Freeport-McMoRan Inc. (FCX) Earnings Call Transcript

Good afternoon, everyone, and thanks for joining us for our session with Freeport-McMoRan. We're pleased to have here today, Kathleen Quirk, EVP and CFO of Freeport, for our fireside discussion to talk a little bit more about the company and the corporate supply demand outlook as we're going forward. So I'll hand it over here for Kathleen to provide some opening remarks, and then we'll go straight into the Q&A.

All right. Great. Thank you, Emily, and thanks, everyone, and Goldman Sachs for hosting the conference and for your participation. We look forward to be back in New York at some point for this conference. We've attended it in many years, but it's good to be with you virtually today. I'm just -- as Emily said, just going to make a few opening comments about where we are as a company. And then we can get to the Q&A. But just in -- reflecting on this year, we started -- Freeport started of the year, and this was a very critical year for us because it was a year of transition from our open pit mining in Indonesia at Grasberg to the underground. And so we had our plans all laid out, of course, and then things changed a lot beginning in February and March in terms of the pandemic. And so we had a challenge of continuing the progress with Grasberg, keeping all of our operations going and then managing the business in a very uncertain and volatile time period. Early in the year, in April, we rolled out a revised plan to address the uncertainties surrounding the pandemic, and you've seen that plan that we've been executing for the last several months and executing it very well. Our top priority in all of this has been to run the business in a way that protects the safety and well-being of all of our employees, and we've adhered to strict protocols throughout the operations to make sure that we can operate in a safe way. And we're pleased to say that the protocols that we put in place have been very effective in managing the health issues that all of us face around the world. At the same time, we have reduced costs significantly. We reduced our capital spending, and we've been ramping up production at Grasberg. And we've executed those plans very efficiently. You've seen in -- just recently, in October, when we reported our third quarter results. We're pleased to say that we have entered a period of time where the major capital investments are now beginning to bear fruit, and we are actually generating very significant cash flows, in excess of our capital spending. So that's very good. You saw the significant cash flow generation in the third quarter. We expect that to continue in the fourth quarter and really see the opportunity to accelerate our cash flow generation as we go through 2021, as we continue to ramp up the very large, low cost operation in Indonesia. Freeport operates all over the world. We have a strong franchise in the U.S., where we operate several copper mines and molybdenum mines. We have a big presence in South America, both Chile and Peru. And of course, the Indonesian asset that we've operated for decades now very successfully. So we're in a great position as a company. We've made some major improvements to our balance sheet. We're well positioned as we look forward, as we ramp up the Grasberg, continue to generate cash flows, we're in a really good, strong position, with really high quality assets, a reserve life that extends 30 years or more. And we have a pipeline of potential projects that we can continue to evaluate for potential development over time. So we're really in a really good position. Looking back where we started the year, the progress that we've made in the year 2020. We're continuing to be focused on protecting the health of our people. We're not letting up our guard. We're very encouraged by the medical solutions that are being rolled out to address the pandemic. That's very encouraging. But in the meantime, we're going to continue to stay very disciplined around health and safety in our operations, continued to manage costs and capital spending very aggressively and continuing to improve our balance sheet. I know, Emily, you're going to get into copper markets, but Freeport is one of the leading producers, global producers of copper. We're very positive about the trends we're seeing in copper and its role, it's very critical role in the decarbonization activities that are ongoing and accelerating. We're a responsible producer of copper. We've just signed on to The Copper Mark, which is an industry-wide effort to have an assurance process where copper mines apply and subject themselves to compliance with responsible producing criteria. And so we're pleased to be part of that. We work very hard on our social license to operate. And it's given us the chance during this time of pandemic really to help out communities with the issues that all communities around the world are facing as a result of the pandemic. So not only do we supply our customers, but we also work to better the lives of all those in our communities and all of our stakeholders and encourage all of you to look at our sustainability for the ESG presentation that we have on our website and our first climate report that we published earlier this year. So it's been a very busy year for Freeport, a very important year. And we're set up now, very well set up, to continue our execution. We've derisked that to a significant degree this year. And as we look ahead, we see the opportunity to generate very strong cash flows, anywhere between $7 million and $9 million of EBITDA at copper prices between $3 and $3.50 per pound with low levels of capital spending. And we expect to be able, with strong execution, to continue to strengthen our balance sheet and provide returns to shareholders. And we're very much looking forward to that. And that's just a summary, Emily, where we are right now. And I'd be happy to take all your questions.

