費利浦·麥克莫蘭銅金 (FCX) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Freeport McMoRan Copper & Gold second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Ms. Kathleen Quirk, Chief Financial Officer for Freeport McMoRan Copper & Gold.

Please go ahead.

Thank you, operator and good morning, everyone.

Welcome to FCX's second quarter 2006 earnings conference call.

Our earnings announcement was released earlier this morning and a copy of the press release is available on our website at FCX.com.

Our conference call today is being broadcast live on the Internet and we also have several slides to supplement our comments this morning.

We'll be referring to the slides during the call and you can access them using our webcast link on our FCX.com website home page.

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

And a replay of the call will be available later today by accessing the webcast link on our Internet home page.

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

We would like to refer everyone to the cautionary language included in our press release and slide presentation and to the Risk Factors described in our SEC filings.

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

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

I'll briefly summarize our financial results and then turn the call over to Richard who will comment on our operations and our outlook.

We'll then open the call for questions.

Today, FCX reported second quarter 2006 net income applicable to common stock of 367 million, $1.74 per share, compared with net income of 175 million or $0.91 per share for the second quarter of 2005.

For the second quarter, our diluted net income per share reflects assumed conversion of FCX's 7% convertible note and 5.5% come veritable perpetual preferred stock resulting in exclusion of interest expense totaling 5 million and dividends totaling 15 million and the inclusion of 32 million shares.

PT-FI share second quarter 2006 production totaled 237 million pounds of copper and 307 thousand ounces of gold.

We experienced weather related shipping delays at the end of June resulting in PT-FI share of second quarter 2006 copper sales of of 220 million pounds, being lower than the previous estimate of 235 million pounds reported on June 5, 2006.

PT-FI share of second quarter gold sales of 278,000 ounces widely exceeded the previous estimate of 275,000 ounces.

Our projected annual sales for 2006 are estimated to approximate 1.2 billion pounds of copper and 1.7 million ounces of gold.

This compares with our previous estimate of 1.3 billion pounds of copper and 1.7 million ounces of gold.

Richard will be commenting on the provisions to our estimates and also our revised mine plan.

Our realized copper prices during the quarter more than doubled to average $3.33 per pound from $1.53 in the second quarter of 2005.

Our gold prices improved by 43% to an average of $614 per ounce in the second quarter of 06 from $428 per ounce in the second quarter of '05.

Operating cash flows during the second quarter totaled 500 million and assuming average prices of $3 per pound of copper and $600 per ounce of gold in the second half of the year, our full year operating cash flows are estimated to approximate 1.6 billion.

Capital expenditures during the quarter totaled 58 million for the quarter.

We're currently projecting about $215 million for the year.

We ended the quarter with total debt of 1.1 billion and net of our $358 million cash position, our net debt was 714 million.

Our debt was reduced by -- total debt was reduced by 184 million during the first six months of 2006.

Common stock dividends during the second quarter totaled 199 million and that was $1.06 per share and that included the $0.75 per share supplemental dividend that we paid on June 30, 2006.

We also purchased 2 million shares of stock in the second quarter for $100 million at an average cost of 49.94 per share.

And now I'd like to turn the call over to Richard who will be referring to the slide presentation posted on our website.

Good morning.

The first slide of our second quarter highlights illustrate just the power of the leverage of commodity prices on our business.

In a quarter when we had 30% less copper than the year ago quarter and 55% less gold in terms of volumes, we had double the earnings.

Net income of 367 million.

In this quarter alone, $500 million of operating cash flows.

Many of you have followed us for years and you know the string of years we had annual cash flows in the 5 to $600 million range. $500 million of operating cash flows this quarter with only $58 million of capital expenditures.

And the usual for our Company to be in the position because of a long reserve life situation of where you're not having to reinvest these cash flows at the high commodity prices are giving us back into the business to sustain the reserve life but that's the case with the Grasberg.

I'm going to talk more about cash flows in a moment.

During the first half of the year, we'll have significantly higher volumes in both copper and gold in the second half of the year but during the first half of the year, we pay over $350 million of dividends, we bought back 2 million shares of stock for $100 million, we reduced our debt by by $184 million, and at the end of the second quarter, we had net debt of $700 million with $300 million approximately of a convertible note that's well in the money today.

So during this first half, we had $636 million of debt reductions and shareholder returns.

I want to talk about operations in the second quarter and our outlook for the future.

The slide on page five shows the area of the mine, the 6 North pushback where during the second quarter we encountered a relatively small amount of what we're calling atypical ore, ore with heavy clay content.

It was 2.5 million tons.

This ore resulted in issues with our ore delivery systems, our mill systems and the quality of our concentrate, and resulted in us not meeting our original estimates for the second quarter.

We are essentially mined out all of this material at this point and we have taken steps to mitigate any future adverse impacts if we encounter this in the future.

This as I said, as I indicated was not typical of our operations.

We made some modifications to our report system we've incorporated identifying this material in our mine planning activity so we can blend it and avoid the problems that we had.

As you can see from our mill proof, by June our operations had returned to a normal situation.

But this is affecting our outlook for the year.

We have reduced our copper sales outlook in rounded terms by 100 million pounds for the year to 1.2 million pounds.

Our goal remains the same at 1.7.

At these levels, we'll continue to have very strong cash flows.

If copper averages $3 a pound and gold average $600 an ounce in the second quarter, our operating cash flows for the full year would approximate 1.6 billion pounds.

