費利浦·麥克莫蘭銅金 (FCX) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Freeport-McMoRan Copper & Gold third-quarter 2006 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.

Thanks, Pamela, and good morning, everyone.

Welcome to Freeport-McMoRan Copper & Gold's third-quarter 2006 earnings conference call.

Our FCX 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 will be referring to the slides during the call, and you can access them on our webcast link at FCX.com.

In addition to analysts and investors, the financial press has 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 would like to remind everyone that today's press release and certain of our comments on this call include forward-looking statements.

Please refer 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 Moffet, Chairman of the Board;

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

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

We will then open the call for questions.

Today, FCX reported third-quarter 2006 net income of $350.7 million, $1.67 per share, compared with net income of $165.8 million, $0.86 per share for the third quarter of 2005.

The net income for the third quarter of 2006 included special items of $35.9 million, which was $0.16 per share related to the conversions to common stock of FCX's 7% convertible Senior Notes due 2011 and the final redemption of FCX's Silver-Denominated Preferred Stock.

These were net of a gain of $21.1 million or $0.10 per share for the disposition of land and certain royalty rights owned by Atlantic Copper.

For the quarter, our diluted net income per share reflects assumed conversion of the 5.5 Convertible Perpetual Preferred Stock, resulted in exclusion of interest expense totaling $2.9 million and dividends totaling $15.1 million and the inclusion of 30 million shares.

Our third-quarter 2006 sales totaled 323.6 million pounds of copper and 478,000 ounces of gold.

These were in excess of our previous estimate to the third quarter reported in July, 2006 of 280 million pounds of copper and 320,000 ounces of gold.

PT-FI's share of year to date sales through the third quarter totaled 769 million pounds of copper and 1.2 million ounces of gold.

We are continuing to project annual sales for 2006 for PT-FI's share of copper of 1.2 billion pounds and for gold of 1.7 million ounces.

Our realized copper prices in the third quarter nearly doubled to an average of $343 per pound.

And that compared to $1.73 per pound in the third quarter of 2005.

And our realized gold prices also improved by 37% to an average of $609 per ounce in the third quarter of 2006 from $446 per ounce in the third quarter of 2005, with strong operating cash flows during the quarter of $692.5 million and $1.1 billion for the first nine months of 2006.

Our capital expenditures during the period totaled $68 million and $178 million for the first nine months of 2006.

Our total debt at the end of September approximated $775 million and it was $76 million net of $699 million of cash on hand at the end of the period.

Our total debt was reduced year to date by $481 million and that included third-quarter debt reduction totaling $297 million, including the successful completion of a tender offer to convert $286 million in our 7% notes into 9.3 million shares of common stock.

This gave us 197 million shares of common stock outstanding at the end of the quarter.

Common stock dividends during the quarter totaled $206 million.

That was just over $1.06 per share and that included $0.75 paid on September 29, 2006 in a supplemental dividend.

Year to date, we have completed over $1.1 billion in transactions to reduce debt and return cash to shareholders.

Richard is going to be talking more about our operations and our financial outlook, and I would like to turn the call over to him.

Thanks, Kathleen.

This is really a good quarter for us, as the numbers show.

We had higher copper volumes, significantly higher gold volumes, roughly double the net income from a year-ago quarter as the result of the strong operations, coupled with the very strong commodity prices.

We had, for the quarter, as Kathleen mentioned, operating cash flows of almost $700 million with less than $70 million of capital expenditures.

This follows the second quarter when we had $500 million of operating cash flows and $50 million of CapEx.

And our strongest operating quarter, the fourth quarter, still remains ahead of us.

The markets of course are very strong.

I am referring to our slides that's available on our website.

On Slide 4, we have charts of exchange stocks which remain low by any historical measure.

The physical aspects of the copper market are very strong.

We can see that in our concentrate marketing activities, where there is an active market with a need for concentrates.

We can see it physically, in Spain, where we operate through Atlantic Copper.

Of course on any given day, macroeconomic factors are affecting investors' perception, but the underlying physical market is very strong, and the fundamentals for the gold market also are strong.

The large cash flows that we're generating from our fully developed Grasberg open pit operations in our mine and mill structures are allowing us to carry out the clear-cut financial policy that our Board has set.

During 2006, we paid almost $3.00 a share in common dividends.

We bought back -- spent $100 million in buying stock back.

We have reduced debt by almost $500 million.

And as Kathleen mentioned, our net debt, net of our cash at the end of the third quarter was only $76 million, and that is a great number for all of us here since we've started out on our efforts going into 2001 to significantly reduce the Company's debt.

So that's total debt reduction and shareholder returns for the nine months of $1.1 billion.

That is shown in detail on the slide on page 6, which includes the financial transactions since December 31st, 2002.

We have reduced debt by $1.7 billion, paid out $1.25 billion of dividends to our shareholders, and repurchased 7.8 million shares in the open market.

Total transactions during that period are $3.2 billion.

And the slide on Page 7 did show how significant we were from reducing our debt from levels that many investors were concerned about at the end of 2000 when we were about $3 billion to where we have almost totally eliminated our debt if you count our cash in place.

I want to talk about the full-year outlook.

We are continuing with our guidance of 1.2 billion pounds of copper and 1.7 million ounces of gold.

During the quarter, as I will talk about a little bit in detail, we had the opportunity to access some higher grade material and produce more copper, and significantly more gold than we anticipated.

Our operating policy is to do this to advance metal when we can do it in a safe way, in a way that is also is consistent with our long-term mine plans.

And when we are at the high grade portion of our mine, as we had some access to in the third quarter and as we will in the fourth quarter, that historically have given us some opportunities to do that.

At the projected levels that I mentioned earlier, we would have very strong cash flows.

