費利浦·麥克莫蘭銅金 (FCX) 2009 Q2 法說會逐字稿

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

At this time, all participants are in a listen only mode.

Later we will conduct a question-and-answer session.

(Operator Instructions).

I would now like to turn the conference over to Ms.

Kathleen Quirk, Executive Vice President and Chief Financial Officer.

Please go ahead, ma'am.

Thank you and good morning, everyone.

Welcome to the Freeport-McMoRan Copper & Gold second quarter 2009 earnings conference call.

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

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

The slides are accessible using the Webcast link on our fcx.com website homepage.

In addition to analyst 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 homepage later today.

Before we begin today's comments, we'd 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.

On the call today are Jim Bob Moffett, Chairman of the Board, Richard Adkerson, President and Chief Executive Officer.

We've also got Dave Thornton and Red Conger with us today.

I'll start by briefly summarizing our financial results and then turn the call over to Richard who will be referring to the slide presentation material that's on our website.

We'll then open the call for questions.

Today, FCX reported second quarter 2009 net income attributable to common stock of $588 million or $1.38 per share compared with $947 million or $2.25 per share for the second quarter of 2008.

For the six-month period ended June 30th, 2009, FCX reported net income attributable to common stock of $631 million or $1.54 per share compared with $2.1 billion or $4.89 per share in the six-month 2008 period.

Our sales in the second quarter for copper were 1.1 billion pounds and that was higher than last years second quarter sales of 942 million pounds and our April 2009 estimate of 955 million pounds.

The increase in the prior year reflects the mining of the higher grade section in the Grasberg open pit partially offset by our reduced operating rates in North America.

The favorable variance to our prior estimates reflects the accelerated mining of a high-grade section in the Grasberg open pit during the second quarter which was previously planned for future periods.

For gold we sold 837(Sic-see press release) ounces during the quarter, that was significantly higher than the 265,000 ounces sold in 2008 second quarter.

Again, we're mining in a very high-grade section of the Grasberg pit which enabled us to exceed our April 2009 estimates of 650,000 ounces.

The molybdenum sales of 16 million pounds in the second quarter were lower than last years level of 20 million pounds but higher than our 2009 estimate of 11 million pounds.

Our sales during the second quarter reflect increased sales to Europe and Asia compared with the first quarter levels and with our previous estimates.

Our recorded copper prices averaged $2.22 per pound in the second quarter, that was a significant reduction from last year's second quarter.

Gold prices of $932 per ounce were slightly above the $912 per ounce in the year ago period.

We realized $10.11 per pound of molybdenum during the second quarter of 2009, significantly lower than last years level of just under $32 per pound.

We-- the results reflect our strong performance really across all of our operations and particularly in the Grasberg mine where we operated at-- where all of our gold revenues offset all of the costs of production there.

Our unit costs on a consolidated basis average $0.43 per pound during the second quarter.

That was significantly lower than last years $1.25 per pound net of five product credits.

The operating cash flows in the second quarter were significant at $1.2 billion.

On a year-to-date basis that brings our operating cash flows to $896 million in the first six months of 2009.

That was net of nearly $1 billion in working capital uses that we had earlier this year, primarily associated with the settlements on our provisionally priced prior year copper sales.

Capital expenditures during the quarter totaled $375 million and year-to-date $894 million.

Our spending is expected to decline in the second half reflecting a substantial completion of our construction activities at the Tenke Fungurume project which Richard is going to talk more about.

We ended the quarter in a strong financial position.

Our total debt approximated $7.2 billion and our cash balance grew to $1.3 billion during the quarter.

We had no amounts borrowed under our revolving Credit Facility at June 30th.

We also announced separately today that we're calling for redemption our 6 7/8 senior notes due 2014, those have a principal amount of $340 million.

What that will allow us to do is to reduce our interest expense by roughly $23 million and reduce our debt levels and improve our financial flexibility.

I'd now like to turn the call over to Richard who will be referring to the materials on our website.

Thanks, Kathleen.

Before I turn to the quarter, I'm going to take just a few minutes to review the recent events in Indonesia that you've been reading about in the paper.

Last Friday on July 17th, bombs were detonated at two hotels in Jakarta's downtown business district.

These hotels are used by international travelers and we had several people staying there.

Fortunately, they weren't injured; however, two of our senior people who reside in Jakarta were at a business breakfast meeting and they were injured.

They are now being treated and are in stable condition.

This is in the backdrop of a situation in Indonesia where there's been a very peaceful environment for a number of years now.

The President, Yudhoyono, has been credited for his actions against terrorists and he has indicated a very strong response to this recent event.

On July 8 there was a Presidential election, the final results are going to be announced later this week, but SBY is based on poles that are deemed to be accurate has won by a wide majority and he ran on a platform of anti-terrorism, anti-corruption, pro-business investment and has great support in Indonesia.

At job site on the day of the election, we had a group of people attempt to block our road leading to our mine and they committed some vandalism.

They were unsuccessful with that; however, beginning on July 11, further down the road in the lowlands, we had several days with an isolated incidence of shootings.

Unfortunately, one of our employees, a contract security personnel and an Indonesian policemen were killed in these attacks.

Several people were injured.

Yesterday, the Indonesian police, and we were very pleased with the response from the authorities, they brought in additional securities under took investigation, and now in a very short period of time they announced that they have arrested 15 people and charged six of them with murder and have indicated that one of those has admitted to being the sniper in these events and we appreciate really the quick and firm response of the Indonesian authorities to this event.

