費利浦·麥克莫蘭銅金 (FCX) 2013 Q4 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan fourth-quarter earnings conference call.

(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. Welcome to the Freeport-McMoRan fourth-quarter 2013 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 call today is being broadcast live on the internet and anyone may listen to the call by accessing our website homepage and clicking on the webcast link for the conference call. The slides are also available on our website. 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, we'd 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, Jim Bob Moffett, our Chairman of the Board; Richard Adkerson, Vice Chairman, President and CEO of FCX; Jim Flores, Vice Chairman, President and CEO of Freeport-McMoRan Oil & Gas; and we have several other members of our team here with us today. I'll start by briefly summarizing the financial results and then turn the call to Richard who will begin reviewing the information included in our slide presentation. As usual after the formal remarks, we'll open the call for questions and answers.

Today, FCX reported net income attributable to common stock of $707 million, $0.68 per share, for the fourth quarter of 2013, and $2.7 billion, $2.64 per share for the year 2013, compare with $743 million or $0.78 per share for fourth quarter 2012, and $3 billion or $3.19 per share for the year 2012. Our net income contributable to common stock for the fourth-quarter 2013 included net charges of $166 million or $0.16 per share as detailed in the press release, which included $73 million or $0.07 per share for unrealized losses on oil and gas derivative contracts and $49 million or $0.05 per share associated with updated mine plans at Morenci that resulted in a loss in recoverable copper and leached stock piles.

FCX's fourth-quarter results reflect strong operating performance in both the mine and oil and gas businesses as we will be talking about. Our consolidated sales of over 1.1 billion pounds was 17% above last year's fourth quarter and reflected higher production throughout the global operations, and particularly at Grasberg, where copper sales were over 40% above last years fourth quarter. Our oil and gas sales totaled 16.6 million barrels of oil equivalence. That was ahead of our forecast. Our average fourth-quarter average recorded copper price of $3.31 per pound was below the year-ago quarterly average of $3.60 per pound. Gold prices of $1,220 per ounce were 27% below the year-ago quarter. Oil prices were strong in the quarter, as Jim will be talking about, with Brent prices averaging $109 per barrel and average utilizations by our oil and gas division of $94 per barrel before hedging impacts.

Operating cash flows of 2.3 billion in the quarter exceeded capital expenditures of $1.7 billion. We ended the year with total debt of $20.7 billion and our cash balance was approximately $2 billion. We have approximately 1.04 billion common shares currently outstanding.

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

Good morning, everyone. For all of you on the East Coast, we're thinking about you facing that storm up there. I know it's difficult. You ought to pack up some shorts and swim suits and golf clubs and come see us in Arizona and enjoy this weather in the 70's.

Looking back on 2013, when we went into the year and as we consummated oil and gas transactions at the first of May, you heard us talking about execution. That is what was really the emphasis of our entire organization, was on operational execution during the year. The results have been strong. We had a 12% increase in copper sales and we had growing volumes in all four regions that we operate in. We had a positive and significant contribution from the oil and gas business. Jim will be talking about that.

We executed on our plans to grow our volumes. We have three major projects that we had identified to increase our copper sales over a three year period by a billion pounds. We've completed the second phase expansion at Tenke and that operation has operated very well. The Morenci Mill expansion has progressed and nearing completion in 2014.

We have initiated construction at the major project of Cerro Verde in Peru and its progressing on schedule. In addition, the Grasberg underground development activities moved forward this year despite the interruptions that we had during the year. We are preparing ourselves for the completion of the mining of the Grasberg pit. It's currently scheduled to be completed in 2016.

In the oil and gas area, the Lucius development project is progressing towards production. The understanding of the assets within the deepwater that PXP acquired during 2012 and now is part of our portfolio is progressing and we've got exciting new growth opportunities there. Then, with the renamed ultra deep play we're calling Inboard Lower Tertiary/Crestaceous opportunity, we've got some exciting news there about a well we're currently drilling about what that means for our Company going forward.

We continue to be focused on cost savings and discipline in spending capital. We've got our targeted debt reduction that remains in place. We're looking for ways to accelerate that. During the year, we had, including a special dividend and our regular dividend and about a 10% stock price increase during 2013, an attractive return to shareholders of 17%, paid $2.3 billion of common stock dividends including the special dividend. Our financial results reflect this strong operating performance virtually across the board.

Our volumes in our mining business for copper were slightly above our guidance, well above the third quarter and the fourth quarter of last year. Realizations of just over $3.30 are below the fourth quarter of the prior year, but going into 2013 there was a lot of skepticism about where copper prices would be and markets appear to be stronger going into 2014 than they did going into 2013. Our site costs for the fourth quarter for the Company consolidated was $1.16 a pound, reflecting strong volumes of both copper and gold in Indonesia. That was well below our guidance and well below our recent historical performance. There was really strong gold production at Grasberg. We had access to higher grades and it just showed what that mine provides to us. Our oil volumes, sales volumes, were in line with our guidance and the business performed very well.

I mentioned that today copper markets appear to be strengthening from where we were a year ago. During 2013, China went through a government change, a reorientation of its economy towards internal consumption with less emphasis on exports and infrastructure development. Major spending on infrastructure continues as evidenced by the recent announcement by State Grid to increase its capital spending and that has a major impact on copper consumption there. Consumer demand remains strong. Infrastructure investment in China is a major part of this marketplace.

In the US, demand has steadily improved, particularly in key sectors like residential construction, where housing starts are up. There's today's news about mortgage applications being up. We're seeing improvement in non-residential construction and the automobile industry continues to be very strong and an important consumer of copper. As we talk to our downstream customers, we're hearing positive comments about their performance in 2013 and a degree of confidence about 2014.