As you remember in the first quarter we had significant working capital uses, primarily having to pay the taxes on our significant earnings from 2005, but the second half operating cash flows at those commodity price levels would approximate $1.2 billion and after paying our capital expenditures, our scheduled debt repayments and our other cash requirements we would have remaining $750 million of excess cash flows which would be available to further strengthen our balance sheet and provide for shareholder returns.

As we've said many types our company has no need to maintain significant cash balances within the Company.

Our revised quarterly outlook is presented on page seven with 280 million pounds of copper and 320,000 ounces of gold in the third quarter broadening to 475 million pounds of copper and over 600,000 ounces of gold in the fourth quarter.

The keys to our operations here in the second half of the year is going to be success with our mining rates and achieving these is our best estimate at the present time and if we have success in extending our mining rates, we have the ability to meet this, but it is a fourth quarter, again, a fourth quarter strong fourth quarter which makes it dependent on whether we will achieve the rates to have it this year or next year, and also as we were affected, as Kathleen mentioned by weather conditions in concentrating load at the end of the second quarter, actual sales volumes would be impacted by those conditions at the end of the year.

Our unit production costs summary presented on slide eight.

In the first half of the year our net unit cash costs were $0.68.

Our projections on the basis of $600 gold would be $0.63 for the second half averaging $0.66.

This is of course much higher than what our experience has been in 2005.

You remember it was $0.07.

The impact of the changes reflects the lower volumes that we have, and in terms of looking at the lower copper volumes, the lower gold volumes, the impact that that has on our sharing of costs between our company in Rio Tinto and the effect on royalties, that is about, for the annual basis about $0.50 a pound difference.

We are no longer deferring stripping costs and that's another $0.05, higher energy costs and other input cost is about $0.08, and we do get the higher treatment cost with the price participation features in our concentrate sales contracts that are common to the industry would add $0.16.

That is being offset by higher earnings as you will notice in our press release from our Atlantic copper smelter and of course we have higher gold credits from the prices.

So that is a reconciliation of our costs and we'll be happy to answer more questions at the conclusion.

Looking forward, we have our standard presentation looking at the schematics relating to where we'll be mining.

There's a photograph that's shown of the vertical photograph of the Grasberg open pit mine on page nine.

It shows the different pushbacks that we are and will be mining in terms of our five year plan.

Pushback 6 North and 6 East will provide the majority of our ore -- are providing the majority of our ore in 2006 and 7 South pushback is the key to providing ore in '07 and '08.

Our five year plan has been revised as we told you at the end of the first quarter, we had gathered new geological and geotechnical data from drilling activities and from our mining activities which indicated that we needed to study the long term mine plan.

We are announcing today the changes in that plan and it reflects this new data.

The revised mine plan reflects a deferral of certain high grade ore from years 2007 and 2008 into years beyond that.

We are also including in our five year outlook a planned expansion of our deals the underground mine to 80,000 tons per day and I'll talk about that in a minute.

This mine was originally designed as 35,000 tons per day.

It's been operating at just under 50,000 tons a day.

We've got a current expansion project sustained production at over 50,000 tons a day and we've identified opportunities of increasing it further.

The revised estimates average 1.24 billion pounds of copper per year and 1.86 million ounces per year which is just under 5% lower for copper and 3% lower for gold than our previous estimates.

We have a current focus, an effort under way to improve the productivity of our mining operations which if successful would provide us opportunity to accelerate mill production and we're also looking at opportunities as we study geotechnical issues of perhaps steepening the 7 South pushback which again would move more metal into the five year plan and we'll be reporting to you as we go forward on these efforts to accelerate metal production.

As you know our objective is to optimize metal production within the constraints of safe operations and also protecting our longer range life of mine plans.

We are continuing to analyze the plans beyond five years , and assessing what the optimal design of the Grasberg pit would be.

The development of our infrastructure into the future blockading operations at the deep Grasberg and KL are giving us some options of deciding which would provide us the best economics within geotechnical issues for continuing to mine from the blocked cave or -- from the open pit or moving to the block cave earlier.

We're studying that and we'll report that to you by the end of the year.

The slide on page 11 just graphically shows the increase in data that we've had.

Since 2004, we've actually had 50,000 meters of drill holes throughout the Grasberg open pit including over 20,000 meters in the area of the contact between the intrusive and the limestone that surrounds the pit.

Also as we've mined during those years, we have given a significant increase in the rock that's been exposed in the high wall and that gives us new data.

We've incorporated this as a result in a refinement of the slope and pit design and that's what's affecting the metal production from the Grasberg open pit.

Looking at the schematics on page 12, beginning with 2006, as you know, the center of the Grasberg is very high grade ore, both copper but particularly for gold and you can see the red section has greater than 3% copper, the orange is 2 to 3%, the green is 1 to 2, and the blue is 0.5 to 1%.

The first quarter we completed the mining, the 6 South pushback essentially completed it.

That was a source of our significant volumes in 2005 and as you recall it gave us higher than planned gold sales for the first quarter.

In the second quarter, the principle source of our ore was the 6 North pushback.

We completed the small amount of 6 South that was available to us and it was in this section that we encountered the clay-type ore which resulted in lower production and production problems for us.

Looking forward in the second half of the year, during the third quarter we will have some small amount of high grade ore available from the 6 East pushback and the principle volumes of our ore production will come from 6 North as we move it down towards higher grade and a higher sales volumes in the fourth quarter will result in a continuation of the 6 North pushback down into higher grade material.

As we move into 2007, the chart here is not exactly graphically accurate of what we will be doing.

