費利浦·麥克莫蘭銅金 (FCX) 2005 Q3 法說會逐字稿

Welcome to the Freeport-McMoRan Copper & Gold third-quarter earnings conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to Kathleen Quirk, Chief Financial Officer.

Please go ahead, ma'am.

Thank you and good morning, everyone, and welcome to the Freeport-McMoRan Copper & Gold third-quarter 2005 earnings conference call.

The FCX earnings announcement was released earlier today, and a copy of the release is available on our website at FCX.com.

Today's conference call is being broadcast live on the Internet, and we have several slides to supplement our comments this morning.

We will be referring to the slides during the call, and you can access the slides using our webcast link on FCX.com website homepage.

In addition to analysts and investors, the financial press has been invited to listen to today's call, and a replay will be available by accessing the webcast link on our Internet homepage later today.

Before we begin today's comments, I would like to remind everyone that today's press release and certain of our comments on this call include forward-looking statements.

We would like to refer all participants to the cautionary language included in our press release and slide presentation and to our risk factors described in our SEC filings.

Also on the call today are Jim Bob Moffett, Chairman of the Board;

Richard Adkerson, Chief Executive Officer; and Mark Johnson, our Chief Operating Officer.

I will briefly summarize our financial results and then turn the call over to Richard, who will review our operations and our outlook.

FCX reported third-quarter 2005 net income applicable to common stock of 165.8 million, $0.86 per fully diluted share, compared with net income of 17 million, $0.10 per share, for the third quarter of 2004.

For the nine months ended September 30, 2005, FCX reported net income of 471 million, $2.48 per diluted fully diluted share, compared with a net loss of 55.7 million, $0.30 per share, in the 2004 period.

Charges to net income for the early extinguishment and conversion of debt into common stock totaled 30 million in the third quarter, $0.14 per fully diluted share.

Results for the 2005 periods primarily reflect substantially higher copper and gold prices and sales volumes than the 2004 periods, following our return to normal operations last year.

Our diluted net income per share for the 2005 periods reflect assumed conversion of FCX's 7% convertible Senior Notes, and 5.5% convertible perpetual preferred stock, resulting in the exclusion of interest expense totaling 9 million and dividends totaling 15 million for the third quarter, and interest of 29.8 million and dividends of 45.4 million for the nine-month period, and the inclusion of 39.6 million shares for the third quarter and 39.7 million shares for the nine-month period.

These instruments were not dilutive for the 2004 period.

Our third-quarter 2005 sales totaled 346 million pounds of copper and 475,000 ounces of gold, compared with 262 million pounds of copper and 350,000 ounces of gold in the third quarter of last year.

Third-quarter sales volumes were slightly higher than our revised estimates reported on September 13, but below our earlier guidance.

Annual sales are expected to approximate 1.47 billion pounds of copper and 2.8 million ounces of gold, with PT-FI's share of fourth-quarter 2005 sales estimated to approximate 480 million pounds of copper and 1.1 million ounces of gold.

Our realized copper prices improved by 29%, to an average of $1.73 per pound in the third quarter of 2005, from $1.34 in the third quarter of 2004.

Realized gold prices improved by 12%, to an average of 445.79 per ounce of the third quarter of 2005, from $399 in the third quarter of 2004.

Our operating cash flows during the quarter totaled 263 million and 883 million for the first nine months of 2005.

We achieved significant debt reduction during the quarter.

Our debt reduction totaled 396 million and 566 million in the first nine months of 2005.

This brings us to a total debt number of 1.39 billion at the end of the quarter; and that is 1 billion net of our $393 million cash position.

Our common stock dividends totaled 133 million in the quarter, and 313 million year-to-date; that is $1.75 per share, which included two $0.50 per share supplemental dividends paid in March and September.

Our year-to-date share purchases totaled 2.4 million shares at $33.83 per share.

Approximately 14.2 million shares remain available our Board authorized share purchase program.

I would now like to turn the call over to Richard who will review our operations and outlook; and then as usual we will open up the call for questions.

Good morning, everyone.

We are speaking to you from our temporary offices in Baton Rouge.

It was seven weeks ago today, the day after Katrina made landfall, that we started operating from here.

We are working with our people who had property losses and dislocations from the storm.

But from a business standpoint, we have been able to carry forward the plan that we had put in place in anticipation of the possibility of this happening, and have been operating effectively.

I appreciate all the calls and comments I have been getting from many of you in the financial community.

As we advised you in September, we did not have the volume of copper and gold sales this quarter that we expected going into the year.

We are estimating that we will make up that going into the fourth quarter.

Despite that, the financial results are very strong because of the very positive copper and gold prices that we have realized during the quarter.

This is a year in which we will have a substantial amount of our volumes in the fourth quarter; but already year-to-date we have generated almost $900 million of operating cash flows.

It was three years ago in the fourth quarter of 2002 that we started our process of restructuring our balance sheet.

We did significant financings in the first quarter of '03.

Since the positive -- with a positive reaction in the commodities markets, at this time three years ago our stock price was at $12, our Senior Notes were trading at 15% or better.

We've had a remarkable change in the situation of our Company.

This year to date, as Kathleen mentioned, we have done significant transactions to both improve our balance sheet and provide returns to our shareholders.

We have reduced our debt by $566 million.

We've paid $313 million in common stock dividends, and made $80 million of repurchases of common shares in the first quarter.

Just in this third quarter, even with reduced volumes, we reduced our debt by $400 million.

That is going to give us $30 million of after-tax savings and interest costs as we go forward.

Our net debt at September 30 of under $1.4 billion, $1 billion net of cash, with almost $400 million of that represented by convertible that is well in the money, evidences the improvement that we have been able to make over the past three years.

The details of our debt reductions are included on page 4.

