費利浦·麥克莫蘭銅金 (FCX) 2007 Q2 法說會逐字稿

Welcome to the Freeport-McMoRan Copper & Gold second quarter 2007 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, Executive Vice President, Chief Financial Officer and Treasurer.

Thank you, operator and good morning everyone. Welcome to the Freeport-McMoRan Copper & Gold second quarter 2007 earnings conference call. This is the first full quarter of results that we are reporting since the acquisition of Phelps Dodge in March of this year. 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 as usual, we will have several slides to supplement our comments this morning. We will be referring to these 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 by accessing the Webcast link on our Internet home page later today.

Before we begin today's comments, I would like to remind everyone that today's press release and certain of our comments on this call include forward-looking statements. Please refer to the cautionary language included in our press release and slide presentation and to our risk factors described in our SEC filings. On the call today are Jim Bob Moffett, Chairman of the Board; Richard Adkerson, Chief Executive Officer; Jim Snider, President and Chief Operating Officer; Mark Johnson, Senior Vice President of our Indonesian Operations.

I'll briefly summarize our financial results and then we will turn the call over to Richard who will be referring to the slides on the Website. We will then open the call for questions. Today, FCX reported second quarter 2007 net income applicable to common stock of common stock of $1.1 billion, $2.62 per share. This compared with net income of $367 million, or $1.74 per share for the second quarter of 2006.

For the six-month period ended June, 2007, we reported net income of $1.6 billion, which was $4.80 per share and this compares with $619 million or $2.97 per share for the 2006 six-month period. Our six-month 2007 financial results include the wholly owned subsidiary of Phelps Dodge following the acquisition on March 19, 2007. We had a number of special items during the second quarter in our net income. Those are charges totaling $377 million, or $0.85 to net income. That included a charge to net income of $80 million or $0.18 per share for the mark to market of the Phelps Dodge historical copper price protection program.

There was $168 million impact, or $0.38 a share for purchase accounting impact on production costs related to inventories. $117 million, or $0.26 a share for purchase accounting impacts on depreciation and amortization related to the step up in property, plant and equipment. There was also a $35 million effect to net income or $0.08 per share for the early extinguishment of debt as we prepaid debt during the quarter. And a gain of $23 million or $0.05 per share on the sale of marketable equity securities.

Strong sales during the quarter, our sales totaled 1 billion pounds of copper, 913,000 ounces of gold and 15 million pounds of molybdenum for the second quarter of 2007. The realized copper prices averaged $3.33 per pound in the second quarter of 2007. This was a similar amount in the second quarter of 2006 but the 2007 period included a $0.13 per pound reduction related to the historical Phelps Dodge copper price protection program.

Our operating cash flows for the second quarter totaled $2.1 billion. Richard will be talking about the strong outlook for continuing to generate strong cash flows. Our capital expenditures approximated $530 million during the second quarter. We took steps to reduce debt and our debt approximated $9.8 billion at the end of the second quarter. This compared with total debt of $12 billion at the end of the first quarter. And our cash balances at the end of June were $2.1 billion at June 30, 2007. Now, I'll turn the call over to Richard who will be referring to the slides on our Website.

Good morning everyone. I'll begin on slide three, which summarizes the comparative financial information that Kathleen just went over with you. Keep in mind, as we look at these comparisons, on this slide we're comparing FCX' actual results from the second quarter '06 with our actual results for the current quarter. And the current quarter is our first quarter to include for a full quarter the results of the combination with Phelps Dodge. We pick up those results in actual results from March 20 forward. We will be looking at some pro forma information that would combine the companies on a historical basis, as the if the transaction had occurred earlier.

Pointing out a couple things. It's interesting that our actual average realizations for the two quarters were the same. Copper prices were much higher in '07 but we have the impact of the Phelps Dodge hedge program that's flowing through this year and that's an average of $0.13 a pound. Phelps Dodge had entered into contracts to limit 500 pounds of copper sales for 2007 at $2 a pound. Then -- it's actually 486, just under 500.

Then again, I'll point out in the net income number where we had $2.62, that includes $0.85 of special items relating to the hedge program, purchase accounting and other factors. With over $1 billion of net income, over $2 billion of operating cash flows, this is an extraordinary quarter for us and demonstrates just the strength that we created by combining these two companies. Purchase accounting issues are detailed on page four and we have shown the step up in the assets resulted in the allocation of purchase price to property, plant and equipment and the inventories and the impact on quarterly earnings and projected quarterly earnings for 2007. These numbers have moved around some from the first quarter disclosures that we made.

These are non-cash adjustments to net income and as a result of the accounting rules that are applicable today, we have to go through detailed evaluations using outside consultants of inventories and property at a detailed level. And this process will continue for this next year and you can expect these numbers to be adjusted as we go forward. Again, they are non-cash and we are trying to be very transparent about that affect and we will lay it out for you as we proceed with this accounting process of allocating purchase lines.

But turning to the real operations on slide five, you can see compared on a pro forma basis, now we are going back and combining Phelps Dodge and Freeport historically. You can see that the second quarter is very favorable on a pro forma basis, with significantly higher copper volumes through the strong performance of Grasberg in the first and in the second quarter. In the first half of '07, we have very strong gold volumes with strong realizations for all three of our primary products. We are breaking out information throughout our press release by region showing North American results, South American results and Indonesian results. And you can see that production volumes were consistent for copper in North America, increased in South America and significantly higher in Indonesia, where the first half of the year we were in a very high-grade section of the Grasberg mine. And we will be moving out of that in the second half, which I'll be talking about.