In the copper business, we're seeing some recovery in Europe, the beginnings of it. Worldwide, the cathode market remains very tight, exchange stocks have dropped dramatically during the second half of 2013. Today they are lower than they've been in 15 months. A lack of strike of scrap is driving higher cathode consumption and that has been an important part of the marketplace. So, we're seeing relatively positive near-term fundamentals for copper in a world that has continuing economic uncertainties, but longer-term fundamentals remain particularly strong because of constraints on supply globally and the demand for copper throughout the world.

Turning to slide 6, you can see our fourth-quarter unit production costs that I referred to earlier, across the board, we were lower than our plans for the fourth quarter driven by cost control efforts Red Conger and his team are applying in the Americas. Our operation in Africa is performing well. Then having the higher grades in Indonesia, where our unit cost net of gold credits dropped to $0.21 per pound, resulting in this $1.16 per pound. You can see how our sales from North America, South America, Indonesia and Africa were distributed during the fourth quarter.

We are releasing our preliminary reserve information for our mining business, proven and probable reserves of copper at the end of 2013 where 111 billion pounds of copper, 31 million ounces of gold, and 3 billion pounds of molybdenum. Since the [sub-sag] transaction, we have had very significant additions to reserves, 45 billion pounds of copper for example, and continue to have opportunities to add reserves. Because of our very large resource base and our ongoing exploration program, our reserves are, as you can see, pretty well distributed between the Americas and Indonesia, and growing opportunity in Africa.

Beyond reserves on slide 8, we have -- and the reserves are based on mine plans using a $2 copper price, we have mineralized material of significance associated with our existing ore bodies. Looking at a copper price of $2.20, you see well over 100 billion pounds of mineralized material that not yet qualifies reserves, so it's incremental to our reserves. Half of that is in North America and our work goes on to see about moving the mineral resources into the reserve category and ultimately into development projects to generate cash flows. Huge asset for our Company.

Our mines are distributed around the world, lead by our flagship mine in Arizona at Morenci, the Cerro Verde project in southern Peru; El Abra and Candelaria in South America; Tenke Fungurume Grasberg. We have, in a world with a very limited number of world class mines, which we're looking at with over a billion pounds of copper per year, we have the opportunity of having five mines within that group. That's what our goal is, is to reach that.

I want to give you a report on Indonesia. Indonesia, for years, has been focused on looking at increasing processing of minerals within the country. In our 1991 contract of work, which is the contract we're currently operating on, there was provisions in that contract which we committed to develop a copper smelter, arrange for the development of copper smelter within Indonesia, under certain conditions. In response to that, we followed through. We arranged with Japanese investors to build Indonesia's first smelter. It's the only copper smelter and refinery in the country. Mitsubishi operates it. PT Freeport Indonesia owns 25% of the equity and we supply copper concentrates to it, but that smelter is operating in Gresik. Indonesia also exports, in large volumes, mineral ores across the natural resource space that aren't processed in the country, that includes nickel, alumina, and tin.

The country, in 2009, when it adopted a new mining law, put a five-year period on requiring that ores be processed within the country. Following the adoption of the law there were a series of implementing regulations that went forward and that export ban was ultimately extended to copper concentrates. The deadline for the ban was January 12 of this year.

Now, our contract of work, which defines our rights and obligations and our relationships with the government, has specific language that gives PT-FI the right to export concentrates. It also defines the taxes and other fiscal terms applicable to our operations and states explicitly that we're not subject to taxes, duties or fees that are subsequently imposed or improved by the government, except as provided by the contract. As this deadline of January 12 approached, we were actively involved in discussions with the government, as were other miners, and the final regulation that was adopted by the government exempted from the export ban, copper concentrates that contained at least 15% copper, which our concentrates will be well above 15% in our life-of-mine plans.

At the same time, and the government provided that exemption from the export ban for three years, but in a new regulation that we did not anticipate that was a surprise to us, the Ministry of Finance of the government imposed a duty on exporting minerals, including copper concentrates. And, there's a progressive duty that's now in place as a regulation of the Ministry of Finance, which starts at 25% in 2014 and grows to 60% by 2016. This is something that does conflict with our contract of work.

Now, where we are today is we are engaged in discussions with representatives of government to discuss how this new export tax applies. The government is working on regulations, which have not been complete, so there is a degree of uncertainty on exactly what its intentions are for implementing this tax. We of course, look at our contract and are of the view that it does not apply to us, but we are going to work with the government in a way to reach an agreement on it, to understand their position, ensure they understand ours. I'll just point out that we've been operating in Indonesia since the early 1970s. We've never had a violation by either party of the contract, and we're confident that we'll find a way to work for it that will represent the interest of our shareholders and be responsive to the government.

So, that's where we stand. This is new, it just came out weekend before last. The regulations are up in the air, so there's not specific clarity on this issue at this point.

Now, with Grasberg, as we've been dealing with this and as we dealt with the tragedy of the training facility issue earlier in the year, and as we reached an agreement with our labor union this fall that avoided a strike that was so disruptive to us in 2011 and 2012, we've really had a substantial increase in the productivity and performance metrics, in conjunction with also having available higher-grade ore to mine and process. In the first half of 2013 for example, our mill operated at average of 157,000 tons to day, in the fourth quarter we were over 200,000. Grades have improved in both copper and gold and that translates into lower unit net cost. You can see how the performance improved over the year.