We have been assured from the highest levels of Government in Indonesia they are committed to provide safety for our people and for our operations.

Throughout this period of time, our mine and mill and operations continued unaffected by this.

We had some travel restrictions on the road but we have been able to continue operations.

Now, turning to the quarter.

When you look at the totality of our operations, it'd be difficult to imagine a better performance.

I have a-- very proud of the way the operating team responded to the plans that we established earlier this year and across the Company in North America, South America, Indonesia, and in Africa, we have-- we've performed very well.

Of course we benefited by the fact that copper prices at today's levels and in the second quarter are higher than most anticipated and that's positive for our cash flows and our earnings.

And we also benefit from the fact that based on our planned mining sequence we were in a very high-grade section of the Grasberg mine, which we'll be in for some time now, which gave us strong volumes of both copper and gold and that benefited our operations.

But underlying all of that is the fact that we had good plans and we operated to meet those plans.

On Page 4, Kathleen talked about our numbers but when you look at the outlook that we gave at our last quarterly call, our copper volumes were 15% higher, our gold volumes were 29% higher, that's driven principally by the fact that we were able to optimize our access to the high-grade ore at Grasberg.

Some of its moving some volumes forward but we always try to do that as we operate while we meet our long-term objectives with our mine of maintaining stability in our long-term mine plan.

We have higher molybdenum sales.

Some of this came from inventory, but with demand out of China we were able to sell more moly than we anticipated going into the quarter.

Strong operating performance.

We had initial copper sales out of Tenke, I will talk about that.

We had not included any sales in the second quarter.

We'll be ramping up that operation to design capacity in the second half of the year.

Revised sales outlook, we're staying with our previous guidance for copper sales for the year but we're showing some increases in both copper and molybdenum for the year and we'll be trying to maximize opportunities to increase sales as we go forward.

Page 5 shows by region what our unit cash cost performance has been.

Now for a Company of combined, taken into account gold and molybdenum credits, our net unit cost was $0.43 a pound for the second quarter and that's a strong performance.

It reflects the high volumes of copper, the high volumes of gold, the strong gold price in Indonesia where we had a credit of more than $0.50 a pound, but also in North America, where we seen the moly price drop have a negative impact on unit cost, we've been able to offset that by taking advantage of lower input cost but also adjusting our operation to be more efficient and to have an experience of $1.12 per pound is very strong with also good performance in South America.

That's for the quarter.

On Page 6, you can see the details of that.

It reflects a 35% increase on a consolidated basis of our site production delivery cost before by-product credits from the second quarter of last year to the second quarter of this year.

And on Page 7, where we have the particular issue associated with these large low-grade deposits that we operate here, we had a particular focus on reducing high-cost volumes, aggressively pursuing lower input costs and aggressively seeing efficiencies and that really is has resulted in a reduction of a third on the unit cash cost before by-product credits which helps offset the loss of the molybdenum credits because of price actions.

From a market standpoint, the recent upward movement in copper prices reflects some important fundamentals about this business that are going to be important for the long run, and that is the requirements for copper in China and the developing world.

I mean, that's an important feature of our industry that's become apparent in the 2000 and it's going to be something that's long term.

To build infrastructure, to expand economies requires copper, we're certainly seeing that in China as China has been doing that and it's in the context of a very tight market.

Exchange stocks have dropped dramatically but inventories around the world today outside of accumulations of China apparently for their strategic reserves of copper but inventories of consumers around the world are very tight.

And even in the United States where market conditions remain weak, we have orders from customers when they do have requirements for copper that they aren't able to fill from their inventories and so in the context of a weak environment in the U.S.

and western world, inventories are very low, the industry has and continues to face issues with new projects, maintaining supplies out of existing mines.

So the supply situation for copper is very well situated for miners and all of this indicates very bright future in our view for copper and we're committed to being a very strong supplier of copper with great growth projects as we go forward.

In the moly markets, the price dropped.

We now had a period of destocking demand from China has emerged for western molybdenum.

Their Chinese mines are relatively high cost so they're buying cooper form the western-- I mean buying molybdenum from the western world.

The market remained tight, the prices picked up, and we are adjusted our operations and prepared to be able to provide the moly that the market needs.

Gold prices are strong, that's a big benefit as I indicated for Grasberg and for our overall Company.

Page 9 shows our current outlook for sales volumes.

We're looking at roughly 4 billion pounds of copper as we go forward in future years.

Of course, we are planned-- we had plans and we were operating to have substantially higher volumes but we adjusted those plans as we went into 2009 in response to the lower prices but this is our current outlook.

You can see in the gold sales chart the impact of moving from the low-grade section of Grasberg to the higher grade section, as I said we'll remain there for some time.

And our molybdenum sales are a reflection of the requirements of the marketplace.

On a quarterly basis, in terms of our plans, this looks to be our largest volume quarter.

For copper sales, we advanced some copper sales out of the second half of the year into this quarter for Grasberg.

We'll continue to try to find opportunities to do that as we go forward into the second half of the year and you can see the impact on gold sales in the chart on the right hand side.

By unit as we look to the-- by region as we look forward for sales in unit production costs for the year 2009, we are continuing to look at strong performance from a cost standpoint.

Our consolidated unit cost net of by-product credits is anticipated to be $0.70 a pound, that's at $900 gold and $8 molybdenum, which provide the credit.