From a production cost standpoint, all of our units, all of our mines are being affected of course by the high input cost levels, that's a result of the current conditions that's yielding these very strong commodity prices. You can see our unit cost, our royalties,s treatment costs, of course in North America where we principally use SATW processing. We don't have PC and RC costs. But overall on a consolidated basis for the second quarter, our net cash unit costs were $0.53 a pound, reflecting the very strong contribution of byproduct credits of gold in Indonesia and molybdenum in North America.

Markets continue to be strong. Summertime is typically a weak time in the marketplace for metals such as copper and molybdenum. Copper markets today remain strong, driven by continued strong internal consumption in China, which has had extraordinary growth rates during the year. And while there has been some impact in the U.S. from automobile and residential construction, it's been offset by strong commercial copper usage there. So, the copper markets with falling inventories and a good outlook remain strong.

Gold. With the currency change and depreciating dollar outlook for gold is strong. In molybdenum, the use molybdenum in stainless steel is it driven by those markets and the price continues strong, the long-term outlook is good. There has been some weakening in demand during the summer and that looks to continue into the third quarter; all driven by steel market conditions. But the molybdenum business is a strong contributor to our operations.

For the full year of 2007 on a pro forma basis, we expect to have copper sales of 3.9 billion pounds, gold sales of 2.1 million ounces, and 68 million pounds of molybdenum sales. That would result in operating cash flows, this is after cash taxes and cash interest, would be modeled to be $6 billion as we go forward. This is at $3.25 copper, $650 gold and $25 molybdenum. And $3.2 billion in the second half of the year.

We are now looking to spend $1.8 billion for capital for 2007, that's up a bit from our earlier outlook. And as we are going forward now with significant debt reduction that we are being able to achieve through our cash flows that we are generating, we are looking at our operations at productive ways to spend capital. To spend capital to provide for more efficiency, to provide a base for future growth that we are going to be looking for. And so we have increased our capital spending for 2007 by approximately $200 million. Neither Company, by the way, has historical success in spending the projected amounts and it will be a challenge for us but we really want to look for ways to spend capital to make our business stronger and prepare ourselves for growth.

With those numbers our year end debt would be reduced to $8.2 and $6.5 billion net of cash. Obviously, well ahead of what our expectations were when we closed the transaction, which was only in the middle of March of this year. But these markets, the success of our operations are really allowing us to move forward with our debt targets much quicker. And as we set out, our principal financial policy at the outset of combining these companies was to aggressively reduce debt. And this chart on page nine just shows you just how successful we've been with that.

We started out with just under $18 billion of debt at March 19. By June, gross debt is $10 billion. Year end, on the basis of the model that I just mentioned, would be just over $8 billion. And so, we just couldn't be more pleased about where we stand from a balances sheet standpoint.

Reporting on our development projects. The projects include the start up of the mill at Morenci. And our new technology to concentrate leach plant, the mill itself is ramping up to reach 54,000 tons a day by the third quarter. During the third quarter we also expect and are on target to start up the concentrate leach plant. That will add 115 million of copper annually and really enhance our cost profile. The success of this technology will give us great opportunities with other operations in the future and it is an impressive project, $250 million of capital.

Near Morenci, we will be completing the development of the Safford mine; first new mine in the U.S. in many years, engineering and procurement are complete, construction is 2/3 of the way. It is SX/EW facility, scheduled to ramped up in the first half of '08. It may have the chance of getting some metal by the end of this year. Capacity of 240 million pounds per year, just under under $600 million of cost. A very efficient project in an area that has significant expansion opportunities, with the Lone Star deposit that we are currently evaluating located at adjacent to it.

In South America and in Chile, the Cerro Verde mill expansion, which involved $900 million of capital, continues to ramp up. By June we had reached design capacity and we are projecting full rates for the second half of the year. This triples capacity at this mine, adding 430 million pounds of copper with long lives, attractive cost structure. In Chile, the El Abra mine, we are proceeding with the steps to develop a large sulfide mineral deposit that underlines the current outside ore that we have been processing. This would extend the mine life significantly, 325 million pounds per year of capacity, a $350 million project. This is a very efficient SX/EW project and a significant mine for us.

We will also this year be looking in the third quarter at the potential of restarting the Climax molybdenum mine. We currently produce molybdenum as a byproduct and at our Henderson mine in Colorado is a primary mine. And of course, the Climax mine is historically the industry's lead mine. It has been idle for several years. Phelps Dodge began a feasibility study that we are pursuing to look at the potential start up of that to meet the demands of the marketplace and further strength us as the world's leading producer of molybdenum and our position downstream of the mines. The feasibility study will be completed this year. In advance of that, we've begun to order some significant equipment with long lead times and we have a good outlook for proceeding with Climax mine.

In Indonesia, the DOX expansion to 50,000 tons has been completed. The mine has been operating at those levels. This will allow us to sustain it. Further, we actually averaged 51,000 tons per day in June and we are proceeding with our project to expand to 80,000 tons a day. The DOZ mine has been a star of the operations there. A good indicator of where we will be in the future as years down the road, we will be able to complete an underground operation.

To prepare ourselves for that we are building the underground access with [add its] to allow us to reach the Grasberg block cave. We are 80% complete with that project. These are major, major tunnels that will allow to us produce for decades there. We will initiate the underground development activities at the Grasberg block cave during 2008, which will lead to it coming on production in roughly 2016 following the completion of the pit.

