Freeport-McMoRan Inc (FCX) — Q4 2019 Earnings Call Transcript

Thank you, and welcome to the Freeport-McMoRan fourth 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 webcast link for the conference call. In addition to analysts and investors, the financial press has been invited to listen to today's call and a replay of the webcast will be available on our website later today. Before we begin our comments, we'd like to remind everyone that today's press release and certain of our comments on the call include forward-looking statements, and actual results may differ materially. We’d like to refer everyone to the cautionary language included in our press release and presentation materials and to the Risk Factors described in our Form 10-K. Also, on the call with me today are Richard Adkerson, Red Conger, Mark Johnson and Mike Kendrick. I'll start by briefly summarizing our financial results and then will turn the call over to Richard who will review our recent performance and outlook. As usual, after our remarks, we'll open up the call for questions. Today, FCX reported net income attributable to common stock of $9 million for the fourth quarter of 2019. After adjusting for net charges of $22 million or $0.02 per share, which primarily reflected net charges at PT-FI, mostly related to historical contested tax audits, metals inventory adjustments and partly offset by gains on asset sales, the adjusted net income attributable to common stock totaled $31 million or $0.02 a share in the fourth quarter of 2019. For details about the special charges, please refer to schedule VII, Roman numeral seven in our press release. Adjusted earnings before interest, taxes and depreciation and amortization for the fourth quarter, EBITDA totaled $891 million. We also have a reconciliation of EBITDA available on page 35 of the presentation materials. Fourth quarter copper sales totaled 906 million pounds. Those were higher than our October estimate of 870 million pounds. And gold sales of 317,000 ounces in the fourth quarter were 117,000 ounces higher than our October estimate of 200,000 ounces. The positive variance to guidance of our copper and gold was primarily associated with an expansion of mining from the Grasberg open pit, which was completed in the fourth quarter and also the timing of shipments as we sold some inventory from the third quarter. Our average realized price in the fourth quarter was $2.74 per pound that was similar to the year-ago average copper price, and gold prices of $1,491 average for the quarter were slightly above last year's fourth quarter. Our consolidated average unit net cash cost, net of byproduct credits was $1.67 per pound of copper in the fourth quarter of 2019. Those were lower than our estimate, primarily reflecting the higher copper and gold sales volumes in the quarter. Operating cash flows during the fourth quarter totaled $170 million. That was net of $250 million tax payment related to contested tax audits in Indonesia. And capital expenditures were about $700 million during the quarter, including about $400 million for major projects. During the quarter, we generated $450 million in proceeds from asset sales associated with the previously announced completion of the sale of a portion of our interest in Freeport Cobalt and also a sale of our lower zone interest in an exploration project in Serbia. We ended the year with consolidated debt of $9.8 billion and consolidated cash totaled $2 billion. We had 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 presentation materials.