If copper averages $325 for the fourth quarter and gold at $575 an ounce, below current levels, our full-year operating cash flows would be $1.7 billion with over $600 million during the fourth quarter.

At the end of the year, we will retain cash to fund our ability to call our 10+1/8 bonds, which we can do in February of 2007.

We will retain cash, as we always do, for our working capital needs, but at those levels of volumes and at those price levels, during the fourth quarter alone, we would generate excess cash over our regular dividends of $500 million.

The chart on Page 9, which those of you who follow us regularly can recognize how we discuss the sequencing of our mining in the Grasberg open pit, shows what we were able to do to achieve the higher than expected volumes during the third quarter.

In our 6 Pushback, we had an eastern section, which was a relatively small amount of tons, 1 million tons, but very high grade, particularly for a gold.

And we were able to mine this in advance of our plans going into the quarter.

Some of this would have been mined in the fourth quarter under our original plans; some would have been mined in 2007.

But as we were advancing our operations, we saw the opportunity to go ahead and advance this metal into the third quarter.

And we are also achieving in a much better fashion our goals for increasing our mining rates.

That includes the rates not only from mining ore, but our waste materials, and that is very important to us in terms of being able to meet our long-term mine plans.

This was our second-highest quarter at 725,000 total tons per day for aggregate mine rates.

The chart on Page 10 shows our quarterly estimates.

It shows that during the fourth quarter, we expect to produce 35% of our annual gold for the year -- significantly higher than we did during the third quarter and our copper -- our copper sales would be 35% higher than the third quarter.

And we would have, according to our current plan, roughly equivalent gold sales for the fourth quarter that we had in the third quarter.

And as I have said, we may have opportunities to advance some metal.

Our cost situation is summarized on Page 11.

Our unit site costs and production costs reflect the impact of higher energy costs, higher steel costs, other input costs.

Royalties reflect higher copper and gold prices.

Treatment charges reflect price participation.

And of course, the gold credit reflects the higher gold price of the volumes that we're having.

During the third quarter, we had net unit cash costs of $0.70, which is currently what we would expect to average for the full year -- $325 copper -- gold in the fourth quarter -- $325 copper and $575 gold.

The Grasberg mine is shown with a vertical photograph on Page 12.

The Pushbacks in 6 North and 6 East will provide the majority of our metal for the remainder of '06 and into '07.

We are advancing the mining of our 7 South pushback, which will begin to get in ore material next year but provides the majority of our metal for 2008.

As you can see, the mine is currently in good shape from a operational and geotechnical standpoint.

The cross-sections to illustrate where our high grade ore is coming from begin on Page 13.

During the first quarter of '06, we mined out the 6 South Pushback, which provided the very high volumes of copper and gold that we had in 2005.

Six North continued to be the primary ore Pushback for the balance of 2006.

And as I mentioned, we obtained this high grade material from the 6 East, relatively small section of high-grade ore.

Then following the mine out of a relatively small amount of remaining high grade ore at 6 North during early 2007, which will provide volumes to us, 7 South will become our primary Pushback as it moves down towards high grade ore during 2007.

Then in 2008, 7 South reaches higher grade ore, and that continues into 2009, which is shown on Slide 16 when 7 South will be at the lower levels of the Grasberg pit, where our highest grade ore is; that is -- the red section there is plus 3% copper equivalents.

Then moving to 2010, the 8 East Pushback will be our primary source of high-grade ore.

That adds up to our current mine plan, which we give a five-year forward projection of our current outlook for volumes of copper and gold sales.

And that's presented on Page 18, which shows the volumes year by year, showing an average of about 1.25 billion pounds of copper per year and 1.9 million ounces of gold.

This is no changes from the five-year plan that we presented during the second-quarter conference call.

At those levels, depending on copper and gold prices, we would generate very strong levels of operating cash flows.

And we talked about operating cash flows rather than EBITDA numbers.

That is to be net of our cash taxes and our tax interest costs.

You can see at $500 gold and copper ranging from $1.50 to $300 or $2.00 copper and gold from $400 to $700, we would be generating roughly $1 billion to $2 billion a year in annual average operating cash flows based on our current outlook for our five-year plan.

During that period, our capital expenditures will continue to be low.

We are currently estimating $250 million for this year and next year.

That includes not only our maintenance capital but our long-range capital projects, which include the development of our DOZ mine expansion, our Common Infrastructure for the initial development of the Grasberg block cave and the Big Gossan mine, which we are expanding.

All those projects are included.

We are asking our operating team to identify additional capital projects that they can meet high return criteria.

We want to take advantage of the opportunities these markets are giving us.

And with our operations, we are looking for opportunities to get additional capital which would not likely significantly change this outlook, but if it is spent, it would resell result in very high rates of return projects.

The summaries of our debt maturities is shown on the charts on Page 21.

As I mentioned, the remaining balance of our 10+1/8 notes, which is $282 million, is callable during the first quarter of '07.

We expect to call -- plan to call those notes at that point, and we will reserve cash out of fourth quarter's operations to make that payment.

Other than that, our debt maturities are minimal for a number of years.

And our Company's financial situation is very strong.

Our current development projects include our DOZ expansions -- the Common Infrastructure project, some mill optimization projects, and the development of the high grade Big Gossan mine.

The DOZ situation is summarized on the Slide 23.

This has been a very successful project for us.

The DOZ mine was a continuation of block cave mining that actually began at our operations in the very early 1980s.

It is the mineralization that is the underground expression of the original Ertsberg surface mine.

And we continue to mine at depths as that mineralization is available at depths and we continue to explore and add additional reserves there.

Initially, this project was to be a 25,000 ton per day mine at a capital in aggregate.

Before our sharing with our joint venture partner, Rio Tinto, was $250 million.

Began ramping up in 2000, reached design capacity by 2003.