Then as we look forward, between 2013 and 2016, when we expect, under normal operations, to complete mining the pit, we'll have increasing amounts of both copper and gold, with an extraordinary year in 2016 during the final phases of operating in the pit. Currently, we are adjusting our operations to continue in a full fashion, but focusing on maintenance activities and mining material that constrains the level of copper concentrates we currently are producing as we have discussions with the government for this export duty.

I mentioned that our brownfield development projects are progressing. The Tenke Fungurume project is complete. Cerro Verde is going well; we started construction there. Our team, with our contractors, are working well. At Morenci we are 60% complete of that project, and we will be starting up next year to add 225 million pounds of copper in a very high rate of return project.

We're continuing with our exploration program. Spending will be somewhat less this year. That's more of the nature of just what our focus will be and what our plans are and certainly no less emphasis on exploration.

With the slide on 13, shows where we will be spending money. Our projects will be focused principally on our brownfield opportunities and focused on our existing mines, but we do have a couple of exciting greenfield projects that we will also be pursuing.

With that, turn over the presentation to Jim Flores to talk about oil and gas business.

Thank you, Richard. Good morning, everyone.

On page 14 you have a slide of the Brent curve from January 2003 to present, as well as overlaid with the LLS curve, Louisiana Light Sweet curve. The take-away from this slide is that 90% of Freeport Copper & Gold Oil & Gas revenues are derived from this curve pricing of oil in the Brent and LLS. It will show you where this provided tremendous margins for our business, somewhere between $50 and $60 a barrel depending on basis differentials and regional markers. That's what's fueling our oil and gas development of the Gulf of Mexico, the Eagle Ford and California and also our Lower Cretaceous and Lower Tertiary exploration play.

What you can see from January 11 of 2013 is that the range has been $125 to $100 in there, so about $110 average. We've consistently maintained these prices in the world for various reasons. I mean a lot of world demand has continued to increase.

The fourth-quarter numbers I saw were well over 93 million barrels as the world demand has continued to expand with all the easy money policy. We've had supply disruptions out of the MENA area, Middle East, North Africa. We've had production growth here in North America. So there's a lot of misconceptions, but the curve going forward always has a 20% discount in it going forward and about degradation. I think it has a lot to do with liquidity issues versus real price discovery.

We continue to maintain our budget process between $100 and $105 a barrel Brent. Going forward, based on the production struggles around the world to grow productions up in North America and also the aspect of consumption demand expanding around a world on a consistent basis that we continue to see accelerating this year. We're very excited about our budget going forward and based on the strong pricing background.

I will mention that we're about 1/3 of our CapEx project is discretionary. Early in the year we can move a lot of things around to affect spending if the prices go the other way or something happens where our price margin erodes. We're in a situation of real flexibility. Obviously that flexibility erodes during the year, but I want to make sure everybody understands that third of discretionary is real and something that we keep that flexibility very close at hand.

If you move to page 15, you can see what I talked about for our fourth-quarter 2013 cash operating margin of almost $1 billion, $900 million or $56 a barrel. That compared with the third-quarter margin of $64 a barrel. We have slightly higher prices, but the big thing we had in the fourth quarter that we didn't -- had to be that supplement in the third quarter was refineries all were on turnaround at the same time in the fourth quarter. We had large basis widening of about $10 a barrel, which affected our margins even though we had higher production.

That's all been reversed. If you look at those operating margins here in January, we're back where LLS is trading right on top of Brent. You can see that on page 14 right at the end of that graph where LLS and Brent diverged. Now, with that, those two curves come together, we're looking at $60 per BOE margins going forward. You see the contribution in the pie chart being 47% out of the Gulf of Mexico, 30% out of the Eagle Ford, and 21% out of California, and Haynesville and other gas assets about 2%. We've got a significant upside in all these areas. We'll take it through it, the details on the adjacent slides.

Before the oil and gas operating summary, the operating margins on a per property basis, California $54 a barrel, Eagle Ford $63, the gas assets in Haynesville/Madden about $9.50, and the Gulf of Mexico assets $63.83 (sic - see presentation slide 16 "$66.83"), $55.95. This puts us in the Best-in-Class group of operating margin. I think this is what separates oil and gas businesses from best to worse, is what the operating margins, how much cash flow they are actually generating on per barrel sold. When you have a heavy natural gas oriented business with the low prices, these margins are much less. Obviously, with our 90% of our revenues coming from oil, we're in the preferred area of the highest margins in our groupings. You can see our sales by region, very balanced, very consistent with the third quarter: California, Eagle Ford, Haynesville and the Gulf of Mexico.

Move to slide 17, we've now started preliminary SEC proved reserves of 464 million barrels as of 12/31/2013. By category, very consistent with last year, 34% PUDs, 53% PDPs and 13% PDNPs. As you can see the spread by our region, with Gulf of Mexico 37%, you can see California with its large resource base being 40%, Eagle Ford 13% and Haynesville and others 10%. Then, by commodity ratio at 6 to 1, which is the old BTU conversion ratio, it's not the pricing ratio of 27 to1 or whatever it is now. It's 75% oil and 20% gas and 5% NGL.

I will mention here there's a couple notable exceptions to our improved reserve base. Our Phobos discovery that we made in the first quarter has not been delineated or offset, so it doesn't meet the proved reserve test, on the Orange Wilcox structure, south of Lucius and Keathley Canyon. Also, this Highlander area, Lomond well, that we're going to discuss here in a little bit, is also not involved in our SEC PB10 year-end 2013 reserves. Those were the only two significant exploration wells that the oil and gas business conducted this year as for proved reserve categories of adding reserves. That will change here in 2014. With our exploration, we'll expand in the deepwater with the arrival of the drill ships and our business will be more normalized as far as adding reserves as we drill production.