Thank you, Kathleen, and good morning. I appreciate each of you for joining today's call. Freeport had a successful fourth quarter, accomplishing our goals. Our focus during this time was on execution, and that’s exactly what we delivered. We have strong momentum on three key initiatives aimed at expanding margins and cash flows while enhancing shareholder value. Reflecting on 2019, we laid a solid foundation for long-term success and positioned our Company for profitable growth in the years ahead. Our first significant initiative is the underground ramp-up at Grasberg, which is progressing as planned. In the fourth quarter, we finished surface mining at the Grasberg open pit and are now focused on establishing large-scale production from our extensive, cost-effective, and long-lived underground ore bodies. This will provide substantial cash flows for over 20 years. We have the benefit of considerable development and infrastructure already in place, along with a skilled team equipped with the necessary technical expertise and motivation to successfully carry out our plan. The positive production outcomes in 2019 have bolstered our confidence in our ramp-up timeline. As we've mentioned previously, we are in a 'show me' phase for ourselves and our investors, and we are demonstrating our progress. The designs for the Grasberg Block Cave and the Deep MLZ mine are exemplary. We are leveraging our 40 years of underground mining experience to enhance infrastructure construction and are employing cutting-edge technology, such as autonomous loaders and remote-controlled equipment. We’ve made advancements in ground support techniques, undercut blasting, and cave management, and we will continue to utilize these improved technologies moving forward. The technological advancements in underground mining yield greater impact and are more attainable compared to open-pit mining, due to the inherent differences in processes. We successfully met or exceeded important milestones throughout the year, which I will detail shortly. The second initiative is the commissioning of a new mine in Arizona, Lone Star, which will commence production in 2020. The project is on schedule, approximately 75% complete, and within budget. Our extensive experience in Arizona is advantageous, as is the support from nearby communities. This investment has very appealing economics, providing a source of long-term cash flow with low-risk growth potential. Exploration of this ore body continues to yield positive results, both in terms of an expanding oxide resource and promising prospects for a significant sulfide resource, which could position this mine as a key asset in the global mining industry. The third driver of value relates to our innovation program, which focuses on enhancing productivity and expanding markets with minimal capital investment. In 2019, we utilized our experience from the Bagdad mine to implement a series of initiatives across our American portfolio, employing new technology and a more data-driven, interdisciplinary operating model. These tools are enabling us to optimize our existing assets, eliminate bottlenecks, and improve overall performance. Early results from these initiatives have been promising. We are now prioritizing projects for larger-scale implementation and expect to achieve an additional 200 million pounds of annual production by 2022, again with minimal capital expenditure. All three of these initiatives are well advanced and largely within our control, providing a clear path for generating high cash flows and creating value. Amid the increasing focus on ESG, we have reaffirmed our dedication to all stakeholders, beginning with a strong culture of safety throughout our organization which is fundamental to our operations. The mining industry presents inherent risks, and we diligently develop resources to enhance safety, focusing on preventing fatalities and driving continuous improvement. We respect and value our global workforce, offering fair compensation and benefits, as well as career development opportunities to support their families. Freeport has a history of partnering with the communities in which we operate to ensure our operations have a positive impact on their health, welfare, and sustainability. We remain dedicated to fulfilling this commitment. Environmental protection programs are also vital to us, and we allocate significant resources to ensure we address these issues effectively, with a particular emphasis on water conservation. We are increasing our sourcing of low-carbon and renewable energy, supported by our strong remediation programs. We are actively collaborating with the ICMM and key stakeholders to develop a new global standard for tailings management and have improved our disclosures in this area to ensure all stakeholders are informed about our activities and progress. As a leading global copper producer, Freeport plays a crucial role as the world shifts towards a low-carbon economy. Copper is essential in reducing carbon emissions through renewable energy technologies and provides a net positive impact for the future economy. Our commitment to sustainable and responsible mining is well-established. This focus on communities, workers, and the environment is ingrained in our culture and is critical for our industry's long-term sustainability. We understand that we can only create value for our shareholders by effectively addressing these concerns, and we are dedicated to doing so. Overall, the fundamentals supporting our future are strong, and our Company will benefit from these robust foundations. Despite the global economic slowdowns observed in 2019, particularly in China and the U.S. manufacturing sector, copper inventories