費利浦·麥克莫蘭銅金 (FCX) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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.

Good morning, everyone, and welcome to the Freeport-McMoRan Copper & Gold second quarter 2012 earnings conference call.

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

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

We have several slides to supplement our comments this morning and we'll be referring to the slides during the call.

The slides are also accessible on our webcast link, at FCX.com.

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

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

We'd like to refer everyone 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 Jim Bob Moffett, our Chairman of the Board, Richard Adkerson, our Chief Executive Officer.

We also have several of our senior operating executives here today, Mark Johnson, Red Conger and Dave Thornton.

I'll start by briefly summarizing our quarterly financial results, and then turn the call over to Richard, who will be going through the materials on our website.

As usual, we'll open the call for questions following our prepared remarks.

Today, FCX reported second quarter 2012 net income attributable to common stock of $710 million, or $0.74 per share, compared with $1.4 billion, or $1.43 per share, for the second quarter of 2011.

Our second quarter 2012 results included charges for adjustments to environmental obligations and related litigation reserves, which affected net income by $53 million, or $0.06 per share.

Our second quarter 2012 consolidated sales of 927 million pounds of copper and 266,000 ounces of gold were higher than our April 2012 estimates of 895 million pounds of copper and 235,000 ounces of gold.

This primarily reflected higher copper volumes in North America and higher gold sales volumes in Indonesia, which were principally timing-related.

Our second quarter 2012 consolidated sales, as anticipated, were lower than the second quarter of 2011 sales of 1 billion pounds of copper and 356,000 ounces of gold, primarily reflecting lower ore grades and production rates in Indonesia.

The lower copper sales volume also reflected lower ore grades in South America, partly offset by increased production in North America and Africa.

The operations and productivity at PT Freeport Indonesia have continued to improve, following the first quarter 2012 work interruptions.

The milling rates in the second quarter of 2012 averaged just under 180,000 metric tons of ore per day.

That compared with the first quarter average of 115,000 metric tons of ore per day.

The mining operations in the Grasberg open pit are approaching normal levels, and the underground mining operations at the deep ore zone, our DOZ underground mine, continue to be ramped up and we expect to reach 80,000 tons per day in the fourth quarter.

Mining rates at DOZ averaged 45,000 metric tons of ore per day in the second quarter.

Our molybdenum sales during the second quarter totaled 20 million pounds, and that was in line with our April 2000 estimate and the year-ago period.

Our realized copper price of $3.53 per pound in the second quarter compared with a realized price of $4.22 in the year-ago period.

We realized just under $1,600 per ounce of gold in the second quarter.

That compared to just over $1,500 per ounce in the second quarter of 2011.

Our realized molybdenum price was $15.44 per pound in the second quarter of 2012, compared with just over $18 per pound in the year-ago period.

As anticipated, our consolidated average unit net cash costs of $1.49 per pound in the second quarter were higher than the unit net cash costs of $0.93 in the second quarter of 2011, primarily because of lower volumes in Indonesia and higher mining rates in North America and lower byproduct credits.

We generated operating cash flows of $1.2 billion in the second quarter of 2012, which exceeded our capital expenditures which totaled $840 million during the second quarter.

We ended the quarter at June 30 with more cash than debt.

Our consolidated cash at the end of the period approximated $4.5 billion, and our total debt approximated $3.5 billion.

In May 2012, we paid a quarterly common stock dividend of $0.3125 per share, and that followed the February 2012 authorization by our Board of Directors to increase the annual dividend rate to $1.25 per share.

We have about 949 million common shares outstanding.

I'd now like to turn the call over to Richard, who will be covering the materials in our slide presentation.

Good morning, everyone.

We're pleased again to be able to report a solid operating performance by our organization and, as Kathleen indicated, the financial performance was in line with our plans.

Some important things happened during this quarter.

We made further progress by improving productivity at Grasberg.

It was about this time last year that we began to see the issues with our PTFI union that led to the strike in the second half of the year.

And our relationships with our workforce has improved significantly, and we're taking some steps to help build a positive relationship there, in terms of being responsive to some of the aspirations of the workers.

Outside of Grasberg, we had some important developments.

As you know, our strategy is focused on our significant resources of copper, and we have a number of brownfield development projects which we are currently engaged in which we are focused on for the future.

At Tenke, we have achieved our first copper.

We'll be completing this expansion project by the end of the year.

This is the first expansion at Tenke following the initial development of the mine in 2009.

We've initiated construction at Morenci, our flagship mine in North America.

Red Conger's group there is really focused on taking advantage of the resources we've been able to identify through our exploration and drilling.

And this is the first project, but not the last.

We're really excited about that.

At Cerro Verde, where we're developing that mine to be the world's largest concentrated milling operation, we are progressing with the planning and permitting.

We got some important steps accomplished with the government -- the government in Peru on a non-controversial, supportive basis.

So we are looking to move forward with construction there.

At our molybdenum operations -- Dave Thornton is here.

The Climax mine restart -- we completed construction.

We produced our first commercial molybdenum there.

We'll be ramping that up, ramping up in a way to take advantage of the resource and be responsive to the market needs for molybdenum.

We paid our dividend, increased dividend, of $1.25 per share annually.

We have a very strong balance sheet, which is good to have in this world, with cash exceeding debt by $1 billion.

The financial highlights that Kathleen reviewed are on page 4. As I said, it was a quarter in which we basically met our plan.

There's always ups and downs in that, but we basically met, slightly exceeded, our production volume guidance and costs were in line with expectations.

Page 5 shows what our cost structure was.

Consolidated unit net cost, net of byproduct credits, were $1.49.

That reflects unusually high cost, uncharacteristically high costs out of Indonesia, because of the grades.

And you'll see that as we look at our volume productions going forward.