It shows we'll be in high grade material from the 6 North, but it's an area of much smaller available amount of material for us, it's about 13 million tons and that's slightly less tons than we had originally anticipated, but it's very high grade material.

Over 40 million tons will become from the 7 South pushback and you can see on the white line where we originally intended to be with our original estimates going into the year, but because of these geotechnical issues, we're having to mine relatively more waste than ore from 7 South and that's what's giving us the reduced volumes for the year.

'08 is again a year in which we will be mining from 7 South.

Our original plan was for this to be a very high sales volume year with the geotechnical revisions.

It won't be as much as originally anticipated and that's illustrated by the difference in the fuchsia colored line as well as the white line to show you the extent of the differences in our mine plans. '09 we'll be completing the mining of the 7 South pushback.

It will be different from our previous plan, but it will provide us significant amounts of volumes for '09 and again in '010 when our 8 East section will provide us significant amounts of volumes but this gives you an illustration of the changes that we had and how we'll be mining the pit and why we have these variances year to year, quarter by quarter, but also from plan to plan.

We do give you a five year outlook.

That's not common in our industry and of course when these changes occur, we have to talk to you about them more explicitly than we would if we didn't get the five year plans, but these things are inherent in mining operations and particularly as we go forward and the like with the Grasberg pit we have to take into account new information changing our plans.

Our five year outlook is presented for copper and gold sales on page 20.

We have a chart in our earnings release which shows the adjustments.

The adjustments from the plan that we had at the beginning of the year and essentially, it's 100 million pounds per year for copper for '06, '07, and '08, and less gold in '07 and '08 with higher gold in '09 and '010.

But that's our five year outlook.

With those volumes and given the positive markets we have for copper and gold, it will allow our company to earn very significant amounts of cash flows with very little commitments for using cash flows for capital expenditures and other uses.

Page 21 is simply the metals prices after closing back here in the second quarter.

Prices have come back in the face of economic conditions around the world, growth in China continues to be strong, and with continuing challenges for the industry and maintaining current supply productions as well as producing new supplies, the outlook for commodities continues to be strong, and the illustration of the respect of that on our business is shown on page 22.

We've shown a sensitivity chart with copper prices varying $1.50 to $3 and this is based on annual average copper and gold sales for our five year plan.

With gold at $500, copper varying from 150 to 300, and then with gold -- copper at $2 a pound and gold from 4 to 700 million, you can see our annual average operating cash flows varying from essentially $1 billion to $2 billion and adjustments to that can be made using the sensitivities that we show on page 23, where a $0.10 change in the annual copper price has an impact of $62 million of operating cash flows and basically, $1 change in the price of gold has a $1 million impact on our annual changes.

With those kind of cash flows potential available to us, our capital expenditures continue to be modest in relation to total operating cash flows.

We've adjusted those to take into account the planned DOZ expansion that I mentioned earlier to 80,000 tons a day and for new estimates on our equipment and our cost sharing.

Our annual average capital expenditures for the five year period would be $215 million.

This includes our sustaining capital as well as development projects.

The DOZ expansion, the continuation of our ongoing common infrastructure development project which is driving a tunnel system from below our mill to ultimately develop the deep Grasberg block cave and Kucing Liar and deep reserves at the DOZ, the Grasberg, and the DOZ mines, our ongoing mill optimization and our previously announced development of the new Big Gossan mine.

The DOZ underground mine is illustrated on page 26.

Our 50,000 ton per day expansion is on track, on budget for completion in mid 2007.

The expansion to 80,000 tons a day would accelerate metal production by adding additional equipment.

It's capital that we would have spent in the future but it accelerates it to these current years.

It's very highly attractive from an economic perspective, and it gives us on a 100% basis, 60 million tons of copper and 90,000 ounces of gold per year in the 2008 to 2010 time frame.

The common infrastructure project is continuing to advance.

We expect to complete this by mid-2007 and it is giving us access to our future production.

Debt maturities with the debt reduction during the first half, we have a very attractive profile for our scheduled debt payments.

We have roughly $80 million for the second half of this year and then very little required payments until 2010.

The 10 1/8 notes which were originally about $500 million are now at a balance of below 300 million.

They are callable in the first quarter of '07 and we would have opportunities to consider in tendering for them earlier than that.

The $311 million balance of an original $575 million of the 7% convertible notes are well in the money and we certainly expect those to go into equity at some point.

Another model to show, just the extent of our cash flow opportunities here.

During the second half of the year, I mentioned that with our current outlook and $300 -- $3 copper and $600 ounce gold, we would have the opportunity to generate $1.2 billion.

If those prices were to persist over our five year period and we don't make any projections about prices, but on a model bases if they were to persist, that would give us annual average operating cash flows of $2 billion and after you consider capital expenditures, debt, preferred dividends, minority distributions that would leave just under $1.5 billion available to improve our balance sheets and provide returns to shareholders.

So it just shows again the leverage of prices on our business.

As I mentioned our company has no needs to retain significant cash in the Company and we have a track record of returning cash to shareholders.

We finished the FCX, was spun off from it's former parent in mid-1995.

We purchased $1.6 billion of shares.

We purchased an additional 2 million shares in the second quarter.

Total shares purchased in the open market, this doesn't include the purchase of the Rio Tinto shares that we did two years ago is at 82 million shares at just under $20 a share.

We've also paid $2.4 billion of dividends since the Company was headed to IPO in 1988, since 2003 it's been $1 billion so that's $4 billion in total shareholder returns of cash over the period.

Our Board has established a very clear cut financial policy and that provides for maintaining a strong balance sheet which will give us financial flexibility.