We are also producing -- we are also developing the high-grade Big Gossan mine, relatively small production but at significant grades and it will be completed in 2010. With our mills at Grasberg, we have completed the start up of our high pressure grounding mills, which will enhance our recovery in our older mill lines. And we are working on further plans to improve our crushing facilities there and the mill continues to operate very well.

You are all familiar with our significant development project in Africa, the Democratic Republic of Congo, the Tenke Fungurume project feasibility study was completed late last year. Construction activities are now underway. We've begun to construct to develop the mine and facilities. This quarter, we completed an important agreement to provide electrical power for the project. Our current cost estimate is $650 million, this is likely to increase as we go through time for input cost factors and as we get our arms around what this will require. But we will be updating that but it will be within this range, it's not like a doubling or a tripling but we will be updating that.

We are targeting production by 2009 and if all proceeds well with logistics we will be able to achieve that. The mine development is relatively straightforward. The mine and processing facilities, logistical issues are a challenge because of where this is located in central Africa and so you would have to say at this point that that's an aggressive target. And we will update you as we go along but at this point our process is leading us toward that. This is a first step of a development that would -- we would expect to grow over time, 250 million pounds of copper, 18 million pounds of cobalt for 10 years. But again, this is a large concession with significant mineralization. And with successful completion of this project, the opportunities for add-on projects to grow the operations there are really significant.

We mentioned earlier, that following the merger we were looking at each of our ore bodes with a view towards thinking about where we could expand. Our first project was to retire debt. We are well on the road for that and now we are really focused on future growth.

On slide 14 we want to illustrate the opportunities that could be available to us from our existing mines. Our current proved and probable reserves under SEC reporting is 94 billion pounds. That's based on price assumptions that were by today's situation conservative. At Grasberg we used $1 a pound. For the Phelps Dodge project we used $1.05 a pound.

Grassberg's reserves and resources are not really sensitive to prices in a significant way because of the high grades. But the former Phelps Dodge properties are. And to illustrate that, we've shown here what our mineralized material would contain in terms of copper at different prices. And that would be increments of, if we relaxed the price constraint to $1.20 of 69 billion pounds, at $1.50 over 100, $2 or roughly 150 billion pounds. What this indicates is is that, in a positive copper environment we will have the chance to look at these mines, determine whether we can deal with permitting, land right development issues and convert these mineralized material amounts to reserves and then convert the reserves to projects that generate cash flows. This is a tremendous opportunity for us and a primary focus of what we are going to be looking at going forward.

We have beyond that significant exploration potential in Indonesia where we have rights to over 2 million acres outside of the area where the Grasberg is producing. You have to say this is one of the world's most attractive prospective exploration areas, simply because of the geological conditions that exist on New Guinea where a number of mines have been found across the border in P&G and we have the only mine in the Indonesian sector.

We have been limited in what we could did there for years for several factors but now we are returning to the field to follow up on prospects that we had identified previously. At the Tenke Fungurume concession, 600 square miles underexplored, we believe this to have the highest undeveloped high-grade copper and cobalt opportunities in the world today. And we are continuing exploration as we proceed with initial development. And then we mentioned the brownfield opportunities from our existing mines and we do have some projects going on to look at greenfield exploration around the world.

Our aggregate expenditures on exploration is shown on slide 16. $125 million is what we are spending but the truth is we will spend where the opportunities are. It could be higher and lower than this amount but we do believe -- we are excited about the opportunities we have throughout our exploration program.

Slide 17 updates our outlook for our mine plan looking forward through 2009. We present this every quarter. We adjust it to give you our best information at any point in time and we will do that as we go forward. We have 3.9 billion pounds in '07 currently 4.4 in '08, 4.4 in '09. The '09 numbers reflects our current assessment about the anticipated start up of the Miami operations, which we are now looking to be beyond '09.

Some of our improved production at Grasberg during the first half was pulling some volumes from '09 forward to '07. As you know we always take steps to advance metal whenever we can within geophysical constraints and operating conditions. We will do that in '08 and '09 but currently we are showing these current levels for our copper, gold and molybdenum. sales for our three-year plan.

Our quarterly production for the outlook for the year is presented on the next slide on slide 18. You can see by the gold sales, the impact of where we are in sequencing for Grasberg during the second half of the year. I'm not going to go over this on the call today because of time constraints but we have included on our Website the sequencing slides that we normally use to show you what this does.

We've been in high-grade sections of the Grasberg for several quarters now. Now we will be sequencing to the upper reaches of the Grasberg mine where we have low grades and we will be there for several quarters. This is all in accordance with our mine plan. We are going to produce as much as we can and the fall off of Grasberg within the copper sales is being offset by the ramp up in Cerro Verde and it reflects the operations we have at -- changes at our other mines.

Page 19 shows our sales pro forma for 2007 for our North America, South America and Indonesia, as well as our pro forma cost structure. You can see at Indonesia we will be having higher costs because of the lower volumes. South America we will show the improvements as a result of the impact of Cerro Verde coming on stream, with average now projected pro forma of $650 gold, $25 a pound molybdenum at $0.75 a pound.

Page 20 is our models that we use to show on an outlook basis what our EBITDA and cash flow would be at varying prices. This takes the average using $500 gold and $15 moly and looks at copper of $2 to $3. From an EBITDA standpoint, that range is $6 billion to $10 billion. operating cash flow, it's between $3 billion and $4 billion, up to $6 billion. Obviously, we can't control prices but we have a set of assets that will generate strong cash over broad range prices.

$0.20 in copper variation means $500 million of cash flow to us. That's significant, as we look at the changes in copper prices during this past year, as we've seen copper go from below $2.40 to the $3.60 level. So, our Company is highly leveraged to copper, that's why we put the companies together and we feel very good about it.