It includes the repurchases of $150 million of our 10 1/8 notes; the induced conversion of about a third of our 7% convertible notes.

These were the securities that we issued in the first quarter of '03.

They had very long call periods.

In fact, the 7%'s are noncallable for their life.

And the combination of current low-interest rate environment, higher commodity prices, and our strong stock prices allowed us to take this debt off our balance sheet much earlier than we had anticipated.

It's a very positive move for our Company.

Since the end of the quarter, we have induced conversion of $21 million of addition to (ph) the 7% note.

We continue to look for opportunities to improve our balance sheet that will provide returns to our shareholders.

We have now paid off 30% of the 10 1/8 notes and 36% of the 7% notes; and our common shares are 185 million outstanding since the conversions.

Page 5, as we started this effort to restructure our balance sheet, we pointed to our $3 billion of debt that was outstanding at the end of 2000.

Now that debt is down to $1 billion net of cash, and with a significant portion of that made by the in-the-money convertible notes.

With our strong fourth quarter and the current strong commodities markets, we will be able to continue to move to forward.

Details of our debt are presented on page 6.

Next year we have a maturity of the second series of our gold-denominated preferred stock.

At current gold prices this will require about $200 million of cash.

We will pay that off out of cash that we will retain in our balance sheet this year; and that will be a further debt reduction.

Then we will look for opportunities to do something with the longer-term securities that are outstanding.

But this is a very strong financial profile for our Company.

We expect this year to have copper and gold sales of 1.47 billion pounds of copper and 2.8 million ounces of gold.

That means, as you see on page 7, that the fourth quarter would be a very significant quarter for us, with 480 million pounds of copper to our interest -- this is net of Rio Tinto shares -- 1.1 million ounces of gold.

We have done these levels before.

It is an ambitious goal that requires that our systems and our operations perform in a very strong fashion.

Those of you who follow us will recall last year at this earnings call we were again expecting to have a strong fourth quarter.

That was the first quarter that we were really able to get to the high-grade material following our remedial activities earlier in the year as a result of the fourth-quarter pit wall failures in '03.

We were able to make those numbers.

Again I will tell you that achieving these numbers this quarter will mean that we will have to have strong operations.

We could be affected by weather and loadings at the end of the quarter.

At the end of the day, the ore is there.

If it is not produced this quarter, it will be produced in the first quarter.

So it is just a question, as we always do, of striving to get it as quickly as we can in a safe fashion; and this is our current expectation.

It would obviously be a very, very strong quarter for us.

And with copper and gold prices being strong, that would result in very significant operating cash flows for us of $1.4 billion in total for the year at 175 copper and 465 gold, with almost $500 million of that coming in the fourth quarter.

That would be net of $350 million net of CapEx, scheduled debt payments, and regular dividends.

So we are generating a significant amount of cash as we go forward.

Page 8, commodity markets are very strong right now.

This time last year we're coming up on LME Week.

As you recall last year at LME Week a number of industry analysts were looking to 2005 and predicting a balanced market for the copper business by mid 2005.

In fact, there was a double-digit drop in the price of copper that week, during LME Week last week.

And that was based on very strong production in 2005 over 2004, in part because of our mines returning to normal operating levels and some other minds mines returning to normal levels.

As it turns out, the industry has not been able to produce as much copper as anticipated this year.

Global consumption is not quite as strong as people expected then.

But China has made very -- has continued to be strong.

Inventories are low.

And the basic fundamentals of the copper industry continue to be strong, as we just don't see a large, significant amount of production coming from major new mines as we have in past years.

At the same time, the outlook for gold continues to be strong based on the number of the factors that have been driving since 2001.

So our Company is positioned to receive very strong prices at a time we are going to be producing significant amounts of metal.

We have a recent picture of the Grasberg pit, this is from October, on slide 9, and showing the very excellent state of the pit that it currently is in.

The pit wall failures that occurred in the fourth quarter two years ago occurred in the 6 South section of the pit, the South high wall.

Since that time that entire section of the pit has been lowered to where it is now at the lower levels of the pit where we have very high-grade material.

In the corner you can see where we are currently mining, and this will be the source of our metal as we go forward.

The primary reason, the basic reason for our lower than anticipated production in the third quarter resulted from those remedial activities that we took during 2004.

As we went into the into the third quarter, the areas of where our big shovels and trucks were operating were not in as efficient position, because of the previous mining activities, that they normally are.

We had made estimates about the productivity of our mining activities in this 6 South section.

And as we got into the third quarter it was clear we were not going to be able to make those, and that resulted in our September release.

We have now through our mining activities restored our mining areas to more traditional set-ups, so that our equipment can operate in their traditionally efficient manner.

You can see the relative pictures of this on the slide on page 10.

As a result of that we expect that will allow us to operate in a large-scale fashion during the fourth quarter.

Page 11 shows why we have such stronger volumes in '05 than we did in '04.

It also shows why it is stronger than we will have on average in years as we go forward.

During 2004, our mining activities were concentrated principally in mining waste and very low-grade material in the higher sections of the South wall of the pit where the failure occurred.

As a result of that, as we went into '05 we were able to concentrate our mining activities at the lower areas of the Grasberg pit where our very high-grade material is.

This shows, this illustrates, where our mining activities are occurring in '05 at the 6 South section as we complete mining that faces, and as we do some waste mining in the higher areas of the South wall and in the North wall.

Stepping forward, you can see in the fourth quarter we will be mining essentially in large part at the very high-grade part of the pit.

That is what gives us the opportunity to achieve these very high levels of production and copper and gold sales.

That is illustrated there.

Looking forward as to where we will be mining in the future, we're also taking the 6.

We have been mining the 6 North face of the North wall down to where it will be providing high-grade ore in '06, as we mine the 7 South and 8 South sections of the South wall.