We've set a regular dividend that could be sustained as much, much lower prices than we're currently realizing and in periods when prices provide us additional cash, we've been supplementing that regular dividend with special dividends and buying shares back as I just mentioned.

So Grasberg continues to be a very strong cash flow generator from it's long life reserves which resulted in us not having to make capital expenditures.

We're on hedge for both copper and gold.

We've improved our balance sheet.

We continue to make shareholders returns and our shares trade at a very attractive valuation in relation to what is being paid today and the recently completed and proposed M&A transactions in the marketplace and also relatively -- relative to the trading values of other base metals and gold companies.

With that summary we would be happy to now answer any questions that you might have.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of David Gagliano from Credit Suisse.

Please proceed.

Great.

Thanks very much first of all for the as usual detailed presentation.

I just wanted to focus in on the cash costs.

Specifically, for '07.

Assuming we have flat metal prices and given the volume projections that you've laid out for copper and gold, how should we be thinking about the trend in unit costs in '07 versus '06?

I.e. are there any offsets that suggest we should expect unit costs to trend down in '07 versus '06?

Well, first of all, Dave, we need to look at aggregate cost levels, and you know our aggregate costs have increased substantially over the past five years.

They've roughly doubled for a number of factors--Input costs, the higher costs that result -- that come along with higher copper prices in terms of royalties, PCs and RCs, and all of the factors that are affecting the industry in general.

For the current year, our aggregate cost levels have not been increasing at nearly the rate they had for the past four years and we went into the year with a budget that was essentially flat cost, we're up now about 10% and a lot of that is being driven by the fact that diesel costs continue to go up.

We had had roughly $1.70 last year, we made recent purchases of $2.

So the changes from year to year for next year will essentially be driven at the aggregate level by input cost.

What goes on with diesel, our labor costs have been increasing at about 10% a year, but our business will be similar.

We will have a similar almost identical fleet equipment, infrastructure cost, personnel components, and so there will not be major changes that we have in terms of those types of levels and so the aggregate cost will be affected by external factors.

As you know, 2/3 of our cost are U.S. dollar, 1/6 of the Indonesian rupiah which has been relatively stable, 1/6 are Australian dollar costs which has been a strong currency and that's had an impact, but all of those things will be a factor in gross cost.

Then when you get down to net costs, those are going to be affected by Copper and gold volumes and we have given you volume outlooks for that by the gold price and then by the Rio Tinto sharing which goes to the metal strip which is disclosed in our 10-K material and you can look at that in terms of what kind of proportion a share of the cost that we would have.

I think that gives you kind of a recipe for getting to it?

It does, it does, it helps very much.

Just the one follow-up question.

Really I'm focused on the site production and delivery cost on a unit basis which is effectively doubled and I understand the implications especially with the higher raw material cost and I'm just curious if based on internal efforts, are there any mitigating offsets that we should expect there from an operating improvements, et cetera to potentially bring those costs down in '07 versus '06?

The best way that we could bring costs down would be to have success with our mine rate activities to make our mining rates more efficient which would allow us to advance units in, and that is really the best way that we can achieve it.

We've had efforts over the year to constrain costs.

It's very expensive to operate where we are in terms of housing people and keeping people there and with our personnel complement, we're actually having to add people as we move underground, as we expand the DOZ and develop the Big Gossan.

We still have to have the complement to drive the 140 haul trucks that we have and to operate our fleet of shovels and operate our mill, so the real key is to try to improve our efficiency in mining which would result in a higher mine rate, getting the high grade material earlier and getting units up.

More units than cost efficiency opportunities.

Okay.

Thanks very much.

Those external factors will be whatever they will be.

Our next question comes from the line of John Hill from Citigroup.

Please proceed.

Good morning, congrats on the strong quarter and also on the share repurchase.

Just wondering if you could fill in a little bit more of the conversation on the geotechnical data, particularly on the south high walls and talk about potentially steepening that?

Just curious whether this data is in sort of a lithological or structural nature, also assuming that you're not seeing the clay that was in north wall over on the south, but I was just wondering given the history what gives you the confidence that you could potentially steepen up on the south side?

Thanks, John.

I'll let Mark comment on that.

John, on the south side, it's not clay driven.

The steepening opportunities come from reviewing our actual rock quality versus what we have in our model.

Right now, we have a -- one of the impacts over the five years is that a sector of 34 degree high wall had grown based on our model.

We're mining through the top parts of that.

It's really just south of where we had the 2003 event.

The rock we're mining to that area appear to be much higher RQT, are not structurally controlled, and we'll be continuing to map that -- the geologists map as you'd expect the actual rock types, provide the geotechnical parameters or the geotechnical properties as we mine it verse -- and we compare that to what we've modeled.

In that area, which is very -- the sort of opportunity that Richard described is very sensitive to the angle that we mine through there going up three degrees from 34 to 37 has some significant impacts that we have not included into this forecast, but those are the opportunities that Richard is referring to.

Great.

And just one quick follow-up for you, Mark.

Interested to hear the comments on potentially going to the Grasberg block cave early.

I guess one interpretation might be success there might actually extend the life of the pit but perhaps this ties to some of the cost factors and some of the stripping ratios that were alluded to in the last question.

Just wondering if you could fill that in for us?

The options that we're looking at, obviously we're we're in a good position with the development that we've had, the progress we've made on our common infrastructure, provides us the opportunity to look at and accelerate start up of the block cave.