The cash capital expenditures are summarized on slide 22. The increases that we've talked about that I mentioned earlier are reflected here. We're showing $1.8 billion this year, $1.5 billion and $1 billion as we complete the projects that I mentioned earlier. We are going to continually review this to spend capital efficiently and to make our operations better and to prepare ourselves for growth in other areas.

Debt maturities are shown on 23 and it shows just how flexible our financial structure is at this point. It's on a pro forma basis to take into account the recently announced restructuring of our term loan debt. That results in somewhat larger near term maturities but our plans are to repay that debt in any event. And considering our cash flows, our debt situation is very manageable and something we are very pleased about.

This is illustrated on page 24, where we show how we will have the opportunity to progress with debt payment as we go forward. Again, looking at a range of prices for copper of $2 to $3 a pound and $15 moly and $500 gold. You can see that if copper averages $3 over those three-year terms, we would essentially pay off all our debt. If it averages $2 for those three years, and of course, we're doing better than that during 2007, we will again make significant reductions in debt.

It doesn't mean we necessarily pay off all this debt but what it illustrates is that with these kind of cash flows it will give us a chance to follow through with our tradition of returning cash to shareholders after we fund expansion and development operations. And that is really the summary that we want to end up with. We are committed to achieving and maintaining a strong financial position.

When we started this merger out by incurring as much debt as we did, we initially faced the risk of -- if copper prices were to have declined dramatically. Much of that risk, if not all of it, is behind us now, we've raised, we've generated cash to paid down debt, we're very comfortable with our balance sheet. The continuation of positive copper markets, which we anticipate, can't guarantee because it's going to be driven by a lot of factors beyond any of our controls, but if copper markets remain positive as we expect, we will be generating the kind of cash flow that you see here in this second quarter.

We have the opportunity to invest to grow and we are going to aggressively look to do that. We are going to continue to reduce our debt down to a level that we are comfortable with. We are going to be looking in the very near term of having the opportunity to return cash to shareholders in the form of dividends and stock buy back. As a Company, our Board committed to this longstanding tradition of maximizing value of our shareholders and we review our financial policy on an ongoing basis with that objective in mind. With that, we would be happy, operator, to open the call to questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of John Hill with Citi Investment Research.

Good morning everyone and congrats on a great quarter and an interesting conference call. Just wondering if you could provide us a little bit more color on the shift of copper production in '09, 4.6 billion pounds to 4.4? You mentioned something about Miami, it's a relatively small number but if you could just clarify that, it would be great.

Yes, it's roughly 1/2 Miami and the remainder is principally Grasberg. And the Grasberg reflects two things, John. One, is we were able to advance some of that metal that was at the high grade section, the lower reaches of the pit from '09 to the first half of ['06.] And them the remainder is our normal -- I mean first half of '07. And the remainder was our just normal mine plan adjustments.

As we go forward into '08 and when we return, when we again reach the higher grade sections of the Grasberg, we will look for opportunities within the constraints of our mine plan and geotechnical conditions to move metal forward, which we've been able to do in the past but this is our current outlook. There is a significant difference of course in the Grasberg and lower grade deposits. At the Grasberg we have the opportunities to do that. To find ways, Mark and his team find ways of advancing metal forward And that's something you can do at a mine like the Grasberg that you can't do at lower grade mines.

Great, thanks for that. And then, shifting gears a little bit on the South American side, looking at costs later in the year, we are expecting those to come down from $0.95 to $0.90 as volumes go up. Is that all Cerro Verde and can you provide, perhaps Tim can provide us some update on the mill performance, the grinding rolls and the ore grade profile, which gave us some trouble earlier?

Yes, John, regarding Cerro Verde, your comment is correct. As the Cerro volumes come in, of course, that creates the divide and brings unit costs down. Cerro Verde has reached a point at which it's about 75% of the time of the days it's exceeding design production. Recoveries are coming up to what we expect at this point in the operation. It's all looking pretty positive.

As far as the mechanically, everything is working pretty much as we had expected. The high pressure grinding rolls was the key. This was really the first application of high pressure grinding rolls in an integrated circuit. It has performed exactly as we had expected. So we are -- as we mentioned in the last conference call, we expect the second half of 2007 to be at full production at Cerro Verde and we are sticking to that.

Great. Thanks, Tim.

And our next question comes from the line Tony Rizzuto with Bear Stearns.

Thanks very much. Just got a couple questions here. First of all, Richard, I was wondering if you could give us an update on the asset sale process and as it relates also to the possible monetization of gold and molybdenum? I have a couple of other small questions.

Sure, Tony. We are continuing with that process of evaluating all of our assets and seeing what's available for us in the marketplace. And that would include, for example, our PDIC international wire business. We, as you mentioned are looking at -- examining the molybdenum business. That business is a very strong performing business. The market conditions continue to be strong and the outlook is very good and we are really positive about that.

In our visits, as we are reviewing the Henderson mine it's a mine that operates very efficiently. We have indications of possible expansion opportunities there. And with the addition of the Climax mine, we are looking at an asset that, to us, to us as Freeport, has very significant values. So as we look at the opportunities in the marketplace, it's in the context of that and also in the context of not having to do anything for balance sheet purpose.

The gold market is also very strong and the gold asset contribution to Freeport is something that is -- adds value to our Company but we will continue to look at market conditions there. We really don't have anything to report. Obviously, if we were to, we would do that, Tony.