By spending a small amount of capital, we were able to raise nameplate to 35,000 tons a day.

We have consistently operated, as you can see, above that.

We're now spending some capital on a crusher and some ventilation equipment to expand sustainable production at 50,000 tons per day.

We expect to complete that in 2007.

And we are planning a further expansion to 80,000 tons per day.

The mine currently provides about 20% of the feed to our mill, but it is one of the very largest underground mines in the world.

It is using the high-volume blockading operations; our costs are very competitive for this operation.

And it is a great indicator for the future of our Company because the majority of our reserves are -- undeveloped, underground mines.

To ultimately produce those undeveloped reserves, we are putting in a new added system, a new tunnel system, which is advancing at a rate of about nine meters a day.

These are very large tunnels which are designed to last for decades.

It is 400 meters below the existing Amole tunnel, which is at 2900 meters of elevation.

That [added] was driven from our mill to the Grasberg open pit in the late 1990s.

As it was being advanced, we discovered the large Kucing Liar ore body.

We are now 400 meters lower than that, and as we move towards the Grasberg pit, will be having the opportunity to do additional exploration at depths we have not been able to reach before.

And it is very interesting considering the geology of the vaulting system that provided the Kucing Liar, Ertsberg, DOZ, MLZ ore bodies.

We have had great experience in operating underground beginning during the early 1980s.

At that time the Grasberg was discovered, the operation was totally a block caving operation.

The IOZ mine depleted after a ten-year life, producing significantly more copper and gold than its initial feasibility study expected.

The DOZ mine has been a very successful mine.

And this gives us a lot of confidence about our future after the depletion of the Grasberg pit, when we will be totally an underground operation in the Grasberg district.

As we mentioned in the second quarter, we are in the process of doing some long range mine plan studies.

We are using those studies to determine the optimal design of the Grasberg pit.

And that will affect the timing of when we begin the Grasberg underground block cave mine.

We're taking into account all of our geotechnical data, economic factors.

Previously, we anticipated transferring from the pit to underground in 2015.

By advancing the Common Infrastructure project, this gives us the opportunity to consider beginning underground mining earlier.

And the success we're having with the DOZ mine and the cost that we're seeing that we can mine underground, give us a lot of confidence in doing that.

We will complete these studies by year end 2006.

Of course, when you go underground, you don't have to move the waste material that you do in the open pit.

And with cost factors changing, the cost advantage of mining in the pit is not there any longer.

We are currently mining at an ore rate of a cost of $4.50 a ton in the DOZ.

And because of the size of the deep Grasberg, we've got the chance of perhaps doing that at lower cost.

We will be reporting on that to you later in the year.

As I mentioned for some time now, we have had a financial policy that has been clearly articulated by our Board.

Maintaining a strong balance sheet and financial flexibilities which we certainly have now, we have set a quarterly dividend which we review periodically -- our Board reviews periodically -- that can be sustained over lower commodity prices than we are currently experiencing.

And as we earn additional cash as a result of our operation and commodity prices, we have been supplementing the regular dividend with a series of special dividends.

And on occasion, we [rang] shares in the open marketplace.

For example, if we look at our annual average cash flows, I showed a chart earlier that looked at it over varying prices, but at $3.00 copper and $600 gold, that would generate roughly $2 billion of operating cash flows.

And after we take out capital expenditures, debt obligations, preferred dividends, minority distributions, that would give us $1.47 billion of excess cash flow for purposes of carrying out the dividend policy and debt repayment policies on an annual average basis.

Historically, our company has been very aggressive in returning cash to shareholders.

Since FCX was spun out from its former parent in 1995, we've bought back 82 million shares of stock at under $20 a share.

We have paid $2.6 billion since the Company was -- had its IPO in 1988.

And since 2003, $1.25 billion -- that is $4.2 billion in total long-term -- returns of cash to shareholders.

So in summary, we continue to generate strong cash flows, expect to continue to be able to do that because of the strong markets, our fully developed Grasberg asset.

Our -- the key to our Company is the long lived reserve position.

We have reserves that extend through the end of our contracted work to 2041.

More copper reserves today than we did in 1998.

And almost as much gold reserves with good exploration opportunities as we go forward.

As you are aware, we don't hedge our exposure to copper and gold markets.

I'm glad that we don't.

With our strong balance sheet and the enhanced shareholder returns, we are very pleased with where our Company stands today.

With that, be happy to answer any questions.

Jim Bob is on the line as well.

So operator, could you open the lines?

(OPERATOR INSTRUCTIONS).

John Hill, Citigroup.

Good morning, everyone, and congratulations on the strong result.

Just quickly, I was wondering, so much seems to have gone right for the Company this quarter -- the mill throughput, 230,000 tons a day, the very high rates of mining, good ore grades, shipping metal above production levels.

How sustainable do we feel that this is as we go out into the first half of 2007?

Well, John, thanks for your comment.

We deal with operating issues out there on a day by day basis.

But we are very encouraged by the progress on the fundamental operating targets that we then set for ourselves that we have talked about for several quarters.

The advance of our mine rate, where not only did we have success in the areas that you talked about in terms of mining ore, delivering it and shipping it, but the improvement in the movement of our waste material, gives us a lot of encouragement as we go forward into next year.

And so we feel very good about it.

Our mill rates will vary, depending on the ore we have.

Recovery rates will vary.

In 2007, we will have kind of the reverse of what we've had the last couple of years because of our ability to complete mining the 6 South Pushback, our volumes -- our 6 North Pushback, our volumes will be front-end loaded next year as opposed to back-end loaded.

But our operating team has done a great job.

We have put in a new management system in early September to help us give us timely data for managing operations, and we've got some aggressive targets set for ourselves, and we feel very good about the outlook for 2007.