Our Lucius development project is one of those areas where as we continue to get closer to production, we're able to add reserve there. We've delineated the Pliocene reservoir and have more to do in the deeper Miocene reservoir. Lucius is on schedule. We've had some pipeline delivery issues that our operator, Anadarko, has done a masterful job at overcoming to keep it on schedule. It's cost a little more money, but on top of that it's a rounding area when we put onto 80,000 barrels a day and 450 million cubic feet of gas that the facility is going to process hopefully here, start processing in the third quarter of this year. Fingers crossed on that, but the project continues to move along just as planned.

In our deepwater Gulf of Mexico update, couple key things here, that, take-aways that are going to be impactful to a couple slides further on about annual production. The reason we bought these facilities, Holstein, Marlin, and Horn Mountain were to have major development projects. To achieve the production rates and the development projects, we have to do platform modifications on each one. That's a 60 to 90 day shut in for each different facility. In 2014, Marlin will be shut in the third quarter. 2015, Horn Mountain and Holstein will be shut in. When you shut in 30,000-barrels a day for 90 days it does affect your annual production rate and so forth.

I maintain that 2014 and 2015, even though we're growing, and even though we're expanding our production base as a Company, its being muted by those shut ins; 2014 with Marlin and 2015 with Holstein and Horn Mountain. Everything we're finding there geologically, all of the new seismic we've shot and all of the new imaging we're finding heavily resource ladened opportunities on our lease block and so forth. The first area of development, obviously, is Holstein where we have a platform rig getting ready to drill our first in-field side-track well to start maximizing our production there. Our guys have done a fantastic job of maintaining high production rates without any drilling activity or well intervention activity at Holstein, Marlin, and Horn Mountain.

On the exploration front, like I said, we have exciting year coming up, not only potentially Phobos delineation, but our Tara prospect, which is a Lucius look alike of 300 to 500 million barrels in the Keathley Canyon area. We plan on drilling with one of our initial drill ships showing up, and probably still plan that well sometime in the second quarter. Our copper project with sometime in the third quarter, you'll see right around Holstein, and the copper project is a project or an exploration opportunity we think is excellent as far as productivity. We think it's imaged very well on the seismic and that is a pure product of our new imaging and showing the real productivity that was being masked by the old data. Very active year, but it will ramp up from here and 2014, 2015 and 2016 is reflected in the production rates of 2016 when we really start hitting on all cylinders.

On page 20, talking about the Inboard Lower Tertiary, which is formerly the Ultra Deep, we want to give it a geologic nomenclature name because of it fitting in with the rest of our projects. Our Lomond North well that you see really in the middle of that circle is the northern most well that we've drilled so far in search of the good reservoirs here in the Lower Tertiary Cretaceous activities.

Here to date, we've found large structures and we've found large sands and so forth, but we've had challenging reservoir quality for those sands, porosities and permeabilities and those things have been on the challenging side. Still dealing with a lot of pressures, so we're in a process of overcoming those with some completions at Davey Jones and the Blackbeard area and Lineham Creek later this year or early next year.

Lomond is the first well that we drilled where we see excellent reservoir characteristics consistent with porosities in the 20% range that are more aligned with what we see in Miocene type reservoirs and Pliocene type reservoirs that have excellent flow capabilities and excellent production rates. It also is very correlative to the Port Hudson trend 50 miles to the north, north of Baton Rouge, Louisiana.

We're 50 miles away to the south and on the northern edge of our area. We found over 150 feet of pay. We're still in pay and still drilling operations of the well. We have another 1,000 feet to go to get down to TD in the Cretaceous. We're very excited about finally finding a reservoir that the long indications and our core indications meets the criteria of it should be a spectacular commercial well.

We are moving at light speed to get this line of production equipment and test this well sometime this summer. We're actually going to harvest some equipment from our offshore operations, and we've got all that in place. We've got 56,000 acres on this structure at Lomond. It's a very large structure. It's going to have a large reserve potential. We drilled kind of a mid-dip well, so there's a lot of up-dip acreage to this well as we pile up these sands in the Cretaceous and also the Wilcox.

Remember the production test Davey Jones Number 2, Lomond North and Blackbeard Number 2, here this year. We've got a large extensive inventory of high-quality prospects. You will continue to hear more and more climaxing with the production tests at Lomond the rest of this year, developing a low-cost source of natural gas with a lot of liquids. On the margin basis, we're thinking this is somewhere between $20 and $30 barrel margin, significantly higher than what we have in the Haynesville and the Madden area, so it can be competitive with similar projects on return.

More on that in Q&A. Richard, I'm going to turn it back over to you to finish summarizing our activities.

Thanks, Jim.

I'm going to talk about sales outlook. I want to point out that this is our plan with our Indonesian operations operating in a normal fashion. We're currently working through this process of getting export permits and so forth. As we go forward with that, if there are revisions to this, we'll update you, but this is based on a scenario of normal operations.

Our current sales outlook is consistent with our prior outlook of 4.4 billion pounds of copper, 1.7 million ounces of gold and 95 million pounds of molybdenum. We've increased our outlook for oil equivalence from 57 million barrels equivalence to 60.7. At $3.25 copper, this plan would generate, in 2014, $9 billion of operating cash flows, including working capital changes. We remain highly leveraged to the price of copper. Each $0.10 change in copper in 2014 means $370 million to us. Our unit cost, which reflects some grade-driven lower volumes in the first quarter of 2014, is $1.45 a pound and $20 a barrel equivalence for oil, as Jim just talked about. Current outlook for capital expenditures is $7.1 billion with just over $4 billion for mining and $3 billion for oil and gas.