With typical grades, typical production volumes at Grasberg in Indonesia, those costs will come down significantly.

Obviously, even these levels, at $1.49 consolidated, with copper today being in the $3.50 range, it shows just what a high margin business we have.

And you can see how our production is divided among the North America, South America, Indonesia, and the growing African production.

Today, copper markets certainly reflect the global economy.

And despite that, inventories have dropped globally.

And in many places, even in Europe with weak economic demand, copper markets remain relatively tight.

And with all of the negative comments about the world's economic situation, to have copper at $3.50, I think is notable.

And the outlook for copper, we believe, is very positive, supported by the continuing challenges of the industry in terms of supply.

Mine disruptions, falling grades of existing mines, delays in constructing new mines, really are very supportive of the marketplace, as you've heard us talk about for long periods of time.

China remains the important demand driver, and China's economy has slowed.

It's still growing at a substantial rate.

And the base of that growth is larger, as it reflects the significant growth that has occurred over the last 10 years.

China has expressed commitment to support its economy through fiscal policy and also through infrastructure spending, which is obviously very key to copper and our commodity there.

In the US, the market has been supported by the automobile industry, which has now returned to pre-2008 financial crisis levels.

Housing has ticked up, as you can read about in the news; and that's provided markets for copper.

Overall in the US, copper demand is stronger than the overall performance of the US economy.

And it certainly reflects the weakness in the economy in the US, but there are pockets that are making the business stronger than the overall economy.

Europe, of course, is weak.

But these global inventories, even in the face of the global weakness in the economy, inventories are low historically and have been dropping.

And as I'll mention again, this is a business that is supported by supply, and even though we've had long periods of time with very high copper prices, high in relation to historical levels, the industry has not responded as it did in the past.

The supplies just have been slow to develop and lower than expectations, and that is very supportive of the market and we think that will be supported in the long run.

Now, that's what leads us to our strategy.

Our strategy is not built on acquisitions.

It's not built on major new greenfield development projects.

We have the benefit, as a result of the transaction we did five years ago by combining FCX with the Grasberg and Phelps Dodge operations, of having a series of geographically diverse assets which have very large reserves, and we've added significantly to those reserves, and very large resources beyond reserves, which we're continuing to qualify as reserves and develop new projects.

These are greenfield projects.

They have a lot lower level of challenge and accomplishments and execution, a lot less risk, and a lot more certainty in the ability to perform them and to manage them in times of varying price levels.

So we couldn't be more pleased about what we're doing and where we stand with our set of assets.

We'll start with Climax.

Molybdenum prices have weakened slightly, but the market outlook, longer run, looks good.

We're the world's largest, lowest cost molybdenum producer.

We're very active in the high value chemical sector of that marketplace, with our Henderson mine and now our Climax mine being primary molybdenum mines, the byproducts that we get out of our copper mines.

It's a great business.

The Climax mine is the world's most attractive new mine development opportunity, and we have completed the construction of that mine.

We're ramping it up.

We had our first shipment of moly in the second quarter.

The current capacity, which we expect to reach in 2013, depending on market conditions, is 20 million pounds a year.

The resource would allow us to go to 30 million pounds a year.

And with the combination of Henderson and Climax, we're going to be in a position to flex production to meet market demands.

If the market's strong, we'll be producing all-out.

If it's weak, we have the ability, without destroying our cost structure, to adjust production.

Then when we turn to the copper business, you followed us as we have returned our existing mines to their levels of production prior to the 2008-2009 financial crisis.

We deferred some projects, then restarted.

All of those have gone well.

Now looking forward, we have near-term expansion projects.

We have longer term expansion projects.

But the near-term major projects that we have, as I mentioned, are the Cerro Verde expansion, the mill expansion and mine expansion at Morenci, and the Tenke 14,000K expansion.

Together, these projects, which we can see completing in the next three, four years or so, will add about 1 billion pounds of incremental copper at $6 billion of capital, which is attractive in today's world.

And beyond that, for example at Morenci, we have this current expansion under way that we expect to add 225 million pounds of copper annually.

We have sulfide resources that will give us the chance to execute potential plans which we're now engaged in studying to have significantly additional incremental production out of Morenci here in North America.

The expansion at Cerro Verde is going very well, going very well.

There's been a lot of issues with communities for expansion in Peru.

We found a way of having a really good relationship with the adjacent community and the government, and the communities are supportive of us.

There's always some dissident comments.

But basically, the way we're approaching this is a way that we get support for.

Beyond that, we have a significant resource in Chile, at our El Abra mine, which gives us an opportunity -- and I'll say right at this point, it's an opportunity to have a major expansion.

At Tenke, where we began construction on our project in early 2008, completed it 15 months later, we're operating effectively.

The logistic system is working.

Production is going in a reasonable way.

We're in an area of the Congo that's far away from the difficulties in the Eastern part of the country, and we've had peace in our area.

We are now engaged in our expansion project and it is going very well.

And beyond that, we have a very significant resource of mixed ore and sulfide ores that we're studying that we believe will allow us to ultimately develop this to a world-class mine.

And at Grasberg, we are actively engaged in developing our underground resources.

Kathleen mentioned that the DOZ mine is in the process of returning to its established capacity, where we were operating before the labor issues occurred.

And then beyond that, we are advancing work on the development of the block cave underground reserves that we have underneath the pit.

We're now within sight of the completion of mining in the pit, which will occur in 2016, 2017 time frame.

And at that point, we will have the infrastructure mine development to begin mining underground and continue the Grasberg for many years forward as a high volume, low cost, profitable operation.

The details of the Morenci mill expansion are presented on page 11.

It's expanding our mill to 115,000 tons per day, increasing the mining rate.

Attractive capital cost, significant new production.

And this gives the details.

Permits are going well.

We don't foresee any permitting issues, and we're progressing engineering and long lead time items.