Great. Thanks, Kathleen. So tomorrow at the session, Karl and I will go through a couple of Q&A. But I thought we'd like to start off big picture here. And let's talk a little bit about copper supply/demand balances. What are you seeing as your outlook for the copper markets over the next several years? What do you think it will take to have copper prices maintained above sort of the $3 per pound level? And most people, I think, can share a similar view around the copper demand picture, but what are you seeing on the ground from the copper supply side of the equation, both near-term and longer-term as well?

Yes. We made -- at Freeport, we made a very strategic decision. It's been 13 years ago now when we acquired Phelps Dodge, which was a very large copper producer with assets around the world. And we did it to get -- had our shareholders have more exposure to copper and to have some better geographic diversity with our Indonesian operation. That's been a very -- that was a very successful transaction. And really, the -- what we were so drawn by in terms of looking at the copper industry was the difficulty in finding new supplies. As we looked at the situation then, and now, it's just even been further validated, that it's very, very difficult to find new supplies of copper. We show a chart from time to time that shows that there really haven't been major discoveries, new discoveries in the copper industry. And the easier projects have already been done. So now what the industry was faced with is working to try to offset declining production and try to grow with limited amount of opportunity. So there have been some projects that have been developed in the DRC in Africa. There have been some projects developed, and there are some still being developed. Of course, you know, there's a big project in Panama coming on now. And there's a big project that -- in Mongolia, that's also a big underground project that's also coming online. But if you look at the pipeline of copper projects, actionable copper projects, there are really few and far between. And so we feel, as a company, very well positioned because to mention we have a 30-year reserve life. But in addition to that, we also have opportunities that would represent an extension of our reserve base in the same areas where we're operating, that have been drilled, more work needs to be done on those, but we have an organic opportunity within the company to pursue over time. But in terms of the copper price needed for many of these projects, it's above today's levels. And what was striking, really, to me, even historically when we saw copper at $3.50 per pound or $4 per pound, everybody was trying to find new opportunities in copper. And really, there aren't plenty. So even if we do have prices continuing to rally with an acceleration of demand, it's very difficult for the industry to keep up with that increase in demand, and just keep ourselves flat. So it's fundamentally, we believe, a very attractive business, and it's underpinned by the fact that very difficult to bring on new supplies of copper.

That's great, Kathleen. Thanks for the color there. And maybe just one quick one. We're seeing a lot of noise coming out of Latin America around sort of the political situation in Peru or Chile. What are your views around sort of the government attitude towards mining there? Do you think that's any -- a bit of a speed bump as maybe the near -- sort of the mid-decade project sanctions that we should be expecting? Or is that not so much of an issue this year?

Well, I think it's an issue really all around the globe in our industry. You see social issues or government turmoil from time to time in places where there's significant copper production. But the industry, as a whole, is a net contributor to these economies in a significant way, particularly in Chile and Peru, a big job provider. And it's -- high wages relative to other opportunities within the country, large taxpayers. So there's a real business case for continuing copper mining or mining in these countries. Mining companies are having to do change and adapt and respond to increasing social pressures, increasing pressures on water conservation and other issues that everyone -- the communities are all concerned about. But I'll give you an example. In Peru, there's been a tension over time many years between farmers and miners really dealing with water usage. And so when we did the expansion of Cerro Verde, we did a major expansion in the 2010 time frame, water was a big factor. And we discussed it with the government and the government encouraged us to do the project, but encouraged us also to make sure we had a project that would be positive and not be reviewed as negative by the communities. And so we developed, our team developed a situation where we used water that was just being put into a nearby river from the communities untreated. And so we took the water and developed a wastewater treatment plant so that we could use the water, and give clean water back that to the communities. And so it was a real win-win situation. And I think those kinds of things is where the mining industry can be supportive of governments as they try to promote jobs and increase investment. And so those kinds of things, you've got to be creative and make sure that you've got acceptance in the communities where you operate. And it's as much on us as a company as it is on governments and others to make sure that happens.

Kathleen, I just wanted to shift over to another part of the world, briefly here, Indonesia and Grasberg. Looking at this from the credit side, I think credit investors, over time, are focused on risks involved, right? And I think you've sketched out a view that growth entails risk, especially in copper, but you're getting to that inflection phase where you take a look at your bond levels, it suggests relatively low risk, positive movement from the rating agencies on your bonds today. When you think about the growth that's going to come from Grasberg, can you contextualize the risk associated with that growth? And how much derisking has been done over the last couple of quarters in Europe?