In '07 we will be lowering those faces down.

We will complete mining 6 North; lowering the 7 South face down to where it will be reaching high-grade ore.

Then in '08 the 7 South face will be mined out, and again we will have a very strong year that year.

All of this is in accordance with the long-term mine plan and the ultimate design of this pit that was established back into mid-90s when we were doing our fourth concentrator expansion.

The situation in 2003 resulted in our mining some waste material earlier than we anticipated.

But the definition of what was ore and what was waste has remained the same, and we will continue to mine this operation in a safe fashion and achieve the high-grade section.

You can see in '08, we will have the very strong -- in '09 we will have the very strong year of completing mining the 8 South face of the mine.

The details of our five-year plan, which we are currently reviewing as part of our normal cycle of our budget reviews, is presented on page 17.

It shows the lower volumes in '04, the makeup of those volumes in '05, and our five-year plan reflecting the mining sequencing that I just reviewed at a high-level with you.

We are reviewing this now.

We will report revisions.

Our mine plan is always a roadmap for actions to see how we can maximize net present values; and we will be updating this with our first-quarter call next year.

Our capital expenditures are presented on page 18.

This year, we have been projecting $180 million of CapEx.

Through the first three quarters we spent just over half of that.

Those are all CapEx that we anticipate spending.

The timing of those will depend on when activities actually occur.

We're more likely than not to have lower than that for this year.

But as you can see in relation to the level of cash flows that we are generating, because of the fully developed nature of the Grasberg pit, we have very low capital expenditures as we look forward into the future.

Included in those capital expenditures are some very important projects for us.

What we're calling our common infrastructure project is driving a new adit system at the 2,500-meter elevation.

That is 400 meters below our existing tunnel system.

This will connect our mill operations to our future underground undeveloped mines, both in connection with the DOZ, MLZ mines, the significant reserves lying beneath the Grasberg pit that we will mine with a major block caving operation, and the major block cave for the Kucing Liar mine, as well as the Big Gossan mine that we're currently developing.

This project is progressing on plan, on budget.

It will allow us not only to maintain our current operations and provide the basis for our future, major underground operations when the Grasberg pit depletes in roughly 10 years from now, but it will give us access to conduct underground exploration and continue to examine the mineralization of this great mineral district.

Our current exploration program is illustrated on page 20.

It is focused on testing extensions of the MLZ and Deep MLZ associated with our current producing DOZ mine, which is providing 20% of the throughput to our mill and is operating very efficiently, above design capacity.

But this whole area is an area that is very attractive for continuing future operations.

We are in the process of expanding the DOZ by adding crusher and ventilation equipment so that it can operate at a sustained rate 50,000 tonnes a day, which will make it one of the biggest, if not the largest single, block caving underground mine in the industry.

Our cash flows are shown on page 21.

Obviously, this year, with the very large volumes and the very attractive prices, will be an extraordinary year for us.

But looking into the future, even if prices were to be significantly lower than now -- and one thing we don't do is predict prices -- our Company will be generating substantial cash flows in excess of our capital expenditures and the requirements of our balance sheet and our current common dividend level, with cash flows over a range of prices, as we're showing, averaging $500 million to $1 billion a year.

And that will continue beyond this period.

Our financial policy has been well established by our Board.

We have been executing that policy in accordance with the directives of our Board.

We are maintaining a strong balance sheet.

We have very significant financial flexibility.

We have set a regular dividend that we believe can be sustained over a broad range of commodity prices.

We review that regular dividend level with our Board at every quarterly meeting and will continue to do that, and assess markets and our operations and cost factors, and the Board will reach conclusions on that.

In periods where our cash flow exceed the requirements of our CapEx, our debt payments, we have been supplementing the regular dividend with special dividends and share purchases.

With this current outlook, we will have the opportunity to continue to execute that plan.

Our Company has no significant needs to maintain cash within our Company.

We don't have historical environmental reclamation obligations or historical employee retirement or benefit cost.

We have had a long history of shareholder returns.

That is evidenced by the slide on page 23.

Since FCX was spun off from its former parent in 1995, we have spent $1.5 billion in open markets purchasing almost 80 million shares at an average of less than $19 a share.

In addition, we have page $1.9 billion in common stock dividends; and $553 million since the effort that I mentioned earlier began in 2003 to restructure our balance sheet.

That is over $3.4 billion in total.

So we have a history of executing the policy that we have laid out.

In summary, our Company looks to continue to be a very strong cash flow generator based on our long-lived low-cost reserves.

We are not hedged to either copper or gold markets.

We have improved our balance sheet, enhanced shareholder returns, and at the same time have a very attractive valuation.

There are many ways of looking at this.

I know a number of you do your own models and examine it.

But if our copper reserves were valued at $0.15 a pound and our gold reserves would be valued at $200 an ounce, on that basis, just using the high-level unit cost basis, you would see the value of our shares being about $60 a share.

With that, we would be happy to answer questions.

Jim Bob and Mark are here along with Kathleen.

So, operator, if you could open the line for questions.

(OPERATOR INSTRUCTIONS) Tony Rizzuto from Bear Stearns.

I just got certainly a comment and then a question.

First of all I want to applaud all of you on the balanced application of free cash flow.

I think that is the right way to do it.

Just a couple questions here.

What guidance can you guys provide on the 2006 site production delivery costs?

And what price for oil and diesel are you assuming in there as well?

Tony, the estimate for diesel costs is something that we don't -- we accept what the market has.

We just use current prices going forward.

So we don't try to predict oil markets any more than we spend a lot of time trying to predict copper and gold markets.

But our current cost structure is something that we are assessing as we go forward with our current budget plans.

We will be giving more detailed guidance in the fourth quarter as we go forward.