remain low, and supply growth continues to be relatively constrained. We anticipate tight markets ahead, where copper will benefit even with modest global growth, particularly with increasing demand to support decarbonization trends. Current copper prices have improved from the lows of 2019, but they are still below the levels needed to stimulate new supply. We remain intensely focused on executing our strategy effectively, particularly as we transition to underground mining at Grasberg, where we are efficiently delivering results as demonstrated by our reported figures. Our production and cash flow are on a promising trajectory, which will benefit our shareholders in the coming years. We are well into our transition to underground mining and the results thus far are promising. By 2021, we expect to see the impacts of over 15 years of efforts. During the ramp-up at Grasberg, the commissioning of Lone Star, and the ongoing productivity improvements in our Americas operations, we anticipate our copper and gold sales volumes will exceed 30% in 2021 compared to the trough year of 2019. This growth will result in a 25% reduction in net unit costs, and more than double our EBITDA and cash flows at current commodity prices. I believe there is potential for even higher prices. With a growing production profile in a time when copper markets may be climbing, our shareholders will benefit from a favorable long-term future, and Freeport will be well-positioned to navigate these prospects. Most of the necessary capital investments have already been made, and the successful execution of our targets continues to lower the risks associated with our plan. These long-lived assets provide a robust foundation for sustainable cash flows ahead. We have summarized the historical and projected outcomes for Grasberg, one of the largest mining districts globally, where we have operated since the early 1970s. Grasberg has historically been a significant copper producer, and its remarkable byproduct gold component makes it one of the largest gold deposits worldwide. Over the past 30 years, Grasberg has generated substantial cash flows, and we expect this trend to continue as it remains a truly exceptional asset. Our achievements with the Grasberg Block Cave and the Deep MLZ are notable. We are leaders in block cave mining with decades of experience, and the Block Cave will facilitate the profitable extraction of more ore. The transition to block cave mining requires mining less material compared to traditional methods while yielding more copper. The projected gross revenues from these underground reserves over the next 20 years at $3 copper and $1,500 gold could approximate $150 billion, significantly more than what we produced over the past three decades. The development of infrastructure for this scale of operations has been our most significant challenge, but we’ve largely addressed that and are now in a mining phase. Our reserves are reported only through 2041 due to our existing agreement, but our resources extend beyond this timeline. I anticipate Freeport will continue to thrive post-2041. The multiyear investment phase for block caving commenced in 2003, and over two-thirds of the underground development has been completed. We have implemented state-of-the-art autonomous underground rail systems and the major portion of capital costs for the Grasberg Block Cave and Deep MLZ are behind us. In terms of recent achievements, combined ore production from the Grasberg Block Cave and Deep MLZ exceeded our forecasts in the fourth quarter, averaging 26,000 tons per day for the quarter, and we closed 2019 at a rate of 33,000 tons per day, despite a planned outage. We are adding new drawbells to facilitate ore extraction and have ambitious plans to increase their number moving forward. The Grasberg Block Cave will significantly contribute to copper and gold production as we ramp up. The deep MLZ offers a unique mineralization zone, utilizing hydraulic fracking to manage seismic issues. Early years’ high grades in the Deep MLZ are significant, and at full production rates, the combined output from these ore bodies is projected to be substantial and sustainable over the long term. Even with the inherent risks of mining projects, we believe we have managed the major structural risks and are optimistic about our results. Regarding the Lone Star project in Arizona, we are on track to commission this new mine in 2020, ramping up ore placement at our nearby Safford operations, with minimal new capital required. This project is forecast to add 200 million pounds of copper annually, with growth potential driven by positive exploration and opportunities. Our innovation initiative is evolving, leveraging new data-driven technology tools alongside operator training to enhance productivity. We're seeing significant engagement from our teams, leading to a positive impact on our operations, exemplified by a 15% output increase at Bagdad mine. We are prioritizing projects in our plans, expecting to add 200 million pounds of copper from these initiatives by 2022. Finally, I want to emphasize the key value drivers that position Freeport prominently in the global copper industry: our portfolio of high-quality assets, a skilled technical team, and our operational efficiency. We manage all our mines, allowing us to leverage experience and allocate resources effectively. Our long-lived, durable assets carry inherent growth potential. With strong copper fundamentals, a growing production profile, and significant cash flows, we are committed to executing our initiatives to generate increased revenue, earnings, and cash flow. I look forward to sharing our progress as we move forward. Thank you. Kathleen?

