費利浦·麥克莫蘭銅金 (FCX) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the FCX third-quarter 2003 earnings conference call. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to Richard Adkerson, President and Chief Financial Officer with Freeport-McMoRan.

Good morning everyone.

Welcome to our third-quarter conference call.

Our earnings announcement was released earlier this morning, and a copy of it is available at our Website, www.fcx.com.

As has been our recent custom, today's call is being broadcast live on the Internet.

We have several slides to supplement our comments this morning, and we will be referring to those.

The slides are accessible using the webcast link on our FCX.com homepage.

In addition to analysts and investors, the financial press has been invited to listen to today's call.

A replay of the call will be available on our Website later today.

Our press release and our Website information and these remarks are all subject to the cautionary statement that we have published, and it includes our references -- we will be including references to forward-looking statements, and these can be affected by a number of factors that have been described in the risk factors including in our form 10-K that has been filed with the SEC.

Joining me on the call today is our Chairman and Chief executive Jim-Bob Moffett, and as usual, after we complete our brief presentation, we will have an opportunity for you to present questions to us.

Today in the third quarter we reported net income of approximately $56 million, 33 cents a share.

This includes the effect of two special charges.

One was the cumulative effect for an accounting change which was 13 cents a share related to issuance costs on our redeemable preferred stock which the new accounting rules require us to now treat as debt, and then $25 million or 13 cents a share of charges related to the early extinguishment of debt when we negotiated a conversion, early conversion, of a proportion of our 8.25 convertible notes.

That would total 26 cents a share.

Then included in our ordinary income is a 6 cent a share gain on the redemption of our gold and silver.

Preferred stock in August, which was treated as a hedge for hedge accounting under accounting purposes.

These three items result in a net charge of about $38 million or 19 cents a share.

Our year-to-date nine-months net income is $1.03 a share including these charges as compared last year with 43 cents a share.

Before we go into our usual review of the financial aspects of our third-quarter, I would like to take a few minutes and discuss the October 9th slippage event that took place in a section of the Grasberg mine.

As we have previously reported and as I am sure most of you are aware, we had a slippage of material that occurred on October 9th.

Regrettably and as a matter of extreme sadness for all of our Freeport team and family, we have had two fatalities that have been confirmed, and we also have six workers who are missing and unfortunately are now presumed to have perished, in addition to five injuries.

The search effort to locate these workers is really our highest priority now.

That is being done with conjunction with activities to ensure stability of the area where the slippage occurred.

Cleanup activities and restoring access to the affected parts of our Grasberg mine have commenced and are currently anticipated to be completed during the fourth quarter.

Our technical team together with our outside experts who have been working with us since inception of our operations are working with the technical representatives of the government of Indonesia to investigate the causes of the mine.

A technical team from the Department of Energy and Mineral Resources of the government of Indonesia has conducted an initial review, and following our discussions with them, we are undertaking activities that will involve limiting mining work in the areas of the slippage as we conduct search activities and operations to stabilize this area.

The inspection team has approved ongoing mining operations in the Grasberg mine in areas not affected by the slippage.

We have seen nothing and do not expect that this event will change our long-term mine plans, and we will continue to study the event in coordination with the Department of Energy and Mineral Resources and with our outside experts and take actions that are appropriate under the circumstances.

We are currently conducting operations in the Grasberg mine, which were not affected by the slippage, and in our DOZ underground mine and our milling facilities and our concentrate delivery and shipping operations.

We have included on our Website a set of slides that provide information on the slip, and this accompanies our financial slides, and those of you with computers may want to refer to those during the course of this presentation.

As you will see, these slides include vertical pictures of the pit taken recently but before the slide; horizontal pictures of the Southwall before the slide, with indications of the areas where the slip occurred and the resulting one out occurred.

Then we have actual pictures of the Southwall after the slip occurred.

From these you can see the portion of the Grasberg mine that was affected by the slip.

You can get a sense of the amount of material involved.

You can see how access to our high-grade mine locations in the lower pit have been temporarily interrupted.

I think you'll find this information instructive, and particularly for those of you who called me about some recent pictures that have been included on the Internet, as as you know, photographs can make things look either very large or very small.

What we have tried to do is put this in prospective.

It was not an insignificant event, and particularly with the loss of life and injuries, this is tragic and a sadness for all of us.

The material high in the pit became very full with water saturation.

This was more like a mud slide than a rock avalanche.

The design systems did not contain this, and we are going to work to determine why and what actions we need to take.