We expect to have this expansion project at full rates in 2014.

That's reflected in our numbers.

You can see some of the details, just about how significant this property has been and continues to be.

And we are excited, we're really excited about a much larger expansion down the road for Morenci.

Cerro Verde, at the time we acquired Phelps Dodge, we were just beginning to operate the last expansion, which brought capacity to 120,000 tons per day to the mill.

Now we're talking about tripling that to 360,000 tons per day, a significantly higher mining rate.

$4 billion of capital, but this is building at a site that's established with footprint there.

Water and power issues, we believe, have been identified.

This is a proven technology, proven approach to development.

We came up with a water supply that benefits Arequipa, the second largest city in Peru, by developing that community a much, much needed waste water treatment facility, which the community is very excited about.

And that facility will give us a water source, so we're not directly competing with agriculture interest.

We filed our environmental impact statement.

The government has recently approved our fiscal stability agreement, which will kick in in 2014.

We're going to start construction next year, and expect to complete it by 2016.

At Tenke.

This is a project that we had a lot of conversations about in the past, and it's really gratifying to see just how well that operation is going.

We have today, including construction workers, about 8,500 workers in Katanga at our project.

Of those, more than 85% are Congolese.

Our contractors are working with us in a much more effective way than we did on our initial project.

The initial project has operated itself above design capacity.

We'll be significantly increasing our mining rate there.

We'll increase production significantly.

Construction, as I said, is going well and it's targeted to be completed in 2013.

We continue to advance exploration and metallurgical analysis to determine where we're going for that, and remain very excited about it.

The Grasberg block cave and the extension of the DOZ mine to what we call the DMLZ mine underground development has been restarted, advanced, following our labor issues.

Significant development has been done.

Working with O-4 systems and the block cave shaft development, it's a significant development cost.

Our share of development expenditures are expected to average $550 million over the next five years.

Rio Tinto will be funding an additional amount.

We have been operating with block caving operations at Grasberg -- and I don't think many people focus on this just because of how big and exciting the pit has been.

But our team has been block caving at Grasberg since the early 1980s, and we've had continual development of new mines at lower elevations, and it's been a very successful part of our operation.

It's an extension, with the Grasberg block cave, of the same ore body we've been mining.

And we're very confident about our ability to operate that at levels where we'll have mill rates well above 200,000 tons per day, which would make it, in all likelihood, the largest underground mining operation in the world.

With respect to Indonesia, as I said, we've advanced productivity during the second quarter.

Still some issues to deal with.

We've had some contractor issues recently, and those will be ongoing.

Our team is working cooperatively to try to address these -- or to address them, and it will be something that we'll be focused on from here on out.

And we're focused on quality of life improvements for our workers, being involved in dialogue with them and with the government authorities to make sure that we have a harmonious workplace.

As we speak today, our open pit mining is approaching normal levels.

We're ramping up the DOZ.

By year-end, we believe we'll be back to normal capacity there.

We've had some repair work to do to some panels that were affected by work stoppages and so forth, but we're going there.

We are engaged in discussions with the government of Indonesia, which is conducting reviews for the contracted work, including ours.

We are talking with them about a contract extension.

Our existing contract provides for extension from 2021 to 2041.

And those discussions are in place.

So there's going to be limited amounts of what we can say on today's call about specifics related to that.

I can tell you that the discussions are on a cooperative basis.

We're committed to working with the government, as we have for years, in a way that's responsive to the government's aspirations, at the same time we're representing our shareholders.

And I'm confident we'll find a way of coming forward with a completion of this review and extension of our contract in a way that will be well-received both by the government and the people of Indonesia, and by our shareholders.

Now, the exciting thing about our company is growth.

If you look on page 16, you see what copper production in the Americas, with our mines in North America and South America, is planned on.

And these are projects that we are now actively engaged in, have confidence that we can execute.

We're being very sensitive about managing cost escalation, making sure we get good rates of return on it, and that we're managing the risk of development.

But we see now that we could reach 3.5 billion pounds of copper out of the Americas by 2016.

That's within the ballpark of our existing company today, excluding Indonesia and excluding Africa.

So it's a great success story, particularly here in North America, where you don't have to go back for many years when they were talking about the Southwest copper region being dead in the water and that these assets that we were making so much money out of and getting such growth, assets were low grade, low quality assets.

These are very profitable.

We're really excited about it, and think in the world that we foresee in the future, they're going to continue to be growing, continue to be profitable for our Company.

And then in Africa, when we first began to look at the Tenke opportunity in 2007, we could see a resource that had never been developed, had not been fully understood.

We still don't fully understand it.

We've still got a lot of work to do with exploration and metallurgical analysis, but one which, in today's world, is extremely attractive, provided we can manage all the challenges of doing business in the Democratic Republic of Congo.

We made great progress there.

We had a recent review with the Governor of the province, and he could not have been more positive about Tenke Fungurume being an example for mining success in the country.

The Mines Minister spoke recently about it.

We feel very good about the relationships we've established with the government.

And it's a government that faces major challenges because of the economy of the country and the social unrest, but we can be a major contributor to that, very supportive of the government, employment, community development, health, education, all the things that mining can do for a community.

We're doing it and we're proud of it.

So, page 18 just gives a global map, shows where our major operations are.

Jim Bob said on one call one time, and one of those Jim Bob comments that I'll always remember and refer to, is small mines get smaller and big mines get bigger.

Well, we have now five mines that we are operating, expanding and so forth that can be ranked in the million -- have the potential, not there yet in all cases, to be producing a billion pounds of copper a year.

Grasberg's there.

Morenci and Cerro Verde are in development.

El Abra and Tenke have the potential to get there.

There just haven't been that many mines in the history of the world, or currently today, that have that kind of opportunity.

And it gives us a portfolio with geographic diversity and the ability to have significant production.