Thank you, Richard. I'm starting on slide 13 to discuss how our initiatives are enhancing cash flow and shareholder value. On this slide, we present our consolidated sales outlook for 2020 through 2022. Notably, there's a 30% growth in copper sales between 2019 and 2021, translating to an increase of about 1 billion pounds of copper, which generates approximately $2.8 billion in additional revenue at current copper prices. The growth in sales volumes is achieved at a very low incremental cost, leading to a significant rise in our EBITDA and cash flows, as you will see shortly. For 2020, we anticipate copper sales of 3.5 billion pounds, aligned with our previous forecasts. The 200 million-pound increase from 2019 to 2020 primarily comes from North America and Indonesia, partially countered by lower grades in South America. In 2021, we project sales of 4.3 billion pounds as Indonesian output returns to typical levels. Additionally, we've included expected gains of 100 million pounds of copper in 2021 and 200 million pounds in 2022 from productivity initiatives in the Americas. We expect 2022 copper volumes to reach 4.6 billion pounds. For gold, we anticipate sales growth as we enhance underground operations at Grasberg. In 2019, our gold sales surpassed forecasts, notably exceeding our expectations by approximately 100,000 ounces in the fourth quarter. Our latest model revisions have not significantly changed our estimates, with gold volume projected at 800,000 ounces in 2020, increasing to 1.4 million ounces in 2021, and 1.7 million ounces in 2022. Molybdenum sales are expected to be around 90 million pounds moving forward, with potential for additional production if required. Next, on slide 14, we illustrate our projected quarterly volumes for 2020. As underground work ramps up at Grasberg, we expect sales to increase throughout the year, aiming for an annual run rate close to 4 billion pounds in the fourth quarter, positioning us well to meet the 4.3 billion-pound target for 2021. Slide 15 shows that our expanding production profile comes with lower incremental costs, which will help reduce our unit costs moving forward. In 2019, our average net cash cost was $1.74 per pound and we project a similar level for 2020, reflecting lower net site production costs but impacted by reduced byproduct credits. We're estimating molybdenum prices at $10 a pound, with a $0.03 per pound sensitivity for each $2 change in price for 2020. As we ramp up production in 2021, we expect unit cash costs to drop by 25% from the averages of 2019 and 2020 due to scale at Grasberg. We anticipate that full-scale underground operations in Indonesia will rank among the lowest globally, with ongoing initiatives in the Americas set to lower incremental costs even further. We are dedicated to reducing unit costs as we enhance scale and productivity. On slide 16, we provide modeled projections of our EBITDA and cash flows at various copper prices, while keeping gold constant at $1,500 and molybdenum at $10 per pound. In 2019, our EBITDA was around $2.7 billion with an average copper price of $2.73 per pound. For 2020, we estimate EBITDA will be between $3 billion and $5 billion with copper prices ranging from $2.75 to $3.25. Notably, for 2021 and 2022, EBITDA is projected to grow to between $6.5 billion and $8.5 billion under the same price conditions, moving from $2.7 billion in 2019 to over $6.5 billion in 2021 and 2022, all from existing projects in advanced stages. Execution is critical; achieving our milestones will reduce risks associated with our plan. Our operating cash flows, net of taxes and interest, will grow from $1.5 billion in 2019 to over $4 billion to $6 billion in 2021 and 2022 at current copper prices. As cash flow increases, we will maintain disciplined capital spending aimed at enhancing shareholder returns as we finalize our transition at Grasberg. Slide 17 details capital expenditures for 2019 and projections for 2020 and 2021. Capital expenditures were $2.65 billion in 2019, expected to rise to $2.8 billion in 2020, including $150 million for productivity-related investments that promise quick paybacks and long-term value. We project additions of 100 million pounds of copper in 2021 and 200 million pounds in 2022 from these projects. The remainder of our capital in 2020 includes $1.3 billion for underground spending at Grasberg and completion of the Lone Star project, alongside sustaining capital of around $1 billion. For 2021, capital is expected to decrease by about $400 million, comprising $1.2 billion in sustaining capital with the rest for projects mainly at Grasberg. Notably, underground capital expenditures at Grasberg are forecast to decline significantly starting in 2020, as much of the infrastructure is completed, leading to reduced capital needs from Indonesia in 2022 and beyond. We are meticulously managing our capital spending, investing in advanced stages to fortify margins at low prices, enhance our asset base, and offer leverage for future market improvements. The expenditures outlined do not consider the new smelter in Indonesia, where FCX will hold 49% of the economics. On slide 18, we provide an update on the smelter project. We are completing engineering studies and expect to finalize project costs and schedules in 2020. The initial estimate for the total project cost is around $3 billion, with approximately $500 million allocated for 2020. We are also undertaking improvements to the land at East Java, Indonesia, and are progressing well in financing discussions with banks, expecting to have funding available in 2020. The financing plan allows for cash needs for the smelter to be met without burdening dividends from PT-FI during construction. We summarize the after-tax debt service costs, demonstrating the impact spread over the remaining 20-plus years of reserves; the net effect on FCX's equity share amounts to about $88 million annually. Additionally, as part of the smelter development, we will phase out the current 5% export duty PT-FI pays, generating savings averaging nearly $80 million throughout the mine's life. Operational costs at the smelter are anticipated to be competitive in the global TC and RC markets. On slide 19, we summarize our net debt position. We finished 2019 with just under $8 billion in net debt, maintaining a robust balance sheet with good liquidity, supported by $2 billion in cash and an undrawn credit facility. With strong liquidity, we face no significant maturities until 2022. In closing, we want to reaffirm our commitment to scaling production, fostering revenue and cash flow growth. The forward-looking financial prospects are positive, and our current initiatives are in line with expectations. We are focused on achieving our 2020 milestones, executing effectively, and realizing our plans, all leading to notable growth in revenues, margins, and free cash flow as we move ahead. Thank you for your attention, and now we invite questions.