Yes. Well, this -- what we're doing right now is something that we have been planning since the mid-1990s. So it was always part of our long-term plan that, at some point, we would get to a point within -- the mining near the surface, the surface of the open pit, that it would no longer be economic and we should move underground to maximize the value of the resource. So that has been in our plans for many years. We started investing in it about 15 years ago, a little more than 15 years ago. So it's a very long investment period where we were investing in the infrastructure necessary to get access underground. And so we did that really from 2003 forward. And it wasn't until last year that we really started to produce from these 2 new ore bodies. We have been mining underground at Grasberg for decades now, but really to go to 100% underground operation, we really started that last year and stopped the surface mining at the end of 2019. So over that time period, we invested billions of dollars to get us to this point, to get access, to put in the infrastructure so that was a big risk. And of course, we were doing it during some kind of periods where there was uncertainty in Indonesia, certainty with our long-term license. And so we knew we had to resolve those issues and at the same time, address the technical feasibility of all this. And so our team has just done an excellent job. We've derisked that project significantly. We really recognize we've got risk ahead of us as we continue to ramp up and gain scale. But when you think about along the spectrum of where we are from a risk standpoint, it really brought that -- the risk of the project down significantly. I would also say that the -- from a political standpoint, the transaction we did in 2018, where the Indonesian government, through a state-owned company, became 51% owner of the operation, was a huge risk mitigator as well. We have very strong alignment with the government. They -- not only do they have their 51% interest, but we're a very large taxpayer, many years, one of the largest taxpayers in the country. So we've -- I think over -- for a long period of time, we've been derisking. But I think really in 2019 and continuing in 2020, we have addressed the major risk, not -- we're going to have risks, it's mining, it's underground mining, complex, but we've got a team that's been block caving for 50 years. Probably, if you look around the industry, you won't see a company with more block caving experience underground than Freeport. So while there are risks, we've got the capabilities, the technical capabilities and the structure to deliver on this plan. We're very focused on it. Aside from health and safety and all these things, this is really what our management team is focused on delivering, and it really transforms the company and you see the numbers. Grasberg will be very, very low cost producer at current gold prices. Gold revenues will completely offset all of our operating costs there. But we've got great assets elsewhere, too, but this one is -- we've been making the investments in terms of the resources, both people resources and financial resources that we've dedicated to this. It's just very gratifying to see. It's really coming together in a positive way.

Is -- and I'd certainly like to talk about outside of Grasberg, especially with the NOL position and how cash -- how earnings can float -- a cash flow outside. But just to stick with the Indonesian region. Two follow-ups. One is around returns and associated investments in the regions and one on the gold content, which you mentioned. Just first on returns and the associated agreements with the government around the smelter, for example. There was some news just recently that smelter expansion has been agreed to. Does that replace the additional smelter that you may need to construct? How should people think about that? And then also how much financing it could require from Freeport?

Well, one of the key things in our 2018 agreement were to extend our rights through 2041. We agreed to construct a new smelter in Indonesia. In the 1990s Freeport, with Japanese partners, constructed a smelter, and it's the only copper smelter in Indonesia today that's been run very well. It's operated by Mitsubishi materials, and they've done a great job with it. The Freeport -- PTFI is a 25% owner in it currently. But as we look at the smelter -- and as you know, that is one area where COVID did have an impact on our plans. We had to delay the start of construction [indiscernible] because of where it's located in Eastern Java at Gresik. And so we've asked the government for an extension of the time to complete the project. And in the meantime, there's been a lot of discussion with our partner, who is a state owned -- 100% state-owned company. The ministry that oversees their investment, the state-owned Ministry of Mines and several other ministries within the government, they're looking at options of what makes sense in light of where we are today. And so this opportunity with the expansion of the existing smelter doesn't meet the full requirement. It's basically increasing the existing smelter by about 30%, which is about 300,000 tonnes of concentrates a year. And we are committed to do 2 million tonnes of new smelter capacity. So this is a smaller project. It can be done, it could be advanced. And it has good economics relative to a greenfield project. And so we, with the government, thought it makes sense to move forward with an expansion of that one. But the other smelter is still being considered. I think some, within the government, would like to see that greenfield smelter continue. Some within the government aren't sure that, that should be the case because they're owners in PTFI, and they may see better uses of capital for their capital. So it's still being discussed, but this was a step, an incremental step to get more downstream capacity, developed in Indonesia. In terms of the structure of how the smelter would be funded, we are -- PTFI would fund the smelter investments. We have availability under potential bank facilities or other debt facilities that could fund these investments. FCX's economic interest would be 49%. And we don't expect that it will require cash contributions from FCX into PTFI to fund. We expect that we'll have availability of debt financing at the PTFI level to fund any smelter investments. We do pay a duty, a 5% duty to the government on exports. As smelter capacity is developed, that duty would go down. So when we look at the economics, while we prefer to invest upstream and invest in our mining business, where we generate the margins, from an economic standpoint because the duty would go away, doesn't have a huge -- the smelter doesn't have a huge economic impact on FCX. The debt, as you know, would be consolidated. But from an economic standpoint, it doesn't impact in any significant way, the amount of cash rolling out of PTFI to FCX.