We covered the pit area like a veneer.

It involved approximately an estimated 2.5 million tons of material.

To put that into prospective, as you know, we have the world's largest earth moving equipment there with our shovels and truck fleet.

On a typical day, we move roughly 700,000 tons of material a day.

There have been days when we moved a million tons of material.

The plan that we will be following, first of all, will be to ensure the safety the safety of our operations and our people.

We want to stabilize the upper areas of the pit from top to bottom as we conduct search operations and then work to establish access to the higher grade sites at the lower levels of the pit.

We will conduct cleanup.

We expect to be able to return to normal operations in the fourth quarter.

The timing of that will depend on how these operations go in the next several days and weeks.

That timing will affect the metal that we will produce.

In the meantime, we will continue to mine overburdened and lower grade areas of the Grasberg mine itself.

The DOZ mine, which is operating at greater than 40,000 tons a day, is unaffected as our mill concentrate delivery systems.

We will accelerate certain planned maintenance activities.

We are providing a new estimate today that this will result in an estimated deferral of 70 million pounds of copper to our interest and 150,000 ounces of gold that will be deferred based on current estimates to future periods, but all of this depends on what transpires as I indicated.

As we initially disclosed, we did not expect this to result in more than 10 percent of our annual metal amounts, and these current estimates are in the 5 to 6 percent range.

We will update everyone as we go forward if there are issues to be considered.

Now in turning to our financial results for the third quarter, the third quarter was a continuation of our high-volume and our low-cost operating performance.

We generated operating cash flows of $221 million in the third quarter and $505 million on a year-to-date basis.

We made significant balance sheet improvements, including reducing our debt on a year-to-date basis by $643 million, and this follows two years of very significant amounts of debt reduction as we continue to generate strong operating cash flows.

Our cash position at September 30th was $529 million.

During the quarter, we had realized copper and gold prices of 81 cents a pound and $388 an ounce.

That is significantly higher for both than we had in the previous years quarter, and up from the second-quarter results.

That resulted in $669 million of revenues and $302 million of operating income.

I mentioned our operating cash flow and our significant debt reduction for the quarter, and these are important continuing futures of our operations.

The debt reductions that we made during the quarter included retiring $76 million of senior notes, bringing a total reduction in those securities or $310 million since the beginning of the year.

As I mentioned earlier, we entered into negotiations with holders of our 8.25 percent senior notes, and $311 million of the roughly $600 million issue converted was on the basis of paying to the holders restricted cash, which was in escrow accounts for our future dividends, and this will result in annual earnings and operating cash flow improvements of approximately $25 million.

As we previously announced, we repurchased the equity portion of a venture that owned our power assets for $78 million.

This will increase earnings and cash flow by $12 million a year, and also we had a mandatory redemption in August of our Series One gold denominated preferred stock for $210 million in cash, and that debt had a book value of $233 million.

Included in our slides is our future debt maturities, and as you can see, we have a very manageable debt servicing situation for many years in the future.

We have $100 million of maturities in the fourth quarter, and then extending through 2009, we have debt maturities that average about $135 million a year.

Our net debt after cash is about $1.4 billion, excluding the 8.25 percent convertible notes that remain outstanding.

Those notes have a conversion price of $14.30 and will be going into equity no later than their call date of August of 2004.

I also mentioned included in our debt is $575 million of our 7 percent convertible notes which we issued in mid-February at a 70 percent premium to the then market price, and those have a conversion price of $30.80 substantially less than today's stock price.

So our Company during this year has moved itself into an extremely strong financial position and a very liquid position in relation to our debt obligations.

We do have a very positive outlook, and that is based on our long-lived reserves with 50 million payable ounces approximately improved in probable gold reserves and 40 billion pounds approved in probable copper reserves.

Our operations are now fully developed for the approximately 10 year remaining life of the Grasberg Pit, and we have roughly twice the undeveloped reserves underground that we will be developing in advance of the exploration of the pit which will give us decades of life as a low-cost producer beyond that date.

We have positive metal markets for both copper and gold.

We are unhedged to each metal, and because a large portion of our costs are fixed, we have significant financial leverage to offer movements in each of these models.

We have a very strong track record for production in costs, and we expect to be able to continue to do that in the future as we go forward.

We presented a slide to demonstrate the impact of varying copper and gold prices on our operating cash flows, and it shows within a range, using averages over the next three years of expected volumes, using a range of prices between 75 cents and $1.05 for copper and $(inaudible) 25 for gold that we generate somewhere between $400 million to $750 million a year on an annual average basis for operating cash flows, and we have very low CapEx and debt requirements to match those up.