All right, Richard. And then if I could follow up. Obviously, you've got tremendous cash flow generation, you are deleveraging the balance sheet more quickly than I think anyone expected. You've got tremendous organic growth potential. If you look further out, should we think about Freeport as a Company that might look at acquisitions down the road?

I think you obviously would. We are in a different situation than we were historically. We have the base capabilities and the opportunities to look at doing any project that's available anywhere in the world. We are focused initially on looking at opportunities within our own sets of assets and we consider those to be significant. But if opportunities become available to us, we are in a position to follow through on that.

We have teams that are evaluating all the projects that are going on around the industry. And with our balance sheet, as you noted accurately, getting to the point of where we would like it to be, that gives us the chance to look for opportunities if they are opportunities that would be accretive to shareholder value. We are not looking to grow just to grow but if something that comes available to us that's accretive to shareholder value, we would certainly be prepared to follow through with it.

In terms of the capital allocation, though, it sounds like a return of capital after the growth projects that you've got on in line and you mentioned about share buybacks and supplemental dividends, which you've paid out in the past and very successfully. It sounds like that would take precedent above any potential acquisitions, though?

I would only say that depends on the acquisition. We saw the opportunity at Freeport to combine with Phelps Dodge. And we made that decision. So absent seeing an opportunity that is accretive to shareholder value, you're exactly right.

With that, should with expect that any acquisitions would be in base or precious metals?

In base or precious metals? We are focused on our own business. We are not going to get far afield from things that we don't know about and what we know about is mining and processing materials. So I think you could think that that's what we were going to be -- that's what we would be focused on.

Thanks, Richard. And very good numbers. Thank you.

Thanks, Tony. One thing I just might mention that in the context of where we are, not only have we progressed faster than we thought we would with debt reduction but in terms of integrating these businesses, that's gone very well indeed. We've acquired good assets with Phelps Dodge and great people and the operating teams are working together very well. Tim and a number of the members of this staff visited Grasberg recently and it was a very positive situation for both teams. From a financial and administrative standpoint, we've progressed faster than I anticipated. So we feel very good about where we are in putting these companies together.

Richard, this is Jim Bob, another response to Tony Rizzuto, is if you go back to page 14 where we talked about the potential for additional reserves to be developed out of our mineralized material, and the exploration program that's on page 15. We have in both Indonesia and in Africa two of the largest unexplored areas in the world. And in our proven areas, which all of this potential for additional reserves from mineral materials exist. If you put those three things together, the exploration in Indonesia and Africa and the possibility of adding reserves from our mineralized resources, like you've shown, that are sensitive to prices. Those are the things that will be paramount. Those are some of the best acquisitions we could make that are already in our asset base.

Our next question comes from the line of Oscar Cabrera with Goldman Sachs Sachs.

Good morning, everybody. Congratulations on the solid results. Just a couple questions. First, just assuming that there's no acquisitions near term and the fact that you are able to be in a net cash position, what would you prefer, would you go for share buyback or a special dividend? That's the first and then I have a follow up.

Well, we've had experience in doing both. It's something that we will review with our Board, we will look at conditions that we've had all along. We pay a good dividend now. With more cash we'd have the opportunity to consider increasing our regular dividend. And even though our share price has performed as it has, as we look at our Company and its relative valuation with other companies in the industry; as we look at the valuations that we now see in M&A transactions and the kind of multiples that companies are getting, we see that our stock at these levels is attractively valued. So, I think there would be opportunities to look at both share buybacks and a stronger dividend.

[Your investors] have done extremely well. And then, the second question with regards to your molybdenum market. It's obviously, molybdenum prices have been done really well and I just wanted to do see if you could give us additional color with respect to the outlook on molybdenum that you guys have in-house? Just want to do get a sense as to the progression or the potential start up of production in Climax and what you think that may or may not do to prices? And what you think the production from China could be, as now the Chinese government is trying to limit molybdenum exports from that country?

Okay, Oscar, you start out by saying that prices of molybdenum are over $30 a pound and that's here in the summer. Molybdenum prices have gone up. In percentage terms, it's been about like copper. You look at the world's need for stainless steel, stainless steel in industrial processes and like the oil and gas industry. Like in the development of the LNG industry worldwide, which is going to be an important factor going forward, the development of nuclear power plants.

There's a number of issues in the world today. Our process in the world today is going to need more stainless steel and molybdenum can provide metal for that processes. It's got the chemical businesses that Phelps Dodge has developed so well over time. Competitive products are higher priced. There are constraints on production, as we are here today in the summer. The issues in China that you mentioned are something that is much more visible today than they were six months ago, even. So, the overall market is good.

Near term you can follow the steel market and see where we are but prices continue to be strong. The outlook for that business is good. We are the world's leading producer with about 20% of the market share. Our Henderson mine is really a first class operation and the Climax is the best development project available to the industry in the world. So we are -- this is an industry -- this is the kind of business that a mining company wants to be in and we feel very good about where we are in it.

Thanks very much, guys.

For our next question, we will go to the line of Amir Arif with FBR Capital Markets.

Thanks, guys. Most of my questions have been answered. Just wanted to get some more color on potential asset sales. As your debt does get paid faster down because of the high commodity prices, is there -- and as you mentioned, you obviously have a positive outlook on moly and even your gold assets. There's definitely no need to sell the assets, so if anything, would the asset sales be done just to maximize shareholder value or is this something you would rather hold on to?

Well, it's just that, you touched it. If we could sell assets that aren't core to our business and maximize shareholder value, then we would do it. If the market is not there to do that, then we would not do it. And it's that straightforward. When we started talking about this in the context of the merger last November, there was the issue of; Could we sell assets and achieve our debt pay down objectives?