And so in North America, you can see that we're looking at sub $1.20 a pound for our unit cost, roughly $1.10 in South America and Indonesia for the year we're looking to see our gold revenues totally fund our operating costs for that operation.

Page 12, even though we're spending less dollars on exploration, we're not at all reducing our emphasis on exploration.

The dollar reduction reflects the fact that we have curtailed some of our core hole drilling.

We had done substantial amounts of drilling both in 2007 and 2008 and our exploration team is using the new data that was received from the drilling to evaluate opportunities to add to our reserves and then to add to future development projects which we see as being very substantial as we go forward, so it's a question of using the data that we have gained previously and limiting the amount of current expenditures on core hole drilling.

Page 13 shows just the strong cash flow generating capacity of our Company.

The chart at the top is EBITDA, at the bottom is operating cash flow, excluding working capital changes but it takes into account cash taxes and cash interest.

At $2.25 copper, before working capital, we would be generating on an annual basis over $3.5 billion of operating cash flows.

We did have some working capital requirements as previously reported during the first half of this year and you can see how that would vary depending on changes in the copper price.

On the next chart we give a series of important input elements to the determination of cash flows both in terms of copper prices, molybdenum prices, gold prices as well as certain important input costs so that you can get some sense of how leveraged we are to these various factors, and of course the biggest leverage factor for our Company is the price of copper where every $0.10 change means $260 million of cash flow variance for our Company.

We have limited capital expenditures.

Page 15 shows how we've reduced CapEx from 2008 to now our current estimate for 2009 of $1.4 billion.

That includes our ability to reduce some of our sustaining capital.

And in 2009 we had two projects we're pursuing, the completion of construction of the Tenke Fungurume project in Africa and construction is essentially complete on that project now.

And in 2009/2010 we're continuing with CapEx for the underground development at Grasberg for the transition in the future and roughly 2015 from open pit operations to mining fully underground there with our very large undeveloped underground reserves.

In 2010, we have included the commencement of a project at El Abra in South America to develop sulfide ore body there, we're going to make a final decision on that this Fall.

But with copper prices being where they are, we're very likely to go forward with that project.

We had retained the ability to defer it if we needed to do that.

In Africa, I want to report on the status of the Tenke Fungurume project.

As I mentioned during the second quarter, we did commence copper production and we sold 36 million pounds of-- we produced 36 million pounds of copper and sold 26 million pounds.

Copper circuit is complete.

From a construction standpoint we're working through start up issues now.

We are-- we've completed and are commissioning the cobalt circuit and sulfuric acid plant is starting up as we speak now in the third quarter.

By sometimes in the second half of the year we will be up to design capacity and the aggregate annual production over time for this is 250 million pounds of copper and 18 million pounds of cobalt.

We're continuing to conduct exploration analysis and our expectations are that we'll be adding major amounts of reserves to this project over the years and that there will be opportunities for a series of expansion opportunities to build this up to be a world-class, world-class mining operation.

You can see just how rapid we've made progress there with the pictures on the next series of charts.

January 2006, that was after we had announced the Phelps Dodge acquisition in December.

PD Ford had approved the project but you can see there was nothing there except African landscape.

During the next year there was some work done but limited amount of work, principally earth work so it was completed during 2007.

Early in 2008, we began construction in earnest and in a 15 month period, constructed a world-class mining operation that involves agitated leach processing, cobalt plant, acid plant, world-class environmental management with lime tailings down et cetera, and now we have this construction completed.

You can see pictures of the processing facilities on Page 20, very pleased with the way this construction has gone.

This is the largest investment in the DRC.

As I said we're building it to world-class standards just as we would build a project anywhere in the world.

We've built the infrastructure there to support future expansion opportunities, we spent more money than we would have otherwise in doing that and also investing in social community programs that have provide benefits to the local people and to the country and this is a region of the world that needs employment and needs the kind of support that we're providing.

The skematic of the Grasberg mine is mining operations and is shown on Page 22, there's further information that's in our slides that we will have available to us for questions, but for those of you that follow us this is a traditional set of slides we've presented for Grasberg.

Right now we're mining from the Grasberg open pit as well as from the underground DOZ mine.

The DOZ has been operating at better than 70 million tons a day, which makes it one of the world's if not the world's largest block cave-- a thousand tons per day, that makes it one of the world's largest underground mining operations.

The pit is scheduled to be operated until roughly 2015 and then we have substantial reserves from this ore body, same ore body, that extends underground.

With the Grasberg block cave, we're-- we've constructed access to those reserves and we'll begin mine development-- are beginning mine development and over time we have the Grasberg block cave, the Kucing Liar mine and further expansions of the DOZ mine that will allow this operation to be a very large low cap cost producer, large volume, low cost producer for decades to come.

Page 23 shows our debt structure and our maturities.

Today we're using some of the cash that we've made with the high operations and copper prices to call $350 million of our 6 7/8 bond that were callable under their terms.

Pro forma, that transaction you can see just how little debt requirements we have for a number of years, essentially the debt we have left is the $6 billion of high-yield bonds that we incurred in the Phelps Dodge transaction and we'll be looking to-- looking for opportunities, if they're available, in the marketplace to further reduce our debt potentially.

At this time we're going to continue to maintain a strong balance sheet and liquidity position.

We have one right now.

We're going to continue to aggressively manage cost.

Some of the efficiencies and cost savings that we have are driven by lower input costs and they may change over time, but some of these efficiencies that we have are going to be sustainable.

And so we're going to have a-- we're going to have a better cost structure from the future because of the actions that we've been required to take now in response to lower prices.