Good morning, Richard and Kathleen. And thanks for the question. I have a couple of questions on South America, if that's okay. Firstly, on Cerro Verde, it looks like costs will be going up this year. Is that primarily due to the grade decline? And how should we think about that going forward? I think you're mining around 0.35% today, which I think is around wherever reserve grade is. So, how should we think about that going forward? Second question, your JV partner El Abra, Codelco has announced cuts to their CapEx budgets going forward? Does that affect El Abra in any way or are you thinking about the future of El Abra? Thank you.

Thank you, Alex. It's Kathleen. The grades in Cerro Verde were approximately 0.36 in 2019, and we anticipate that to drop to about 0.33 in 2020, with no expected further decline in the short term. We are ramping up the concentrator there, which is already producing 10% more than its original design capacity. Red and the team have identified opportunities to increase the concentrating rate to 420,000 tons a day, which would make it the largest concentrator in the world. We expect this to start coming online in 2021. So, while we have relatively stable grades at 0.33%, we are focusing on large scale and efficiency initiatives that will benefit Cerro Verde, including the mine-related initiatives and the CHLOE project currently being piloted there. We are optimistic about enhancing the mining efficiency and utilizing the large mill at Cerro Verde. Regarding El Abra, we do not anticipate any changes in our partnership with Codelco, as we collaborate closely with them on expansion opportunities. Our emphasis at El Abra is on optimizing current operations. We are evaluating an expansion project but are not looking to make any decisions at this moment. We have ample time with the existing operations to consider future steps. Red, would you like to add anything about Cerro Verde?

So, let me just say, with El Abra, we are working cooperatively with Codelco on it. They're encouraging us to work on it. We're not planning on initiating major new expansion projects until we complete this process of the underground conversion at Grasberg. And so, we're studying it now along with expansion at Bagdad and others. And we'll be doing tradeoffs to see what makes sense when the time comes to make decisions on expansion. So, we think that if it does come down to a joint decision to expand El Abra, there'll be sources of capital to finance it. So, I don't think that's going to be a constraint to us. But that's a future decision to be made.

So, just in terms of the smelter financing in Indonesia, Kathleen. Have you been facing any pushbacks, or what obstacles are you getting from the conversations with the banks? When do you really think during this year that you can grab this issue for good, so your Company can move on and investors can feel more confident where the money is going to come from and at what rate? And then, if I may ask Richard or Kathleen, do you have an early sense of the potential CapEx estimate for the oxide expansion Lone Star and when do you think you can be ready to make a decision? Thank you.

Carlos, regarding your first question, we are currently in advanced discussions with a group of banks that has been ongoing for several months. We are very close to securing $3 billion in commitments. We anticipate having the facility established in time to fund the capital. We have not invested heavily into it yet; most of the work so far has been focused on ground improvements and we are currently conducting engineering studies. We expect the bank facility to be in place in 2020, ahead of our need to fund the estimated $500 million for that year. There has not been any pushback on this; there is strong interest in PT Freeport Indonesia. PT-FI currently has no existing debt, and the banks are encouraged by the strong support from our partner Inalum and FCX. Thus, we have not faced any pushback.