With the favorable equity markets, which allowed us to do the equity deal and now with the way our operations are performing and generating cash, it's not needed to achieve debt reduction. That's no longer needed. So, we wanted to review the market, we wanted to review our assets, review the marketplace. And in our judgment, reach a decision; Was it better for our shareholder to own these assets or sell them? And that's where we are. It's strictly shareholder value oriented.

Okay. And just a final question on the gold volumes. Definitely surprised at the upside in the second quarter just because of the higher grades. In terms of your guidance going forward, would these numbers have the same kind of conservatism as the second quarter or should we assume that that's the best estimate on where gold volumes will show up?

No. You can't think of it in the same way because in the first half, we were in this high grade section of the mine and we completed, or are completing early in the third quarter, all the opportunities that we have. Because now for mine planning and geotechnical reasons we have to move our shovels and mine at upper reaches where grades are very low. So we are giving you the best estimate. Absent special conditions over time, as you know, Grasberg has been able to do better than we anticipated and we always work to try to do that. But it's not the same kind of opportunities in the second half than we had in the first half.

This is Jim Bob. Let me add that I think that his question might have suggested that the gold being lower the second half; Was that a trend that could be expected to continue? And some of the shareholders that are Phelps Dodge shareholders prior to the merger may not have been as familiar with your diagrams that you included in your miscellaneous material. And you might want to refer them to the fact that they shouldn't assume that because we have two good quarters and two low quarters, that the low quarters are going to continue and that we are getting into some dearth in gold. Because of the golden ring that we've been talking to our former Freeport shareholders. That the charts you have that are numbered 27, 28, 29, especially 28, where it shows that production through 2011 gives people a good idea that the gold is going to go up and down by year. But you shouldn't assume that the low two quarters of 2007 are an indication that something is going to continue.

Jim Bob has a good point. Let's just -- I can do it in two minutes. Flip back to 29, your charts there. And it shows color coated where the highest grade material is at Grasberg at the lower levels of the pit. The pit itself is very large. It's 1.5 kilometer across and almost a kilometer deep. On page 29, it shows in the first quarter we are mining at 6 North and very high grade material. Page 30 shows that same thing.

Then in the third quarter, you can see we have a very small amount in 6 North but are now mining back in 7 South. As we are reducing that elevation down in the fourth quarter, we'll be pushing it down further. And then in 2008, by the end of 2008 or the last half of 2008, we will be getting back down into the higher grade material. And this is -- and then in 2009, we will have significant high grade material to process. So, this is something that's part of a long-term line plan.

It's necessary to keep the symmetry of the pit in the right way so that we can mine safely over the long periods of time. And so these variations in volumes are just an inherent part of our operations, an inherent factor of this great Grassberg mine.

And just for completeness, Richard, if people that have not seen these charts before, that were not former Freeport shareholders. If you just assume this page 31, for instance, that he just referred to, the third quarter of '07, the red area is like the core of an apple. And as you go out toward the peal of the apple on the outside of that pit, the grades go down. It would be great if we could go like a gun barrel and go straight down and stay in red, which would mean we would have constant gold values and copper values. But as Richard mentioned, the symmetry of the pit is important, so you have to take down the core of the apple as much as you can. And then you've got to go back and peal back the outside of the apple, so you don't have a geotech problem and stability of getting the slope of the open pit mine at too high of an angle to be safely mined.

That's an important issue. I'm glad the question came up and I hope these miscellaneous charts that were part of our Website but not in the original presentation, I hope you will have a chance to look at those. If you have questions, Richard or anybody on our team, will be available after this call to answer them.

For our next question we will go to the line of -- I'm sorry, we are going to go to Victor Flores' line, he's with HSBC.

A couple quick questions. First of all on the production outlook that you've given for molybdenum, does that include any contribution from Climax or not?

No, it is not within that time frame because, Victor, provided we go forward with the feasibility study, the construction period would result in production beginning in 2010.

Great, thank you. And then second, turning to Tenke, could you tell us whether that increase in capital relative to what was in some of the previous numbers is due just to what's happening in the industry, which we are all well aware of? Or if there are any specific scope changes that you've made to the project like expanding the plant or other changes that might explain why the number has gone up?

Tim, why don't you comment on that.

The $650 million that Richard referenced is consistent with what we've been seeing for several quarters. I think what he said was that there's the possibility that could go higher in the future given pressures in the industry and operating in Africa and so forth.

So, there aren't any scope changes built into some of those numbers?

No, the scope is basically the same as what we have been talking about for sometime now.

Okay.

And again, this is the first project. And what we are looking at is with success of that project, the development of infrastructure; How aggressively we go beyond that? And if you look back at our history on how aggressively we develop the Grasberg, you get a sense from a philosophical standpoint, how we proceed with those things. Grasberg was at -- the Ertsberg operations, was it at less than 20,000 tons per day in 1988. We went to 32, 54, 66, 90, 118, to the current rate of 222.40 over a 10 year period. But it was a series of expansion opportunities. Different situation, different ore body but significant expansion opportunities that in the right political environment, with infrastructure development you can anticipate we would be just as aggressive in pursuing.

So you are still planning to start this thing up and then after a few years expand?

I wouldn't even qualify it after a few years. We are going to expand as quickly as we can. We are still doing exploration definitional work with ore bodes. We are considering the logistical issues. And so, it's not going to be a question of starting and waiting a few years and deciding where to go. If we can, and I'm not reaching that judgment today as to whether we can or not, but if the opportunity is there we are going to take it as aggressively as we can.