We are limiting capital expenditures for the present time.

We're going to be prepared if market conditions warrant to go back to these projects and we've retained all the rights.

We still have the ability to undertake all of the projects we had that we were looking at a year ago, they're still there.

We have developed plans to reinstitute those to upgrade our [curtailments] own production when market conditions warrant.

So near term we're going to continue to protect our liquidity as we preserve these large mill resources and growth opportunities.

We review every Board meeting the Boards financial policy, our Company has a tradition of paying shareholder returns in the form of dividends and stock buybacks.

And again, at the appropriate time, I feel confident our Board will be back in executing that policy.

With that, will be pleased to respond to any questions that any of you might have.

Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator Instructions).

Your first question comes from the line of Michael Gambardella of JPMorgan.

Yes, good morning and congratulations on a good quarter and especially good results on the cost side even at the site.

Two questions.

One, on the buyback of the bonds, which I also liked very much, could we anticipate a restoration of the dividend in this short term?

Mike, that is something that we'll be reviewing with the Board and here's sort of the context that we'll be looking at that.

We have some very attractive investment opportunities for capital in our projects and we'll be balancing the amount of cash that we have being generated, potential opportunities that we might have with further debt reductions although the structure of that debt will provide some limitations to that, and then the-- if we have additional incremental cash, that would be available to look for potential restoration to the dividend.

So it's a combination all three of those factors, a lot of it depends on how the world unfolds right now.

It's a-- China is setting records with their imports, it's been supportive prices and we certainly hope that the western world's economies recover, if they do, we're going to be in the position of generating a lot of cash and we'll be able to probably execute on all three of those objectives.

And the second question is regards to Tenke.

What are the chances of getting a rail connection for Tenke?

Well I think ultimately that's-- that that will happen.

The rail connection, while there will be some restoration of some rail connections elsewhere, the primary one we're looking to would be a railroad connecting to the Angolan railroad to give us access to the port in Angola, and for some time now the Chinese have been working in Angola to restore that railroad and there's some plans to upgrade the railroad within the Congo.

That will be necessary for us to achieve the kinds of expansion opportunities that we have with this ore body because we're looking at growing it to be-- have very high volumes and the rail connection will be a necessary element for that to occur.

That's really the optionality on Tenke, the rail connection?

Well the optionality comes from the ore body of course and--

Right.

And that we feel--

I mean getting it out.

But yeah, when you start talking about this being a 400,00/500,000 ton copper production, you're looking at sulfide production and you'll need the rail to do that.

We're-- we are being successful with our trucking operations in getting product to market.

Of course we've used those trucks and those roads to bring in the components to building construction project but to get to be kind of mine we think this mine has the opportunity to be, that rail is going to be a key factor for it.

Thanks a lot Richard.

Okay, Mike.

Thanks.

Your next question comes from the line of Tony Rizzuto of Dahlman Rose.

Thanks very much.

Congrats Richard and team on the excellent progress and results in the debt reduction and everything too.

I've got a couple of questions here.

The first one is I wonder if you could share with us your current thoughts on restarts of copper output and with copper prices up near 250 per pound and the Chinese imports being very strong this year, do we still need to see the rest of the world contribute to the global demand at this time, Richard?

Well, Tony, in terms of returning to the expansion projects that we were pursuing, the answer is yes.

We're going to need to see recovery in the U.S.

and western world to warrant going back and going for the expansion opportunities.

But Red Conger had his team here last week and we went through each of the mines and we're looking at opportunities that we may have to increase some volumes without spending expansion type capital.

But as we're learning and evaluating the experience we've had now for six months and operating under our new plans, we're going to see some opportunities to have some incremental volumes, and we'll be reporting on the results of those as we develop and complete those plans.

I think absent any real negative change, we're highly likely to go forward with the Sulfolix project at El Abra, and we'll have the opportunities to look for the chances of adding some volumes from our other operations.

So we should think about it that you're going to be able to certainly flex your production as you can do in moly very well and continue to look at it from that point of view with copper as well?

Exactly.

We're going to, we were focused on the long run about where we need to be with these operations.

One of the things we found is we'd expanded so quickly that now as we've scaled back production, we've gotten much more efficient with our workforce.

Our safety statistics are improved and we're learning some efficiencies that we can gain by having on average a more scaled workforce now.

And so now we're just going to take advantage of that and see how can we efficiently do things to optimize call it more of an optimization of the ore bodies and so fourth.

And with moly, with the Henderson mine, it's a very efficient mine and it would be a mine that Dave Thornton and his guys could scale back up.

We have some moly inventory right now but it's a mine that's more easily scalable upward than something if where we'd have to go out, in a significant way and go out and add to our workforce like we'd have to do if we were to significantly scale up Morenci, for example.

But we had a good quarter with volumes and we're going to focus on the second half of the year, opportunities at Grasberg, to advance volumes.

We do that continually.

We're going to look for optimization of our mines in North and South America.

We're going to look to see Tenke ramp up to its design capacity and all the time we're going to be focused on our cost.

Excellent.

Richard, my second question, I'm just thumbing through here in the-- on Slide 28 and it looks like the PTFI mine plant in 2013, it looks like it is a steeper, little bit steeper drop than the previous estimate.

How comfortable are you with all the opportunities you have and the flexing of your various mining operations throughout the world, and certainly the excellent potential at Tenke, that this decline at the Grasberg can more than be offset by these other opportunities?