Spending money on exploration, that's part of our heritage and we'll continue to do that.

Our budget this year is $275 million.

Over half of it's in the Americas, principally focused in major part on brownfield exploration, so that we can take advantage of these reserves and resources that we have available.

We've added, since the Phelps Dodge deal, 46 billion pounds of new reserves in the last five years of copper, 45 -- 46 billion pounds, and we see the ongoing capability of adding to our reserves.

Now, 2012 outlook is very consistent with what we gave you last quarter.

We've had to make -- we've made some adjustments, principally from a slight adjustment at Grasberg because we made a decision to pull out of the bottom of the pit in the second half of the year.

That ore's still going to be there.

You can see in the supplemental slides that we'll have a plan of taking Grasberg down to its ultimate pit limits over the next five years and getting into very high grades as we go forward.

Unit cost, we've got some benefits from lower energy cost in certain cases.

Unit costs are affected by the volumes, but they remain under control in today's world.

At $3.50 copper, we'll see operating cash flows of $4 billion this year.

That's net of some working capital changes.

And CapEx in that same category.

So, that's our outlook.

Now, look on page 21, you can see how that outlook for 2012, as we look forward, will be much better, because volumes will be increasing.

You see for copper that 3.6 billion grows to 4.3 billion, 4. 5 billion, to 5 billion within sight of 2016 or so.

This is a low gold year at Grasberg because of where we are in terms of our mine sequencing, and gold volumes return to more normal levels as we look forward to 2013 and 2014.

All of that translates, depending on copper prices, gold prices, molybdenum prices -- all that translates into higher levels of operating cash flows than we see in outlook for this year; and again, a very bright future.

With respect to this year on slide 22, you see that volumes will be down because of mine sequencing, some in the third quarter, returning to higher levels in the fourth quarter.

And on page 23, that would result in consolidated cash -- consolidated net unit cost at roughly the levels we had in the second quarter, and you can see sales by region.

With respect to the net unit cash cost and sort of historically where we've been, we've prepared this slide on page 24 to show the impact of what Grasberg would be if it were more at its traditional or characteristic volume levels, and that has an impact of about $0.30 this year.

And so with more normal grass Grasberg volumes, our cash costs would be substantially lower at $1.16.

Our EBITDA and cash flow models are shown on page 25.

EBITDA between $3 and $4, $7 billion to $11 billion.

Cash flows are $5 billion to over $8 billion.

This is based on average 2013, 2014 production levels, and it's also based on $1,200 gold and $12 molybdenum.

Sensitivities are presented on page 26, and it shows just how leveraged we are to copper prices; $0.10 translates into $280 million, variations in cash flows.

Our capital expenditures reflect some timing adjustments, basically $300 million has been pushed from 2012 to 2013.

It covers the projects that we talked about.

And then our financial policy remains focused on strong balance sheet, investing in attractive growth projects in a disciplined way, returning cash to shareholders.

And that's been our philosophy for a long time.

So as we close out my comments and open the line for questions, we had a couple of investor conferences this quarter and heard a lot about the concerns of investors about the near term economic outlook, the situation in Europe, slowing growth in the US, concerns about China.

Then when I look at our business and our assets, had a great visit with Red's operating group here recently, can just see the excitement of what our people feel about the opportunities that we have.

We feel like the future for our commodities is very bright because of the world's need for them and growing needs in different places, the challenges the industry faces in developing new projects and new resources and then seeing what we already have in our Company.

And with the technical expertise, the morale of our people, we couldn't be more excited about where we're placed right now.

So with that, we'll open up the line and respond to your 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 Barclays.

Hello.

Thanks for taking my questions.

I just have two quick ones.

On the contract extension discussions, are there any particular milestones or dates that we should be looking for in terms of either deadlines or potential resolutions?

That's my first question.

Dave, you know, it's a process that we just can't identify those things.

We've been through things like this in the past.

It's not something that's set with a specific regulatory time frame.

Both the government representatives that we're speaking with and our team really wants to get this done as quickly as possible, and we're certainly going to be as responsive as we can.

We hope that the government can meet its targets of completing these reviews by the end of 2013, and we're going to continue to work to do that in advance of it.

But it's not something that has any sort of set time frame that we can say, here's a milestone.

Okay.

All right.

Fair enough.

Just switching gears.

You mentioned in the prepared remarks, the strategy's not built on acquisitions.

My question is, are acquisitions essentially off the table?

Or if not, where does that sit in the pecking order of internal project development versus returning cash to shareholders versus acquisitions?

Well, it's certainly not off the table.

We are always looking at opportunities.

We're monitoring internally opportunities in the resource business around the world.

Our friendly investment bankers are constantly knocking on our door, suggesting things to us.

We're thinking ourselves about what we might do and talking about things with our Board.

So it's not off the table by any means.

And we have -- we're fortunate that we are not pushed to do anything.

We have the ability to grow and return cash to shareholders, if something doesn't work out.

But if an opportunity came to us that was attractive, we have the financial wherewithal, the capabilities to take advantage of it.

I want to be clear about that, that we have a good strategy, and if an opportunity came to us, we can take advantage of it.

If the opportunities don't work out, we've got a great future without them.

Okay.

Fair enough.

Thanks.

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

Thanks.

Richard, if I look at last few years inflation in the cost, excluding the byproduct credits, it's running about 20% average.

I was just wondering how should we think about it over the next couple of years.

Do you think that kind of I'm inflation rate will remain in the cost side?

Sal, let me say one thing, though, that I think is really important in looking at those inflation rates.

A lot of our significant elements in our cost are correlated to copper prices.

So when energy costs or when steel costs or certain other input costs increase, it's in a world where the scenario is that copper prices are increasing and we're able to maintain or increase our margins, because when you look at those other cost elements, it's hard to picture a commodity that's better situated from a price standpoint than copper, because of the supply challenge.