Yesterday we announced that our Board had increased our annual dividend.

We went through the dividend earlier this year at our annual rate of 36 cents a share.

The new dividend is set at a rate of 80 cents a share and will be paid initially in the first quarter of 2004.

First dividend payments is on February the 2nd.

Based on current shares outstanding, that would require $136 million of cash payments.

That is less than 50 percent of our annual average free cash flows.

That gives us a lot of flexibility to deal with financial obligations, operating events and also the opportunity to consider potential future increases in dividend and stock buybacks.

In that regard, the Board yesterday authorized an open market purchase program for up to 20 million shares of our common stock.

We will be considering future stock buybacks at appropriate times in the marketplace.

That is a summary of our activities, and I will turn the presentation over to Jim-Bob.

Thank you, Richard, for that report on our quarterly.

Before we start our question-and-answer, let me just myself refer to the slide for just a minute, which I hope most of you are able to access on our Website.

The only thing I would add to Richard's comments is we mentioned that this slippage and overflow is a veneer of settlements.

I want to emphasize as you received in the past on our Website some cross-sections of the mine that shows you how we will mine this pit to the bottom of the pit and the sequence, which is the basis of our five-year and 10-year plan and 14-year plan to get this open pit mind.

This veneer that flowed out of the wall was not mineable ore.

It was waste.

Once the veneer is removed, those cross-sections go to the basis of the models that are based on 1500 drill holes.

It has no change.

This does not impact the shape of the ore body we have been presenting to you.

The only other comment I would make here is I hope all of you get access when you see that less than 5 percent of the pit was involved, and it speaks to the issue that Richard talked about when some of the pictures from the Northwall that you have seen tend to look overwhelming in terms of the amount of material that was held back.

But to put that into perspective, as Richard said, we move from 750 and up to 1 million tons a day.

Just to be straightforward with you, if we had the focus all of our earthmoving equipment on this, we could clean this up in three days as soon as we are convinced that we have we have got our (inaudible) recovered and we have got the slope stabilized.

So if this 2.5 million tons of dirt had landed somewhere and we did not have a company that every day is the largest earthmoving company in the world, it might appear to be a sizable task.

This can be cleaned up quickly.

Once we are prepared to go in and do a full job, and that will happen just as soon as we are convinced that we have got the high wall stable, which should happen we believe quickly.

We have been working on it almost since the slip occurred.

We redirected the water, which had some influence on this mud flow versus a landslide, and all projected devices, the 90 meter bench which overflowed because of the viscosity or lack of viscosity of this fluid are going to be looked at with some additional burns and equipment, and then we will get back to work.

So I hope that you will get to look at the slides and hope that this answers most of the questions you might have.

With that, Richard, I will turn it back over to you for the Q&A.

Thanks, Jim-Bob.

Operator, if you could open the lines for questions?

(OPERATOR INSTRUCTIONS).

John Hill, Smith Barney.

Good morning everyone and thank you for a very frank and straightforward presentation.

I guess I just have one real quick question, and that is that certainly there has been commentary in the media originating overseas that this unfortunate incident related to overproduction, obviously echoing things from years past.

I was wondering if you could comment on the sources and the merits of that kind of posturing that we are hearing?

You know, frankly, what that is as you said this is the lobbying group, The Friends of the Earth, the environmental group.

Unfortunately they are just totally uninformed.

Our rate of production had nothing to do with this incident.

The (inaudible) probably knows that.

We have inspectors at that mine year-round, and if they thought the rate of production was endangering the walls of the pit or the workers, they would have shut us down long before.

They don't wait until an event to do that.

So the source of that and the other is one of the tribesman from the Morning (ph) tribe which is outside of our area of work.

They all, of course, continue to claim that they have a claim to this, even though it is not on their traditional lands.

So the Morning (ph) tribesman, who is a top one, felt that if he could do some of his magic, that he might be able to put a spell on the mine and prevent this from happening.

But those are the only two articles that I am aware of.

All the reliable people that understand that this pit is monitored every day by us and the Department of Mines knows that we would not have gotten a permit or would continue to be permitted to operate at a rate that was endangering the safety on this kind of an event or any other kind of event.

They would have stopped us before we had the event.

So the environmentalist will always take a position that they don't want a city mining in the mountains of Papua, and that is just reality.

That is the source of it.

Very good.

Thank you.

