費利浦·麥克莫蘭銅金 (FCX) 2010 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 2010 earnings conference call.

Our results were released earlier this morning and a copy of the press release is available on our website at www.fcx.com.

Our conference call today is being broadcast live on the Internet, and anyone may listen to the call by accessing our webcast -- our website home page and clicking on the webcast link for the conference call.

We also have several slides to supplement our comments this morning and will be referring to the slides during the call.

The slides are also accessible using the webcast link on www.fcx.com.

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

Before we begin today's comments, we 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 presentation materials and to the risk factors described in our SEC filings.

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

We also have several of our senior operating team here including Red Conger, Dave Thorton, and Mark Johnson.

I'll start by briefly summarizing our financial results and then turn the call over to Richard, who will be referring to the materials in our slide presentation.

After the formal remarks, we'll open up the call for questions.

Today FCX reported second quarter 2010 net income attributable to common stock of $649 million, $1.40 per share, compared with net income of $588 million or $1.38 per share for the second quarter of 2009.

Our results in the second quarter of 2010 included losses on the early extinguishment of debt, totaling $42 million to net income, which was $0.09 a share, and we also had an unfavorable impact of our provisional pounds that were recorded at March, at a higher price.

That resulted in a $72 million impact or $0.15 per share decrease in net income in the second quarter.

Our consolidated sales for copper of 914 million pounds during the second quarter of 2010 were higher than our April estimates of 830 million pounds, but as anticipated were lower than the second quarter of 2009 sales of 1.1 billion pounds.

The variance to our previous estimate primarily reflects favorable production performance in the Americas and Indonesia and the timing of shipments, principally in North America.

The variance to 2009 period primarily reflects lower copper ore grades at Grasberg, resulting from planned mine sequences and anticipated lower sales from our South American mines.

This is partially offset by our higher contribution from the Tenke Fungurume mine in Africa.

Our gold sales of 298,000 ounces during the quarter were higher than our estimate of 270,000 ounces, but significantly lower than the second quarter 2009 sales of 837,000 ounces.

The favorable variance primarily reflects the timing of mine sequencing at Grasberg.

Molybdenum sales totaled 16 million pounds in the second quarter period.

They were higher than our estimate of 15 million in April, because of improved demand in the chemical sector during the quarter.

Second quarter results reflect improved pricing for our products, all of our products, copper, gold and, molybdenum, compared to the year-ago period.

Our realized price during the second quarter of $3.06 was about 38% higher than our price in the second quarter of 2009 of $2.22.

For gold, we realized $1,234 per ounce in the second quarter compared to $932 per ounce in the second quarter of 2009.

And our molybdenum price averaged $18 per pound, which was significantly higher than the $10 per pound price in the year-ago period.

Our unit net cash costs on a consolidated basis averaged $0.97 per pound for the second quarter of 2010.

It compared with $0.43 per pound in the second quarter of 2009.

The higher unit cash cost primarily reflects anticipated lower gold and copper volumes at Grasberg and at South America, partly offset by higher byproduct gold and molybdenum prices.

Operating cash flows in the second quarter totaled $1.1 billion; it was significantly higher than our capital expenditures of just under $300 million.

And for the six months, ended June 30, our operating cash flows totaled $2.9 billion, and capital expenditures totaled $527 million.

During the second quarter, we repaid a total of $1.3 billion in debt, that included the April redemption of our senior floating rate notes, totaling $1 billion, and we also made open market purchases of our public debt securities of just under $300 million.

Since the beginning of 2009, we've repaid approximately $2.6 billion in debt.

This is just over a third of our debt that was outstanding at the time, and this has resulted in annual interest cost savings of over $170 million per year.

At the end of June, our total debt approximated $4.8 billion, and our consolidated cash approximated $3 billion.

Also during the second quarter, our 6.75 mandatory convertible preferred stock converted into 39 million shares of FCX common stock, and our shares outstanding as of June 30 totaled 470 million shares.

As previous announced, our Board authorized an increase in our common stock dividend from $0.60 on an annual basis to $1.20 per share, and the first quarterly dividend at this new rate of $0.30 per quarter will be paid on August 1.

I'd like to turn the call over to Richard now.

He'll be referring to our slide presentation.

Thank you, Kathleen.

The first slide is on page three, and it has the financial statistics that Kathleen just reviewed with you.

There's a couple of things I think when you look at this that become apparent about our Company.

And that is the significance of our exposure to the copper markets, which was where we want to be because we feel so good about copper going forward, because of its essential need in the world economies and the challenges that the industry has in developing supplies and producing current production to meet those opportunities.

Here we have a quarter in the second quarter of where we had such a substantially lower amount of gold sales out of Grasberg simply because of mine sequencing.

We had well over 800,000 ounces last year and under 300,000 ounces this year.

Our copper volumes were lower, and, yet, because of higher copper prices, we were able to generate comparable earnings that we did in the first quarter of -- second quarter of last year.

And that's even more apparent when we look at the first half statistics where we had much, much lower copper sales last year.

We had 1.4 million ounces last year in gold sales, and 765,000 ounces this year; 50% less copper volumes and yet our earnings were more than double what they were last year because of the copper price movement.

Our cost structure is something that we worked on very hard.

We had to do that in the last part of 2008 when copper prices fell so dramatically and now as we're taking steps of resuming curtailed production, we're doing so in a way that preserves cost savings that we were able to achieve during that period of time and during the quarter even with the significantly low gold credits we have out of Indonesia, we were able to finish the quarter with less than a dollar net unit cost.

This is consistent with what we had in the first quarter and this unit number will vary as we go forward with different amounts of copper -- with gold prices and volumes and molybdenum prices.

But, for our overall Company, with roughly 4 billion pounds of copper sales, very attractive to be able to produce copper at a net cost of less than $1.

At the bottom of the slide you can see just how significant the issue in Indonesia was.

Last year, we really benefited during a time when we really needed it because we were at the highest grade section of the Grasberg.

Now we're sequencing into lower grade sections.

We'll be moving back to higher grade during the second half of the year.

We're real pleased with these financial results, given those circumstances.

Copper Markets.

As I talk with our marketing guys, the comment that came back to me in preparation for this earnings call was that the physical markets really are stronger than economic indicators in the United States.

The issue of falling exchange stocks, an issue with scrap markets, trucking and so forth, we see our order books filling more strongly than we have in some time.

There's still, of course, a lot of weakness in the US economy, but overall the copper markets that we're seeing them on the ground, day-to-day in the US, Northern Europe, to some extent in Korea and Japan, are stronger than we've seen them in some time.

And China, which is everyone's focused on the steps they've taken to control the growth in their economy and to try to deal with inflation, continues to be strong.

So we're optimistic about copper markets.

We think it is important for the future of this industry to think about having a price this strong, today above $3, in a world in which we read about economic problems every day in the media.

So we continue to feel very, very positive about the outlook for copper longer term.

We have to be prepared for volatility, but we like where our Company is positioned in these marketplaces.

We benefit from the high price of gold and molybdenum has similar characteristics to copper, a smaller market, but the fact that we're the world's largest producer of that product and the world's lowest cost producer and have such growth opportunities, makes that a very attractive asset for our Company.

Development Projects.