This is Jim Bob. I think the best way to answer the question is, you made your reference to Grasberg and how aggressively it was expanded. And, of course, what you had in the back of your mind, to give the listeners a reason why you brought it up, the Tenke area geologically has unlimited potential. We are just scratching the surface because we can see a lot of ore at the surface. But this thing continues in depth based on the drilling we've done to date. But as you know, we couldn't expand the Grasberg until we drilled and kept adding to reserves as we added reserves and then we had to add capacity.

So the comparison of Grasberg, if you were looking at a typical opportunity that had limited geological outlook, you couldn't be quite so comparative. But the comparison between Tenke and Grasberg is really something that you have to consider because the Tenke potential has all of the earmarks of the world class deposit that Grasberg was when we found it. So that's the real reason why Richard was comparing the Grasberg aggressive nature. As you prove prove up reserves, which we feel we will in big increments as we get more exploration drilling, then you have to be prepared to add on to your production capacity.

For our next question, we will go to the line of Brian Macarthur with UBS.

Just a couple financial questions. First of all on your debt forecasts, I assume for year end we haven't made the cash payment for the Phelps caller, so that will all fall into the first quarter next year. And the second part of that question, what did you assume for the volatile component of that or has that become insignificant right now and the only cash payment is really going to be $3.25, the difference between $3.25 and $2?

That's pretty much what it is, Brian. And you're right on your first question, the payment would be due in the first part of January. So that cash would he be used in the first part of January. Of course, we would be generating cash also during the first quarter to cover that.

But in terms of the valuation of the liabilities, it's just a mark to market approach, it's $592 million and that's based on the average LME price for the year. And then that's discounted back at a very low rate. So in terms of the volatility, it's really all in the money. So there's really no real volatility associated with it. It's a pretty easy math.

Great.

And I just want to point out that those Phelps Dodge hedges expire at the end of '07 and we do not have any hedges going forward beyond that.

Great. Thank you. And the second question, just maybe I'm reading too much into this, but on page six you talk about for your cash costs, there's a footnote that says profit sharing in South America included in production costs. What is that?

It's part of our workers' compensation program down there. Sorry, it's, most specifically in Peru. We have a part of the -- if our contract with employees and it's government mandated that there be a profit sharing arrangement. So, at very high copper prices, their compensation goes up pretty dramatically but of course, at lower copper prices that would come back off.

Right. I just wanted to make sure. So, it's nothing to do with the minority interest. This all proportionately -- all consolidated except for Morenci, which is proportionately consolidated. So we are talking about, all of these are consolidated cash costs, if I want to look at it that way. Is that right?

Cash costs to the operation itself, right.

Except for -- and when you weight these in as -- the only one that's weighted in proportionately would be Morenci at 85%, is that right or is it in at 100%?

Yes, for Morenci, it would have 85% of the volumes and so it's weighted in at that --.

All right. Great. That's what I thought but just when I read this profit sharing, I began to think to think maybe it was something else that was going on there. That's great, thank you very much.

Brian, as you probably know, at Grasberg we don't consolidate the Rio Tinto interest in our joint venture there. The government's minority interest is part of our consolidated results. The government owns just under 10% of PTFI.

Thank you very much. That helps a lot.

We also have a question from the line of John Tumazos with John Tumazos Independent Research.

Good morning, congratulations on all the progress and being ready to invest and grow and congratulations on just growing so much already. On January 11, the Aluminum Company of China bought a company of Dr. David Lowell, the discoverer of Escondida. And its deposit was in a March, 2006 slide at the PD Field Trip in Arizona and a presentation by your head of exploration, as 22 billion pounds of copper, 840 million pounds of molybdenum. That went out, depending on how you valued the moly, at $0.10 or $0.12 per pound contained copper, as an unbuilt deposit.

Rio Tinto was bought into Mongolia and the Pebble deposit in Alaska. Teck, a few weeks ago bought half of the Galore Creek copper poly-metallic deposit in BC. A lot of the good deposits, that aren't as good as Tenke but are still respectable large deposits, are getting snapped up. How are your acquisition targets and the existing producer, senior end, the junior end? Could we expect you to be so brisk as to say snap up a 1 billion pound plus undeveloped deposit per quarter before they all go for $0.10 pound?

John, this is Jim Bob, I would like to answer your question in a very simple way. The best portfolio of potential mines in the world are in our exploration portfolio and in the potential that we just referred to. As you look at the increased outlook for long-term copper prices, we would be strongly influenced by the fact that we already have a portfolio in-house of mineralized material that may be some of the best opportunities that we could have that we've, that we already own in our portfolio. So other people may not have the benefit of some of the things that we've shown you to have the internal growth that we have.

So we are going to be looking really hard at internal growth that we can put into production by just spending the CapEx on development costs as opposed to having to pin-the-tale-on-the-donkey with additional acquisition costs. So that will have a huge impact on the Freeport, Copper & Gold Company is we do have this wonderful exploration portfolio and mineralized material that you see, gives us an opportunity to more than double our reserves at higher prices. So we are going to be looking very hard at that internal growth. Some other people may not have the same opportunities. Excuse me, Richard, as you make your comment.

John, I was going to say basically the same thing. To be clear, we don't have a strategy of growing through acquisitions. If there is an opportunity for an acquisition to add value to our shareholders, we are in a position to consider it. But our strategy, as Jim Bob just laid out, is to grow through our own set of assets and through our exploration program.