So we fight costs.

We try to take advantage of when we can reduce them.

Our guys -- when we have our meetings, the first thing we talk about is safety.

The second thing is production volume.

The third thing is cost.

And even though we have such great margins, we all recognize we're in a commodity business and we've got to do what we can to reduce costs.

We work very closely with our suppliers, and can't say enough about how supportive our major suppliers are to our business.

We're big customers of theirs.

We're at the cutting edge of operations and development activities, so it's in their interest.

And we all work together to find out ways of extending tire lives and getting the right truck fleet in place.

We're doing a major test right now with Caterpillar's large trucks and they're putting money into that.

We're putting money into it.

And we believe, at the end of the day, we're going to come out with a lower cost alternative for our big truck fleet, which is going to be very helpful to us as we ramp up these mine rates at our mines to take advantage of the resources.

It's something we fight every day.

When we look at our outlooks here, we're not projecting significant inflation.

Labor rates are increasing, true, around the world.

But if that inflation hits certain of our costs, it will be in an environment with much higher copper prices.

Thank you very much.

Your next question comes from the line of Brian Yu with Citi.

Great.

Thanks.

Good morning Richard, Kathleen.

Brian.

My question is on CapEx.

You touch on a little bit that seems like the reduction is related to timing.

The bigger question I've got is when you look at your CapEx spends going forward, you're running at close to $4 billion and above level.

In a scenario where, let's say copper prices do correct significantly, what's the ability to try to lower that CapEx spend?

Are there levers that can be pulled?

Brian, I say this with a smile.

But when you say correction, you mean go down, right?

Yes, sir.

Yes.

Well, that was right at the forefront of our mind five years ago.

Obviously, we had a lot of debt at that point and we were taking on working with our new team, how we would manage that.

I think we had a great track record in 2008, 2009 of what we can do.

And when you look at our set of assets, our set of assets, we have an ability to do that in a way, I think, that's better than many others in the industry.

We were able to adjust operations at Morenci and drive our costs down dramatically.

We can defer some of these projects, if we have to, without losing them.

And there's always some inefficiency of starting and restarting, but we did that at Climax.

We were going out at Climax, and we deferred it and came back and completed it when the financial situation was improved.

So -- and when we did that, we always did it in a way so that, one, we wouldn't lose assets or we wouldn't lose opportunities to grow, because we believe the longer term view, even if we do face a downward correction, will ultimately be positive.

So we have plans of doing that.

Our project economics are not built around having to have $3.50 copper, and so we can take that into account.

But as we've shown, if we have to, we have a business that can be adjusted to take into account some period of lower prices.

Okay.

And then my second question is a clarification on Grasberg.

I remember last quarter, in early April, you were running at close to a 200,000 tons per day rate, at average 180,000 tons.

Was there anything notable that happened in May or June to change that?

Yes.

In June, we had a nine-day scheduled maintenance for relining the sag mill.

We made our targets.

We were targeting 180,000 tons, and we met our plan.

As we look forward into the third quarter, we're looking at 200,000 tons, a little bit better than that.

So we anticipate normal operations.

And what you're seeing in the second quarter numbers was a scheduled nine-day maintenance to reline one of our big sag mills.

Great.

Thank you.

Your next question comes from the line of Oscar Cabrera with Bank of America.

Good morning, everyone.

Hello, Oscar.

Richard, Cerro Verde is about two-thirds of your brownfield expansions, which are very, very competitive compared to the rest of the industry.

BHP and Extrada have had a tough time managing the social unrest.

I just wonder if -- you mentioned in your comments that the government and the locals are very supportive, but there's still some signs of opposition.

Could you just provide us more color on that?

Okay.

Well, first of all, we built some groundwork early on.

We came in -- and this is where our experience in Indonesia has proved useful, I think, in creating the team we have here now with the organization we have, because we had to learn how to work with the government, a government that changes, the local community of indigenous people and the surrounding community; and we knew that it took investments and resources and people involved with it.

So even before we started our expansion, we were working more aggressively with the government, with the people of Arequipa.

We committed to build a water system for them.

And that's a big issue for them.

When I talk with President Humala and his background and his aspirations, he talks about very basic things of infrastructure for people, water, energy, education.

And so we focused on that before we started talking about expansion.

And then, as we were talking about the expansion, we benefited by the fact that we had a footprint.

We weren't building a new mine in a new location.

And the footprint was very conducive to what we're trying to do.

And then we started -- we worked through the power situation and were able to find sources of that.

Then when it came to water, we looked at a number of different alternatives about what we might do, including building new dams and things like that.

And then hats off to Red and his team.

They came up with this idea of saying, let's do this waste water project for Arequipa, the second largest city in Peru and a city, by the way that traditionally has had a pretty radical political bent in terms of the country.

But that waste water system is a big addition for that city.

And the mayor of Arequipa, who was an early supporter of Humala, bought into it, see the benefits to the community.

We then don't find ourselves, as many miners do, butting heads on agriculture interest for competition for water.

There's always some of that.

But at the same time, it's a way that gave us a way forward to do something on a cooperative basis, and it reflects a lot of hard work and focus on what works for the community as well as what works for us.

That's great.

If I may, just a quick clarification.

On your reconciliation of unit cash costs on slide 24, you talk about that $0.31 decrease when Grasberg volumes return to normal.

What metal prices are you assuming for gold -- and molybdenum, if that's part of that as well?

Oscar, this is Kathleen.

That reconciliation just says what would be our 2012 average cash cost on a consolidated basis if we were to roll in the estimated production, both copper and gold, from Grasberg in 2013 and 2014.

And so it assumes the same $1,600 gold that we are using in the second half of this year and just rolls through what those volumes are.