We talked at the first quarter about how we were taking some steps to move forward with resuming curtailed production, curtailed development activities that we had put in place at the end of 2008 at our flagship Morenci mine here in Arizona.

Red Conger and his team are working very effectively.

We restarted the mill, which we had shut down.

It averaged 28,000 tons per day in the second quarter.

We're moving up towards a rate of 50,000 tons per day in 2011.

We are increasing the mine rate, which we had basically cut in half.

This statistic here on this slide is in metric tons.

Morenci is typically talked about short tons in its operations and we're moving up from 500 short tons to 700,000 tons with our plan.

This is stripping additional ore, stripping to get to additional ore, has some effect on cost, but at these price levels it's very attractive.

We're doing this in an organized, systematic way to control our costs, but we do have the opportunity of further increasing our rates; and we're studying that and moving-and potentially moving forward with that as the market warrants.

In Arizona here, east of Phoenix, at the historical Miami mining activity, we've now begun stripping to mine ore in connection with our reclamation activities.

We're ramping that up, using some existing equipment, and that will be generating revenues to help contribute to our business.

At our Safford mine near Morenci, we have resumed construction of a sulfur burner that had been deferred and this will have very positive benefits from a cost standpoint, logistics standpoint for our Company.

In South America and Peru at our Cerro Verde mine, we're now completing a project that involved expenditures of about $50 million, which will increase our current mill's capacity from 108,000 tons per day to 120,000 tons per day.

That will add 30 million pounds of copper at very low cost.

The real story there at is the opportunity for a major expansion.

This is a mine that is situated so that a major expansion can be undertaken in a straightforward way.

As always, there are power and water issues to deal with.

We are working towards those and are confident that with the resource we have there, the physical location and the footprint of the operations, that we will be able to move forward with the major expansion.

We're working on the feasibility study now.

That will be completed no later than the first half of next year.

The size of that is the real question and water resources really will be the determinant of that.

We think at least a doubling of the current production is in the cards and we might have a chance to increase substantially more than that as we deal with the water issues.

Great resource there.

We continue to drill it, continue to find ore that could be profitably processed.

In Chile, at our El Abra mine in northern Chile, since the mid-90's or earlier, the operation's been mining oxide ore.

That is currently deleting.

We have a very significant sulfide resource.

Initially, we're looking to move forward.

We are moving forward with a leeching project we call Sulfolix.

That will -- changing and processing but it would extend the life of this mine by 10 plus years, making a world class producer, continuing as a world class producer at 300 million pounds per year and this involves capital of about $725 million through 2015.

But there's another page to this story.

The sulfide resource has grown significantly since we combined our Company with Phelps Dodge, and now we're studying about how potentially to take advantage of that resource through a milling expansion.

One avenue we're pursuing is the possibility of a joint undertaking with Codelco and its nearby mine and we've got a feasibility study looking at whether we might do something jointly there from a mill standpoint.

Of course, in that location water is a major issue, but potentially we could build our own mill or do something in conjunction with Codelco, but that's a significant opportunity for us.

In Indonesia, in addition to the great Grasberg pit, which is now looking forward to completion of the pit mining, we're studying whether that's going to be in 2015 or maybe two or three years longer than that.

But we have these very significant underground reserves which, probably, if you look at it within the industry, is the most attractive development opportunity for a copper company in the world, because of the significant reserves and its cost structure.

We have shown since the early '80's that we can block A very effectively with this ore at Grasberg.

Currently, the DOZ mine is operating at a sustained rate of 80,000 tons per day.

We're developing a smaller high grade mine called the Big Gossan, but the future of this company lies in the Grasberg block A, which is directly underneath the pit, just an extension really of the ore body that we've been mining there since the early 1990s.

The DOZ has significant expansion opportunities.

Our current plans look for this to be a very large operation when we move totally underground with mill rates of 240,000 tons per day with attractive long-term volumes and cost structure.

In Africa, in the second quarter, we sold 55 million pounds of copper and 4 million ounces of cobalt.

We had an operating issue in April; and during May and June we operated higher rates than that average.

At full rates, the current operation generates 250 million pounds of copper annually and over 18 million pounds of cobalt, more than that in the early years.

Cobalt processing facilities has had start-up problems involving the S02 plant and cobalt circuit.

We have developed plans to address that which we think we will have dealt with by the end of this year.

The mill, which was originally designed to operate at 8,000 tons per day is actually capable of operating at a higher rate, and we're going to take advantage of that.

We're spending a small amount of capital, about $20 million for mine equipment, so that we can mine a high grade materials to take advantage of this excess mill capacity.

We think we can get up to 10,000 tons per day at that in 2011 and so without really expanding the operations we can increase our copper production from 250 million to 290 million a day -- 290 million pounds per year.

We continue with our exploration activities.

We've been drilling oxide targets so far in 2010 which will provide the basis for further expansion and we're doing some deep drilling to get our arms better around the sulfide opportunity, which is really the long-term opportunity there.

We've got a number of feasibility studies going and we will be reporting on those, but they have the potential of increasing copper sales to the 300 million to 400 million, 500 million pound per year range.

We continue to work with the government.

We're operating under our contract and so we have a fiscal regime for paying taxes and royalties.

We believe we have -- are closing in on the completion of these discussions about our contract review and try to work with the government to get a basis for dealing with administrative issues that keep coming up there.

At Climax, Dave Thorton is here, and we are really taking steps so we have the optionality of restarting the Climax project.

It's not in our budget numbers now.

Our Board has not formally approved the start-up, but we're doing a significant amount of work this summer in Colorado, so we will be in a position of reaching that decision, watching the market.

This project has a capacity of 30 million pounds per year, could be expanded beyond that.

We have about $500 million to spend to get it started.

We're spending $60 million, $70 million this summer to position ourselves to make that decision, so that we could be prepared to go in the second half of 2011.

Story of our Company is reserves of copper that we have, over 100 billion pounds of proved and probable reserves under SEC definitions, 100 billion pounds, long-term reserves that are there now as reserves.

But beyond that, we have done sufficient drilling around our existing ore bodies to be able to find resources that are not yet qualified as reserves, but that has contained copper -- at $2 copper that's in excess of this 100 billion pound number by another 100 billion pounds plus.

What that gives us is the opportunity to really have significant growth without having to have success in our Greenfield Exploration program or without having to go out and make acquisitions in the marketplace, which in my opinion's going to become increasingly expensive and difficult to do because of the shortage of copper in the world.

We've got a number of projects that we reviewed in the past that are on page 13 that are -- many in North America, starting up the Chino mine in New Mexico, further increasing Morenci.

We'll acquire the Twin Buttes property that's adjacent to Sierrita which gives us development opportunities there.

We mentioned starting Climax.

Morenci and other mines in North America, we know have significant sulfide resources.

We're confident that we -- and we're studying the development of mills to process those.

In South America, the expansion in Sierrita, the El Abra mill project are significant.

In Tenke, we mentioned de-bottling the further oxide expansion, the ultimate sulfide development, and then at Grasberg we continue to find where this will allow us to optimize and improve the economics of that operation.

When you add all those together on page 14, as we see the Grasberg open pit deplete, the El Abra oxide deposit deplete, we have resources that we're working on right now to replace those that would be in production.

Then, there's incremental new opportunities for us that are significant.