We are looking on 22, where we have our quarterly sales outlook. This is the annual sales outlook. You can see going from 4.1 billion to 4.4 billion, for copper. Then moving up, as we complete our development projects, to 5 billion in 2015 and 5.7 billion in 2016, where we have the benefit of the expansion projects plus the extraordinary year in Indonesia.

As we near the ending of the mining of the pit, you can see that in gold with 3 million ounces of gold to our interest, that's net of the Rio Tinto participation in the joint venturing that year. You can see the annual oil sales -- oil and gas sales, on equivalent basis, and as Jim said, that is net of these maintenance tie-in, shut-ins of the deepwater rigs in 2014 and 2015. By 2016, we will be at an average of like over 220 a day there, and that, with these kinds of margins, generates very substantial cash flows.

On a quarterly basis, as I mentioned on 23, we will be having lower copper sales in the first quarter because of grades in Indonesia for mine planning purposes and also in South America, principally at Candelaria. You can see our quarterly outlook for all of our commodities in the third quarter is when the Marlin shutdown occurs and that shows the lower oil and gas equivalent production in that space.

Page 24 shows our minerals sales by region and shows increases in North America, which reflects the Morenci start up of its expansion project. South America affected by some lower grades, both at Europe, Candelaria and Cerro Verde, that's just mine sequencing issues, and then Grasberg and Africa.

Unit production costs are shown on page 25. In 2014, you can see the continued strong performance affected by volumes across-the-board, but current plans for our consolidated net unit cost, net of by-product credits of $1.45.

Page 26 is the models we present each quarter. This is updated to show an average of 2015 and 2016 cash flow and EBITDA generation. That's in the solid section showing it in comparison with our outlook for 2014. You can see, for example, at $3.50 copper we would be just under $9 billion here in 2014, but the average for the next two years would be over $12 billion. That shows just the effects of our growing volumes and the strong margins in our business, and you can see how that would fluctuate between $3 and $4.

On the following slide, we have our sensitivities to prices and also to certain costs, energy costs and currencies for your purposes in conducting your analysis.

Our updated capital expenditure slide is shown on slide 28. We've talked about the $7 billion for 2014 and you can see how the outlook is for 2015 and the new information that we're presenting for the first time in 2016. Jim made a point about our oil and gas capital spending. This is the opportunities that we have today given current market conditions. There is a lot of flexibility as to how we manage that if market conditions change, certain expenditures are discretionary.

We also have the ability of bringing in partners, joint ventures and so forth to deal with that. We are going to manage, as we've indicated over this past year, the oil and gas spending to be consistent with the cash flows generated by that business. The spending to date reflects opportunities to increase volumes to pursue some new prospects that we've identified and take advantage of the resources that we have available to us.

We are committed firmly to a strong balance sheet management. We've targeted reducing debt to a level of approximately $12 billion to 2016. We're running our business with the continuation of current commodity prices, and doing nothing else would get us close to that. Our objective is going to be to manage our business safely, but to achieve the volumes and cost targets that we have. We anticipate continuing the current common stock dividend at $1.25 a share. This debt-reduction target is clearly within our reach considering our large resource space and having discipline about the way we run our business and spend our capital.

We are continuing to review divestitures and other options that are available to us through joint ventures and potentially involving MLP structures, and that work is ongoing. We don't really have anything specific to report to you today on it other than the fact we're all working very hard to do it. We're all committed to getting this debt to the level that we've targeted, and that remains firm focus of our entire organization.

Here we are, Freeport, maximizing shareholders' return, strong execution in Management, as we've had a great track record of doing, focusing on shareholder returns and growth in a disciplined way to provide value for our shareholders, protecting our dividend, protecting our balance sheet, and paying our shareholders good dividends. That's the story that we've been operating under for years, and that's what we continue to be focused on as we go forward.

We appreciate your attention and now we will be available for questions that you might have.

(Operator Instructions)

Our first question will come from the line of Jorge Beristain with Deutsche Bank.

I just wanted to dig deeper on this Indonesian tax situation. Could you quantify what exact export tax rate you're paying currently? What the incremental change would be, assuming that this law is affected on Grasberg, either in gross dollar amount or in cents per pound? Then, could you comment about your drive to continue with the underground CapEx? What would be the point of proceeding with that if in the future you're going to be facing this progress every higher tax rate?

Okay, thank you, Jorge. We pay no export duties on copper concentrate shipments. Currently, we've never had that as part of our operations, so this is a new duty that's been there. Now, we pay a 35% income tax, which our contract provides for. Since the contract was signed, income tax rates have dropped in Indonesia, and other companies currently pay 25%. We have a 10% tax, so withholding tax on distributions from PT-FI to FCX. There's payroll taxes, there's royalties under the contract, and there's other types of payments. Overall, we have historically been one of Indonesia's largest income tax payers, many years, the largest. We would estimate that we paid $15 billion in taxes, royalties, income taxes, royalties and other taxes to the government over the life of the contract. Under the contract, we would be paying very large amounts going forward, so we are a major financial taxpayer and contributor to the government of Indonesia, but not in the form of export duties on copper concentrate exports.