And we expect Grasberg unit net cash costs to look a lot like they did historically, before this year, in the outlook.

And so on a consolidated basis, that has the effect of dropping our consolidated cash costs by 30-plus cents.

Great.

Thank you very much.

Your next question comes from the line of Richard Garchitorena with Credit Suisse.

Thanks.

Good morning.

Good morning, Richard.

My question is on Tenke, and it looks like the current expansion is progressing on target and on budget.

My question is, when should we expect some additional commentary on the next phase?

Are you sort of working towards completing phase two first before you look at phase three and beyond, or -- ?

No.

No, Richard, not at all.

We have a master plan of what we can see.

We can see another expansion.

Thinking about whether that's one step or two step, that still focuses on the oxide ore, and that's what we're processing now.

So we're looking already at additional tank house capacity, as we complete phase two.

And then we have a team that goes from our -- Rich Lovell's exploration team with their drilling, to doing metallurgical work and different processing alternatives for this what appears for this, what appears to be a very, very large sulfide mixed ore capacity.

That information changes continually as we go through things.

I can tell you the information has become more positive recently.

But we will be reporting to you as those plans go forward.

The first thing we had to do was get the first expansion done and prove that we could operate in a reasonable way, logistically, operationally, administratively.

And we've done that, so we're comfortable going with the second expansion.

It's gone very well.

But as we do that, we're studying for the future.

Great.

My one follow-up.

I notice for Grasberg you didn't change your volume expectations for 2013 to 2016, despite the fact that you lowered 2012's.

Does that mean the higher grade ores -- is that going to be past 2016, or is it just being conservative at this point, in terms of when you will access that?

No, we will get back to the -- to that higher grade ore.

Most of what you see is just rounding differences, but I would suggest, spend some time looking at our supplemental slides and look at that outlook, and I think you get a good understanding about what we're doing here and --

But in general, the five-year plan at Grasberg and PTFI is substantially the same as the previous plan.

Thank you.

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

Thanks very much.

Hello, Richard, Kathleen, Jim Bob.

I've got two questions.

Richard, I thought the color on Cerro Verde was excellent and how you have positioned yourself with building the relationship there was excellent.

I wonder, along the same lines, you mentioned about taking further steps at Grasberg to be more responsive to the workers there.

And I'm just wondering if you could elaborate a little bit on some of those steps you guys are taking.

Well, first of all, you know we had a union emerge in a way that was different than we ever had.

They had leadership and so forth.

We've been there since the early '70s.

We've had very, very few, very limited worker issues, and they were in short duration.

So now we've set up processes to more formally deal with the union leadership, to involve them in situations where there may be some disruptions in the workplace.

We're really focused now on dealing with some shortcomings that we've identified with the food quality -- things like food quality, housing, recreational opportunities.

Like many places around the world -- we did this in the Congo, by the way, we sponsored the local Katanga soccer team.

And that just -- I mean, it's amazing.

Our workers buy big TVs.

They all wear the jerseys.

We're sponsoring a soccer team in Papua now, and it's being received very positively.

The world changes.

And Indonesia's a country where social networking is amazingly well established.

And so we're having to change with that.

And we made investments over time in facilities and quality of life issues, and we've got to make some more and listen, and do things in a way that is responsive to what we are.

You've been there, Tony.

Everybody knows, it's a challenging place to do business because of the geography and the weather and the remoteness.

And so we have to deal with those.

Our workforce is changing.

It's increasingly being populated by Papuans.

That's something that began in 1996 and is our future.

So culturally, there's some issues we have to deal with as well.

So it's more of a question of adjusting to new circumstances.

And that's just the world, and it's going to be the world there as we go forward.

That's great insight, Richard.

I just have one follow-up on Cerro Verde and on all the progress there.

Can you update us on the status of the environmental impact assessment, and are you getting indications when that -- of the next key point on the time line there?

Tony, I'm going to let Red respond.

Thank you very much, Richard.

Tony, that's all progressing well.

We've done all the community input work.

We're now responding to the input that we've received.

We anticipate having those permits all in place early next year and commence construction to maintain that schedule that we showed you in the packet.

Excellent.

Good stuff.

Thanks a lot, Red and Richard.

Thanks, Tony.

Your next question comes from the line of John Tumazos.

Thank you very much.

Capital -- in terms of the capital spending profile going out multiple years, you've completed this phase at Tenke, and you're completing the mill next year at Morenci, and then the projects will build up at the Cerro Verde expansion or the El Abra mill, if you build that one too, et cetera.

Will the CapEx increase as the $4 billion consolidated Cerro Verde mill starts up, or will other things wind down?

And is there any level that we can comfortably say is the upper limit, or cap on capital spending, like $4.5 billion, or $5 billion, or $5.5 billion, or $6 billion, or $7 billion?

Right now, you know, it's -- it depends on -- I'm going to say some qualifiers, that John, you know this industry well enough, I know I'm not -- that you understand this.

It depends on how these studies unfold.

We would like to go faster than we can, but it just takes time, because of the need to drill, to do metallurgical work, engineering analysis, get permits, arrange for water, power.

I mean, if you could just see the effort that our team is exerting to find water resources here in Arizona for the opportunities we have.

We're looking at buying ranches.

We're talking with Indian tribes.

We're talking with other water users and dealing with things.

So all those things result in a longer time period for developing these resources than we would probably like.

On the other hand, everybody in the industry faces these sorts of things, and that's what's supportive of copper prices because supplies can't be turned on very quickly.

I would say that as we look out in what you're talking about, that for purposes of investor analysis, the capital spending is sort of in the lower end of that range that you were talking about.

You know, $4 billion, $5 billion, $7 billion.

$4 billion to $5 billion, you know.

And it will be down for a period of time as projects wind down, as we start up other projects.

So if I could talk (multiple speakers), Richard.