We've identified incremental production of annual rates of up to 1.5 billion pounds to 2 billion pounds a year from these operations in North America, South America, and Africa that are incremental new production that we have available to us.

We are using some of this cash flow we're generating to increase our exploration spending.

Most of that is focused on our existing ore bodies.

We are doing some Greenfield projects that could materialize to be significant opportunities for us, but our primary focus is in this area of increasing our resources with our existing mines, qualifying those resources as reserves and identifying development projects out of the reserves.

Our 2010 outlook is similar to what we've had -- we had laid out in the first quarter with 3.8 billion pounds of copper, 1.8 million ounces of gold.

Molybdenum is up 1 million pounds to 63 million pounds.

The cash cost at $0.86 is in line with what we had earlier.

At these levels with $3 copper for the remaining six months, we would have operating cash flows in excess of $5 billion, and our capital expenditures that have been approved by our Board of $1.7 billion, we're looking for other ways to spend capital and we'll update you with those as we move forward.

We will have a very profitable business at these commodity price levels and strong cash flow generation.

I want to report to you, and Mark Johnson is here to respond to your questions, but we made a mine planning change at Grasberg.

For those of you that have followed us over the years, you recall that this is a dynamic situation that occurs from time to time.

We try to find ways of mining the open pit in ways that are safe.

We try to advance metal forward when we have opportunities to do that and that has been the story that we typically have.

As we've gone forward with our mining in the second quarter, we have revised our plans as a precautionary measure because of some geotechnical issues related to the southwest corner of the mine, a pushback eight east.

It's a relatively small but it's a high grade section of ore that was scheduled to be mined at the end of this year and into 2011.

As a result of these geotechnical analysis, we are going to defer mining this high grade section.

Our current plan calls for mining so we can go back to the upper reaches and come down and mine it in a way that ensures safety.

This current plan that we had would result in a deferral of 130 million pounds of copper, and 270,000 ounces net to our interest from the next five-year period to the scheduled end of the pit life of 2015, 2016.

The ore's still there.

We'll still get to the metal.

It's just a question of timing.

The biggest effect, if you look on page 18 is going to be in 2011 where our guidance as it currently stands for 2011 gold is down 400,000 ounces.

We may find ways of getting this quicker.

We're working on that, but at the present time our plan calls for this to be the effect.

Now, with copper, the copper impact is being offset by other -- it's smaller.

This is a section that has extraordinarily high gold grades and it's being offset by other operations that's we have, so our copper guidance is really unchanged.

Page 19 shows the quarterly payable gold metal -- quarterly metal sales projections versus the first quarter.

We found ways of moving forward some of the copper production so that you see higher production projected for the third quarter coming out of the fourth quarter sales, and then at Grasberg you can see the step-ups of where we are is where mine sequencing takes us down to the higher grade section at the bottom of the mine.

This plan results on page 20 with the sales profile that you see by region and consolidated unit cost of $0.86 a pound.

That's at $3 copper, $1,200 gold and $14 a pound molybdenum for the remainder of 2010, so we'll be able to retain our attractive cost structure.

Page 21 shows our earnings, our cash earnings capability of our Company at current copper prices and looking at $1,000 gold, $10 molybdenum and our mine plans for 2011, 2012, which includes this adjustment to our gold sales at Grasberg for 2011.

You can see at those commodity prices, we would have EBITDA of over $7 billion, operating cash flows of over $5 billion.

The sensitivities of our sales products and certain of our costs are shown on page 22.

Our capital program as currently we have not made changes.

We have all these studies that lead to the opportunities to spend capital in the future, but the capital spending currently is consistent with what we had laid out in the first quarter.

We continue to generate cash.

We continue to generate and to reduce debt.

Kathleen laid out some of the steps we took in the second quarter and we ended the quarter with less than $5 billion of debt and consolidated cash of $3 billion; some of that is tied up in subsidiaries and not available to the parent, but we've got a very strong balance sheet and that is our goal.

We're going to keep our financial liquidity, have aggressive cost management, invest in growth projects.

Our Board increased our dividend earlier and the Board will continue to review our financial policy.

My perspective on where our Company is right now is that given the world that we have and where we are, that we have the right assets.

This is the right time to have these assets because the commodities that we have are really essential to the world's economy as we go forward.

Over the past three years, we have developed the right financial assets so that now we have the financial capability of undertaking these great growth investments that we have.

If something else comes up, we have the ability to look at it.

We also have the financial liquidity to be able to deal with volatility, which is always a possibility for our industry.

We've got really high quality assets, great operating team; every day we work to make things better and we solve problems, whether that's dealing with our cost structure, whether it's dealing with expansion opportunities, dealing with our situation of managing our business in countries like the DRC and Indonesia where we've had such great success over the years.

So our business is well-positioned in an industry that has a real strong outlook because of the tight supply situation, the difficulties of developing new resources of copper and new production and maintaining production.

We see every day that the issues associated with mine planning or grade issues that come out from this industry and past labor problems or problems with governments' taxation problems or environmental problems.

All these things add up to having a tight industry and so having a company with the level of reserves, level of resources and production we have makes us feel very good about where we are today with Freeport McMoRan Copper & Gold.

And with that, Operator, we will open the line for questions.

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

(Operator Instructions).

The first question comes from the line of David Gagliano with Credit Suisse.

Great.

Thanks for, as usual, a very detailed presentation.

Obviously, you've got a lot of additional projects currently under evaluation.

You've got Cerro Verde concentrator, the tank expansion, the mill at El Abra, restarting Climax, et cetera.

So my question is based on what you know today, could you rank or prioritize those projects from most likely to move forward to relatively less likely to move forward based on what you know today?

Okay.

More of a question of timing.

I really believe all the projects that we've mentioned are likely will be done and it's just a question of timing.

The one thing that we will be able to do, I mentioned just briefly this Chino operation in New Mexico.

It was a very old mine, 100 year old mine that we curtailed, but we're taking the steps now and that will bring in 150 million pounds to 200 million pounds of copper by restarting this operation.

In terms of major expansion projects, in the copper business, Cerro Verde is a project that's -- the word slam dunk comes into my mind.

You live in a world that you don't want to go that far out.

But it's a straightforward major project to double or triple production there, unless something really turns down in this world, that's something we'll be announcing within the year to go forward with.

Climax is another project along those lines.

It would be the best molybdenum mine in the world, and absent some major change in the marketplace, we would be prepared to go forward with it.

Production in 2012, 2011, depending on how far we go about this.

We're going to be prudent about timing because we want to get out ahead of the marketplace.

But given marketplace, then those things will happen.

Tenke Fungurume is a project that has the physical opportunity to expand.

Besides markets there, we've got to deal with some of these governmental issues that's conditioned on our doing that.

We believe we can do that but it's got the resource to go forward.

What we want to do right now is work hard to be ready to pull the trigger on these things, not making the decision that you're totally committed to do it in terms of a specific timing, but go forward.

Really excited about the mill prospects in North America, particularly at Morenci.

It's a huge resource and to be able to build a mill there and to have a modern mill that could handle large volumes of ore and produce large amounts of copper is very exciting.

Three years ago, we looked at El Abra, and we thought we saw just oxide and Sulfolix.

Now, we see the potential for a mill there, so we have to work on all the things that go in, converting reserves to projects and that involves permits.