Yes. It’s not accurate to say there has been pushback. The banking community has responded very positively to this. As Kathleen mentioned, PT-FI has no debt, which makes banks eager to work with Freeport, Inalum, and the Indonesian government. We have received a positive reception because of this. Regarding Lone Star, our current focus is on launching the initial project. Production is set to begin this year, and we are reviewing exploration data to determine our next steps. This is a work in progress for both an oxide expansion and, ultimately, I am confident we will pursue a sulfide project there. But all of this is currently in development.

Hey. Good morning, everyone. I just want to say, as it's been through the years, it's been great to see the progress made at Grasberg. I appreciate the work gone into that. A couple of questions for me, just in the near term. Expectations for the first quarter reflect a pretty big step back in production, step up in per pound costs. Essentially, is that due to this being the first quarter where you're completely out of the open pit? And then second, Kathleen, I wanted to ask a little bit more on just the accounting for the smelter, as this comes through over the course of the year. Just to make sure. The debt’s going to be consolidated in the balance sheet. I expect the total 100% spending for the smelter will come through on your cash flow statement. But, can you help us out with some of the other pieces or the other offsets that would reflect your partner's participation there? That would be very helpful. Thanks.

In regards to the first point about first quarter production, you are correct, Matt. The primary factor affecting this is the absence of the open pit at Grasberg, which has had the most significant impact. We are also seeing some variances at Cerro Verde, mainly related to our first quarter estimates. Additionally, for South America, the first quarter tends to be the weakest of the year based on our current mining plan. Overall, production across all sites is low in the first quarter but is expected to increase throughout the year, which is typical in mine planning. We aim to maximize production within our overall mining strategy. Regarding the smelter, you are right that it will be consolidated, and you will see this reflected in our consolidated results under capital expenditures and debt. On slide 16, we aimed to clarify the economic impact. The financing will be at the PT-FI level, meaning FCX and our partner will not be contributing cash for the smelter. Therefore, the economic effect for FCX will primarily revolve around dividends from PT-FI. We are highlighting that the phased-out export duty will effectively offset the debt service, representing the true economic impact. However, financial statements will reflect it in our consolidated results, and we want to emphasize the actual economics involved.

Matthew, you've highlighted a key point that everyone is aware of. To clarify, our new arrangement with Inalum, the Indonesian state-owned company, is different from our prior partnership with Rio Tinto, which was a joint venture. Currently, PT-FI has two shareholders: Inalum with 51% and FCX with 49%. It is PT-FI that will construct the smelter and handle the financing at the entity level. Even though FCX only holds 49% of the economic interest, this is similar to what we had under the Rio Tinto arrangement, which is why we are pleased. Through a shareholders' agreement, FCX maintains operational control. It's critical to note that if there had been equity requirements for shareholders, it would have been structured as 51-49. However, we determined that the availability of low-cost bank financing is overwhelmingly favorable, making it the optimal financing method. As Kathleen mentioned, considering the elimination of the export duty, the differences are minimal, and the addition of a major smelter globally will positively affect our overall business by impacting global production costs and revenue costs.

Hi, Kathleen, I had a question on slide 16. If I look at 2020 operating cash flow, let's say the $2.75 per pound scenario, and I compare that to your presentation from Q3, the drop looks a little more than just the byproduct assumptions. So, I'm wondering has anything else changed in the expectations? You said top line production costs would be down. But are they down less than you expected at Q3 or anything else that can explain that change?

The significant differences between last quarter's forecast and this one stem from our adjustment in molybdenum from $12 to $10. We've also integrated our new mine plans and some studies associated with our innovation projects, along with variations in the timing of tax payments. Overall, there aren't any major changes aside from these assumptions.