Jim Bob used to say it's all about buying mama a brand-new dress.

So when are we going to see a brand-new dress from all the expansions?

That's going to unfold over time, and depend on copper prices and so forth.

We're thinking about pearls and diamonds, rather than dresses, John.

We just don't want to feel subordinate to the capital expenditure vendor suppliers, as shareholders.

And I'm a shareholder, Richard, and I idolize Jim Bob and you and the Company.

We appreciate that, and we understand that.

And I can tell you that message came through loud and clear as we have these investor conferences, and that's the world today.

We will be very disciplined about our projects.

We believe the investments we make will create value for shareholders and the opportunity to return cash to shareholders as we go forward.

And as I said, John, as you can sense, I couldn't be more pleased with the set of assets that we have.

You know our track record.

You know what this Board has done and what this company has done in the past, so I hope that gives you some comfort.

Thank you.

Your next question comes from the line of Marisa Hernandez with Neuberger Berman.

Hello.

Thank you for taking my question.

It's a quick one on molybdenum and the Climax mine.

With moly prices that have weakened somewhat here, and you mentioned that the ramp of Climax would depend on market conditions, could you talk a little bit more about that?

How confident are you that the market can absorb the 20 million pounds from Climax next year, maintaining a price of above $15?

Dave, you want to talk about molybdenum?

I think we're ramping up Climax right now.

The market has weakened a little bit.

We're down in the $12.70 per pound range.

But our outlook for molybdenum and for growth remains strong.

The European economic issues, the slowdown in China, are causing some of the softness in the global economies today.

But our long-term outlook for moly, as it is for copper and our other metals, continues to be positive.

We feel next year with just our normal growth rates into 2013, we'll be able to move those 20 million pounds of moly into the market.

So our view hasn't changed on that.

The other thing, Marisa -- it's Kathleen.

The other thing is we've also got some lower byproduct production forecast.

So if you look at our outlook for sales, we expect to go from roughly the 80 million-pound level currently to 90 million.

So we've got some offsets with byproduct.

And as Richard and Dave mentioned, we'll have the ability to flex production with Henderson to meet market requirements.

Got it.

Thank you.

The issue at byproduct is a sequencing issue, primarily at our US mines.

We have some lower grades coming in 2013, and then we'll ultimately get back to higher rates.

You're seeing that, in fact, this year with Climax starting up.

Our sales are relatively flat compared to last year, and that's the same reason.

One good thing about our set of assets is we can adjust quickly.

We can adjust quickly through mine rates, throughput rates, and so forth, without turning our cost structure upside down.

Because our costs are low and a reduction would increase the cost some, but not to the point of where it's a major decision to do that.

And the nature of the operations gives us a lot of flexibility.

Thank you.

Thank you, Marisa.

Your next question comes from the line of Brian MacArthur with UBS.

Good morning.

A couple of questions.

Just following on that last question, lower grade moly at Baghdad and Sierrita in 2013, does that continue like for three or four years, or what sort of time horizon should we think of that, because obviously that will affect the cost there?

It's down for a couple of years, I think, at Sierrita and then it picks back up again in, I believe, '14, Red?

Yes, 2014.

2014, we see it pick up again.

So it's just a sequencing of the mines in those two places.

Baghdad's a little more stable on their throughput, where we see more variability at Sierrita.

Great.

Thank you.

By the way, both of those have resources that we're looking at down the road that have great expansion opportunities at.

At Sierrita, we have the Twin Buttes property that we acquired for a couple hundred million dollars that we're looking at.

So when we talk about this pipeline of opportunities, those are two mines that have resources that we're looking at very hard.

My second question sort of follows on.

I realize you have lots of optionality in all these projects, which is a great asset to have, all that optionality.

But just to clarify, on Morenci, we've talked about growing the current mill to 115,000 tons per day, which will get us to 800 million pounds.

But you've also got this statement now, current expansion, on page 18, could get Morenci over 1 billion pounds.

Is that possible with the current 115,000 tons, i.e.

there's some higher grade coming, or does that start to include the second sulfide expansion where you talk about the 800 million pounds, or can you just reconcile like how all those numbers fit together?

I realize there's a lot of moving parts.

Right.

It would require that further expansion.

It's that opportunity that would get us to those kinds of levels.

Right.

So then it would be kind of like out of 800 today, and then I get the other 800 with the major capital expenditure, that's the way to think of it?

It would be a big capital expenditure.

It would be the sort of thing that would be done based on the world's need for copper.

I like what you said about optionality.

Having this here gives us a chance to generate lots of volumes, lots of profits at today's prices, lower prices.

As the world's needs for copper grows, I believe they will, we then have a resource like this where we can go in, make an investment, take advantage of that opportunity as an option.

Great.

My final question's a little bit the same, but just on El Abra, we're obviously -- as the current operation winds down and we replace, whatever, 350 million pounds.

Again, you talk about the billion.

Is that -- two questions.

Is that the add additional 600 million that you talk about from the sulfide?

And if so, is there a way to actually -- does it make sense just in a capital allocation decision to go right from 350 to $1.2 billion?

I realize it's a move in future.

Are we talking about making a 360,000-ton per day operation, like Cerro Verde, or how does that actually work at El Abra?

It's a long-term deal.

And it's separate and apart from our Sulfolix project.

We looked at what to do as we were going from the oxide into the sulfur resource.

And quite frankly, we weren't aware of this resource five years ago.

It was only through this process that we had of trying to understand the ore bodies, do a lot of drilling and so forth, that we became aware that there was a bigger opportunity at El Abra.

It's got some challenges to overcome, some big challenges to overcome.

We decided to go forward with Sulfolix and continue to work on this additional sulfide resource which would require major capital, new processing.

It won't be a leech operation.