It involves water power issues, personnel issues and so forth.

But what we see here is looking forward, a whole string of these opportunities that gives us a chance to grow based on resources we already have in-house.

Okay.

Perfect.

Thanks.

You mentioned Tenke.

Just as a quick follow-up and I'll pass it on to somebody else, was wondering if you could give us an update, if there is one, on the negotiations you've been having with the DRC government?

Tenke had a very important event that happened on June 30.

It was the -- the country did.

The Democratic Republican of Congo, it was the fiftieth year anniversary of their independence from Belgium.

That was a big deal for this country.

The King of Belgium came to Kinshasa and there were a lot of big events, so the government has really been focused on that activity then.

Recent conversations have been very positive about going forward.

And as I said, it's a question of where we have a contract, we're operating every day under that contract.

And we get encouragement from a number of sources within government that our contract's not going to be significantly -- they're not going to take a position of changing our contract.

Our position is we're not really negotiating.

We have a contract and we're supporting that contract.

We're working cooperatively with the government.

We want to be responsive to issues they have.

It's always going to -- when you're going into it, it always will be a complicated place to operate but you can see by -- our numbers speak for themselves there.

Thanks a lot.

Thanks, David.

Our next question comes from the line of Michael Gambardella with JPMorgan.

Good morning, Richard and Jim Bob and Kathleen.

You guys have done a great job at showing us the great assets that you have, but I just wanted to say congratulations on entire management team on the fabulous job you did on cost, especially in North America.

It's just superb results.

My question, though, is on your guidance for 2010 on production.

Your guidance, you beat your guidance in both copper and gold in the second quarter by 10%.

Pretty wide level and you upped your guidance for the third quarter, yet keeping the guidance for the full year.

Is that just being very conservative or is there something that's changed in the mine plan?

First of all, thanks for the comments.

Just with Red and his operating management from North America and South America -- and we look back on history and looked at where we've come with these operations.

We've had six straight quarters now of meeting our targets and these are hard targets to meet with mines of the nature that we have in history and the guys are all -- all of our guys are so fired up about the success we're having and dealing with costs.

We've just got a great team and momentum is going very good.

One factor in this issue about guidance that you talked about is that we do have some lower volumes coming out of Grasberg because of these eight east situation and so some of the better than expected performance out of the remainder of our operations is making up for that.

And Grasberg itself has outperformed its targets from that, so some of that is an offset for that.

And then as you mentioned, as we look forward, historically we've tried to be not overly optimistic.

We would rather under promise and over deliver on situations.

That's been our history.

So we're going to work hard and with this Grasberg mine plan, our team's working on issues so that we can do better than the mine plan for eight east than we talked about.

We want to make sure the investment community knows an outlook that we're confident in.

And then on -- you mentioned in the presentation that you could expand it or double it, from 250 to 500.

And I assume that's under the current logistics where you're trucking the product out.

Is that correct?

That is correct, right.

It is a logistics challenge.

It's costly because we are trucking this product and certain of our inputs by 3,000 kilometers.

But that system would handle a doubling of where we are now and we have studies going on then for the longer range opportunities to build this up to a world class mine, which would require rail and we're working with the government, there's some regional things going on with other countries.

Historically, there was rail systems there and we think that, ultimately, the country will get there.

If you have agreement with the government and you did find some rail connection out of Tenke, could you just give us an idea of the scale of Tenke's production?

Would you be able to quadruple it or more?

Yes, from our current level, that's the range that we talked about.

We've talked about the ability to double with oxides and double again with the sulfides, but that's order of magnitude type of deal.

We still have to do some core drilling and exploration analysis.

We have some mixed ore -- that's the significance there that will require some metallurgical work to deal with, but that's the order of magnitude opportunity that we see there.

One last question, just on the balance sheet and you have very conservative balance sheet.

You paid down almost all of the Phelps Dodge debt now in a very short period of time and you recently doubled the dividend.

Each though you have a number of organic opportunities, you seem to be leaning away from the external.

Of course, the organic is so attractive; you still have what looks to be a lot of excess cash or cash flow capability.

Could you comment on the potential for share buy-back?

I think you just look at the traditional and the history of our Company, our Board has a tradition of being shareholder oriented and as we look forward, we think -- I think -- you see this across businesses everywhere.

Now is the time that businesses are being conservative with cash positions, but our tradition has been not to retain excess amounts of cash.

We really want to invest it.

I mean, that's the best thing we can do for shareholders.

But to the extent we have excess cash, our Board's tradition has been to return cash to the Company.

We pay strong regular dividends.

We pay special dividends and have bought stock back and all those things will be considered -- are considered by our Board at each one of its meetings.

Thanks, Richard and congratulations again to you and the whole team.

Thanks, Mike, we appreciate your comments and we'll share them with everyone.

Our next question comes from the line of Kuni Chen with Bank of America-Merrill Lynch.

Good morning, and good job in the quarter.

I guess just first off on Tenke.

Can you remind us -- my understanding previously was that the feasibility for Phase II would be around now.

Can you just remind us on the timing there and what the milestones look like as far as your discussion with the government?

Does that need to move forward by the end of the year?

What's the point in time where you would look to commit capital to that?

Well, you know, we've been very clear with the government and it's just common sense to say we're not going to commit existing capital until we get all the issues related to our contract discussions and our ability to operate in a reasonable fashion behind us.

In the meantime, we have advanced the feasibility studies.

We're looking at several alternatives.

The feasibility studies are not going to be the time constraint for going forward.

We're going to be prepared to go forward when these discussions with the government are completed in a mutually satisfactory way.

That takes place first and then you address the feasibility of Phase II after that?

No.

We'll execute on the expansion.

We're dealing with the feasibility studies right now.

We are working and we've got several alternatives.

They're wrapping up.

We've got a lot of data and things of that nature.

It's really the question you had about committing capital.

So we're meeting all the requirements of our contract in terms of doing the studies and so forth, and we're not slowing down the study aspect of the work, in terms of saying we're going to start ordering equipment and doing construction work that's what's pending resolution of these discussions.

I see.

Okay.

Just one follow-up.

As far as your position in the US, would investing in a larger truck fleet be something that you would consider as a way to further improve your costs?

Is that an attractive investment or is there too much parked equipment at this time to consider going to larger sized trucks?

You're talking about mining trucks?

Yes.

Okay.

Because one of the issues that's on all of our minds is there's currently an issue with delivery trucks and that sort.

But with mining trucks, that's an interesting question.

We are working right now -- we had in round terms 100 haul trucks that were idled when we cut back.

We've been using those.

We've been using some of those in our restarted operations.

We're going to use some at Climax.

We used some at Chino.

We sent some to South America, some to Indonesia, and now we're seeing some opportunities at reworking.

As we watch how the industry is changing its truck fleet situation from one manufacturer to another, we're seeing some opportunities of acquiring some used trucks and reworking them and that would give us capacity on an ongoing basis.

It's a real dynamic thing.

We have a large scale operation.

It's in large part the Cat 793 trucks.

Some other operations are going to different trucks, different size trucks, different manufacturers, and that's making some trucks that fit in particularly well with us available; and we are moving to take advantage of that.

Thank you.

Our next question comes from the line of Sal Tharani with Goldman Sachs.

Good morning, Richard.