Hi, Richard and Kathleen. Thanks for taking my questions. Two for me. First one just on cash flow and thinking about other ways you can reduce your net debt further. Just wondered if you could touch on working capital over the next 12 months or so. And then also, you’ve done a good job on the asset sales in 4Q. Just wondered if there are any other assets in the portfolio, JVs et cetera where you can monetize some of the rest of the portfolio that we might be missing. That’s my first question. Thanks.

Thank you, Chris. We completed some asset sales in the fourth quarter and are exploring more transactions that could make economic sense, focusing on non-core assets that aren't generating returns and could be sold for cash. We'll assess these opportunities to ensure they provide positive valuation for our shareholders. We are actively working on reducing working capital, and our teams, including Red's, are examining our supply chain for better efficiency in utilizing existing supplies throughout the organization. In the fourth quarter, we successfully reduced our sales concentrate and finished goods inventory, and we will continue to prioritize this area. This focus is crucial during our transition period as we aim to conserve cash, positioning ourselves to return more cash to shareholders as we move forward.

Thank you. My other question is about CapEx. I know you've addressed this in several other responses, but I wanted to ask about the smelter, which cost $3.5 billion in 2020. Should we anticipate a similar allocation of approximately $800 million for each of the remaining three years leading up to 2023?

We're in the process of getting final engineering done and project schedules. So, we don't have at this point an exact estimate of capital cost. I would expect just based on our preliminary estimates that the capital in 2020, one would be slightly above the average you just talked about and in 2023 be slightly below. I think most of the capital will be spread between 2021 and 2022. But that's I think for your modeling purposes, which you have is probably pretty close.

Hi. Good morning. I just wanted to again return back to unit costs. I've been a bit surprised about just the upward trend that we've seen in both North America and South America. And in your guidance of I guess about 130 a pound for 2021, does that assume that unit costs continue kind of in North America, South America around that $1.90 to $2 mark?

We observed a slight benefit in North and South America starting in 2021. It's important to note that in recent years we have been increasing our mining rate, which will prepare us for better and more flexible production in the future. Between 2018 and 2019, we significantly raised our mining rate after reducing it due to market changes in 2016. We have been working to rebuild that mining rate, which will ultimately provide better long-term value and more consistent performance moving forward. However, we are not anticipating increases like we have seen in recent years. In fact, our productivity initiatives are delivering volumes at lower incremental costs. We expect to see this trend reversed as we head into 2021. It's about execution. Over the next few quarters, achieving our key milestones will continue to derisk the plan. We have a similar story for operating cash flows net of our cash taxes and interest. Our operating cash flows grow from $1.5 billion in 2019 and would range from over $4 billion to $6 billion in 2021, and 2022, with copper prices ranging from current levels to $3.25 per pound. As our cash flow grows, we're going to be very-disciplined about capital spending to target increased returns to shareholders as we complete the transition at Grasberg.

Just concentrating, two questions, one in production, the other one in CapEx. So, Cerro Verde is producing about a billion pounds, or produces about a billion pounds a year, your throughput at 420,000 pounds per day, about 60,000 pounds per day higher than name plate capacity. So, was the plan to keep production at about the 1 billion pounds of that declining over the next five years?

So, I think, Oscar, you're right. I mean, we are having to offset the grade decline at Cerro Verde, and we are putting more through the concentrator. In 2020, we expect to be a bit below the 1 billion pounds, but return back to the 1 billion pound level in the years following 2020.

When we designed the plant, we anticipated it would be producing 1 billion pounds by now. However, we have managed to maintain that level of production.

Yes. We hope to achieve this with our mining initiatives. We're mentioning 420,000, which is the largest in the world, and we take great pride in it. This provides us with opportunities to maximize the resource in ways that benefit us. Red's job involves finding ways to reduce costs, increase volume, and ensure safety, right, Red?