And I was just wondering, as a follow-up if you could touch on the smelter issues.

Obviously some negatives at Gresik, but could there be some hidden positives out there from greater volumes of concentrate sold in the open market, let's say, without price participation in there?

Well, the situation with Gresik is a new one.

And the operator, Mitsubishi, had a press release out on it on Tuesday, which is our night in Japan.

They are working very diligently to get that -- the oxygen plant issue fixed.

They expect to do that by early December.

So it is not expected to be a major impact on the marketplace.

We have the ability to work with our customers, which we have very strong relationships with, in terms of placing the concentrate, and we will do that.

The market needs concentrate right now, and so we have total confidence that we will be able to ship the concentrate to customers on market terms during this period that Gresik is out.

John, this is Jim Bob.

On the question of our mining sustainability going into the 2007, I think that I would like to just add to what Richard said.

We had a tough break and got behind because of some hard ore in the second quarter.

But if we go back -- and of course we have to deal with the issue when we had the slide.

But I think what I would say is if you go back over the last five years, you will see that this quarter was more in line with the normal abilities that we have shown in the pit to move ore, and in almost every case, exceed our goal.

So the reason I think your -- the confidence for 2007 is -- can be relied upon, is it -- the second quarter of 2006 was unusual.

We don't usually get caught in a trap like that -- this hard ore, causing us to not meet our projections.

So as you go and take the whole open pit record, we've talked about, we give these five-year projections in almost every case, with the exception of the period that included the slide in the pit, we been able to out-produce our projection.

So I think the third quarter, and hopefully the fourth quarter will give you a good feel that we are just returning to normal performance for this group in this great pit.

David Gagliano, Credit Suisse.

Just a bit of a bigger picture question, and Richard, I know you addressed this briefly, and I'm sure you get asked this a lot, but with the $1.1 billion debt reduction and $1 billion to $2 billion operating cash flow outlook for each of the next few years, CapEx at 250 at most, the obvious question is -- any update on your thinking with regards to the use of free cash flow?

And would you consider acquisitions?

And if so, are there any particular regions or perhaps even metals that you find interesting at the moment?

Thanks.

Well, first of all, we're earning a lot of cash, and within our Company we really don't have needs to retain cash in our Company.

We don't have obligations to fund.

We've shown that we can be profitable and cash flow positive at very low prices.

So that is why our Board has adopted the policy of returning cash to our shareholders.

The industry is changing and valuations of assets that were once viewed as not very high-quality are today achieving very high valuations.

And as the industry has trouble in finding new resources through exploration and development activities, consolidation is almost inevitably to occur.

We have not participated in the past.

If we were ever to participate it would be something that would have to be an exceptional opportunity for us.

We have a highly attractive asset.

We don't have to do any transaction at all.

We believe we have a great future for our Company.

In our current situation in terms of operating our business, generating cash flows, adding to our reserves, we have exploration opportunities as I mentioned surrounding the Grasberg.

But we also continue to have rights and have plans to resume exploration in Papua outside of the Grasberg areas.

Our total focus is going to be maximizing shareholder value.

We don't have an objective for growth.

We just have one objective here and that is to earn values for our shareholders.

This is Jim Bob.

Let me add to that.

I think that it is important to think about what Richard said about the exploration side -- the exploration side in block A is going to get a shot in the arm.

This Common Infrastructure, these two tunnels that we are driving have already started to expose us to potential underground geology that could connect the Grasberg and the Ertsberg.

If you will recall, the Grasberg and the Ertsberg are two separate ore bodies and both have their own geology.

And there's always been an area between the two that goes right underneath the old Ertsberg, to the West of it.

We believe that the Big Gossan and the Kucing Liar trend of ore that is mainly in line with faults that run, more or less Northwest/Southeast, and right into the area that this Common Infrastructure is intersecting.

And we believe that there will be some opportunities as we found with the Kucing Liar discovery to better define the area between the Grasberg and the Ertsberg.

In Block B, where we are really in the process of starting our exploration effort back up after several years of concern about security, we now believe that we can go back to work in our Block B area, where we have some very large magnetic highs that have already had some drilling that showed some exploration success.

So we have under control some of the best exploration territory left in the world.

There is no better place to expect to find an ore body that is as rich in copper and gold and silver as our Ertsberg/Grasberg complex has shown.

So that is one place that this mine could go.

And I think to emphasize Richard's last statement, we realize now that we have our debt paid off and we are going to be generating substantial cash, the challenge for us in this Company, our Board and our management team, is to be sure that we get maximum shareholder value.

The extra flexibility that we have by not having the debt and having the projected cash flows if prices stay where they are, gives us the opportunity to be very, very flexible in everything that we do.

But in Richard's words, maximize shareholder value, I think the record shows that that is what this management team and Board always figured out how to do.

Mark Liinamaa, Morgan Stanley.

To the extend that you can comment on cost expectations next year, based on your anticipated production levels, can you give us an idea on what you might see for site production and delivery costs and treatment charges?

Well, let's see, Mark, start out by saying in many respects we have a fixed cost environment.

And since we have a workforce that's there, we are working full out in the pit and the mill.

We are training people to work underground.

And we have a full complement of equipment now with trucks and shovels and drills and so forth.

So the cost input levels are essentially fixed.

The cost levels are going to depend on what prices do.

Diesel costs were up in the third quarter from the second quarter.

And by the end of the quarter, we were buying diesel for less than what our average was for the third quarter.

So we would expect our aggregate cost -- and that is where you need to start, to think about our aggregate cost -- to be roughly similar.

And if energy cost comes down, we burn about 100 million gallons of diesel a year.

Coal costs are market-based for our electrical generating.

Steel costs will be whatever they will be.

So our input cost levels will be similar.