Good morning, Sal.

How are you?

Good.

Just a quick question on El Abra Sulfolix project.

I thought that you mentioned about an opportunity to do milling and concentrate over there that you found larger reserves.

Does that mean that you would do it instead of Sulfolix or Sulfolix will go ahead?

Sulfolix is going ahead as planned.

We have the infrastructure there.

We have to make some changes.

We had this dynamic pad that we've been using for the oxide.

We're changing it.

But this would be -- the mill opportunity is incremental to the sulfur.

Sulfur is under way and will operate regardless of the decision we make on the mill.

And what will be the capacity of that concentrate, if you do that?

Just an approximate idea what range are we talking about?

Well, it's really too early to say that.

These concentrated mills for a project with this grade; there's standards that we'll look at in the alternative, in the studies.

Right now we're in kind of a pre-feasibility or study phase with that and a lot of this will depend on how we work through our potential opportunity to do something jointly with Codelco.

Thank you very much.

It would be a large scale mill, Sal.

Yes, Sal.

It's like at Morenci.

You don't do a small mill for a large low grade deposit.

It has to be a mill that has substantial capacity because you need the economies of scale to make something economic.

Good news is we've got the resources to even think about this.

Great.

Thank you very much.

Thank you.

This is Jim Bob.

Let me just comment on the size of these sulfide deposits.

It's come up in four or five questions here.

Just don't forget that the Morenci, which, of course, is a world class mine already, that the sulfide ore at Morenci could be up in the 5 billion pounds, which is 2.5 billion pounds more than we have at Grasberg.

Obviously, the grade is going to be less.

What you have at Morenci, you're still talking about something that's going to be over a half (inaudible) as copper.

Of course, you've got the same size at Cero Verde.

That has the outside based on our exploration drilling of being a 5 billion ton ore body.

That's again twice as big as the Grasberg.

Obviously that's a grade again.

With the copper and moly credits, that will be over 0.5% percent copper.

El Abra is probably in the 3 billion ton range which is, again, bigger than Grasberg in size terms.

Once again, it will be lower grade, but based on the deep drilling we're doing there, could be up in the 0.5% percent.

So, as we talk about these things, I just thought I would put it in perspective.

We've already talked about the size of the group at Tenke.

So when you throw those kind of numbers around, obviously as you said with the lower grades you've got to have the big mills.

When you take the Grasberg at 2.5 billion and you take the potential of being able to quadruple the order there because of the size of that and then Morenci.

Cerro Verde, El Abra, talking about five world class properties that have tonnage.

We've got enough exploration and exploitation drilling done that those are not just numbers we throw around.

Those are likely targets.

I hope that puts a perspective around this whole envelope of what we call Brownfield projects that are really Greenfield type of size that we've got in our hip pocket to develop as the market allows us to.

Thank you very much.

And Jim Bob mentioned something, too.

Currently there is just a miniscule component to Morenci, as we go deeper and look at these mill opportunities there's a more significant molybdenum, much more significant possibility there.

But these mill sizes, when I talk about a standard, it's 150,000 to 200,000 ton per day mill that would be needed to deal with ore bodies this size.

Okay.

Operator, next question.

Next question comes from the line of Gary Lampard with Canaccord.

Good morning, Richard.

Good morning, Gary.

My question is on the transition to the block A at Grasberg.

Every now and again somebody asks you how your cost structure might change as you move from the open pit to the block A.

I'm wondering if you could update us on your current thinking?

Yes.

It's a very attractive situation and it's very dependent on the price of gold as it has been in the pit.

But a combination of price of gold and the price of diesel.

Because when you move underground, we're going to be idling 140, 150 big haul trucks or maybe it's more than that now.

Mark, how many?

160.

160.

Because we don't have to mine the waste that you do out of the pit and so at various combination of gold prices and diesel prices, our unit costs have actually been lower under ground than they have been in the pit.

In broad terms, when we think about, say, gold at $800, and oil cost at, say, $70, $80 a barrel, you end up with something in the kind of net $0.40 range, where the pit would have, over its life, been around $0.20, sometimes lower.

But it's within those ballparks, but it will vary significantly, depending on the relationship of the price of gold and the price of diesel.

At current gold prices, it will continue to be our lowest cost operation within our portfolio.

So that summarizes down to a slight increase, if you think about $0.20 a pound of copper.

Is that right?

That's right.

Okay.

If it's in the same range, still you know in terms of the industry, one of the very lowest cost operations anywhere.

Okay.

And presumably, that's all the mining cost.

There's probably some economies of scale as you go to 40,000 tons per day in the mill but that would be relatively immaterial?

There are some issues that we'll face over time.

Certain of our ore bodies have to have -- will have to have some additional processing because of the nature of the ore and so there will be some things.

Initially, though, it's going to be real similar to what we have now.

It's the same ore really.

Go deeper and then with the DOZ mine, over time, we'll have some additional processing.

But that's -- we're talking about 2020 and beyond.

This is Jim Bob.

Let me make sure that everybody keeps in mind when you talk about underground mining, you have to remember the elevation here.

I know that everybody's aware of the fact that we have gravity working in our favor; we wouldn't be talking about block A.

That's why this thing, as we just pointed out, can have these kind of low cost numbers on the horizon because people talk about underground, sometimes a lot of the new stuff is being looked at, people are talking about deep underground mines.

They're talking about mines where they can't block A, they're going to have to have gravity working against them.

So the unbelievable geometry of this ore body at Grasberg where we went up at the 13,000 foot elevation and built that open pit and we mined the open pit, and yet at the mill, you still have the advantage of going underneath the big ore body and as we said, you don't have to move the waste.

Not only do you not have to move the waste, you don't have the hazards of the open pit that we've had at the Grasberg.

(Inaudible.) Rainfall, fog, et cetera, et cetera.

Fortunately, there's no fog underground; there's no rain underground.

So not only are you getting rid of trucks, but you're getting rid of a lot of hazards that you don't have to deal with.

You have your own hazards underground with the block A, but for any of you that have been up to the Grasberg and been there doing during the heavy rainfalls that fall with those big trucks driving up and down, getting in and out of that open pit, so there's lots of things to consider.

That's why the cost structure always fools people.

People think that underground mining is going to be more costly.

With the terrain, the conditions, the weather conditions, it has a huge impact for us to be underground block A.

Thanks, Jim Bob.

Okay.

Thanks very much.

All right, Gary.

Next question comes from the line of Brian MacArthur with UBS Securities.

Good morning.

Two quick questions.

First of all, I'm just trying to clarify on your sales profile over the next few years, where you go from production of 3.8 billion pounds to 4 billion pounds.

What's in there?

If I got it right, we have the small Cerro Verde expansion, Miami, Tenke at 250 level going to 290, Morenci, but no Chino, no Tenke double expansion and obviously no big Cerro expansion.

So effectively those four or five offset 100 million-pound decline at Grasberg and the decline at El Abra.

Is that sort of the way it works in what you have there and all the other optionality going forward?

That's more than sort of.

You've got it nailed.

Okay.

Second question.

Just for accounting at Tenke with the cobalt credit, and I recognize there's been some challenges in the cobalt plant.

You have this little number that says byproduct credit which is the cobalt revenue and freight.