Well the 2013 number that you're seeing actually reflects the positive news of our mine plan of moving some of those volumes forward.

And last quarter we were showing a drop off in 2011.

And as part of our ongoing mine plan, we keep looking to try to adjust those in ways to accelerate metal and at the same time achieve that the safety factor in terms of geotechnical factors and the long term mine plan, so you're seeing results of a lot of work that we've been focused on in trying to deal with what was a significant drop off in 2011.

Now we're working on 2012 and other numbers and the years 2014, 2015 will be the last years of this operation, will be very strong years because we will be mining much less waste, we'll be down in the core of the ore body.

So all of this is just part of our ongoing process of trying to accelerate volumes and improve the net present value of cash flows from these-- from this great ore body.

Excellent.

That is correct.

I mean I'm looking at 2011 and 2012 and you have raised those estimates there as well.

Right.

All right, excellent.

Thank you very much, Richard.

Okay.

Your next question comes from the line of Kuni Chen of Banc of America Securities.

Hi, good day, everybody.

Hi, Kuni.

Just hoping you could-- we could dig into Tenke for a little bit.

I think last quarter you guys said that the contract review process would be coming to a resolution nearer term.

Just want to get an update there and see what you-- what's new with that process?

Kuni, the truth is I didn't predict that it would-- when it would come to completion.

There were signs at the time of the last quarter that the government was moving towards that and nothing negative has happened since then.

But during the summer months, there has been some changes within the government in Indonesia and indication that there will be a further realignment of the Cabinet responsibilities and so fourth.

And as a practical matter there's been a period of time that not much has happened from an overall government policy standpoint during these summer months and we have really heard nothing for some time now about any activity related to the contract review.

I just want to remind everybody on the call that we have a contract.

Our contract is a binding contract that has been renegotiated that is accepted by the government of the Congo as being a contract in force and we're actually running our business and selling product under the terms of that contract.

But there has been no, absolutely no recent commentary developments with respect to the contract review.

Okay.

Great, and just as a follow-up, I don't know if you had commented earlier in the call, perhaps I missed it, but as far as the copper sales outlook here in the second half sequentially it's lower.

Is that due to mine sequencing or is there another factor that's driving the--?

It's all--

Excuse me.

It's all Grasberg and it reflects the fact that we were successful in taking some second half volumes and producing them in the second quarter.

So this is our current outlook.

We're going to work to optimize that as we go forward, and over time our team has been very successful in adding volumes, particularly when we're in this high-grade section that we're mining now.

So you're still in the same high grade in the second half or you move to what's the sequence in the different part of the Grasberg mine?

No, it's been a real simplification to talk about this being in high grade, we are in the bottom of the pit with substantial mining equipment.

It's-- the pit is almost three kilometers across and over a kilometer deep, so-- and we're moving 700,000 tons a day of material so it's a very large operation and-- but we will continue in the second half into 2010 and some in 2011 of mining in the lower reaches of this mine where the grades are very high.

Great.

Thanks a lot.

Your next question comes from the line of Jorge Beristain of Deutsche Bank.

Good morning, Richard and everybody again, congratulations on a strong quarter.

My comment or my question was really more to do with the guidance page that you have on Page 11 of your slide packet.

The implied site production cost for the, if I'm reading this correctly, for the full year still stands at $1.15 for site production and delivery unit costs on a consolidated basis?

That's correct, Jorge.

Which would imply the second half to be roughly $1.25 a pound for site production if we just take the average of what you've already done in the first half versus your full year estimates.

So I just wanted to understand, is that-- is there upside to that number, in other words do you think that unit costs come in lower than that guidance or will this be a function of the fact that you are expecting lower copper sales going forward and therefore the-- just the-- there'll be less dilution over less volumes?

It's more that second point that you just said.

If you look back to Page 10, we are showing at Grasberg a drop of roughly 200 million pounds of sales for each quarter so you have, your denominator is going to be lower.

There's also energy cost assumptions that we've made here that has an impact, the price of energy has ticked up some in recent weeks, so we factored that in there.

End of the day it will be what it will end up being and we have a very attractive cost structure given the nature of our mines and where we were as late as third quarter of last year, so-- but in terms of calculating that number, that factor that you mentioned of having the lower volumes out of Grasberg is the most important one of the factors.

For the year, the $0.70 average cash cost is similar to exactly what we reported at the end of the first quarter call but it does reflect higher by-product credits from having more gold.

We added 100,000 ounces of gold from Grasberg in 2009 and it also includes the factors Richard was talking about.

We've seen some increases in our energy cost.

We've also seen the impacts of the weakened U.S.

dollar from earlier in the year and then we've also got slightly higher TCRCs which is a function of the price increase that was experienced.

So the second half is expected to be higher than the first half just as a function of volumes but on average for the year, it's very similar to what we reported in the first quarter.

And Jorge, if you just go back to Page 5 and compare 5 to 11, you can see that in the second quarter, Grasberg pre just site production delivery cost was $0.93 and now we're showing $1.11 for the year.

Okay, great.

And my second question was just related to Tenke.

From an accounting point of view, I gather right now you're still in the inventory accumulation phase with the production but I would expect in the third quarter we'll start to see some actual sales volumes, if you could give us some kind of guidance as to what kind of sales volumes you expect to reflect and also what kind of implied unit cost you're now seeing out there?

We actually as I mentioned we had $26 million of sales- pounds, 26 million pounds of sales in the second quarter.