And I guess I would just ask any implications for the pit wall steepening activities that have been underway lower down?

Not really.

If you have a chance to look at these slides, John, if you look at the hands of the clock, we are about two minutes on the clock looking down, and we regret that even though we had been moderating this thing, that it came down as almost a liquid.

It did not come down under any normal predictable circumstances.

We have not have a slide since '88.

We had a 90 meter bench that should have caught this, and it should have formed a footwall.

And when it did, it would have stopped.

But instead it flowed like a liquid, and that is the thing that really overwhelmed the safety mechanisms that we had.

The rest of the pit, John, with the exception of a couple of other places, which we monitor and have under control, 95 percent of the pit is volcanic consolidated rock, hard marble, limestone/marble.

So as we lay this pit back and get the opportunity to steepen this pit, the walls of the pit will be more and more of the consolidated metamorphic type rock that are the building blocks of a lot of buildings that you know.

So the foundation of this pit is 95 percent what is described.

In this event, even though we were monitoring it, the only thing that surprised us and got us in this case and created this runout was somehow some water got trapped behind it and ran out like water instead of like sediment.

Very good.

Thank you.

James Copeland, Goldman Sachs.

Good morning everybody.

I am not quite sure I understand.

Are you saying that going forward there is nothing you would do differently in terms of the mine plan?

You were clearly surprised by this incident, and you were monitoring it and it still happened.

I don't quite understand how you can expect that there may not be another occurrence of such an incident.

Well, landslides in pits are always there.

All I can tell you is I just tried to explain that the other walls in the pit are much more competent rock than the few notches that had this.

And will we not ever have another landslide?

I cannot guarantee that will never be a landslide in the pit.

We will continue to monitor the pit as we have, and obviously with this event, we will look at the areas that would be subject to a flow, and we will up the ability to de-water those as we thought we had done here.

But when we say it is not going to affect our long-term plan, let me be sure that you would put it into context.

What we're trying to say there is this flow does not change the shape of the structure of this pit, and the ore does not move; the ore bodies are not changed.

If we have another event, we hope that our safety mechanisms will be improved and our mines will be improved.

But if we have one, if we don't get unlucky and have it block our access and even more important not to occur in an area where our miners are without warning.

So will we change things?

We change things in our safety program every time we have an accident, whether somebody steps off a truck and breaks a leg because they violate our SOP safety codes, whether they drive recklessly, or whether somebody is operating a mill does something that is not according to our safety standards, so we investigate every accident from a broken finger to this horrible incident where we covered our people.

So, yes, there will be a lot of relooking, but remember this pit is monitored every day by our staff, the GeoTech staff and by the government inspectors who stay here every day, and will continue to try to be perfect out here.

We haven't had a slide since '88, all we can tell you is that none of these accidents have an impact on the shape of this pit and the ultimate ability to mine it, and we do not foresee any accident, even after we have gone through this tragic loss of our co-workers' lives that is going to change that on a long-term basis.

Thanks, Jim.

But actually on the safety issues, perhaps I can suggest two ways it may change the pit, and perhaps you could respond.

Either if there was a gentler pit wall slope, which would perhaps lessen the risk of a slide, or alternatively you might not go quite as deep with the open pit mind and perhaps mine the bottom of the Grasberg from the underground as ultimately you will be mining.

Those two possible changes could affect the amount ore you have to mine, or -- I am sorry the amount of waste you have to mine -- or alternatively the amount of ore that it is mined from underground which would likely increase costs.

Could you comment on those two possible scenarios please?

Let me say once again this study as to how deep we go before we go underground has been underway since 1988 when we found this ore body.

We have looked at it with this model we have of this mine 16 different ways from Sunday.

In essence, what you said is as you get deeper in the pit, does it become more volatile?

As we actually widen the pit and get down in the pit, the walls of the pit become more stable because away from this mineralized rock, we get into unmineralized rock, which is metamorphic rock, and as we widen the pit, that is all we are going to be dealing with.

So as you take out the center of this ore body in the shallower depths, you actually remove the mineralized part of this rock, and the mineralized part of the rock is the only thing that is vulnerable to slides.

What slid here was some poker chip and volcanic material.

The marble that you have seen on your slides, and if you have ever been to that mind, the marble, which is a metamorphic rock, and the cemented volcanic (inaudible) are hard sandstone.

As we lay these things back, that is all that is exposed.

So I understand your two alternatives, but the mine plan which we have studied and look at and have revised as we go and have the empirical data, we believe is the right plan and we do not see any reason to off that.