Do you -- to me, there's a distinction between major companies who's valuation now range in the teens on current earnings at today's copper price and these large deposits often by venerable people like David Lowell where the valuations appear to reflect $1 or $2 copper. And if they were billed at $1 or $2 copper, two to five times earnings. The geologists that have raw deposits appear to be selling them much more cheaply than Phelps Dodge was offered to you, for example.

Well, John, the portfolio that I just described to you doesn't have any of those concerns because the portfolio that I just described to you was part of why we made the acquisition of Phelps Dodge for. But if you go back, we found the Grasberg in 1988 and didn't make this acquisition until 2007. So I think that gives you a pretty good idea of how we view internal growth and we have excellent opportunities. We grew the deposit at the Grasberg from the discovery from a 1 billion-ton ore body to a 2.5 billion ton ore body, including the addition of the 0.5 billion tons at Ertsberg. I think the same opportunities exist for us in this huge portfolio of assets that is now represented by the Freeport and former PD assets.

So once again the simple answer to your question is, these other opportunities are interesting. And they are going to be looked at by people who don't have the internal growth portfolio that we do. But the internal growth portfolio is going to weigh heavily on any decision that we make, just as it did from 1988 until 2007 when we were looking at the growth opportunities we've had in Indonesia.

Thank you. For our next question, we'll go to the line of Wayne Atwell with North Street Capital.

Thank you, and congratulations on a very strong quarter. A couple quick questions, what did you sell during the second quarter, what asset?

During the second quarter we sold interest -- we sold some shares that we owned in a junior mining company, [Dynatech].

Dynatech, okay. Your moly price was about $5 less than I calculated the average for the second quarter. Am I wrong or what was that?

Some of our moly is sold under longer term contracts and that provides us long-term access to the marketplace. Some of those contracts roll off at different times and as they roll off, the prices ratchet up and what you see in the second quarter is the impact of certain of those prices. They are aren't locked into that price for long periods of time but are adjusted during the normal negotiations of contracts.

Okay. And you mentioned possible asset sales earlier. I would have thought moly was a great diversification, you are heavily weighted obviously towards copper and gold. I would have thought you would want some diversification. You talked about possible acquisitions. Obviously, part of that would be to diversify into other areas. I would have thought moly would have been a great asset.

We think it's a grates asset, too. It is a great asset. It's like gold, it's a relatively small part of our total revenue base, representing 10% or 12% of our total total revenue. So, we made the decision to focus on copper. We like the moly business. It's adds value. We are not looking as a strategic matter to diversify. We've diversified geographically with our mines the but we like our exposure to the copper business.

And if we look at Climax, if you've already started ordering some long lead time equipment, it sounds like you've already made your decision to go ahead with this.

We ordered it under terms that if the feasibility study was to turn in a different direction, we could do that but we are optimistic about this business and we are optimistic about the Climax project but the final decision will be based on the feasibility study.

I think to answer Wayne's question completely. You've been talking about potential asset sales back when we made the acquisition because we took on this big debt. And you already said in your other comments, the way the copper market has performed and the raising price of gold and moly had given us an opportunity, as well as the equity markets that you source. That those asset sales don't have the same priority that they would have had we not had the opportunity to have delever as quickly as we have, Wayne. So, when you pick up on some of his comments of six months ago when we were talking about where we would be while we were in the process of closing the Phelps Dodge agreement. There was -- we had to have the flexibility, once the deal was closed in March, that if we needed to delever. The options for delevering were asset sales, our own internal growth, our businesses and prices of the products. And a lot of our commodities have been so buoyant that they've allowed us and the marketplace has allowed us to do the deleveraging that we don't have the same exposure. And so therefore, asset sales don't have the same priority that they might have had when people were asking us; What were our options as to how we would pay down debt if commodity prices hadn't performed as favorably as they have since we closed?

That makes a lot of sense. And then lastly, Henderson you mentioned 2010 and what would the volume be, is that about 10 million or 15 million pounds or what would the potential volume addition be?

It's Climax and it would be in that range.

Okay. Thank you.

It's 20 million. You said -- did you say 15 to 20, Wayne? He's off the line but it's roughly 20 million pounds a year for Climax.

For our final question, we'll go to the line of Vivek Pal with UBS.

Do you have any specific debt target before you initiate stock buybacks or stock dividends or any specific ratings target?

With respect to ratings, we are one step from investment grade at S&P and two steps for Moody's. We are on positive outlook for at S&P. We believe over time that though our business financial situation will warrant investment grade ratings. It's not something that we are -- we will run our business totally to achieve. At the outset of the merger, we had said we were targeting paying off our $10 billion of term loan, which would get us down to $6 billion of the high yield debt, long-term debt that we have. And so we will continue to evaluate this as the situations concern but -- as the situations develop but we are looking at longer term debt in the $6 billion to $7 billion range and we are getting very close to that.

Is that absolute or net?

That would be an absolute kind of, the gross debt situation.

And just a final question, why are you getting so much cash because you are generating free cash flow and why such a big number?

Well, it has to do with where this cash is located. We are taking every step we can take to free cash up in an efficient way to bring it to the parent Company to pay debt down. Some of that is needed to fund some capital expenditures efficiently and there's tax issues that are involved in terms of transfers that make it make sense to keep it there.

Thank you.

We've actually reduced the cash from $3 billion to the $2 billion level since acquisition. And we will take every step we can to get the cash down.

Thank you very much.

It seems there are no further questions on the phone lines at the moment.

Well, we are available for follow up questions. We appreciate everybody's interest and we look forward to reporting operations through the remainder of 2007.

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.