Our 2005 numbers for the diesel cost is at $1.80 a gallon, which is about currently what we're paying; and that is up from $0.74 a gallon as we go forward.

But in terms of giving any detailed guidance about '06 costs, we're going to wait till we go through our budget process and give that.

You can take the details that we're giving now and the volumes and come up with a calculation for yourself a fairly straightforward way.

All right, Richard.

But I would like to wait till we get through our budget process to give you any more specific guidance.

All right.

It does appear, if I could just follow-up -- it does appear that, looking at the different slides that you present, that your stripping ratios should be declining as well as you move forward.

Is that correct?

Obviously '05 was and '04 were difficult years, but '06 should be much improved?

Yes, well, '05 is -- '04 was obviously an extraordinarily difficult year; '05 is improved.

Let me just say, you raise the question of stripping.

Like most other mining companies, we have been following and we are following through '05 the policy of averaging our stripping cost over the life of mine stripping rate.

New accounting rules require us to essentially begin charging all stripping cost to expense beginning in '06.

There will be a retained earnings adjustment for the balance that we will have there.

'06 stripping rate will be something that will be something similar to the average of '04 and '05.

Then as we go out into beyond the next three or four years, we will be in a period from then to the end of the mine of significantly reduced stripping rates.

At the very end of the mine's life obviously we will have very little waste to mine and essentially very low rates.

Richard, thanks very much.

Michael Gambardella from JP Morgan.

Congratulations on another great quarter.

I have a question on dividends.

I am kind of curious why you didn't either up the dividend or do another supplemental dividend in the quarter, given your view on pricing and also just the high level of prices that we have in the market today on both copper and gold, and the cash balances that you still have, even after the big debt reduction.

Thanks, Mike, appreciate your comment.

We did pay a supplemental dividend in this quarter.

We paid $0.50 on September 30.

We have regularly scheduled quarterly Board meetings, our next one is in two weeks.

As I said, the Board will be reviewing dividend policy at that time.

But what you saw this quarter was a decision that was made in the previous quarter, and the current circumstances will give our Board the chance to continue to do this, as we have been doing.

We have had three special dividends required, (ph) commodity prices remain strong, so the Board will be taking all that into account as it reviews where we are right now.

Will you continue the practice of looking at it just on a fairly regular basis, on the supplemental dividend?

As opposed to, say, making a decision, okay, we're going to pay several dollar dividend, a special dividend all once?

The process that we go through is review what the regular dividend rate should be.

We look at our cash requirements.

We're going to be retaining cash in the fourth quarter to make the $200 million payment on the preferred bonds, the preferred stock next year.

We will be looking at opportunities to pay other debt in advance of its scheduled maturity.

And then reach the decision on dividend versus stock buyback.

At the end of the day, I want to go back to the point I made earlier, our Company has no needs to retain significant amount of cash in the Company.

All right, okay.

Thanks a lot, Richard.

Daniel Roling from Merrill Lynch.

Richard, going back to earlier question, can you help us quantify the impact, if it was material, on the Indonesian government's change in policy on subsidizing oil and gas, gasoline diesel?

Thanks, Dan.

That is an important situation that is going on in the country.

It does not affect us at all.

We have paid market prices for our diesel throughout our Company's history, and we continue to do that.

So the subsidies that the Indonesian government has been providing to its citizens and to certain businesses has not been provided to us.

So there is no change in our cost structure, other than the market changes in energy cost.

The government has recently announced a series of steps to reduce those subsidies.

The subsidies were absorbing, at today's high-energy cost levels, about a quarter of the Indonesian budget.

The president has announced and implemented these steps.

He has been very well received by the rating agencies and the world's financial markets.

There has been some -- it's obviously a painful thing for many of the citizens of Indonesia, and there has been some protest.

But overall that has gone very well and was a necessary and positive step for the country, but did not have an effect on our cost.

Thank you.

Second question, if I read the release right there is a note that you basically had a $0.01 charge for the hedging losses on the Silver-Denominated Preferred Stock.

Is that included in the $0.14 or is that in addition to the $0.14?

The $0.14 is related to the losses we took on the prepayments of debt related to our 10 1/8 notes and the 7% convertible notes.

So it's excluded.

This is something that has been an ongoing thing.

Unlike the gold preferreds, which had a onetime term redemption, the $100 million of silver-denominated securities we had had an amortization of the principal amount.

So that has been something that has been ongoing that has always been a function of the price of silver.

Under the old accounting rules we were able to treat that as a hedge transaction, so you only recognized the difference between the silver index and the actual payment at the time of redemption.

So this effectively is no different than you were doing; but under the new accounting rules it is called a hedging loss?

Yes, that's right.

As accounting rules have changed, they have had these new names for some of this.

But the accounting for that security and for our gold-denominated security has been the same that we followed over the past 10 years.

Thank you.

John Hill from Citigroup.

I would echo the congratulations for moving the ball forward.

Solid progress despite some near-term headwinds.

I guess, Richard and team, I was just sort of curious about the near-term outlook.

You had indicated that the near-term targets depended on the full functioning and availability of systems.

I was wondering if you could comment on the stability of the mill electrical system; and then what other subsystems within this that you would characterize as critical path items?

John, with all of that, it is really an operation of the total systems.

It requires our mining rates of the ore to be achieved.

The ore delivery system to the mill, for the mill to operate.

Processing this ore is a situation where our mill can operate very efficiently, and it has historically done so.

The delivery of the concentrate through the concentrate delivery system; and loading on the ship.

So it's a question, as I said, of all of these systems working fine.

We did have an issue in the third quarter, as we previously disclosed, that a scheduled mill maintenance program for one of our sag mills took longer than we had anticipated.

It is a normal part of this operation.

It's a very large, complicated situation in difficult terrain, difficult weather conditions.

We continually have to deal with issues associated with those factors.