It will require a lot more water and power, and all the things that are in short supply in Chile, probably require us to work with our partners in the area to find ways of doing this in a an efficient way.

It's an opportunity, Brian, but it's a separate opportunity.

Great.

Thanks very much for all the color, Richard.

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

Good morning, guys.

I guess my first question, quickly for Kathleen, a bit of a technical one.

On these recent environmental litigation charges, could you comment as to is this going to be more of a recurrent kind of nature charge, something that you're working towards settling, or are these lumpy and you take them as they come?

It's the latter.

We've got established reserves for what we think the -- our exposure is.

And when something changes from that, we review the reserves.

And in this quarter, we had two matters that there were things that developed that caused us to relook at those reserves.

So it's more lumpy than it is a recurring item.

Okay.

And then maybe for Richard, my second question was with the expected changes in the US tax code coming in 2013, namely the higher taxation of dividends, is there a thought process in Freeport that you may want to shift to a strategy of maybe more buybacks as a more tax efficient way to return yield to shareholders?

You know, we'll take into account everything.

But when we look at our shareholder base, Jorge, we have principally institutions that aren't subject to income tax.

And so it's not a -- as we talk with investors, it's not a major factor.

Investor feedback in recent years has been more positive about dividends.

I must tell you, as I'm sure you're hearing, I'm hearing more about stock buybacks now being something that investors are attracted to.

But it's not going to be tax-driven.

Okay.

And then just last quick question, what would be the incremental cost at Climax to ramp from the 20 million to 30 million pounds, if you chose to do that?

There's no additional capital.

We designed the facilities to be able to produce at 30 million pounds per annum.

We're operating those currently at a reduced rate, in light of the market situation.

So there wouldn't be additional capital.

And actually there would be operational cost efficiencies of doing that.

But we're really trying to ramp it up in a measured fashion.

We're managing the costs closely, so we're -- but we did design it for the 30 million pound level.

Great.

Thanks very much.

It's a great asset, Jorge.

It sounds good.

I'm looking forward to seeing the incremental production.

So are we.

Your next question comes from the line of Paul Massoud with Stifel Nicolaus.

I just had a quick question about Tenke.

It sounds like phase two is coming along well, and you're adding the extra tank house capacity.

If I'm not mistaken, the extra capacity is coming on in a couple of phases.

One phase being completed later on this year, and then the entire thing probably done, it sounds like in the beginning of 2013.

Is it possible, one, to see any incremental benefit from increased capacity going through later this year that isn't being incorporated in guidance, or would you expect to see costs go up before they come back down?

Well, we've got in our outlook, we've got improved production in the fourth quarter associated with the start-up.

We won't get to the full rates until next year, but we do have some benefit in the late part of this year from the new tank house capacity.

Okay.

Just as a quick follow-up, has there been any more discussion about a potential cobalt refinery getting thrown in there later on?

We're looking at alternatives about how to deal with this significant amount of cobalt in a smart market -- in a small market of getting it to market in an efficient way.

Same sort of issues conceptually that our predecessor companies faced with the molybdenum business.

So we're looking at a number of different alternatives.

Right now, we're able to market the product we produce and there's a good demand for it, and it's not something we have pressure on.

It's more of a long-term view as to how we're going to deal with the significant amount of cobalt resources there.

Okay.

Thanks.

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

Good morning.

Now that the Supreme Court has ruled on the medical constitutionality -- the medical plan, a number of companies apparently are beginning to look at maybe jettising their medical coverage for their US employees, though I think it's premature to do that.

How many US employees do you have that get covered by the medical, and what is the cost per employee?

You know, Chuck, we don't have a cost per employee situation here.

We're not going to jettison our medical coverage for our employees.

It's one of the important benefits that people see from working with our company.

This issue about what the cost is going to be is a very complicated one that all American industry right now is trying to sort through as to what it has.

It's not going to be a game-changer for us.

We're going to find ways of dealing with whatever law comes down the pike and what we have to deal with in terms of being responsive to the needs of our employees and doing it on a cost efficient basis.

Over time, we've made changes to our benefit plans, as other companies have.

But this is not something that's of huge significance to our company.

We provide the coverage.

We get some reimbursement through premiums from employees.

But the coverage that we provide is funded by the company.

It's a self-insured program.

Some people are trying to take advantage of the federally subsidized state exchanges.

And of course, nobody knows what that's going to be yet.

But anyway, thank you very much.

I agree with that.

I'm like everybody else, I read and scratch my head about it, in terms of running our business as something that's manageable.

Your next question comes from the line of Wayne Atwell, Global Hunter.

Good morning.

Thanks for all your insight.

I had just a quick question, a follow-up on John's question about capital spending and the like.

You seem to have a pretty good cash flow.

You have a great cash balance.

We've talked about dividends and buybacks.

You seem to have plenty of cash available.

Your debt's fairly low.

What are your thoughts about a buyback?

It seems like this might be a good time to do that.

It's something our Board looks at continually.

I will tell you, in a world that we live in today, with the uncertainties that I mentioned earlier on in my comments, it feels great to have a very strong balance sheet.

And so all I can say is that our Board talks about this continually and evaluates it.

But in an uncertain world, having a strong balance sheet, being an investment grade rated company that allows us to look at opportunities is a great benefit of our Company.

And Wayne, you've been around us long enough to know, it always hasn't been that way.

And like I said, it's just a great strength of our Company today.

Great.

Thank you.

Thanks for your question.

There are no further questions at this time.

All right.

Well, thanks, everyone, for your attention.

Appreciate your support.

We're working hard every day.

Jim Bob, do you have any comments you'd like to make?

No, Richard, I think you've covered them.

All right.

Well, thanks, everybody.

And we'll look forward to reporting our progress in the future.

Ladies and gentlemen, that concludes our call for today.

Thank you for your participation.

You may now disconnect.