The area that we're looking at is over on the northwest corner of the pit that dictates this life of the pit, and what we're looking at there is the most optimum blend or combination of the open pit and block cave.

The strip ratio on the larger pit, if you will, the longer pit life, on it's own it's still a very attractive pushback.

It's a question of getting the maximum value, taking -- possibly taking advantage of the underground mining platform that we would have, the infrastructure that we'll have in place.

The costs for the block cave really don't change regardless of the pit scenario.

The footprint of the block cave would stay the same.

The infrastructure required for the block cave would stay the same.

It would be a question of bringing those dollars forward and foregoing if you will, the stripping costs that would be required on the larger pit.

We're working through those options the next three to six months, we feel we'll have all of the work done, geotechnical, plus the financial and mine planning side of it completed, and we'll be continuing to provide updates on that study.

Let me just comment on that.

When you're looking at the total Grasberg/Ertsberg complex, you must remember that when we started the Big Grasberg pit, the reserves at the Ertsberg were less than half of what they are today.

We got almost 0.5 million pounds of ore over there and had probably just over 150,000 tons, and by going up to 80,000 tons, that ore body which was originally designed for 25,000 is quite a change in the outlook for ambient operations.

So the common infrastructure has been designed with the idea in mind that we had been sighting and adding significant reserves to the Ertsberg.

So you have to talk about the total Grasberg/Ertsberg complex when you look at when we go underground and what the cost savings would be if we were operating a total underground operation in light of the fact of the 80,000 -- 80,000 tons, if you will check your records, I think the largest underground operation is about 100,000 tons, so this has a huge impact on the interplay between the Ertsberg/Grasberg, two significant ore bodies.

Very good.

Thank you for that, Jim Bob, and thank you, everyone.

Thanks, John.

Our next question comes from the line of Brett Levy from Jefferies & Company.

Please proceed.

Hi, guys.

I know you're not hedged now, can you guys talk about what you're thinking about in terms of hedging in the markets and the outlooks?

And then also can you guys talk about kind of optimal debt structure here given your cash tax rate and what that might look like going forward?

Just so we can get a sort of baseline sense as to where you guys would like your debt level to be?

Hi, Brett.

Let's take those in two different pieces.

We obviously stay abreast of the marketplace.

Our Board has had a philosophy of not hedging on the upside in the '90s.

We did buy some clicks from time to time and we continue to look at the cost of puts with the volatility in the marketplace and the outlook.

So far we've concluded that they've been very expensive, but our basic philosophy has been that we mine and produce the metal and investors can make the choice about individually about whether they want to do in terms of price protection activities and we have not, as I said, hedged any of our forward prices for either copper or gold.

The debt situation going to the tax issue that you mentioned, we are an Indonesian tax payer and that's where our cash taxes are.

Certain of our debt is at our U.S. parent and as a result of that we don't get tax credit for the interest cost we pay on that debt and our interest cost of course is down very substantially because of our debt reduction that we've done, our interest rates are largely fixed and the way that we look at that is not so much as any sort of targeted optimal debt level in our balance sheet and that's because we really don't have uses for cash if we were to decide just to increase the cash other than returning cash to shareholders and we've elected by policy to do that out of cash flows as we generate it.

We take steps to repay the debt in advance of it's scheduled maturities when on an economic present value basis, we can do so in a way that's positive for our company.

So it's strictly a cold blooded economic analysis standpoint and if we can pay the debt off and create value for the shareholders, then we do it.

And then the policy is to distribute cash to shareholders in the form of dividends or share buybacks as we earn it.

All right thanks very much, guys.

Okay, Brett.

Our next question comes from the line of Hongyu Cai from Goldman Sachs.

Please proceed.

Good morning.

Congratulations on the good job and thank you for the presentation.

I wonder if -- could you please give us an update about your exploration activities?

Yes.

We are -- let me just make a couple of summary comments and then Jim Bob can comment on it, but we do have an active program that we're looking at extending our reserves, principally focused on deep Grasberg with our current drilling program and looking at the potential of the relationship between our Kucing Liar reserves and deep Grasberg reserves.

We've mentioned that as we -- of course in past years we have had great success in adding reserves to the DOZ complex, as we've drilled adjacent to it and at depth.

We've mentioned that as we advance the common infrastructure added system, it will give us the opportunities to do exploration drilling off that.

We haven't reached that point yet and we have done no exploration drilling there, but our current program is looking at potential extensions for the deep Grasberg and the area between the deep Grasberg and the Kucing Liar ore bodies.

Jim Bob?

[Inaudible] from Block A and then the Kucing Liar which is 0.5 billion tons has a sheet of low ore, it's another 0.5 billion tons and that's been evaluated as Richard just said as far as tacking on to the under ground.

In addition to that, everybody that's been listening to us for a number of years or today if you are just on call for the first time, the north side of this ore body in the Grasberg has been spatially explored just because we haven't had access to it and as you look down on that picture, that we showed the different ore bodies and the different levels, 8 North, 6 North, 7 South, you know the symmetry of the ore body that was actually drilled up, and we don't believe that the south and the north that we signed in Kucing Liar is going to be the end of the ore that is encompassing the existing known Grasberg body.

So we've got the whole north side and you get on the ground and Richard said, it gives opportunities to drill some core holes on the north side and see if we can find a Kucing Liar look alike.

We also should mention that in the outer of the block B, we still have got the efforts going on to try to start our exploration efforts in the area, it's about 100 miles to the ledge, there we have the [Komoka] area, we have gotten significant indications of a Grasberg-type ore body on a magnetic which identifies the possibility for a major ore body.