The announcement and regulations that have been adopted today talk about a progressive royalty starting at 25% growing to 60% in steps through 2016, through the middle part of 2016. Then, it talks about beyond that there will be a ban on exports. We don't know exactly how that would be applied because the regulations to implement it have not been completed and we're waiting to see that, but if you were to apply those rates to the gross value of our concentrate exports it's a very large amount. That would be incremental to the very large payments we're already making to the government. That is what we're engaged in discussions on, with the fact that it's inconsistent with our contract of work and that the amounts would result in a very large amount going to the government. So those are what we have got to deal with.

On underground development, based on our confidence that is supported by our track record of operating there over many years and dealing in a country that's gone through tremendous social, political changes and economic changes, we have confidence we're going to work this out. We're continuing with our underground development program, in fact we had a good year with that 2013, because it's important so that we can make this transition from mining in the pit through mining underground. That underground development is a extraordinarily attractive development opportunity for our Company. When you stack it up against other projects around the world. Given the high volumes that we can mine underground, we're looking at underground mines providing 240,000 tons a day of ore to a mill, which is just extraordinary, at a very low cost, cost levels based on today's cost that would be comparable to open pit mining. It's just really important to us and with our confidence of being able to work with the government to resolve this matter we're continuing with our development plans underground.

Thanks. If I could just clarify, what's being talked about is if, let's say rough numbers you do $3.3 billion of copper revenue in Indonesia in 2014, the part that's not processed locally, call it roughly half, would be about $1.6 billion of revenue. Then, you would pay roughly a 25% export duty. That's what they're asking for, on the copper con, and also would there be similar amounts on the gold as well?

Well, okay, first of all, we are currently processing about 40% of our output from the Grasberg operations of PT-FI at the Indonesian smelter at Gresik. That 40% would not be subject to any -- the export duty applies to international sales of copper concentrate, so it would be 60%. We sell concentrate that has both copper and gold in it, so we don't sell copper concentrate and gold concentrate separately. There is, what we are waiting to see is, how these regulations would work, and then how we can reach an understanding with the Indonesian government about how to reconcile this regulation with our contract of work and what's the basis for us to go forward.

Okay thank you.

David Gagliano, Barclays.

Sticking with the Indonesia topic, obviously we know picture's an indication negotiations can take a long time. I have two questions. My first question is in the immediate term, the very-near term, how long will Freeport be willing to go in terms of timing without implementing more significant changes at the mine? I think you mentioned that you're using workers to stripping and maintenance, etc. How long will that last before perhaps more significant changes at the mine? That's my first question.

Okay, Dave, well it's a good question. The practical issue we face is there's limited amount of opportunities to produce copper concentrate and store it, just because of the nature of the product and where we are. We're looking at alternatives for that. We are adjusting mine plans to reduce concentrate production as we continue to mine. We are looking at the plans of how to arrange shipments to the smelter at Gresik. We're looking at alternative storage opportunities. As we go forward, we would want to focus operations on continuing to produce from the Block Cave at DOZ. Because the nature of Block Cave mining is not something that you can interrupt and preserve the operation, so we will progressively be looking at ways of continuing to produce through the mill, first from the Block Cave supplemented by the pit to ship to Gresik. We will maximize storage opportunities. Then, if we're not successful in getting this done, we would be forced to scale back operations in the pit and suspend operations. Now, look, we are positive about getting this resolved and that's what we will work to do. We believe it's in everyone's interest to do it, and so that's the kind of communications we're having with the government. We've had a long history of really -- its been a successful for an investment for our shareholders but also Indonesia and that's what we will try to build on to resolve this issue.

Okay, thanks. Then my follow up, which is related in the medium term, if there is no agreement resolution, what is Freeport's next medium-term steps? What is the preference here? Presumably there would be a consideration given for a smelter. If so, could you also, when you answer this question, give us a sense of the capital costs associated with building a smelter and things like that?

We built a smelt in the mid 1990s. It was on the order of -- and it's a world class smelter 300,000 tons of metal, one of the most efficient smelters in the world. At that time, its cost was in the order of $750 million. Since that time, the replacement cost for that smelter, we've had some third-party experts analyzing this in conjunction with working with the government, the cost of building that's roughly tripled since the Gresik smelter was built. At the same time, TCs and RCs haven't risen, the processing fees the smelters receive, because of market dynamics, the expansion of smelter capacity in Asia, principally in China, and how that capacity stacks up with available concentrates on a global basis. So, you've got a situation where smelter construction costs have tripled and processing fees are in the range of where they were back in the mid 1990s, so that makes the economic of building new smelters challenging. That's what we've got to talk with the government about.

Okay, and that's helpful on the smelter cost, very helpful. In terms of the first part of that question, what are Freeport's next steps? What should we expect to hear from Freeport? Assuming that there is no agreement reached, what would Freeport do next?

Well, I don't want to speculate because I think we're going to reach an agreement. It obviously, as we have these discussions and particularly given the circumstances within the government within Indonesia, with upcoming elections and so forth, for us to speculate publicly would just be inappropriate right now. We're going to keep the market informed. We're going to work as we've always done in a positive way. We're engaged every day. We're going to work to find a solution to this. Dave, I know you've got to think through those scenarios, but I think you can appreciate from our standpoint is just not appropriate for us to try to speculate on those sorts of negative outcomes.

Okay, understood, thanks.

Sal Tharani, Goldman Sachs.

Just wanted to ask a couple questions on Indonesia. First is, you have increased your CapEx to $900 million a year from $800 million, that's about $500 million more for the next five years. Just wondering if there's anything different you're doing or it's just a cost escalation?

A lot of that's just rounding. This is a project where it's dynamic and we make adjustments as we go along. We do everything we can do to save capital. Some of it is things like labor escalation and then things of those natures, but there's nothing fundamentally changed about it.