You know, this operation has changed.

We are halfway basically through the life of the Grasberg open pit.

The equipment, the new mill line itself was put in in '96, '97.

The pit is much -- continued and will continue to get deeper and challenging.

So meeting targets is not as easy as it was when everything was new and the halls were shorter and less steep.

In some ways, you pointed out in some of your own reports, that characterizes the copper industry today.

We don't have new Grasbergs or new Escondidos or the new mines in Asia, and it challenges the entire industry to make it.

Our team has worked very hard to deal with these challenges, and the challenges are there every day.

So we just want to be realistic with everyone.

We come up with plans, we work to execute those plans, and we have very good people who work very diligently doing it.

Sometimes the plans to achieve the volume targets are exceeded, as we have historically done.

Sometimes they fall short.

At the end of the day, the ore is there.

We are not going to do anything to compromise safety or compromise our long-term mine plans.

We are going to mine this ore when it makes sense do it and give you guidance as to when we think we can.

Great, one quick follow-up if I may.

In previous calls, you have indulged us with a characterization of the concentrates market.

I was just wondering if you would be willing to offer a view on the direction of contract TCRCs from the '05 $85 a tonne level.

Then also any observations about concentrate balance and inventories, industrywide, sort of, that you can see and sort of touch from your own dealings abroad.

As you know we're one of the two largest providers of custom concentrates to the marketplace.

All of our contracts, except one small contract, is a year-end negotiations.

We only have one small midyear negotiations.

We sell very, very tiny amounts in the spot markets.

We sell under long-term contracts with year-end negotiations.

We are in the process of those negotiations right now.

We have had round one; round two will be during LME Week.

So obviously there are limits to what we can say.

The concentrate market appears to be balanced.

It fears that people had of enormous amounts of hidden concentrate inventory do not appear to be justified.

The inventory -- the system did have high levels of concentrate inventories in terms of normal levels; but nothing extraordinary level.

So we expect to see a balanced marketplace and for that to be reflected in the new negotiations that we're going through.

Higher TC and RC rates.

The customers participate and prices have caused PT-FI's costs to go up this year.

In fact, it is about $0.02 a pound of copper based on the guidance we had at the beginning of the year.

On the other hand, you'll notice that Atlantic Copper, our Spanish copper smelter subsidiary, had record operating earnings this year.

In our situation, because of the balance between Atlantic Copper and PT-FI, equivalent changes at both those operations would offset in our financial statements.

We didn't benefit from the very low TCs and Rcs, and we are not hurt by the very high levels.

That was a third-quarter record for Atlantic Copper.

I misspoke earlier, Kathleen tells me.

Very good, thank you.

Wayne Atwell from Morgan Stanley.

One quick question then a couple follow-ups.

Now, your stock buyback was only in the first quarter?

Yes, that is correct.

It was actually in the April-May time frame, second quarter.

Second quarter, excuse me.

Okay, second quarter.

When do you think you might step up your spending materially on your effort to go underground within the next 10 years?

Well we have a plan that we are in the process of executing right now.

I will tell you, Wayne, there's a lot of details on that in our 10-K, which has got timing schedules and plans for us.

We are spending money right now, and the number is in our capital budgets.

We're developing the infrastructure.

We're developing the Big Gossan mine, which will be stepping up to a 7,000 tonne per day operation in the 2009-2010 frame.

That is going to be a very high return development.

It will also be an excellent training ground for our people to move underground.

So we have a plan that is staged to coincide with the ultimate depletion of the Grasberg pit.

We can't develop the block cave under the Grasberg until complete development of it, until the pit is depleted.

Then we continue to explore in areas that add reserves, opportunities, and resources.

And we will be updating our plans based on the results of our exploration activities.

It is a really positive feature of this operation that, even though it is very mature, producing very high volumes, that we have more copper reserves than we did five years ago and more than 90% of the gold reserves that we did then.

So five to 10 years out, you don't expect a big step-up in spending?

Well, there will be stepped up in spending as we do the block caving development of the Deep Grasberg and then ultimately the Kucing Liar.

That will involve significant amounts of capital.

That capital will be on a schedule that will be -- it's reflected in our five-year plan and it will be on a schedule that goes beyond that.

At the same time, the capital spending on the Grasberg pit will continue to fall off as we need fewer trucks, and we will be retiring trucks, and the surface equipment will be retired and not have to be replaced.

Those capital expenditures are not one-time hits for our Company.

They are spread over a number of years.

All of them could easily be financed out of cash flows, because even though we're developing these enormous reserves and major new mines, we have the supporting infrastructure, our mill, or town site, and our port.

All of that is in place.

So it will be something that will involve a significant amount of capital, but something that will be spread over a number of years.

Okay, lastly, when do you think you might step off of Block A and do some exploration in the surrounding areas?

It seems like there's a lot of very exciting territory.

When do you think you might start punching holes in those areas?

Well, we are very excited about it.

It is -- we haven't had field activity for several years.

We are still working with the government on regulatory issues, security issues, to allow us to resume activity as soon as those are resolved.

We can't predict that with any precision, but we are working to prepare ourselves to go out and pursue some of the prospects that have significant potential, that we will be drilling when the time is right.

So it could be a year or two?

Well, it could be shorter than that.

It is one of those things that coming up with a very precise prediction is just not feasible.

Thank you.

We are retaining the rights to those prospects, though, under the terms of our arrangements with the government.

We are able to suspend some of the timing requirements.

So we are not at this time losing any prospects.

Part of our analysis and working with the government is based on the terms of our contractual rights.

Wayne, this is Jim Bob.

We are very close in some of the areas from a security aspect of being able to get back in, especially in Wabu and Kamopa and some of those areas that we were very encouraged on when we shut down our drilling.