We need to drill some more core tests out there, unfortunately because of the political situation that's been going on, really all over the world including in Indonesia, it just brings some tenuous situations including exploration people out there, and the command post there at the Grasberg but we still have those opportunities.

So one can say that the best place to try the big ore body is on trend and adjacent to an existing ore body and since we have the largest ore body ever found in the Grasberg/Ertsberg contracts, we continue to have a lot of optimum in the real time and some major ore additions in Block A and find some opportunities in Block B to develop.

I might mention that when you look at an exploration project, three years ago we were all looking at $1 copper and $300 gold, so when you look at the same exploration opportunities and look at the pricing and the impact in which you would describe it, the exploration equity that we own around the Grasberg/Ertsberg complex becomes more valuable every year and you see what people are paying in the M&A deals that are ongoing, you see that people are willing to pay the maximum dollar for copper and gold and other minerals.

So our exploration effort and exploration acreage has gone up in value because of this potential to discover these major oil bodies.

I hope that gives you a little material for both of our Block A and Block B situations.

Thank you very much.

That's very helpful.

Thanks, Hongyu.

Our next question comes from the line of Victor Flores from HSBC.

Please proceed.

Thanks, good morning.

I was hoping that you could answer a couple of specifics with respect to some of the technical issues.

You talked about the clay content and the ore giving you some trouble during the second quarter, and some of the modifications to perhaps identify this in the future and avoid it.

Could you give us a sense of where you think you might encounter more of this clay, high clay ore and what you're doing to kind of work around it?

Yes, Victor, this is Mark Johnson.

We've identified the type of material that was giving us the issues.

The issue that -- the major issue that we had was just getting the material through our ore flow system.

Once we got it to the mill we processed it relatively well.

We had some minor recovery down grades in recovery and some con grade issues, but the biggest issue in the second quarter was getting it to the mill.

The geologists and metallurgists have worked closely together.

It's a section of material just along the Grasberg contact zone.

As the one diagram shows, it's where the intrusive meets the limestone, we had 2.5 million tons as Richard mentioned in the month of May.

When we look at the remainder of the year, we have somewhere in the order of about 1.5 million tons for the remaining six months of the year.

That's obviously a much smaller ratio per month.

The other issue we had in May is the ore that we had from other areas of the pit was relatively fine.

We're in a situation going forward that the material exposure is much coarser in the other areas.

We've got stockward zone opened up in the pit bottom, near the pit bottom and we also have much coarser ore from the West side of 6 North that is now available to us at a much higher percentage.

The ore flow modifications we made, we modified a number of our chutes, the transfer points that were giving us problems, we put bin blasters, we've put chains.

There was probably 25 initiatives that we were able to put into play in a relatively short time frame and we really have not had any issue at all since we've accomplished that in late May, early June, and we really don't foresee it being a problem going forward.

The other areas in looking in the future mine plans, it wouldn't be until probably 2008 that we would have -- we'd pass through this zone again. 2009 actually, and we really don't feel it will be in the same sort of percentage basis that we suffered in May.

Great.

Thank you.

Second question goes to the longer term mine plan, and you've talked a lot about geotechnical issues and geotechnical studies but really what you're saying and correct me if I'm wrong is that you're going to have to be a bit more careful about the pit wall slopes and that potentially as a result of that your strip ratio is going up.

Could you give us a sense of what happens to pit wall slopes in the new mine plan and what happens to strip ratios as well?

Really, we have not changed our approach on how we analyze or the factor of safety that we apply to the pit walls.

It's really, the changes that we've implemented has been driven by the acquisition of data both through drilling and through our actual mining experiences.

So we haven't been any more aggressive or conservative.

We're following industry standards and how we apply that information.

We've had both areas that have been steepened and areas that have been flattened as a result of that increased knowledge.

We continue to, we'll continue to develop our knowledge base, if you will, and continue to modify plans as required.

We have had a significant increase in our drilling that was directed towards the geotechnical and geologic acquisition, data acquisition over the last two years and the rate of that acquisition will decrease.

We've had a good campaign.

We feel like we're in a much better position to make those long term calls.

We know the limestone surrounding the pit is generally very competent rock.

We have found some small sections, mostly adjacent to the contact zone where we've had to flatten the angles, we've got a much better understanding of that whole contact zone.

That was a big part of the modifications that you see in the plans and I don't expect a large rate of change going forward.

Okay, great.

Thank you.

Thanks, Victor.

Our next question comes from the line of John Tumazos from Prudential.

Please proceed.

First, I just want to compliment your organization concerning corporate governance.

And all the wonderful things that you're not talking about today, because you just do your job and do it well.

I just want to express my appreciation.

Thanks, John.

If there's anything that you want to volunteer about your disposition toward business combinations given contemporary events or maybe you just want to stick to your business, that's fine.

My specific question is on the decision of whether to be open pit or underground at Grasberg.

In terms of that break-even analysis years down the road, there are some things that are difficult to predict--rainfall, seismic events, changes in ore character.

Which is more predictable?

The open pit or block caving?

Clearly seismic events would influence either.

Rock competence would influence either.

And I know that some of your technical people would calculate RQTs and things like that, but when it rains ten days worth of rain in two hours, there's a seismic event, you're up the creek and which is more robust to unforeseen issues of mother nature?

John, this is Jim Bob.

Let me make a couple of comments and then Mark Johnson can fill in and Richard can fill in.