Okay. Richard, knowing what we know from your contract of work and derive audits, it appears that it does protect you from any kind of changes in the mining law until at least 2021. I was wondering, would you be willing to take it to an international arbitration court if government forces the new law on you?

Let me make two comments about your questions, Sal. While the primary term of this contract does end in 2021, the contract itself provides for two 10-year extensions. We report reserves through 2041 on the basis of that contract provision, and the extensions are provided for an extension on the terms of the original contract. I think most of you know that for over two years now we've engaged with the government as they've reviewed contracts and as they compare this contract to the 2009 mining law. We've indicated a willingness to sit down with the government and talk about some revisions that would be responsive to certain of the governments aspirations in a way that will protect the value of our shareholders. That's the process that we've been going through. The contract does provide that we do have the rights for international arbitration and that is a protection that we consider to be important for our contract. We have a strong desire not to go to international arbitration. That is a feature that's available to us, but it's not something that we see as an attractive course of action for this. The much more attractive course of action would be able to find a mutually agreeable resolution to it with the government.

Okay. Thank you very much.

Michael Gambardella, JPMorgan.

Not to keep on harping on this Indonesian issue, but do you suspect that people who are making these proclamations are fully aware of the details of your contract of work when they come out with these statements?

Mike, Indonesia has changed so much, from the transition from the government in 1998 to the evolution of the country to be a free and open democracy with a free press and so forth. Like here, and other places in the world, there are people I know who are commenting on this who aren't familiar with the full facts of the situation. There are also people who make comments for political purposes, and that happens every where. The point is, we will engage in serious discussions with people and press articles will be what press articles are and you have to read that with the understanding of the nature of the situation.

And the Indonesian presidential election is in July this year?

Well, no. There's initially a parliamentary election that occurs in the spring and the presidential election does initial rounds of the presidential election is scheduled for mid summer, the July time frame. Then, if that doesn't decide the president, there would be a subsequent run-off election that would be in the early fall.

I see. Last question on this --

And the current president, President Yudhoyono is not eligible to run because of term limit.

Got it. In terms of the 2021 and 2031 in your extensions that you have, I understand it's same contract basically, but would an early announcement on the 2021 extension be basically the only reason why you would give any changes, any financial or operating changes now in your contract?

Well it would only be--

That are early extensions?

It would only be in connection with having a completion, a successful completion of the contract view process and getting an extension to our contracts. Like we've done in other places in Indonesia over the years, as we listen to these things, we thought and we had some productive discussions about how could we get a resolution of this process? Get the contract review behind us, get our extensions, end up having some concessions that we would make from the contract that the government could feel that they had achieved something of importance in representing the government and the people, and we could have a way of successfully having a mutually agreeable outcome to this, but it would be in the context of getting all this behind us.

Alright, thanks a lot.

Let me make a couple of comments. This is Jim Bob. In my year and those that are talking about these negotiations with the government. As Richard said, we've got a democratic country, you've got a parliament, you got ministers, you got the president. This announcement was just made. When I read things and say we could be subject to billions in taxes, we're not going to sit here pay billions in taxes when the solution is working out some deal evidently that involves a smelter. What Richard's saying and what we're all thinking is that we just have to look at the most profitable. When you talk about why we're taking the 2021 to 2031 and 2031 to 2041, the reason why that come up is because we've been spending $15 billion on the ground. No sense spending $15 billion on the ground with that plan for the years that we have to have production and shareholders back. Just look at it this way.

Right now the parliament, just because this announcement was just proclamated on Monday, they don't even have the regulations yet. They understand the deal, about like our Congress understood Obama's Healthcare. There's a lot of questions being answered and people see these piece of paper that they haven't even read yet because it was just announced on Monday.' That's why we are trying to just be patient here and let everybody have the chance to read the darn thing. Now, do people make stupid decisions? Our callers wouldn't shutdown the United States government for any amount of time. They wouldn't dare do that. Would they?

So, just be patient with this. I've been over there since 1984. Getting the first contract to work in 1991, there was lots of times you just had to sit and wait for people and have a chance to understand things. There's a resolution here, and we'll get there. We've got the best copper mine in the world, one of the largest mines in the world. The largest gold deposit has paid money to everybody in Indonesia. The questions that you're asking are important, but the answer is since we just got this thing on Monday, let's not make an Obamacare out of this thing. Let's let everybody understand it and then we'll figure out what to do and so will they.

Thank you very much, Jim Bob.

Oscar Cabrera, with Banc of America Merrill Lynch.

First of all I just want to congratulate you guys on meeting your objectives, so strong execution in your operations. First question, just changing the subject a bit and then coming back to Indonesia in the second one. Your oil and gas expectations for 2014 and 2015 increased from your previous guidance given the last quarter as well as the expectation for capital expenditures. Can you just provide more color as to where this increase is coming from?

Oscar, this is Jim. One of the main increases -- there's two components to the increases in production. Number one, we retained the Gulf of Mexico assets. We did not sell them because of some productive events that happened there. We celebrated some of the behind-pipe reserves, or are in the process of doing that in conjunction with Chevron's operation. So, the present value changed dramatically, and we're going to enjoy those productions. That's number one. Number two, as we're scheduling work to be done in the Gulf of Mexico, the deepwater's long lead times, long lead-time projects, we're finding more efficient ways to do things. We're finding ways to look at the facilities from the standpoint of the best over the long term and the most reserves. For instance, in our Horn Mountain facility instead of us drilling wells from the facility and interrupting production and actually having a lower production volume in 2015, we're doing subsea only in the Horn Mountain versus the combination of dry trees with a rig on the Horn Mountain structure and subsea. Therefore, we'll have minimal supply interruption of existing production.