Our unit costs will reflect the fact that right now we're talking about producing slightly lower copper next year than we do this year.

In terms of our share of the cost, that is also affected by our sharing with Rio Tinto, because of the metal strip situation.

But overall cost levels, I think, Mark, you can take your view of what input costs would be and adjust our aggregate cost for that.

And the unit cost will be based on the volumes that we have.

In terms of the T.C. and R.C. market situation, you need to take into account that we are buyers of concentrate as well as sellers.

And Atlantic Copper, which doesn't have taxes of loss carryforwards and so forth, doesn't have minority interest.

We essentially, if there's an equivalent change in the marketplace and we realize that with each operation at PT-FI and Atlantic Copper, it offsets.

Made rate, mid-year negotiations in the concentrate market, which we don't have participation in -- our contracts are negotiated at the end of the year, saw rates come down, changes in the structure of the industry's price participation feature.

So with this year being in such a deficit from a concentrate market standpoint, and with all the smelter additions in Asia, you would expect T.C. and R.C.'s to come down at year end.

Deficit that you just mentioned -- I know you don't usually provide market commentary, but any insights that you have to the ability of scrap to offset that would be interesting to me, as well as any comments on demand destruction talk that we read so much about.

I will tell you, Mark, there are better people to talk about it than me or our Company.

We only sell in the physical market in Europe through Atlantic Copper.

I can tell you there, the market is very tight.

And there is aggressive competition for the copper we produce at Atlantic Copper.

With our concentrate, the world wants our concentrate.

It's got a desirable chemical makeup.

It's a good grade for our smelters.

And we have a very long line of people wanting to increase contractual commitments for our concentrate.

But I'm not much help in terms of the scrap situation or the demand destruction.

There was a lot of commentary, of course, I'm sure you have seen coming out of LME, (multiple speakers).

Fewer [adds] I think.

Last week.

I was definitely there.

And the great thing about copper in the marketplace, because of its physical characteristics, it is very, very difficult to replace for its basic uses.

And the competitive products costs are also up.

It is an underpinning for the market in the future because if copper prices were to come down, copper would come right back in the marketplace for most of its uses with some permanent changes.

But it is a great commodity.

And at the end of the day, it is very well placed today for producers, simply for the reason that it is so hard to find major new copper mines.

And I think besides China, that is the striking thing about this marketplace.

Even with prices increasing to the extent they have increased, the demand response versus historical responses is remarkably low key.

And there are a lot of reasons for that -- geologically, cost structure, geopolitically.

So we feel very good about being a major copper producer and about where we stand in that marketplace.

John Tumazos, Prudential.

A follow-up on the costs, in terms of the $0.70 forecast for next year.

With the -- basically, the good productivity you experienced, you're enjoying underground at lower diesel, you're expecting to be offset -- or more than offset -- by the lower copper ore grade and lower pounds of metal produced.

In the fourth quarter, however, you're going to have a higher copper ore grade and a continued very good gold ore grade.

And you are forecasting about the same $0.70 unit cost net of byproduct.

There seems to be pretty good potential for you to be one or two dimes lower than your fourth-quarter estimate.

Are there any special maintenances for other factors affecting the fourth quarter?

No, John.

And let me be clear, the $0.70 was an estimate for this year, not next year.

We are basing that on a lower gold price than we had realized during the first half.

We are using a $550 gold price for that.

So our gold credits would be somewhat lower.

Our royalties would be higher.

And we are projecting a lower site production in unit average cost than we have experienced in the first nine months of the year.

But it has to do with the impact of royalties versus where we have been and the lower gold price.

could you raise your prices (multiple speakers)

But there's no special maintenance cost.

Richard, this is Jim Bob.

Why don't you give the -- you or Kathleen give John Tumazos an idea of what the price participation does to the T.C. R.C. and what the royalty percentages are because of the way our royalty is in the contract to work?

Right.

Our royalty for gold is a flat 1%.

But it is a sliding scale royalty for copper, which goes to 3.50% above $1.10.

Our T.C. and R.C. effect for this year reflects the negotiations that were done two years ago and last year.

And it is about -- about -- participation, about 9%, considering the price participation and total cost now.

That is going to be renegotiated, so next year will be a blend between what we negotiate this fall and what we negotiated last year.

Is that 9% of 350 or something like $0.30 extra to the copper smelter for price participation?

Yes, it is 9% above $0.90, on average, for the current contracts that we have.

For instance, if we have a $0.42 costs for T.C.

R.C.'s now, if your price participation wasn't there, just so you could show what the increment is -- what would the T.C. R.C. be as opposed to $0.42?

It would be $0.90 over say, $340 or $270. 9% of -- $0.24.

It would be $0.24 below that -- so roughly $0.20.

So when your royalty on your sliding scale and you said for copper, slides from 1 to 3.5.

With the royalty increase in the T.C. R.C. increase, that accounts for some 25 to $0.35 of the increase.

Is that correct?

That is correct.

John, this is Jim Bob again.

Once again, we are used to seeing our costs down in the $0.30, $0.40 level.

And when you just go through the drill that we just went through and you see why it is double as a result of the price increases.

But --

If we just go back to the year-ago quarter and compare that, our treatment charges were $0.25, our royalties were $0.06, $0.31 versus $0.55.

Our unit costs then when we had higher copper volumes was $0.71.

But input costs have changed.

Our cost structure over the past five years has roughly doubled.

Now we are moving -- we have some more trucks, some more shovels.

And as this Grasberg pit matures, and we have been saying this for years, hauls get longer; that means maintenance costs are higher.

We burn more fuel.

We put more wear on tires.

The pit is roughly 900 meters deep now.

So all of those things have resulted, plus diesel costs going from over $0.70 to over $2.00 -- $0.70 a gallon to over $2.00.