On the issues that you discussed, the weather obviously since we've been out there mining for years is not predictable, but is predictable if it's going to rain and we have been [Inaudible] of road maintenance because it was delaying and tar are your two biggest problems in the pit and if you have good road maintenance you can survive big rainfalls, if you don't, you don't have good drainage, we've seen the problem that you have with that situation, but as far as underground versus open pit, it's a very simple issue.

If you look at the cost of the truck maintenance and the truck efficiencies and making those haul out of the open pit and the weather conditions you just discussed, and as I tried to say earlier, if you look at the Grasberg today as the Grasberg and the Ertsberg complex since the Ertsberg has become such a major ore body gone from a 75,000 ton or 75 million ton ore body to 0.5 billion tons of ore, high grade ore sitting over there, you really do have to look at the whole underground operation and allocating costs between the Ertsberg and Grasberg.

Seismic events, as you know, a lot of them are [Inaudible] but we explain after the tsunami, the horrible tsunami in December that this is technically Australian platform, and our seismic events in the Grasberg, because the Grasberg and the Ertsberg fault structures have all become quiescent 3 million years ago, the seismic activity on the north side of the island is just too far to create a seismic event so [Inaudible] in the high seismic area, our area is a mature area from the standpoint of plate tectonics and the Australian plate and the horrible timing of the seismic events and because those problems took place a million years ago and you have the two volcanos in the Ertsberg and Grasberg became quiescent 3 million years ago, we have a lot less issues about seismic events than you would if you were in another part west of the island of New Guinea.

So in that category, John, I hope that gives you at least a big picture of how we feel about the predictable phase that you talked about.

The last one is the predictability of the amount of ore that we're going to mine.

Obviously, we drill out of our core drilling we drilled thousands of cores and looked at those.

We try to be able to predict how the rock is going to perform once you get the pit laid back, but we learned a lot about the pit in the last period of time since the '88 discovery of the Grasberg, so a lot of our knowledge is based on the experience of having seen the ore as we've exposed it and the base of studying the drill, the whole samplings and making estimates and you always, once you get the face of the pit exposed and you can really look at the geology and the dynamics contact between the sulphur and the limestone and the actual hard ore that Mark described, we're just a lot better at predicting those kind of things than we would have been had we not had the experience since '88 of taking this big trip to the depth that we had it.

So I hope that gives you a broad range of the kind of things that you were talking about.

Thank you, Jim Bob.

Are you basically saying that you're comfortable with open pit ore or underground and you're going to make as much copper and gold as you can either way?

We're going to take the experience that we just talked about and all of the factors that you just talked about and look at the Grasberg/Ertsberg as a underground operation versus an open pit and underground operation at Ertsberg and we're going to see how they pan out and what is the most economical and the safest and more predictable way to mine the rest of the ore in this major ore body.

Well, thank you.

Thank you, John.

Our next question comes from the line of Brian MacArthur from UBS.

Please proceed.

Hi, good morning.

My question I think follows-up on a lot of the other questions but just maybe I was going to ask it a little differently.

Over the last -- we've revised the mining plan.

If we sort of look at the five year plan obviously there's an MPV value before.

We pushed some pounds back in copper and pushed back some ounces of gold.

But it also looks to me like at the back end we've also accelerated the underground up from 50 to 80,000 tons, maybe earlier than we did before and I assume that -- was that done because you've got more underground information, more open pit information, or was it purely because of relatively costs arising the open pit, the economics got better of those tons underground relative to the open pit.

So what I'm saying is if we had a volume plan before with a certain cost structure, did that cost structure in the back end get better in the underground and that's why we brought that into the plan earlier?

This is Jim Bob.

The Ertsberg expansion has been driven strictly by exploration successes.

As you know, we found the DOZ underneath the IOZ which is the intermediate ore zone and then we went to the deeper MLZ and so the discovery of the ore really added almost 400 million tons of ore has really driven the expansion of the Ertsberg.

It's all a lot of ore body, but unfortunately, as you know, you can't drill these things until you get some of the ore mined and so as we mine the original Ertsberg and then the IOZ which is the intermediate part of the zone, we've got all these fancy names for Ertsberg IOZ, DOZ which is the deeper ore zone and then the MLZ which is the zone below the DOZ, but we found that that ore we thought was a 75 to 100 million ton ore body was 0.5 billion tons and that gave us the opportunity to make the first expansion from 10,000 tons a day to originally planned 25 and that 25 turned out to be more like 40.

So you see we had to tack on more ore so you have 80,000 pounds had been driven strictly by operation successes and that's the key to why we keep talking about other parts in association with this massive Grasberg pilot if the Ertsberg can grow with the information deeper, by getting access to these drill holes from 75 to 1 million tons to 0.5 billion, we've still got the opportunity to drill [Inaudible] the ore adjacent to this Grasberg underground ore body.

But the Ertsberg was driven strictly by exploration success.

Right.

And Brian, let me just add the open pit costs don't go away.

I mean we're continuing to operate the open pit so it's not a question of replacing those costs and so this is really an incremental add-on of value.

It's reserves that we've added that we were planning to develop at some point in the future but as we've gone forward with this current expansion plan, our guys have found ways of advancing that forward and going back to John's question, it's a great indication of our confidence in our ability to block cave at size to take this DOZ ore body from 25 to 35 to 50 to 80 and so this is really an increment in the PVs and just incidentally, the changes in the five year plan volumes in relation to the overall PV of our operations is not significant.

I mean it changes from year to year, but sometimes that year to year is from a fourth quarter to a first quarter and we've run some numbers in the PV adjustment.