One of the things that causes Richard to say it is hard to predict, now that we feel the security issues have waned, there is a court decision, which is very straightforward, that all of our permits are within the realm of the so-called protected forest, which our current mining operations are not.

But the exploration activities are.

We clearly, in the decision by the Indonesian courts, were allowed to go forward.

The forest ministry has come with a contrary view on that, which will not sustain in legal time.

But it is just -- what it has done is delay people.

For that reason, it is a little hard to predict whether we can go back in there this year.

This year, excuse me, being 2006.

But as you know, we have those big areas where we had the cores drilled and had Grasberg type ore indications.

We will get back there, and it is not going to be very long.

But that is what we mean when we say it is hard to give you exact months.

Thank you.

Alberto Arias from Goldman Sachs.

Just maybe a follow-up question on the exploration program.

You mention in your press release that you are evaluating the extensions of some of your existing ore bodies.

If you could give us sense of how the results are coming; should we be anticipating that are good enough to replace the depletion of the mine that you have, the ore that you have mined this year?

Or should we anticipate that the emphasis is more on resource than reserve conversion?

This is Jim Bob.

We're still having great success adding reserves in the area.

We are now in the area in the Lower Grasberg and Kucing Liar.

The success we have had in the Ertsberg, we have had the same kind of success in the Grasberg Deep.

So we still hope that for the next several years that we will have a substantial portion of our reserve, especially the copper, replaced by taking current resources and moving them into the reserve category.

We have an enormous amount of resources, for instance, in the Lower Grasberg and the area of the sheathe, if you will remember, that we have around the Kucing Liar.

It is high-grade ore.

It just requires us to have a little more closer spacer drilling and a mining plan.

But so instead of looking for more resources as you say in our current area of Block A, we're still spending our time blocking out proved reserves from areas that we had considered resources before.

Any magnitude of the discoveries that would change in any way the sequence of your ore bodies’ developments, or it is too early to say?

I think most of what you saw with the ore that we found below the DOZ, the MLZ, and MLZ Deep, you have seen those.

We continue to add onto those, even from last year's reports.

So those could have some effect, as they have had in the last five years as we expanded the size of the DOZ by almost 400 million tonnes.

That has in fact, given us the ability to begin to look at how we develop the remaining part of the DOZ and go into the MLZ.

That is the closest that anything we're doing right now would come to changing the mining sequence.

The lower Grasberg and the proven reserves around the Kucing Liar, just like the Big Gossan that we just are building the common infrastructure for, are going to be down the road in the underground.

So in the next five years, you won't see a big change from some of the drilling that we're doing that would change the way we are going about lower Grasberg or Kucing Liar other than what you have already had indicated in our reports.

But you have seen that the DOZ has had in the last five years a drastic change because its footprint grew so big.

We will continue to do that as we move below the DOZ into the MLZ and the MLZ Deep, because these reserves are right by existing infrastructure.

That lets us get it into the mine sequence a lot sooner than we would have been able to do with anything on the west side of the Grasberg.

I hope that is clear.

Just one final question on the common infrastructure development.

By when should you have access to areas where you can drill and perhaps open a new horizon on the exploration front?

Mark, why don't you take a shot, and I will punctuate it.

Okay.

Alberto, this is Mark Johnson.

We are currently, from the one slide that you saw, that we are currently directly below the mill with the drift.

Essentially it's about 400 meters below the mill level, but directly located below it.

We will be into the Grasberg block cave area by 2008.

We will be start developing the Grasberg block cave from that level at that point.

So we're at about 25% down with the common infrastructure portion of the drifting.

To say when we could encounter good horizons, we've got prospective ground between the mill and the mine.

Previous drifts that we drove, the Amole drift, was one that allowed us to explore the Big Gossan.

We also had good access to the Kucing Liar.

So I think, and I will let Jim Bob really deal with the sort of prospective ground, but we are in the district when we're driving this drift from here on out.

When I said I was going to punctuate it, what happens is, as Mark just referred to, we discovered the Big Gossan and the Kucing Liar when we were driving the Amole tunnel.

Amole tunnel was being driven to take water from the Grasberg.

We knew that we had faults that we were going to cross, but at the surface we had no real indications of the high-grade ore that we encountered at Big Gossan and KL.

So we literally found those fault trapped reserves on those two areas by driving the Amole.

Now the common infrastructures will be in between the Amole and the Ertsberg.

As you have seen us wave our hands before, we think all of that is on one east-west trending structure, and that is what caused the mineralization at the DOZ, MLZ, MLZ Deep.

You have seen the high-grade ore from there, and even the old, original Ertsberg pit.

We are going to be going halfway in between the Amole and the Ertsberg underground.

We will get some -- we will unravel some of the secrets of how those two things hook together.

Because it's been really impossible to get to them without having the ability to get drill rig accessibility, as you just asked.

So from here on, from the mill to the time we get under the KL and the Big Gossan, every foot of tunnel that we are looking at becomes a laboratory for us, just as it was what we discovered the major ore body at KL.

Always an opportunity for the tunneling to turn into an exploration drill.

Great.

Thank you.

Next question, operator.

Amir Arif from Friedman Billings.

I had a couple of quick questions.

First of all, just on your cash cost guidance that you did provide, heading into the fourth quarter, down to $0.07 per pound on a net basis, is that simply to reflect increased volumes?

Are you actually seeing any increase in absolute costs as well?

It's our cost structure.

Our cost structure is really set.

It varies, depending on diesel cost, Australian currency costs.

Two-thirds of our costs are US dollars; about one-sixth is the rupiah-based cost.

If you look back to the beginning of the year, when we had -- we were looking at -- the guidance we gave you was at $0.55 cost before credits and zero after credits.

Those factors have added about $0.04 per pound to our cost structure.

We have had some higher TCs and RCs that I mentioned.