Can you just go through how much is freight, how much of it is that you're just not getting good cobalt right now?

Therefore, if you get the cobalt problem, that guidance you have of byproduct credit might actually go up.

Could you go through what's that in calculation how it might unfold over the next couple of years if you get the cobalt plant working?

We're selling a -- first of all, when you look at the cobalt price, the market price, we're not selling refined metal, we're selling a hydroxide product that's price structure is similar to like you would have concentrates in the copper industry, so the price that we receive is a discount to the market price.

And generally is varies depending on what the price is, but generally somewhere in the 65% plus or minus range of that price.

That's not the discount.

That's the price that we receive.

So it's like a two-thirds, 70% of the selling price is what we realize.

Right.

And then on top of that, so the realized price that you see in the press release reflects that number.

And then on top of that, we have freight costs that we pay which is in the $2 a pound of cobalt range currently.

The freight cost currently is higher than it will be when we get some of the issues resolved because we're shipping the product that has higher water content.

And so that freight will come down and then we've also got processing costs that are netted in that line item for the byproduct credits.

There are things over time that we expect to realize better economics.

We're putting in a new dryer system that by 2011 we hope will deal with this water content.

Long range, we may process the material ourselves to metal.

And then we will get much more efficient when we deal with problems with the S02 plant.

Just to be clear, when you say guidance of $12 a pound, you're talking -- are you talking hydroxide or -- ?

No.

Right.

You're talking cobalt market.

Yes, talking about metal.

Okay.

Thanks very much.

That's very helpful.

All right, Brian.

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

Good morning.

Another question on Tenke cost structure.

Looking at the release, it looks like you're talking about for 2011 cash costs of, say, $0.80 a pound at $12 cobalt.

That's higher than you previously talked about.

My recollection was last quarter you were talking about some of the run rate costs being $0.50 a pound, at $10 cobalt.

What's the difference?

And is that kind of the new cost structure expected to remain in place in perpetuity?

Thank you.

We're going to work hard to get it back down.

With these grades, we're going to work to get the cost back to some of these previous estimates to get with -- this is just where we are right now.

There's some sulfuric acid costs that are higher than anticipated.

Some of it has to do with the material that we're now planning on running through to get to the higher throughput rates.

There's some transportation cost issues with that.

Overall, transportation costs are higher than we anticipated.

We're going to -- some of this has to do with some government fees we're having to pay, not only just in the Congo, but through some of the other countries we're going through and we're working on dealing with that.

We've got about -- I think it's around $0.04 that we've identified that has to do with some of the legal and administrative costs that are facing us because of some of the issues we're facing -- not with the contract review, but with an administration with the government and labor costs are a bit higher.

We just had a session with our team.

We're focused on this.

But you're exactly right.

This is where we are right now and again, that's the guidance we're giving but we're going to work to get the costs down.

As the project expands, we get the benefits of scale, we deal with some of these cobalt issues and some of the other issues, we would think that our costs would come down.

Thank you very much.

Thank you.

Our next question comes from the line of Brian Yu with Citigroup.

Great, thanks.

Good morning, Richard and Kathleen and team.

With your Indonesia guidance, if I look at your back half production it looks like volumes are going to be up about 11%, yet with your revised production numbers doesn't look like costs are going down that much on a unit basis.

Anything changing there in the back half versus the first half?

No.

Let's see.

Let's get those unit costs, because they will be coming down substantially at Grasberg.

Give us a second.

Kathleen will give it to you.

If you look at the top line cost number where before you get to the byproduct credits, it's really very attractive and they've been nothing from a cost standpoint is going on.

Just looking at full year, looks like on the site production delivery basis, you're guiding to $1.57, and thus far in the first half it's averaged $1.58.

So --

Yes.

And it's -- copper volumes are not significantly different.

If you look at the gold byproduct credit, we're well above -- we're going to be $0.14 for the year.

And last time at this quarterly call we were estimating $0.25 for the average for the year.

So our costs are actually better in Indonesia than we had originally forecast and that's being driven by these higher gold credits.

Copper volumes are actually down from our previous forecast for Indonesia.

So that's resulting in the higher site production and delivery cost compared to where we were previously.

Okay.

So because of the mine plan changes, when you look at Indonesia alone, we've got lower volumes.

That's being offset by some higher volumes in our consolidated numbers and that's partially what's driving what you're observing.

All right.

And then at Climax, I didn't get what the total dollar spend you were going do over the summer, 6 to 7 or is it 60 to 70.

Ballpark, $60 million.

Okay.

And is this money you're spending going to be part of the total CapEx of $700 million?

Right.

This is cost that going into the year we were planning to be spending next summer and we made the decision to go ahead and start doing some work this summer.

For those of you, I think most of you know, this is located right on top of Fremont pass in the Colorado Rockies and so there's a summer construction season that you have to take advantage of.

And so what we really did is we advanced some things we were planning on doing in the summer of 2011 to this year.

And it's in all of our numbers.

And it would be part of the $500 million cost to complete that we're disclosing.

All right.

And then at Morenci, I think you mentioned that as you go deeper, the moly content does go up.

Does this influence your decision on when you would want to go forward with Climax?

No.

No.

No.

A Climax decision will be earlier than this -- we're doing studies at Morenci now.

It will be a major capital project to build a big mill and so forth.

I just wanted -- as Jim Bob referred to, it adds to the economics of looking at the expansion at Morenci, but it won't affect Climax.

Great.

Thank you.

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

Good morning, everybody.

I'm sorry, the questions never end.

Just quickly, I was a little bit surprised on the Tenke coming in a little bit higher than the average.

I think we addressed some of the cobalt issues and the moisture and things like that but you would sort of stand by $0.50 net cash cost range for that division in 2011 regardless of if you do a second phase expansion?

Is that kind of the ballpark?

No, no.

Our guidance is $0.80 at this point.

We're going to work towards driving that down, but when we look at a combination of our historical -- the costs that we've been incurring.

We now have been operating this.

We began a year ago and ramped up copper.

When we look at what we're actually spending, we have the issues that we'll deal with.

Some of the issues with cobalt, but some of those will be with us for a while and when we have these issues with the government, plus some incremental sulfuric acid costs, right now we're looking at guidance of $0.80 for 2011 with an understanding we're going to work to get it lower.

Great.

In terms of the change in the mine sequencing plan at Grasberg, is any of that related to the recent heavy rain season and some of the seismic activity out there?

No.

No.

That really hasn't affected us.

We haven't -- as far as I know it's just been normal rain, maybe a little less.

We've had normal rainfall this year, both in the first and second quarter.

We don't have a monsoon season like some of the rest of Indonesia.

First quarter, we see marginally higher rain.

We saw that.

Wasn't substantially high.

And the seismic activity that you've seen -- it's off the northeast corner of PNG.

It's a long way from us, not even felt out at site.

Any impact from the Dodd-Frank legislation that's going through that's requiring additional disclosures for companies dealing in the DRC.

They named a bunch of minerals, copper wasn't one of them, but any impact there that could relate to additional disclosure in doing business out there.

No.

The metals they're talking about are the ones that are being mined in small operations in eastern Congo, its coltrain and other metals like that.

It has no impact on us.

And another thing the disclosure about payments you a make to the government that's in that bill were really modeled after the international effort to disclose payments that we were already complying with.