But your two suggestions would be something to look at if we had not studied this thing for the last 15 years, it would even be more relevant.

But we continue to look at it, and we will continue to study to see what we can do to make the current plan more safe.

But does it change the GeoTech and the mine patterns opinion about the angle of repose and the slope of these walls and how far you can lay them back?

I don't believe that will be a conclusion that we get to.

Thanks very much, Jim-Bob.

Thanks, Richard.

Wayne Atwell, Morgan Stanley.

Thank you.

My questions have been answered.

(OPERATOR INSTRUCTIONS).

Michael Lewitis (ph), JL Advisors.

Congratulations on the repurchase and the dividend.

Even though they are quite significant, they still represent only a small part of all your free cash flow.

So in regards to that, two questions.

Could you just comment on how aggressive you attend to be on the buyback, over how long your intention is to complete that?

Secondly, things being equal, if business continues as is and the cash flow materializes as you think it will, what are your intentions or your plans or your thoughts on a further dividend hike sometime down the road?

Thanks for those questions, Michael.

You are correct in pointing out -- as I noted, this is a -- less than 50 percent of our free cash flow would be devoted to this current dividend.

That will give us the opportunity as we go forward to consider both stock buybacks, and our policy there is to enter into the marketplace when our cash resources are available and when the market conditions are appropriate for us to do that.

We had a stock buyback program during the 1990s when we acquired at that time about a third of our outstanding shares.

The Board, we have set a dividend that we believe is very comfortable to be maintained over re a pretty broad range of commodity prices.

But we are in an industry, as our history has shown us, of where there are ups and downs in prices, and the Board will be reviewing the dividend as it goes forward.

With the positive outlook, I think the expectation was that that would give us an opportunity to consider a higher dividend as we go forward.

Thanks very much.

Dan Rolling, Merrill Lynch.

Thank you and thank you both for the update.

You mentioned, Richard, that you may accelerate some maintenance into the fourth quarter.

Could you be a little more specific on that?

I assume what you are talking about would be at the mill, and what would it entail?

Well, we had scheduled mill maintenance during 2004 for our sag mail lines, and depending on the amount of ore that is available both from the existing stockpiles, the ore that comes from the DOZ, and we are continuing to produce at the present time low-grade ore from the Grasberg Pit.

That may give us a time to put one of the lines, the sag mail lines, at a time into a maintenance mode, which it would be doing next year.

So it is simply advancing, taking the opportunity that we have because of the reduced ore that we would be having going through the mill system to shut the mills down for brief periods of time and conduct these maintenance activities that we would otherwise do next year, and that will make us obviously more efficient as we go forward next year when we return to full ore production.

Richard, I think they have actually shutdown sag one and started during the liners and the repair there, which was scheduled for the first quarter of 2004.

As you can easily see, if we don't full ore flow and we do our sag one maintenance, then when we have that back at full capacity and don't have to do the scheduled maintenance in the first quarter of 2004, we will be able to actually see our first quarter of '04 next year because we will have both sags running.

So that is the kind of stuff we are talking about.

Okay.

That is great planning.

Can you give us an estimate on the incremental cost in the fourth quarter, or will this be capitalized, Richard?

Well, the cost will not be capitalized.

We have a number of competing factors that will affect cost.

When we undertake the cleanup activities, we are essentially diverting facilities and resources and people away from mining activities to some of the cleanup activities, so it is not incurring incremental costs.

Certain costs will be less because we will be mining at a lower rate.

That will lower things like fuel costs and maintenance costs and other costs associated with mining rates.

So all of these things will come into play.

Dan, we have given an outlook based on our current estimate of generating operating cash flows for the year of $575 million versus the previous outlook that we had given of $600 million.

So between those two numbers, you can get a sense of what would be the cash flow effect of the expected deferral of metals and the changes in our cost structure.

From that number, you can see that it is not a very large amount.

Thank you very much.

I will turn the call back over to you.

Please continue with your presentation or any closing remarks.

We have given you some information today that we hope makes you better informed about our situation.

I know as you review that you may have further questions.

We would encourage you to give us a call if you do have those questions, and we will be available.

We have our scheduled annual meeting with analysts on November the 11th.

That will be here in New Orleans in which we will be able to give an updated report on where the situation is at that time and what our outlook is for 2004 and future years.

That presentation will be available over the Web for those of you who are not here in person, so as material events -- if material events occur, we will report to them you promptly.

We appreciate your interest today and your interest in our company, and we look forward to talking with you again.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.