We have had some maintenance cost.

We have also had higher gold prices which offset some of those costs.

But the guidance that we gave you reflect all of those factors.

Okay, so it does include some increase in the cost pressure from the third quarter?

No question.

Like I said, we include diesel cost, which is an important -- on an annual basis we burn for the total operations about 100 million gallons of diesel; and we are using $1.80 for diesel in the fourth quarter.

Okay.

Just second question, regarding your dividend and your hedging strategy.

I know historically you have just looked at your dividends on a quarterly basis.

But just given how much you've improved your balance sheet and your limited capital expenditures, have you looked at or will (indiscernible) look at your hedging and your dividend policies as one strategy?

Or will you just keep looking at your dividends on a quarterly basis?

Let me comment on that.

Back in the '90s when we were spending money on our expansion, and when we had positive copper markets, and there was anticipation of weakening in those markets, a time we bought puts to provide downside protection for prices.

We continue to look at puts.

Even though prices are high, puts are relatively expensive because of the volatility of copper prices.

Today with our stronger balance sheet and our low capital expenditures, really the impetus for us to provide downside protection is not as strong as it was then.

Because of our very low cost structure, we don't run our business any differently at low prices or high prices.

We make -- we will be cash flow positive at even the lowest imaginable prices.

So at the end of the day, for us to think about hedging now would result in us just basically reaching some kind of outlook ourselves about prices.

And when I tell you we don't have a particular outlook, we don't.

Prices are high now, and there are scenarios where the prices could go lower.

A weakening in the U.S. economy, issues in China, would definitely have an impact on prices.

But with this industry being fundamentally structured as it is, and with inventories being so low, there are also reasonable scenarios of where you could see higher prices.

So for us to make a hedging call at any price level would be basically making a call on those factors.

We don't have to do that.

We're not risking our operations for downward movement in prices.

And we believe it's appropriate to give our shareholders exposure to potentially higher prices.

This is Jim Bob, Richard.

But we also at that time in the '90s had a very clear signal from the market that they held our security and securities as a hedge on copper prices.

And if hedged copper prices we would basically take away their hedge.

Sounds great, thank you very much and congratulations again on a good quarter.

Thank you very much.

We appreciate your comment.

John Tumazos from Prudential Equity Group.

Congratulations on all the great progress.

As it is within, I guess, shooting distance now, that if you wanted to next year you could have no debt, depending on breakage fees, I guess if is the copper and gold markets stayed anything like they are today a year from now people are going to be asking you what you are going to do when there is no more debt to pay.

Will you pay out all the cash as dividends or share repurchases or -- ?

I don't think you're going to go out and make acquisitions at $1.92 copper and $4.75 gold.

Maybe, but would you build up a little bit of cash within the Company for other opportunities down the road that might arise at another time?

I guess you have been in Indonesia 30-odd years, and the country is still there, and you are still there, God bless you.

John even -- and your analysis is right.

If we were to direct all of our cash to reducing debt, and there were opportunities to do it, we could be essentially debt-free next year.

The thing about it is, even though we might be in that situation with our reserve base, we have significant financial capacity to finance things in the future if opportunities came to us.

While you are right in saying that with today's price levels and with the competition for properties in our industry, the idea that something would make sense for us is not likely.

But even in those situations, there is no need for us to retain cash to do it.

We would have the financial capacity to do whatever opportunity, to take advantage of whatever opportunity we wanted without having to retain cash.

So in those environments, our philosophy of returning cash to shareholders becomes very significant.

So the -- God bless you -- you are just going to pay it all out?

We have -- I just -- I will say that is a decision for our Board to make.

But there is no need for us to retain significant amounts of cash in our Company.

We just don't have obligations to deal with; and with our long-lived reserves it gives us very significant amounts of financial capacity to finance something that might become available to us.

Rich, Jim Bob, is the trade report correct that the two of you are going to found a consulting company to teach other managements how to manage?

Jim Bob says, thank you for the compliment but we won't comment on that.

Have a good one.

Alex Latzer from Merrill Lynch.

Just wanted to ask a couple questions here.

Confirming in the fourth quarter I see the talk of a rather large deferred profit on intercompany sales.

Just want to make sure I understood how that was arising, and is it of that magnitude?

What do you see heading into early '06?

Alex, thanks for your question.

You know, this is one of the things we give guidance on, but it is a difficult area to give guidance on.

The reason it is large is because we have such a large volume of sales in the fourth quarter.

A certain amount of those sales go to our affiliated smelters, principally Atlantic Copper, where we have to defer all the profits on shipments to Atlantic; a quarter of the profits on shipments to the Gresik smelter.

Because we have large volumes of sales the intercompany sales will be high, and that is what results in the higher deferred profit.

The ultimate amount of that depends on the timing of shipments.

If we ship later in the quarter to our affiliates, the deferred profit is higher than if we ship relatively larger amounts beginning of the quarter.

We give you our best estimate, but there a number of factors that can cause it to be changed.

But that, as we sit here today, is the guidance that we would suggest you go with in developing your own estimates of earnings for the fourth quarter.

Thanks for that, Richard.

I had a follow-up and that related to the development of Grasberg block cave.

I was just trying to get a sense for the time it takes to develop something of that scale on a block cave.

I know that, like was mentioned earlier, the tunnel is being driven to get you there to start development in 2008.

Then I believe it is six years from there where you will have the block cave at an initial face to begin that operation.

Is the sort of a six years sort of fast-track time frame that you folks are pursuing?

Or is that simply given the timing of the requirements?

It is giving the timing of the requirements, because it is scheduled to come in place in the sequencing of our overall mining plan, with tying into the sequencing of the plan.

But it takes time to develop block caves.

Again as I was pointing to John about the cost structure of the industry, in today's world as you look forward, many of the new resources that will be developed will be underground developments.