So over the past five-year period, our total aggregate costs have roughly doubled.

If I could ask a follow-up question, concerning the oxygen plant interruption at Gresik and Java, in the American steel industry sometimes -- there was a fad of using extra oxygen to try to make the furnaces run faster for a time, and trucked oxygen was used.

In Java, is oxygen available by truck?

No, there is a contractor that supplies the oxygen through an oxygen plant.

And that is the source of oxygen.

And that plant is where the mechanical failure occurred.

And that will be rectified by changing -- by repairing the malfunctioning equipment at the plant.

I just want to say -- when I was talking about costs doubling, fortunately, the good news for us is that our commodity prices have increased more, so our margins have really expanded dramatically.

And that is what is generating all this cash for us.

Victor Flores, HSBC.

I wanted to ask a question about the long-term development plans.

You mentioned that you'll be giving us some information on the optimal design of the pit and the block cave.

In addition to higher fuel costs, which seem to be skewing the decision towards the underground, what are the other main technical items that you're taking into account in looking at the optimum mining between open pit and underground?

Well, fuel costs are one element, but we also have 140 big haul trucks that are -- and shovels and all of the input costs that go into open pit mining, as well as the technical issues of having to manage the waste that we produce as we mine.

Which when we mine underground, those issues will be significantly different.

So there's operational technical issues affecting waste management, geotechnical issues affecting the mine itself.

And than the economic factors, from a cost standpoint.

So all of those things are going into the various options that we are considering.

And as I said, because we have the infrastructure advancing and the quality of the ore body underground, it gives us the ability to consider different options that if that wasn't there, we wouldn't have a chance to do.

So at the end of the day, we're going to be combining operational risk factors and economic factors to come up with the best answer.

Just a follow-up -- does that mean that the open pit might end sooner and more of the ore would be taken from underground?

Exactly.

We're not talking about losing ore here, it's how we access it.

So the options include the opportunity to shorten the life of the pit or extend it.

And that is what we are studying.

Just one final follow-up.

What size crown pillar are you currently thinking of leaving below the open pit?

Victor, this is Mark Johnson.

The bottom of the pit to the extraction level would be -- it is roughly 200 meters at the end of the pit life.

That crown pillar though -- with the block cave essentially what we would be doing is removing that.

That would be the amount of ground between the ultimate bottom of the pit and that extraction level.

It is in the -- that 200 meter area is within the highest grade portion of the ore body.

So we would be caving through that -- what you are referring to as the crown pillar becomes the ore for the block cave.

And then that -- that height of those columns would increase as you move away from the center of the pit.

That is our golden triangle -- we don't want to leave that behind.

This is Jim Bob.

You know, Richard, you and Mark might just give a couple of statistics around this whole issue of underground pit.

For instance, Mark, how many trucks do you have in the pit today -- just give a specific number.

Yes, we're right at 150 trucks in the pit.

How many trucks are you using underground at the Ertsberg to move the [50-pound] ton?

Yes, right now on the DOZ to do the 45, 47,000 tons a day that we are averaging, we're running about 8 trucks on our [polys] level.

8 versus 150.

And just some pie in the sky thinking -- when we get underground at the Grasberg, and if the 200,000 tons a day with the Ertsberg/Grasberg -- how many trucks would you anticipate we would be using at the Grasberg?

Jim Bob, we are evaluating both the truck option, but with hand and rail option, we feel that the rail option is going to be the more opportune, more cost-effective in the Grasberg block cave.

But I were to guess that it would be very proportional.

It would be roughly three times as many trucks as we currently have in the DOZ.

We are forecasting a mining rate in the Grasberg block cave of about 160,000.

So roughly, we'd probably have in the order of 30, 35 trucks if that were the option we went with in the Grasberg block cave.

35 trucks as opposed to 150.

And then you have got the issue that we are handling -- the ore and not the waste, because the waste basically is not mined underground.

I think we just need to give the aura of how mining underground versus mining the pit is just like two different worlds.

Yes.

It is an area where technology has given us some advances and has potential for future advances.

And it is -- again, it comes back to the fact that we have such comfort with our ability to mine very large volumes underground because of this ore body and our experience in doing it.

The other aspect of that, on a block cave, it much more lends itself to automation.

It is nothing that we are relying on in our current estimates.

But in a block cave scenario, essentially the load points stay fixed, and the draw point that you go to -- it is something that -- it doesn't change from day to day.

It only expands and contracts as you open and close draw points.

So there's a great potential.

And as Richard mentioned, there has been a lot of work done on fragmentation and block caving techniques that have improved our ability.

Certainly in the DOZ, we have been able to implement a number of those.

The advanced undercut -- there's been things that we've done that have improved our ability to operate a block cave without some of the problems that operations would have had 10, 15 years ago.

Not to mention the fact that with 300 inches of rainfall a year, what is the differences between a rainy day in a pit and a rainy day in the underground, Mark?

Big difference.

It is like playing in the Superdome versus an outside stadium.

Lots of things to be considered here, ladies and gentlemen.

Brian MacArthur, UBS.

My question sort of I think gets to the point we were just discussing.

But Richard, you mentioned your underground costs now for mining I believe were 450 a ton.

Can you tell me what your open pit mining costs are right now and the strip that is driving that at the moment?

Yes, it is over $2.00 a ton now for material moved.

And so if we're -- you can see that if you aggregate our waste mining as well as our ore mining, the underground costs are roughly 3 to 1.

So our underground costs on that basis are significantly lower.

And we're looking at lower numbers at the Grasberg block cave.

We're still studying those and want to make sure they're right.

But it is a larger mine than the DOZ and that gives us a chance of taking advantages of scale.

And just to remind me again, how does the strip go over the next few years?

Well, that is going to be a function of the decision about the life of the pit.