We do have still some start up costs that we are, we're treating as sort of inventory like cost but by the second half of the year, all of our production costs will be flowing in.

We will be up to design capacity.

At design capacity and with $10 cobalt, we are looking at unit costs being less than $0.50 a pound.

For the year, we're estimating sales of 100 million pounds from that operation.

Great and by the third quarter you think you'll start to reflect Tenke in your overall guidance for unit costs on a consolidated basis?

Let me just say we'll do that when we get to this design capacity, that could be third quarter, will be in the second half.

Okay.

Great.

Thank you.

Your next question comes from the line of John Tumazos of John Tumazos Very Independent Research.

Rich, congratulations on the good results and sort of following up maybe on Mike's initial question, how good do things have to be for share repurchases, higher exploration spending, maybe relaxing the cutoff grades at some of the lower grade mines, finishing Climax, finishing Tenke?

In your initial remarks you'd talked about the strength of Asia and the developing world and how much further do you want to see the copper price advance to begin investing to prepare for that more aggressively?

John, I think that it's simply a question of when we see economic recovery I'm going to say in the U.S.

and the western world.

It's just that simple.

It's not so much a function of the copper price.

At the price we have today it would warrant a number of the actions you just mentioned but that price is really driven by China and there's obviously risk in the Chinese situation depending on their buying patterns, et cetera.

So it's going to be a question of recovery on the economies in the U.S.

and that's talked about every day in the newspapers and on cable TV, so that will be what will drive us.

When you see the western world recovering, what do you guess your target dividend pay out might be vis-a-vis the various good investment opportunities on several continents?

I think the initial focus is going to be on investment, because we will-- we have such great opportunities to invest.

They are not greenfield projects that has this enormous amount of capital in today's world, but they are brownfield expansions and those will really be projects around the world.

So we'll do that and then as we've always done, and you can just look at the history of Freeport organization, after we've determined what's the appropriate allocation for capital, what the right financial structure of the balance sheet is, some of that capital might be financed by debt, then we're going to be very aggressive in returning cash to shareholders.

The Board will make that decision but I'm confident that's the policy, that's what the Board will decide.

Thank you.

Thanks, John.

Your next question comes from the line of Charles Bradford of Affiliated Research.

Good morning.

Chuck.

Being primarily an equity guy, I have a question on the debt side.

I mean clearly buying back the senior notes makes a lot of sense, but why not go after some of the higher rate notes for the following couple of years?

Are there some covenants that inhibit you buying back those securities, was the premium too big or--?

Well it's just the structure of the notes.

The notes we call back, number one they were callable under their terms.

The other notes aren't callable yet.

But the second point was these were some of our older notes that had more restrictive covenants than-- and our covenants even in these weren't very restrictive so-- but in terms of the relative covenant package in these notes versus others, these are good ones to get out of the way.

Good answer.

Thank you very much.

Okay, Chuck, thanks.

Your next question comes from the line of Terrence Ortslan of TSO Associates.

Good morning, Richard.

Good morning, Terrence.

2010, you paid about $0.5 billion for El Abra and also for Grasberg underground.

It assumes again that (inaudible) this year, or second half of this year is going to make a decision on El Abra, am I right?

That's correct.

Okay.

And from the (Inaudible) your parameters for El Abra, the time it will take to develop the sulfide and the scale you're talking about is roughly what, Richard?

Yeah, the timing for the development of the sulfide project is roughly two years and if we make a decision later this fall, we have all environmental permits in place, we've dealt with our partners, we probably could start spending money as early as later this year, and it's a very attractive project.

The ore body has been defined and metallurgical work is done.

It would add 300 million pounds plus copper for-- or 10 or 12 years to the project.

It replaces the, it replaces the oxide.

The oxide that we've been mining.

That's been the traditional source of ore for this operation.

We continue to drill at El Abra, and continue-- in fact one of the things that's happened over this past year with the drilling that I mentioned earlier is that our view of El Abra is changing.

The ore body is larger than we had anticipated, there's more volumes and so that leads us into longer term studies about how we might expand that operation further with potentially a milling option.

And so that is something that's currently under study and it's just one of the many opportunities we have at this Company to think about even a bigger operation than the Sulfolix project conditions.

And of course milling gives you much higher recovery rates than a sulfide leach project.

And given the standard--

This is Jim Bob.

I might just jump in and just say that the description that you'd just given of El Abra pretty much goes across-the-board on our properties.

As you've reported already, we're spending lots of geologic time and mine planning time looking at the results of the big program that we instituted several years ago right after the merge of the two companies, and the-- as I say in the El Abra description that we've just talked about can be really taken across-the-board on all of our properties.

And the reason why that opportunity is there is because in lower copper price environments as you know the big reason why people went to the oxide ore was because they could be leached and which for all of you, as all of you know, I mean you don't have to have a mine that has to have a mill.

And you don't have to pay smelter costs, et cetera, et cetera.

You just take the oxide ore and everybody knows on the call and for those who don't, the only difference between oxide ore and sulfide ore is the portion of the ore body that's been eroded and then basically, oxidized by erosion.

So if you can just imagine these ore bodies and imagine an ore body that's buried underground, the portion of the ore body that's exposed to the atmosphere and from the ground water leaching et cetera.

et cetera to basically create this oxide piece, if you will, it's kind of a-- to use an illustration it's kind of like a big peach that's starting to get overripe and you get these ripe areas on the outside of a peach and the inside of the peach is still unaffected by the fact that it's being reached by oxygen.

