipment transfers as we’re scaling up the underground operations need focus too. We talked about how to complete tasks efficiently while the operational status of various contracts involving transfers.

Thank you.

Hey guys, good morning. Just one question from me that I didn’t hear anyone asking and I wanted your high-level thoughts on. There seems to be an uptick in disruptions in Chile lately and some project-specific issues in Peru. Can you talk about whether this is an isolated incident or if we should be worried about country risk picking up in those Latin American regions?

Peru has been a nation with this dichotomy over presidential administrations. The government has consistently recognized that encouraging mining investment is the way to go, which has allowed them to see historical success like in Chile. The challenge in Peru is conflict between local communities and mining projects, often focused on water access. This has been an issue we’ve faced for years, and it’s likely to continue, as there remains a large income disparity. However, we’ve developed strong community relations, recognizing that communities must improve along with miners to succeed.

Over time, Chile has been steeped in rule of law. Disrupted private sectors like water access have affected the project. Recently, a small increase in metro fares sparked unrest. The President addressed the situation effectively in a speech and is working toward resolving current unrest. Overall, we’re all feeling positive about the efforts being made going forward.

Reflecting on your question about country risk, that is undoubtedly a reality we have today as the global situation evolves. Every region is under scrutiny regarding mining investment. The scarcity is ever-present as we encounter operational challenges. We must approach these arrangements with utmost diligence and maintain our focus on community relations to build trust.

Hi, good afternoon. Just a couple of small questions. Your treatment charges for Indonesia have gone up by $0.02 on the 2019 guidance. Is there a change in concentrate grade, or are there any interim revisions in terms similar to early royalty and export duties? I understand gold price and volumes are higher, but the copper price is lower. Is it just the mix?

It is indeed the mix, and we are exporting more than prior plans, which is the basis for the change rather than anything else.

Thank you, operator, and good morning. First, congratulations on the strong development of Grasberg. We look forward to seeing how that transition will excel. Getting back to South America and Cerro Verde, are you assuming the blockades won't be there for your budget in Q4 and into next year?

With — Can you repeat that?

The blockades are down now, right Red?

Yes, we’re assuming operations will run normally from here on.

And that’s the case today.

Yeah, that was the question. Thanks very much. Then secondly, on Chile, can you just remind me of your situation regarding water and power in El Abra?

The water at El Abra comes from well fields near Bolivia. They’re well-managed, sustainable, so there are no issues for us.

And this is a leach operation; it doesn’t require any milling. When we discuss potential expansions, we would address water with desalination, but it’s not needed for the current operation.

One of our most attractive projects is El Abra, where we have a partnership with Codelco. It would require desalination for any expansion, subject to Chilean taxes. We have a number of valuable projects in the US — our Bagdad mine and Morenci — in the pipeline for potential future expansions.

Thanks everybody for squeezing me in. Richard, what do you and your team expect to see when you get to LME Week?

LME will serve as a barometer for what's going in the industry. My guess is we’ll hear about US trade policy complaints and discussions around China's stimulus to bolster their economy and spending. Expect talk about tailing management, a recognized global concern. We’re confident we’re making the right choices, continuing with best practices. The mood can change at LME, so it'll be both positive and negative predictably.

You’ll be running into Brexit issues over there, so good luck when that happens. Thanks, Richard.

Thanks, everyone, for your participation. We look forward to ongoing reporting of our progress. If you have any follow-ups, feel free to call David Joint. Thanks so much. Bye-bye.