It takes time for block caves to be developed.

If you go back and look at our original DOZ development, here was a mine that had all the supporting infrastructure in place.

It had access to the mill.

It had a mil.

It had infrastructure, town sites, etc.

It was the development of a new mine that lied (sic) beneath two earlier mines that our Company had operated over the years.

We began the feasibility on that in -- Mark help me with these numbers -- but it was '97, '98 and it wasn't until -- and it was fast-tracked as we do everything.

But ramped up production began in 2002, '03 and '04.

It is just a function of block cave development that it requires time.

And in today's world if someone finds a significant new resource that is an underground mine, it is going to take a number of years to get it in operation.

One comment I might add is that, particularly for the Grasberg block cave, it is very much tied to the end of the pit life.

We will not initiate the cave until the pit is complete.

So the development for the block cave could conceivably go faster.

Right now, though, it is essentially scheduled and sequenced to coincide with the end of the pit.

From that point in which the pit ends in 2015, we very quickly start ramping up our tonnage rate into the Grasberg block cave.

We envision over about a six-year period we go from that initial development up to somewhere on the order of 120,000 tonne per day mine, and that is very much driven by the geometry of the block cave.

It is a combination of the footprint, the XY footprint, and then also the column heights.

And the Grasberg block cave is a very large ore body; it's going to be very conducive to a very high rate.

Essentially with that large footprint, we have many caving fronts that will be developed at the same time that all combine to be that overall production.

Thanks, that does help.

And I would imagine certainly getting the expertise you have in-house, but what is your assessment of the ability of the industry if it were to go underground to ramp up?

Is this an expertise that can be developed in-house and transferred around the world?

Or that's just simply another issue?

Block caving is an established operation.

There are a number of block caves around the industry, and our Company at the time of the discovery of the Grasberg was totally a block-caving operation.

We're focused on our own situation.

We are encouraged by our history; we are encouraged by the really great success that we're having with the DOZ mine.

This was originally developed as a 25,000 tonne per day mine, and it has operated above main play capacity since its inception.

That has just given us a lot of encouragements and opportunities to go forward.

Mark, you might want to comment on that as well.

Yes, it does take some experience initially.

We brought in people -- those early days we brought in people from the Magma block cave operations.

I would say now that much of our expertise is national engineers and national operators.

We have got a very strong track record with the IOZ and then the DOZ.

Each block cave we've built, we've been able to improve on the state of our technology and our ability to manage the block cave.

I'd say that we're at the forefront right now with our DOZ mine.

We've got an excellent team here.

Our cave management skills are good.

We'll continue to look at -- one thing that when looking at block cave, it very much lends itself to automation.

We're continuing to pursue that.

The draw points are very distinct points within a grid, which like I said does lend itself to automation.

I think that will be the direction that a lot of mines go; minimizing the manpower, reducing the capital required for ventilation, and increasing production and productivity.

So we do have a great team.

We're focused on the next generation.

We have got a very good program of bringing in fresh graduates from Indonesia, and we have had great success in developing those people.

Great, that's very helpful.

Thank you very much.

Ildico Hildreth (ph) from Waterstone Capital.

A couple part question.

As John Tumazos I believe was discussing, do you really intend to reduce leverage further from this point, first of all?

Well, if we have opportunities to do that, on an economic basis, we would do it.

Secondly, with the free cash flow you're going to be generating in fourth quarter and in general, how do you prioritize what is more important, paying out special dividends or actually buying back shares?

What do you think about?

We look at market conditions, and we just reach those conclusions.

There is nothing that that is a formula based situation.

But it is in discussions with our Board, we receive their counsel, we review the commodities market situation, we review the trading in our stock.

Then we reach those conclusions.

So unfortunately I can't give you any set of criteria that you might be able to use to project that.

Lastly, when you pay out your dividends, do you pay them out in anticipation of the cash flow you're going to generate during the quarter?

Or does the Board usually wait till after the quarter is done in generating things to pay out -- think about how back much you back or how much you buyback?

Meaning when they meet in two weeks, are they going to look at what you guys generated in third quarter?

Or are they going to say, okay, we're going to do this phenomenal fourth-quarter cash generation, so we're going to pay it out in this quarter as we speak?

I would respond to that by saying it is sort of a two-stage deal.

One, in terms of looking at the regular dividend, we look at cash flows over a long period of time.

Our business at a fundamental level is, I believe, very straightforward to analyze.

It is volumes, cost, and then views on commodity prices.

So we are able to review with our Board a detail of scenarios over a number of different commodity price environments; and look at what our cash flows are and what our requirements are; and then make certain decisions.

The application of special dividends then takes into account our overall excess cash generation.

It is a combination of where we are, our outlook, and our view about what current circumstances are leading us to.

Richard, I think the slide that you showed, showed that we paid out 3.5 billion in cash to the shareholders since inception -- is the best answer to the question.

The Board and management's instincts get sharpened as we look at the world markets in every quarter.

Suffice it to say people's long-term outlook, the way the market has been moving up-and-down, amounts to about a week these days.

So I would say with the dollars moving, and the economies moving, and different opinions about whether the economy drives the dollars or whether the dollars drive the economy -- that we're going to have to be quick on our feet and take the cash that this mine throws off, and use the same instincts we used in the past to make the right decisions on dividends, debt repayment, and share repurchase.

I hope after $3.5 billion that we will continue to make the right decisions.

Thank you.

Ms. Quirk, there are no further questions at this time.

I will turn the conference back to you.

Thanks, everyone.

We appreciate your interest and we're available for any follow-ups.

We can be reached at our Baton Rouge number.

The main number is 225-765-2200.

That concludes our call.

Thank you.

Ladies and gentlemen, that concludes the conference call for today.

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

Have a good day.