So there's nothing in there that really is affects us.

Great.

Thanks very much.

Okay.

Thanks Jorge.

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

Hi, folks.

Hi, everyone.

Couple questions here.

Hi, Richard.

Couple questions, here.

First of all, when we've been out in Peru at Cerro Verde, I guess the thing that really surprised me was to hear the possibility of a tripling of the size of that -- of those operations there.

Is it because you're so comfortable with the water availability, the electrical and power availability and you've got a workforce that's located right there in Arequipa and all of those capabilities are reasons, along with the resource, of course, why you feel even more confident to talk about those kind of numbers today?

Let me be clear.

The resource -- the mineral resources are there, the ability to expand is there.

The water resource is a question mark.

Red, fill in here if I go too far.

We feel real comfortable about our water resource.

Got some work to do, but we feel real comfortable about a water resource that would allow us to double.

But that's the limitation about whether we could go beyond that.

Tony, we've been very successful there working with the local community on additional reservoir capacity.

That was a big part of the first mill project that we built.

We think we have opportunities to partner with the government and the community on additional projects like that in the future, and it's those kinds of things that we're working on and would open up a bigger window of production capacity for us there.

So Red and Richard, these discussions now are ongoing about the possibility of looking at further reservoir potential, that type of thing?

Yes.

I mean, it's -- we're working on feasibility study information right now.

Right now we're doing the engineering, correct.

Yes.

All right.

Excellent.

Just a follow-up question on Tenke, Richard.

It sounded to me as if -- I know it's been a long process in this whole review and you've got the existing contract and you continue to adhere to the parameters of that -- but you sounded much more comfortable on the margin.

Is that a fair portrayal on how things are developing there and the support that you're receiving?

Well, let me say, we've been with this over a two-year period.

We've been very close on a couple of occasions during that period that we thought we were within a matter of days of having this completed.

For whatever reason, a government changes, other things that have come in the way.

I think throughout the period, you can describe our situation as being cautiously optimistic.

And sometimes what you hear in the tone of my voice is what's going on at a particular time we're talking and right now the discussions have been very good.

So we remain cautiously optimistic as.

As I said, we're operating every day.

We're going to work to get our cost down, to improve our volumes and right now we're re-capturing investment.

We're -- cash is coming out of this, back to repay the advances that we made over time.

The key to going forward with developing us to its full potential which would be a great event for this country.

It would be very positive for all the stakeholders involved and we keep saying that it's getting these discussions out of the way.

Appreciate that insight, Richard.

Thank you.

Thanks, Tony.

Next question comes from the line of Wayne Atwell with Casimir Capital.

Good morning.

I'm very impressed by your list of projects that you can develop.

Do you have the staff?

This may sound like an impolite question.

Do have you the staff because you're talking about expanding just about every project, and it's going to take a huge amount of engineering work.

I tell you, we've got a great team and that was one of the great things about the combination of our two companies was being able to put these two groups together and a lot of the young people.

One of the great things, Wayne, that's been fun to watch over time is seeing our Indonesian national staff has developed.

We actually have Indonesian nationals working in the DRC in South America, here in Phoenix, and so all of that's good.

Having said that, we are going to be out looking for people.

This is a very attractive place to work.

We're hiring people and we'll continue to do that, so we've got development.

We're very comfortable internally with what we do.

Two years ago, the big issue at this very moment in time was dealing with outside equipment suppliers and contractors.

And that's going to be an issue going forward is to the outside services, but I'm very comfortable with what we can develop and handle in house.

Now, you have a huge list of very attractive projects, but in the past management's been very excited about the rest of Indonesia.

You have block A, which of course you've got a good handle on.

We've seen a number of huge potential projects that you could identify and develop in the rest of Indonesia, and I realize you had to pull in your exploration teams a few years ago when there was some reasons to do that.

What's the status of your exploration work in the rest of the country?

Jim Bob, you want to comment on that?

Obviously, the big project you're talking about are the ones we identified early on.

We went in and did the (inaudible) surveys.

One of the things that we haven't been able to do, we did as you know plan a gold project at [Waloon] to the north.

One of those big mines.

Still haven't been able to get the size of it to the point even with these gold price that's we have that you could justify a road as far north as we would have to go to get to it.

Probably the biggest frustration we've had is a big that you're remembering at [Kamopo] which is about 100 miles west of the Grasberg and that darn thing, the aeromag, just like the aeromag at the Grasberg, so we had some high hopes.

There was some shallow drilling down there that had seen some indications of some copper and gold.

And we got in there and we drilled what looked like the identical spot on the aeromag that you have, a Grasberg type ore body and we had one or two hits but we just couldn't confirm the size that we wanted.

So a lot more work to be done in there because these aeromags are so big.

As you know, you don't want to miss the sweet spot.

Every time we had gone in there to try to really get going, we had some kind of security issue because of the situation, et cetera, et cetera.

So just have to stay tuned on that.

We still have control of the acreage but in Kamopo, in particular, is a prospect you're remembering that we had hoped by now we would have done enough drilling that if there was a Grasberg type ore body out there we would see.

We just haven't been able to ever have a continuous program like we have in block A and of course the reason for that is block A where Grasberg is, we don't have any issues as far as camp and having to have people out there in the rural areas without the infrastructure to back them up that we do on the exploration that we do at block A.

So that's why we've been able to -- we've been so successful expanding the bottom of Grasberg east and getting the (inaudible) and the Big Gossan and those kind of things defined.

Just stay tuned on that because is Kamopo's still out there, lurking in that jungle somewhere.

Could be another Grasberg.

The aeromag says it ought to be there.

We haven't been smart enough or lucky enough to get the drill holes in the right place.

Okay.

Great.

Just one quick follow-up in addition.

I was just in Arequipa last week, and another copper Company is very concerned about water.

They drilled some wells and they found water, but it's unbelievably dry down there, as I don't have to tell you.

And they were concerned about local pushback because without irrigation, people just can't live down there.

So you feel pretty good about water?

Would you use wells or take it out of the river?

They seem to feel there was a lot of risk that the locals might get pretty feisty if it weren't handled correctly.

Wayne, this is Red Conger.

The water supply that we have at Cerro Verde now is renewable.

It comes from a reservoir system in the high mountains above the operation.

In the expansion, we did to build the current concentrator; the water resource that was created by building a new reservoir was split equally between the community and Cerro Verde.

So the things that we've done a bit in partnership with the farmers, with the community, and we look forward to doing more of those kind of development projects there in the future.

So you think --

we're not -- what we're looking to do is not compete with the local community, but do things that would be incrementally beneficial to the local community and provide for water for our operations.

So you maybe could beef up your reservoir and then that would bring some water in and maybe share some more with them and use it yourself.

Yes, or build a new reservoir, that's one of the things we're looking at.

Seems like it's quite a distance, maybe 50 or 100 kilometers to bring water in from a reservoir.

Do I have that right?

We take advantage of the natural drainage.

Right.

So it flows by gravity naturally down the Rio Chile drainage.

Okay.

Thank you.

Thanks, Wayne.

Our next question comes from Peter Volkner with [Benine] Capital.

Hi, guys.

Good morning.

Hey, Peter.

Congratulations to the whole team on a great quarter.

I've had an opportunity to meet a number of your operating personnel.