It's just not material in relation to the overall PV of the ore body just for the open pit changes, but the addition of the DOZ mine is an increment.

It happened because we were expanding and studying it and gave us an opportunity.

We've been block caving for over 25 years at this operation and we've had a long history and we've taken into account new advancements in technology, and so fourth, and it's a great success and it should give all of us a lot of confidence about what we have in the future.

Another thing on the 80K expansion of the DOZ ESZ, the dollars that we talk about really are required for future development of the MLZ and deep MLZ so if we're able to do with this incremental expansion which as Jim Bob mentioned is a result of adding reserves of the DOZ, ESZ, it gives us the geometry to allow us to ramp up the tons and sustain those tons for a period of time and then the capital that we spend on it is capital dollars really.

It's not new dollars.

It's dollars that we would be spending eventually on the DOZ, ESZ.

The ventilation that we add to the 80K expansion is ventilation that we require for the MLZ anyway, so it's a great chance to build leverage off of this success that we've had.

We'll use the same two crushers that we -- we're finishing up the second crusher in the DOZ in the first quarter of 2007.

This 80K expansion really allows us to make full use of the success that we've had to date.

So really what you're saying is independent of the open pit drilling which you had to push some high grade ore back, I mean even if you had that good ore grade up front you'd still have -- this 80,000 ton expansion was just totally independent and you were going to go ahead and do it no matter what.

It wasn't that it had a higher MPV than the deferred high grade that's being pushed back in the open pit?

That is correct.

It's an incremental project.

Okay, great.

That helps a lot.

That's just what I'm trying to sequence because it goes back to what John said is a trade off of the underground versus the open pit cost structure going forward.

Thanks, Brian.

Thanks very much.

Our next question comes from the line of Sanil Daptardar from Sentinal Asset Management.

Please proceed.

You mentioned about the fundamentals of China is strong and you feel other economic challenges in the industry to produce the supply.

Could we just talk about what you are seeing from the consumption point of view other from China, what other regions of the world are showing to you in that case?

Well, we read the reports about economic activity in China, we actually sell as our product copper concentrate.

We don't sell refined copper metal anywhere except in Europe through our Atlantic copper smelter and their supplies of refined copper are extraordinarily tight and so the demand for our product in Europe is very strong.

Our copper concentrate is a very desirable product for the industry because of the clean nature of the concentrate and it's desirable grade and we have long lines of customers asking for us to increase our committed sales volumes and we could sell substantially more than we sell and we have long term contracts that we sell on.

So demand for our products is very strong.

In terms of your output production for next four or five years, now does that assume that you are going into a lower grade ore body because silica, the grade of the ore body this quarter versus last years has been significantly lower and probably the result reflects in the production outlook for the next five years?

No, it's not a lower grade ore body.

I mean, the grades of the ore, the reserves that we have are there.

This is a very high grade ore body.

What we tried to illustrate with our charts that I reviewed is the amount of metal that we produce and sell in any quarter in any year is driven strictly by how we access that metal in the mining activities.

We have to mine waste material and lower grade material to get to the high grade and the grades that we mine, the metals that we produce, the metals that we sell is a function of when do we get to it.

It's not a function of this ore body changing.

Okay.

If you'd like, since we've talked about this, I'll be happy to speak with you directly about that because again, this is a high grade ore body.

One of the highest in the history of the mining industry.

This is Jim Bob.

Maybe I could just, since other people on the call may or may not have a chance to ask the same question, remember, this ore body is like if you put a -- hold an apple in your hand and this ore body is like an apple and it has a the core of the apple and the core of the apple you can see from the cross section it is where the rich part of the ore body is and as you go out toward the peel of the apple, the ore slightly reduces like the rings in a tree.

So we can't just mine the core of the apple.

We have to mine all of the apple and in order to do that we have to keep layering back the limestone and that's what we've done in the first half of the life of this pit.

We're now getting to the point where we can start to go down the core of the apple like a gun barrel because we are exposing the very hard, competent limestone rock, but every year and every quarter, every week depends on whether we are at the edge of the apple or whether we are at the core of the apple, so the ore body, as Richard said, doesn't change in grade.

It's just a matter of which part of the apple we're able to get to and if we're on the outer part of the apple you're going to have lower grade ores in the quarter and as you begin to move back into the core of that apple you'll get your high grade ore, but because we're going deeper in the ore body, there is not any impact on what grade ore impact we've got.

It's all drilled.

We know what the apple looks like and we know where the core of the apple is and we know where the skin of the apple is.

I hope that's helpful to you.

Yes, that's helpful.

One last question on the cost.

After the six months cost was $0.68 per pound and you're looking for the full year of $0.66 which means that in the second half, the cost -- unit cash costs are average somewhere around $0.60 to $0.62 a pound.

Now, does that account that you're looking for lower stripping cost in the second half of '06?

It reflects the fact that we are going to have a greater access to higher grade ore in the second half and that will give us more volumes, more unit of copper and gold which will reduce our unit cost.

Okay.

But the stripping cost is going to be what it is, what it was in the first half of '06 then?

Yes.

Well, because we will then have higher grade ore that that's what gives us the additional units.

Our stripping costs are going to be roughly the same.

Okay, thank you.

Thank you very much.

Next question, operator?

There are no further questions at this time.

Please continue with your presentation or closing remarks.

Well, we just want to thank everyone for tuning in today.

If you have other questions you can call David Joint, or Kathleen, or me and we would be happy to respond to them and we look forward to reporting our results in future quarters for this year.

Thanks for joining us.

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.