Just a quick one. That's very helpful on the smelter and the different levers. A quick one here, just on the gross content -- the gold content at Grasberg. This question comes from an investor. What's the potential for a gold streaming deal there? It seems like it's not necessary given the leverage, but some in the market seem to suggest that it would be beneficial. What's the -- what's your take on that?

Well, it's something that we've looked at over time. Grasberg is a significant gold producer. And we've looked at ways to bring value forward for the gold content. Right now, we're just focused on getting up to the ramp-up levels as we get to those and derisk the production schedule further, we'll have options to evaluate. The pluses and minuses with a traditional gold stream, you may be aware, but in the U.S. the traditional gold spring under U.S. accounting principles would be treated as debt. So that's a factor. As we think about it, but if there -- or that -- ways that we can enhance the value and derisk further, we'll certainly be open to that, but there's not a slam dunk transaction that and we're ready to recommend to our Board at this point.

Right. Great, Kathleen. Maybe pivoting to the rest of the welding in your portfolio. You recently constructed -- you recently completed construction of the new Lone Star mine. Maybe give us an update as to how the ramp is going there? When you're expressing full capacity? And then while we're talking rest of the world, as you think about longer-dated growth, where are the opportunities that you see in the portfolio?

The Lone Star project, this is in Eastern Arizona. It's close to our Morenci line and Morenci is the world's largest mine -- copper mine in North America, but this was an operation that was developed on a smaller scale, and its life was coming -- Safford mine was coming to an end. And we had the adjacent property at Lone Star and had the ability to do a economically attractive project because we already had infrastructure in the area. And so the project, which was about 850 million and actually came in a little under that, probably around 825 million. But that project was basically to do a stripping of the ore so that it could be transported to the production facilities at the nearby Safford operation, which I mentioned was reaching the end of its life. And so the ramp-up has gone very well. We're on track, 200 million pounds of copper per year. And really, that's kind of the start because when you look at the resources in the company and the drilling that we've done, a lot of the drilling that we've done in recent years has been in that Lone Star area in that district to look at what's beneath the oxide. And what we have determined through the drilling is that there's a potential for a very large deposit or sulfide mineralization beneath the oxide. And so not only are we having good cash flows and an attractive economic project just for mining the oxide ores, what we're doing by mining the oxide ores is that we're uncovering potential future ore that can be mined. We may end up bringing a mill there at some point. This is a long-term project. We think it could be another Morenci at some point. But this will be an investment that will go on over a long period of time. But we have the opportunity, while we're generating cash flows, to potentially reinvest some of those into what could be another cornerstone asset for us in the U.S. That's only one of the opportunities in the U.S. We have a series of others that are within our portfolio. I mentioned that we've got long life of reserves, but at some of the mines like, our Bagdad mine, for instance, the reserve life is currently like 80 years. And so there's the opportunity maybe to put in some additional equipment to bring some of that forward. And so we're looking at those kinds of opportunities. We're really focused on this technology initiative we have, where we're using big data and artificial intelligence to help us better understand the ore bodies, work our assets harder. Rather than just bringing in a new truck or a new mill, we're finding ways through this exercise to find opportunities to get more capacity through our existing assets. And so we're really focused on that because what it could do for us is allow us to have more economic expansion projects in the future. So it's helping us rethink about ways that we can bring down the capital intensity of the business. So we have a series of things like that in the U.S. We also have a major opportunity in Chile at our El Abra mine, where we have a large resource there that would support a now concentrator, like what we have at Cerro Verde. And so that's a real opportunity. It's going to require us to put in -- I talked about these water issues, but require us to put in on desalinization plant. And it has some significant capital associated with it. So that's an opportunity. But what we want to do is look at the whole of our organic opportunities and determine which ones should be sequenced first and to just have a pipeline that we can consider over time. These are long-term projects. In the interim, we're going to be generating a lot of cash flow. And so we hope to be in a position to -- and expect to be in a position to being to pay down debt, get returns to shareholders and invest in these projects over time. And that's kind of our -- the financial policy thoughts around how we go forward post getting the Grasberg up and going.