Yes. This is Mark Johnson. We mentioned it in the last quarter update, the planned shutdown. We had one conveyor that in the ore flow system that was able to collect the ore from the Grasberg open pit, and this same belt also collects ore from the Grasberg Block Cave. We no longer needed the portion of that belt that serviced the pit. So, we shortened that belt by about 40%, which just makes the longer-term system more robust. So, it’s a matter of taking the tail portfolio of that belt and moving it to a different location. And then, we also modified a bunch of the motors that control, so that would be a much more modern system for this long-term application at the Grasberg Block Cave. Going forward, we obviously have maintenance plans. They are built into our production plan, that's integral to our planning, looking at crushers, conveyors, mill, which we've always done. So, going forward, the production plans are reflective of our maintenance plans. There's nothing significant or unique coming out. We continue to incrementally add to our infrastructures, as Richard discussed. The rail systems, all those things just continue to grow, but it's all going quite well and on plan.

In summary, during our discussion with Mark, it was emphasized that a crucial aspect of achieving our production goals is the effective transport of ore from mining operations to processing facilities. We utilize gravity to our advantage by developing mines horizontally, which simplifies the process. However, it is essential to adhere to maintenance schedules to avoid unexpected issues that can complicate operations. Our Americas team is actively supporting these operations to ensure effective management. While mining presents its challenges, we are confident in our ability to handle them, provided we maintain our systems properly to manage the large volumes of ore we need to transport.

Hi. Good morning. Thank you for taking questions. A couple more from my side, please. Firstly on these productivity enhancement projects, you mentioned $150 million included in current year’s CapEx guidance. Are you able to give a number for 2021 that's included in your current 2021 CapEx guidance? And is that the only spend that you need to do to keep 200 million pounds of production run rate, or would you still need to spend more beyond 2021 as well? Second question is on moly. You are still using $13 price for 2021 cost guidance, but you've taken your production guidance down and you are using $10 for this year. So, just trying to square that you do seem to have spare capacity in the system and $13 looks like a good price, how do I reconcile lowered volume but still using $13 for 2021 cost guidance, please? Thank you.

We don't have much capital allocated for productivity initiatives in 2021. The total is $200 million, with $150 million coming from 2020. We spent some in 2019, and we will have some available in 2021. This capital is primarily for mining equipment and the development costs of data models included in those figures. Our goal is to maintain low capital intensity moving forward. We are also considering other incremental projects with quick payback periods, but for now, we are focused on achieving the 200 million pounds target.

Yes. We clearly have the capacity to add to those volumes.

Hi, everybody. Thanks for the questions. On slide 18, quickly, the $180 million of annual debt service for the smelters, does that include amortization of the $3 billion loan, or is it just interest?

It does include amortization, spread out over the remaining life, so over the roughly, 19-20 years after the smelter’s operational. So, it assumes that it's financed over the life of the reserves. And as I mentioned, we’ll likely have a shorter-term financing at first, but that can be refinanced as we go forward. So, it was principal on interest.

Okay, thanks. And do you expect any return from the actual investment? So, meaning like, once the smelter’s built, if we were to include any profitability from the smelter, can we like subtract that from the 180 in terms of what the ultimate kind of cost of the smelter is?

What we're showing here on the right of that chart that by building the smelter we can phase out the export duty. Okay? So, that offsets essentially this principal on interest. But other benefits that we get from the smelter, one, we got an extension of our mine life through 2021. Two, we expect that once the smelter is operational, smelter cash costs generally are below $0.20 a pound. In fact, our line of copper operations were well below $20 a pound in 2019 compared to market rates in the $0.25 a pound range on average. So, you'll have some margins, depending on TC RCs. But, as Richard pointed out earlier, we also get a benefit to the rest of our operations and Cerro Verde and the Americas that with this capacity, it’ll likely bring down market TC RC rates, and that will benefit our other operations that are paying market rates for treatment charges.

Just concentrating, two questions, one in production, the other one in CapEx. So, Cerro Verde is producing about a billion pounds, or produces about a billion pounds a year, your throughput at 420,000 pounds per day, about 60,000 pounds per day higher than nameplate capacity. So, was the plan to keep production at about the 1 billion pounds of that declining over the next five years?

So, I think, Oscar, you're right. I mean, we are having to offset the grade decline at Cerro Verde, and we are putting more through the concentrator. In 2020, we expect to be a bit below the 1 billion pounds, but return back to the 1 billion pound level in the years following 2020. I mean, and we've got great opportunities to increase production with efficiency.