But under our existing mine, we continue at roughly this rate -- for the next -- at 3 to 1 for the next four years and then it starts coming down dramatically.

And the last years of the pit would have dramatically lower strip ratios because obviously, you are getting down to the bottom of the cone, and you just not having to remove material.

But that will all be things that will be a function of where we come out on this life of pit study.

Just switching to one other topic, just so I'm clear, as you drive the Common Infrastructure project through to the Grasberg deep, which I believe you put in the presentation you are going to be there at the end of 2007, as you go into the area that has never been explored, are you planning to drill holes as you go along for exploration?

Or are we just going to wait until that is developed and then come back end drill holes?

Obviously if you hit something just as you are sinking the tunnel through there, you will explore it.

But is there going to be active exploration into that area between now and the end of 2007?

Or is it just sort of going to occur if you actually run into something?

No, we will be setting up drill sites as we go along.

As we study the geology, we may drive exploration drifts.

But we will be drilling as we go along.

And this is Jim Bob.

Those who don't remember history, when we were driving the Amole is when we drove right straight through the exposure of the Kucing Liar.

First, we hit the Big Gossan and then we hit the Kucing Liar.

As I say, we have already had a couple of interesting intercepts as we have gone with the Common Infrastructure.

But it gives you the ability, as Richard said, to set up these drill sites.

And when we were driving the Amole, which is to the West other, we knew the service geologies that said that there were several faults that we might intercept.

And those faults always are targets for possible ore concentration.

Sure enough, in both cases, we found some interesting concentrations.

We know where those faults intersect the Common Infrastructure.

And those would be the places where we will get an opportunity to sort of fill in and connect the dots, if you will.

Once again, if you just imagine the Northwest striking fault that goes through the south side of the Grasberg and then over to the north side of the Ertsberg, we have just had that blank area between there and been really no way to get the drills with the exception of a few core holes in there.

So it is a huge opportunity for connecting Ertsberg, Grasberg geology.

And we are confident that we are going to better understand the things like the K.L., the Kucing Liar, and predictions -- geologists are always optimistic.

I would be very surprised if we don't nail down some more ore going between the two.

But that is what exploration is all about.

And we will be finding that out very soon now since we are getting so far along with the common infrastructure.

Right.

And I guess that's what I'm trying to get at, Jim Bob.

And obviously, this isn't a detailed map, but just where you've got it marked September 2006, where we are.

And if you sort of look at where those faults might run, it looks to me, just based on the rate you've been going and the nine meters a day, and obviously this isn't a great, detailed map.

Are we talking we're going to hit that intersection point in the next three months?

We could start to get the effect of being closed to that intersection.

Remember the fault is not a line, it's a fault zone.

And especially the metal that is associated with these fracture zones.

As we get closer to it, not just to the finite line, the better chance we have to find some indications of how pervasive the mineralization has been as it came off the big Grasberg stock.

As you know, that's our whole theory about how the Kucing Liar and the Big Gossan got there -- is that the base of the Grasberg was so prolific and as the volcano began to become quiet that it actually plugged off the top of the volcano and caused these limbs, as you've seen us draw, to come off the base of the Grasberg.

And they were potent with -- the mother liquor was potent as it came off of there, with both copper, gold and silver.

And that is why you've got such a uniform grade, both in the Grasberg [die-right] and in the Grasberg sediments around it like K.L.

It is most striking that the copper, gold and silver content are so similar.

Kent Green, Boston American Asset Management.

Great quarter, fellows.

My question pertains to exploration outside of the current complex.

I think that you alluded -- Jim Bob alluded earlier on to section D. And the question pertains to -- if something is found outside, would you be prepared or do you have the capability with your agreement with the Indonesian government to start a second complex?

Or would you have to wait for a time frame to put that into the query later on?

Under all of our exploration agreements -- thanks for the question -- this is Jim Bob.

Under that Block B, every ore body stands on its own.

As you may remember, when we went out and laid out the magnetic -- parallel magnetic surveys -- we had several big [arrow mags] that were similar to the arrow mags at Grasberg/Ertsberg.

We went out in the town [Waboo], which is somewhere between 5 and 10 million ounce potential deposit.

That would have a feasibility study and would go forward on its own.

We have further to the West, about 100 kilometers to the West, we have a big magnetic anomaly which we discussed to you before at [Kamopa].

And that area, there have been a few shallow core holes drilled by the former -- French company that was in there that we took the acreage over from.

And we were drilling some interesting core holes and we went some deeper.

To answer your question, that area, if we drill up enough reserves, would have a feasibility study and a project that would be designated and could begin as a separate entity.

Obviously, with our infrastructure at the lowlands, one of the things that gives us a huge advantage is, you remember, we put up that big command post in the lowlands to have all of our personnel where we could use that, as I say, as a command post and go to satellites, if you will.

Something as big as the Grasberg/Ertsberg complex -- hard to refer to that as a satellite.

But that is what it becomes because you in essence, run all of your different -- the Grasberg/Ertsberg, Waboo, Kamopa, all the areas that you have would be independent operations with their own mining infrastructure.

That would be a part of our whole complex.

A huge advantage to us having our command posts and our beachhead already there.

For instance, when the last companies that ran Papua were exploring, they found that they were spending three quarters of their money on logistics and a quarter on exploration.

In our case, we spend 90% of our money on exploration and 10% on logistics because we have a beachhead.

Sanil Daptardar, Centennial Asset Management.

You talked about tight physical markets in Europe.

Would you mind to give some kind of idea about what is happening in China?

There was a talk about doing destocking, consumption slowdown.

Do you see that consumption picking up or destocking phase is largely over?

Or what do you see -- could you just give your viewpoint?

Well, underlying all of the numbers for copper imports earlier this year, it was very strong economic performance in China.