So we got big peaches sitting around to make a simple people comparison for you and if you look at the overripe part of the peach that's what we've taken and put into these leach pads because of the lower prices of copper.

As copper prices go up, we can go in to the good part of the peach and take that peach and go from a leach to a mill and we've got some very big reserves across-the-board, not just at El Abra, but at Cerro Verde, Morenci, and at Safford.

All of these projects that you've identified over the years that have been leached by using oxide ore and our drilling across-the-board has shown that the big part of these ore bodies are the sulfide ore and there's unbelievable opportunities for expanding the size of the pit.

At Morenci, for instance, you're going to basically end up with as we've said the whole Morenci area, where you've had a series of pits through the years is going to become one big pit and some of that involves the same kind of oxide to sulfide ore identification.

So we have years of those kinds of reserves available to us and it's really just a question of when we decide to put in the mill, to expand the mill, to go get that sulfide ore.

But that's really the-- and why we've said our brownfield type opportunities principally going from oxide to sulfide ore are bigger than most greenfield projects around the world.

And I've just been-- over all the new interpretation of all of the core hole drilling that we did in putting in the big models, and you'll be very impressed as we start to give these models to you like the slides you saw on the Grasberg in this presentation where you see all of the potential both in the pit and underground are just the enlargement of pits.

So that's really the story of this Company right now is the good growth of ore and adding ore and replacing production over a number of years by bringing those kind of things into production.

Thanks, Jim Bob.

Thanks, Richard.

Thanks, Terry.

Your next question comes from the line of Mark Liinamaa of Morgan Stanley.

Hello.

Through the last few months there's been all kinds of speculation about the China SRB, what they're up to and what the impact of them pulling a little bit out of the market, they seem to have done that or at least reports are and yet copper continues to hold up.

Can you just comment a little bit if at all about any of the supply/demand fundamentals you're seeing re China demand and elsewhere in the world?

Thanks.

Thanks Mark.

We're not the best source of information on that.

We're not currently a major supplier of copper cathode or concentrates into China although we are-- we recently entered into some new concentrate arrangements with the Chinese, but beyond potential buying for strategic reserves I think you can just look at the performance of the Chinese economy and the recent reports of their GMP growth and their IP growth.

The extent of their copper imports where they've set records now for a series of months clearly reflects something other than strategic reserve buying or the absence of scrap.

They're physically consuming copper on infrastructure projects and to support their growing economy.

All right, thanks.

And is there anything to be read, if at all, into the decision not to hedge any of the provisionally priced copper this quarter?

No, our Freeport's traditional philosophy is not to hedge and even last quarter where we did lock in the open pound prices we did not hedge any of our future production.

The decision last quarter was not any kind of outlook about copper prices at all and we're not taking any outlook at the end of this quarter.

It was simply a step that was part of our overall strategy of protecting liquidity and as we looked at the situation.

At the end of the first quarter, we felt that that was an appropriate incremental step to protect liquidity.

Our liquidity position is much stronger now at the end of the second quarter and so we concluded that it wasn't a step that we would take at the end of the second quarter.

Thanks, and good luck with the continued progress.

All right, thanks a lot, Mark.

Your next question comes from the line of Wayne Atwell of Casimir Capital.

Thank you.

Once again congratulations on a great quarter and good execution.

You have a gold property near Grasberg which, if I'm not mistaken, is somewhere between four and six million ounces.

Why don't you develop it or why don't you joint venture it or sell it?

Gold prices are fairly strong, it would take several years to bring it on.

It seems like this would be an ideal time to start an initiative there.

Well Wayne, we have.

The Wabu project is a project that we've had exploration over the years, we've done economic evaluation and because of the cost of infrastructure, the indicated size of the opportunity there, we've concluded that it's not economic for us, and from time-to-time we have interest expressed in it and we'll follow-up on any opportunities that develop from it.

So we won't see you put it in production but you might sell it or JV it?

Yeah, that's correct.

Okay, thank you.

And what's the ultimate size of Tenke do you think?

How big could that property get and how big could be--?

We just don't know.

It's a very, very large concession area, 650 square miles roughly.

There's mineralization indications throughout it.

We've done enough drilling to support the current project that we're constructing.

We clearly see oxide ores that are available, if not all of which are in reserves, but are either in reserves or near reserves that would allow for a doubling of the current type project-- roughly a doubling of the current project that we have.

There might be an intermediate step of where we could optimize the current project and we're looking at that.

But a longer range to get to the kinds of world-class status that we think is available to us, we need to do more drilling and exploration analysis, and our guys are working on that now.

There's a-- core hole drilling indicates a very large sulfide deposit, there's some mixed ore that we need to decide how we're going to technically process, but over the years people involved in this project have talked about 400,000 to 500,000 tons.

It's certainly-- those are not unreasonable expectations.

It could be more but it depends on the work we need to do there.

We have another nearby exploration project called [Consanfu] that has a very large potential and attractive indication to mineralization as well.

So if we're able to get the right infrastructure, I feel confident there will be major expansions in Freeport's operations in the Congo looking out for a number of years.

Richard just to comment for Wayne.

When we got into the Congo operation after the merger, there was 1500 core holes that had been drilled over the years, and (inaudible) people for the years.

We've added 1500 core holes to that database so we doubled the amount of information, and that's because the area is so wide and so long.

And most of the stuff we've done is just going to the ore that's visible by satellite.