I know they're best-in-class across the board, but especially to you, Richard.

Congratulations for doing such a great job steering the Company over the last two years.

My question's probably not a big surprise and I think Mike was alluding to it earlier.

To say you have a strong balance sheet and ample liquidity and cash flow maybe understates the issue.

At the pace of the first half of 2010, you're going to be showing net cash on the balance sheet by the end of the year; and I understand that you want to be conservative but my question is this.

In a more normal or stable environment, macro-environment, what do you think is an appropriate level of leverage on the balance sheet?

And how do you think about something like a special one time dividend to re-lever the balance sheet versus an expanded share repurchase?

Those are issues that our Board considers, Peter.

And no question, the times that we're in and uncertainties and so forth, lead to different sorts of analysis than you would be if you were in different times.

We have an issue just from a cold blooded economic analysis of debt levels in that we don't get tax benefits for debt like some other companies would.

And that has to do with the fact that we pay such large taxes in our overseas operations, particularly Indonesia, which has no need for debt because it's of where it is.

There's all this big discussion right now about foreign tax credit and so forth.

Freeport is a mirror image of what a lot of US companies are where they have low foreign taxes and higher US taxes.

We have higher foreign taxes than we do in the US.

One of the issues about leverage that business school students would normally look at is the tax deducibility of interest.

We only get 15% of our interest that's deductible.

That's just one factor that goes into it.

In terms of what would we be comfortable with -- you can almost go back to the point of the Phelps-Dodge transaction, the way we structured what we paid for it.

We at that time we were comfortable with having $6 billion to $7 billion of long-term debt, which is more than what we have now.

So, we could be comfortable with more debt than what we have now.

It's a question that the Board's going to be talking about.

It's their decision, and they will look at -- as I said, we all want to invest.

That's the first thing we want to do.

And then we look at things like the regular dividend, special dividend, and as Mike mentioned, stock buy-backs.

As a quick follow-up, if you look at the current price deck of metals, and just make the assumption -- and I know isn't anybody's base case -- but if you think it hangs around plus or minus 10% of where we are today, you guys should be generating close to $4 billion of free cash flow even with the dividend and a little bit below that, in that type of environment.

As you've alluded to, or as you've pointed out very clearly, you've got as much as six world class mines that you could be sitting on if you fully vet them out.

If you were to -- to fully get there -- I have two questions.

What kind of volume would you be looking at?

And, would that require spending all of that cash flow, if (inaudible) numbers, or would you still have surplus cash flow?

It seems to me, I can't get the numbers to add up.

It seems to me like you're still generating cash -- or I'm sorry, you're still accumulating cash on the balance sheet, given the timing of these projects.

No question.

We have access to credit now that's comparable to what we had before the downturn, so we have a lot of financial flexibility.

We'd be very comfortable in financing these project using some debt.

They are going to be over periods of time, but as we look here right now, you're going to see a Company that will have the opportunity of returning significant cash to shareholders as we invest in growth.

And outside of the internal CapEx programs, share re-purchases and changes to the dividend, are there any other uses of cash that the Company and the Board are evaluating or is it all on the table?

No, it's all on the table.

If you notice in our financial statements, we do spend money on reclamation activities, but there is one of the things that we are really committed to that's going on behind the scenes -- we don't talk about it earnings conference calls -- is we've had a very active program solving problems.

We've been settling these issues, reaching conclusions, spending money in advance to get problems behind us.

But that is just all normal course of business.

Terrific.

All right, I appreciate it.

Again, terrific job.

Thanks, Peter, appreciate it.

Our next question comes from the line of Dave Katz with JPMorgan.

Hi.

I just wanted to come back to the question which was asked earlier about the Tenke Fungurume costs.

Specifically, looking at the site production delivery costs for the first half of the year is $1.32.

If you take the average, it would imply that the second half of the year is $1.47, and I was curious why it was going up?

It's just the combination of the factors that I mentioned earlier.

It's the fact that as we --

Are you talking about site production and delivery costs?

Yes, yes.

I am.

Before byproduct credits?

Correct.

It's just issues related to some incremental transportation costs as we step up some production, we're having some higher sulfuric acid costs, we're having some higher employee costs, and we're also having some costs dealing with legal and administrative issues in dealing with certain things that we are having to face with the government.

So, it's the combination of all of those factors.

Okay.

Thank you.

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

Hey, guys.

One is a global issue.

Obviously, we are hearing rumblings of the Australian super tax.

Any of your venues, whether it's Indonesia or the Congo, where they are thinking about something similar as far as the people on the ground that you are talking to are saying?

Also, I wasn't clear, just wanted to clarify, based on all the ramp-ups you have, do you have a 2011 CapEx estimate?

Yes, it's on the slide.

Is that the 17?

Yes.

That doesn't include potential additional investments that we are considering, but that's based on our current plan, slide 23, that is consistent with the volume projections that we've got, so it's an apples and apples.

Right.

Brett, we only add in to our -- that slide, slide 23, projects that have been formally approved by our Board.

All these things that we are considering are not in there, neither the cost nor the volumes.

So, when a project gets approved, it goes into those numbers.

Now, with respect to taxes, I think there are some real important things here.

In Indonesia, we have a contract of work.

We've had two since the mid-60's when this Company started there and that sets for the life of the contract the taxes and royalties that are payable, and that's never been changed.

Even though, today in Indonesia, their corporate income tax is actually 30% and we pay a tax of 35%.

Whatever Indonesia decides to do from a policy standpoint -- and by the way, Indonesia, as a country, has done very well and they are talking about decreasing taxes to encourage business.

But our situation is fixed there.

In Chile, we and other members of the copper industry have recently been engaged in discussions with the government about a revision to their royalty payments to in effect advance some royalty payments so that they would get some funds to deal with the aftermath of the earthquake and tsunami.

That fell apart for political reasons and right now our situation in Chile is fixed by our agreements that we have there.

In Peru, South America has had very attractive tax regimes and royalty regimes compared to world standards.

That is one of the reasons Chile and Peru have just done so well.

We use them as examples in other parts of the world, that if you do have attractive taxes and royalties, you encourage investments.

Peru, there has been some steps to have what they call voluntary payments that we've been involved with.

We constantly have discussions with them about tax issues, but the whole industry -- our ICMM organization and our chair was very concerned about what Australia was doing.

We have seen this case in other countries like Mongolia, which had difficulties in getting contracts approved.

In the DRC, they have indicated they are moving towards a new mining code there that would provide for higher taxes for new projects.

It wouldn't affect our project because we have an existing contract.

This whole issue of resource nationalism is world-wide and it's another one of those factors that's going to make it more difficult from an economic standpoint to justify new investment in copper mining operations.

That, along with environmental concerns and the fact that resources are underground, cost structure, et cetera, et cetera, et cetera.

Yes, it's an issue.

Thanks very much, guys.

All right, Brett.

Appreciate it.

Well, I believe we have answered all the calls.

It's been a long call; we appreciate -- we still have a large number of people still online.

We appreciate your interest in our Company.

We look forward to reporting the rest of the year and as always, if you have questions, be sure and call David Joint, and he'll get you connected with the right people in our Company.

Thanks a lot.

Ladies and gentlemen, that concludes our call for today.

Thank you for your participation and you may now disconnect.