And that would indicate these de-stocking comments are valid and the recent numbers are looking strong.

So from all information that we have available, China continues to be very strong, and we would expect it to be a strong consumer of copper.

So as I said earlier, the market looks very good to us.

You also talked about strong fundamentals in gold.

And what do you see in the gold market -- is it mainly to run by the financial markets?

Or is it driven by more physical buying of gold?

Well, I tell you -- I want to go back and say something that I say to people all along.

We don't see ourselves as market experts.

We run our business, we run our operations, we don't trade in the commodities, we don't hedge.

But fundamentally, the outlook for gold, and the gold prices over time have moved up strongly.

Not as aggressively as copper.

But the fundamentals that have led to that increase in prices appear to still be here.

And overall the market is good.

But there are a lot more -- there are a lot of people with a lot more expertise about gold markets than anybody on this call.

And I would refer you to them.

On your slides, you showed projections for '07, '08 in terms of the outlook you are going to produce in copper and gold.

It seems that compared to I think two quarters back your projections are a little bit lower than this.

They have increased now.

Do you anticipate mining higher grade material going into the next two years, or how should we view that?

Well, I would refer you back and spend some times looking at those sequencing charts on our website.

The location of the high grade ore in the Grasberg mine is well known because of the drilling activity that we have taken and the analysis that we have undertaken to identify that.

And the volumes of copper and gold that we produce during any quarter, any year, depend strictly on the access that we have to that high-grade material.

The answer to your question is clearly available on those schematics.

They are simple, but it really shows where we are in the mine, when we will get there, how we come -- we start mining a Pushback at the upper reaches of the mine when we are in waste material.

And as we advance that Pushback down, it will reach lower-grade material, then higher-grade material.

And then at the lower elevations of the mine is where our highest-grade material is.

So you can watch and see how we advance with that.

And that then translates into this five-year outlook.

I don't know if anyone else gives you that.

But I know it is very limited, but we give you our best estimate of what our annual volumes are for the next five years.

And that takes into account where we are in the mine, where we expect to be with the mill based on the nature of the ore that we are processing, in terms of mill rates and recovery rates.

So we boil all that down and give you our best estimate.

We will update it every quarter.

But you can visually see that through those schematics.

One last question, of course I followed what you mean to say.

But you said that in 2007, the volumes would be front-end loaded rather than the back-end loaded, meaning in the second half of '07, volumes would be lower than what the first half would be?

That is what you're trying to imply?

Yes, more than implying, that is what I am telling you.

Because we are mining -- during the fourth quarter, we will see getting high-grade ore from the 6 North Pushback.

There will be some of that material that will be available to '07.

We will continue to mine it.

So that will give us very higher grades during the early part of '07.

When that is finished, then our ore will start coming from the 7 South Pushback.

And during the second half of '07 it will be in relatively lower grade material and then as we move into '08, it gets into higher grade material.

Wayne Cooperman from (technical difficulty).

Lots of cash flow.

Do you got -- what's your -- now you have almost no debt.

Are you going to run this company with no debt, or are we going to take advantage and start paying out more dividends and buying back more stock, or what should we look for?

Well, our current policy, Wayne, is to have a distribution policy as we talked about.

As we earn cash, we are distributing it, and we have shown we have done that, in the form of these dividends, these special dividends.

And on occasion, we buy back stock.

So it is a distribution policy.

There's no need to maintain cash in the Company.

We continue to look at our capital structure.

But in the current environment, the idea of borrowing money to pay distributions is not something that we have.

As we reduce debt, that's given us more cash to distribute.

Our interest expense on an annual basis is running -- will run about $80 million a year less than it was on an annual rate a year ago.

I guess the question is -- should we look for distribution to equal your free cash flow and the net debt to stay about flat?

Is that your strategy now?

Well, you can look and see that we have very limited opportunities to repay debt further after we pay back the $282 million of the 10+1/8 next year.

So --

So you have zero net debt.

It doesn't seem that that is the most prudent capital structure.

Well, we have viewed this as a chance, again, with this focus on shareholder value of being able to provide shareholders the direct opportunity to participate in these positive capital markets as we earn cash.

We don't think that is a bad place to be.

Hongyu Cai, Goldman Sachs.

Congratulations on the strong results.

Earlier you mentioned that the copper price participation as an important factor leading to your higher costs this year and we hear that some miners have already settled the T.C. R.C. at a higher base level.

Do you have any update on that front for Freeport?

No, we are just now in the time of the year, Hongyu, that we are beginning our annual negotiations with our customers.

That kicks off during LME week.

So we really have no update.

You have seen the press reports on the mid-year negotiations.

Actually, the base rates as reported came down from last year.

And there were reported limitations on price participation, which put caps and so forth on it.

But we have nothing to report now because we are just beginning the process of our annual negotiations.

And if I may ask another separate question -- in terms of going underground -- what is your major concern in underground operations compared with open pit?

Well, I want to emphasize we have a lot of confidence in it.

But we are in the process of training our workforce to operate underground as we expand it.

We have been able to do that through the expansion of the DOZ mine.

We mentioned earlier that one of the factors -- it was a good economic investment, but one of our decisions to advance the development of the Big Gossan mine, which is not a block caving operation but an open stoping operation, but it does give us an opportunity, which is more people-intensive, to give people on the job training in that mine development, which we'll be able to develop that.

I think our biggest issue is first of all to make sure our plans are well-established, then to train our workforce.

But we feel very good about all that given our experience.

And at the end of the day, we are going to make these decisions to optimize the net present value of this ore body.

There are no further questions at this time.

I will turn the call back to you.

Thanks, everyone, for your participation today.

And if you have any follow-up questions, feel free to call us.

That concludes our call.

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.