You can-- it's a vegetation anomaly and we found that vegetation anomaly for miles, and so most of the stuff we've done is near surface drilling and just trying to confirm the ore that can be reached right at the surface.

As the ore body goes underground (inaudible) as we followed it underground for a few areas, but there's a huge potential for this thing to go underground.

And as I said about all of our projects, and Richard just mentioned again, the ore that's been looked at Tenke is oxide ore and the sulfide portion of this ore body is going to be bigger than the oxide ore for the very same reason we talked about with the peach that's got the ripe area and the unripe area.

So we haven't even started to drill deep enough to develop that.

But that ore there for-- it will be there for 100 years or more and can provide all of the expansions we need as we said, and we have to go to pits, more and more pits, the deeper pits but we also have to add mill.

So it's unlimited at this point based on my observation and 3000 core holes is a lot of core holes, but there's a lot more to be done on following this thing underground.

Great.

Thank you.

Your next question--

While we're looking at those long-term opportunities, we're going to focus on the near term on getting this first project up and running, getting the business process set up to operate in a very difficult part of the world and optimizing what we spent this initial capital on.

Your next question comes from the line of Lawrence Smith of Scotia Capital.

On projects, one on Tenke, the very useful cost guidance that is under $0.50 at the $10 cobalt, under $0.50 is a big range, I'm mean zero to $0.50 off $0.49 I'm wondering what's the impacted grade on that?

I guess I kind of thought you would be mining higher grade early on and then cost would be lower.

Is that sort of a reasonable cash cost until the first expansion?

And then second question relates to Climax, I read through your quarterly quickly.

I didn't actually see any mention of Climax.

I mean are you still planning on bringing that into production at some point or is there a chance that will just sit there and not go ahead?

Thank you very much.

Okay with respect to the cost structure that we commented on with Tenke, that number that we gave you was a cost structure over time based on current cost levels, $10 cobalt and the design capacity to produce 250 million pounds of copper and 18 million pounds of cobalt.

And obviously as to the extent as we see with the Grasberg operations to the extent that we have periods of time where we have higher grade material available to us from more cobalt, that is going to have impact on cost in any particular period.

We expect to have the opportunity to have for example, higher cobalt grades early in the projects and to the extent we have that that'll have an impact on unit cost at any particular point in time.

But what we were trying to give guidance on is what the overall cost structure of this looks like in terms of the design capacity that we've built the project to.

It'll vary period-by-period and this is what we have now.

Great, thank you.

And on Climax?

Oh, Climax, yeah, no question.

I mean it's a great project.

We had spent capital, I mean the mill is there, a lot of the building construction, all of that is in place and none of it's going away.

If the market responds, let me say when the market responds because I'm confident that the market is going to require Climax volumes at some point, when that market responds we will go back and resume construction.

We think we spend roughly $350 million and within 18 months, we are adding 30 million pounds of cobalt a year on a year molybdenum and we've done enough drilling there, this is another theme of what Jim Bob is talking about.

We did additional core drilling at Climax and we can see the opportunity to increase that production to twice the level of what the 30 million pounds are, so it's still there.

We own that land and fee, we're continuing to manage the historical water drainage off the mining site and as I said, we have-- we're certainly not walking away from that project in any sense.

Great.

Thank you very much.

Okay, thanks.

Your final question comes from the line of [Jeff Karmer] of UBS.

I'm in the big times now.

Hello?

Yes, go ahead.

I'm sorry, I don't know what that was.

Good morning and congrats again on the quarter.

Just wanted to follow-up on the bonds you guys are calling.

Are there certain I guess covenants within those that incentivize you a little bit more than others to call these?

In the--

On the 6 7/8 bonds--

Yes.

These were issued prior to our transaction with Phelps Dodge.

These were non-investment grade covenants, the notes were secured, and they did have some restrictions that don't exist in our other securities.

That was one of the factors that played into our decision to call it.

The other factor was that these notes were callable, and we could take out the whole issue with the cash that we had.

We do have some notes that are also callable, the floaters which are $1 billion dollars, those are due in 2015 but those are callable now.

And we'll continue to look at all of our debt securities and see what makes sense to retire as we go forward, but this 6 7/8 was the one that really from a first step standpoint made sense for us to go after.

Okay.

I guess then regarding expansion projects, the mine acquisitions are not on the drawing board or there's not really any plans to divest properties either then I guess other than potentially the property next to Grasberg?

The-- with respect to acquisitions, we have such great opportunities of investing in our own assets and growing volumes and adding to shareholder value without having to pay premium prices that you have to pay in making acquisitions, so we don't have any strategy of looking for acquisitions.

Now having said that, we're constantly made aware of what's going on in the industry and we'll monitor it and if an exceptional opportunity comes to us we could be in a position to do it but that's not our strategy.

And in terms of divestitures, the same way.

We're always looking to see what would make sense with our portfolio of assets.

We have good contacts within the industry and so fourth with people who are interested in participating on a joint venture basis with our-- with us.

We have joint venture partners now and Grasberg and in our mines in North America, South America and in Africa, around the world, people are looking for opportunities to add to copper exposure, so we're plugged into all of these things and we'll go forward and see if anything makes sense from our view of creating shareholder value.

Great.

Thank you very much.

Thanks.

There are no further questions at this time.

All right thanks, everybody for participating.

We look forward to continuing to report to you our results as we go into the second half of 2009.

Ladies and gentlemen, that concludes our call for today.

Thank you for your participation.

You may now disconnect.