At the same point in time, we'll go ahead and get all of our high potential subsea tie back. Yes, that costs more money initially, but the returns are higher and the production consistency and growth from the business point of view is more consistent. I would characterize it as the Gulf of Mexico retainage and fine tuning our Gulf of Mexico model from a standpoint. As I said, about one-third of this CapEx is discretionary or timing of those types of things. If we ended up with say a $20 erosion in oil prices, we can make a lot of adjustments here over a single-year period but for sure over a two-year period to reign things in. We're committed to -- we've got a great margin business. We're committed to fine tuning that and while prices are high and demand worldwide is continuing to accelerate, we think it's a good opportunity for us to be aggressive with our development plans for our planning purpose. We are positioned to always have the flexibility to change that if the market shows us that.

Thanks, Jim. That's very helpful. Now, if I may just going back to Indonesia. Richard, the existing operations include a smelter refinery for copper but not refinery for gold. As I understand, this slime that comes out of the smelter gets shipped out to be processed elsewhere. Would the progressive tax be applicable, if it in fact is applicable to all of the gold shipped from Grasberg? Then, in your three times the replacement costs for the smelter, are you including a gold refinery in that amount?

Okay, let me just make sure the rest of the people on the call understand. Thanks for your comment about our operations, Oscar. The PT-FI, as our other operations that produce concentrates, sells the concentrate to PT Smelting, which is a jointly owned company in which PT-FI has a 25% interest. That concentrate includes copper, gold and silver. The PT Smelting's smelter and refinery produces copper cathode from that concentrate, which is the basic product of pure copper, that then goes to fabricators to produce wire and other copper projects. There is a residual slime, it's called slime, that has the gold and silver in it. Currently, there is not a processing facility in Indonesia to process that. That, since the construction of the PT Smelting facility, has been shipped to Japan for further processing.

We are still waiting to see how these regulations come out, but our expectation is that, that slime will be able to continue to be shipped without export duty, at least for the next three years. We don't think that that's going to be a restriction on PT Smelting's operations. The feasibility study that we're working with would include a slime processing facility. So, when we're looking at the cost of a project that would be $2 billion, $2.5 billion plus working capital, that would include a facility to process the slimes and recover the copper and gold in Indonesia.

Great, thanks very much, Rich.

Curt Woodworth, Nomura.

Richard, I was wondering if you could just talk about how you're arriving at the 40 million counts per month for the copper full? Is that based on the tonnage associated with the export licenses that you haven't been able to obtain or that have been delayed?

Yes, it just reflects what our mine plan shows. We wanted to give -- since we're giving the disclosures on a basis of not having any impact of the situation on our operations, we wanted to give you some sense of what we're talking about. What we're looking at is based on our mine plans and a plan of continuing to ship to PT Smelting. This with what would be affected for international shipments out of PT-FI.

The second question is looking at your free cash flow guidance for this year after dividends, it's about roughly breakeven. In terms of hitting your net-debt target of $12 billion by 2016, it seems like some form of asset sales will be needed. Can you just comment on how active the Company is at pursuing various asset sales or a potential MLP to ensure you hit that target?

Curt, from the start, we've seen the situation, because of the capital we're spending at Cerro Verde and other places, that this cash flow from normal operations was going to hit us in 2016. That's mining business adds, oil and gas adds, considering the platform shut ins, and all of these projects ramping up. So, 2016 and the very favorable operations in Indonesia in 2016, all that adds up to 2016 being a hell of a year. That's, through normal operations, where we could reach it. Now, beyond that as I mentioned, our Board's challenged us, we're challenging ourselves to find ways of advancing that and we're working very actively on the possibility of asset sales, potential joint-venture arrangements, potential transaction involving the MLP market in some way. All those things are working and we're really focused on trying to advance the time when we get the targeted debt level reached.

Okay, great thanks.

We understand. That's been the facts just about the flow of capital and so forth about 2014, 2015 the cash flows are going to fund the projects that generates volumes not only in 2016 but those volumes go forward, way beyond 2016. Then, we have additional growth opportunities, really, in those post 2016 years is when all this, when the oil and gas growth really kicks in. The capital that Jim was talking about would have the opportunity to spend now enhances that. Then, we're looking for the next round of expansion projects in the mining business.

Okay, thank you.

Joe Allman, JPMorgan.

Thank you. Just a couple quick questions. Jim Flores, could you just clarify what you said about the Lower Tertiary Cretaceous play? I think you mentioned there you experienced some challenging reservoir quality. On which projects did you experience the challenging reservoirs? Then you also mention excellent reservoir quality. I think you were talking about the one you're doing, Lomond North. Just clarify that, please?

No, the gel is kind of -- for our Lomond North well at Highlander has the excellent comparable rocks to traditional South Louisiana production at any depth. Define it at 28,000 feet, 29,000 feet under this pressure is truly spectacular, so we're holding all huh-rahs and so forth toward our production test this summer, and we'll show you what 20% of rocks can do. The other reservoirs that we found to date have less porosity, but they're offset by the higher pressures I talked about. They are going to be more challenging produce. We've been very forthright with all of the investors saying we're trying to get to the core of this play. With the exploratory drill bit we have eight points of control now. Our wells, the latest well, this Lomond well is by far the best reservoir that we've found to date. That trend I expect to continue now that we know what to look for and what to find, but Lomond by itself will support the entire deep expectations of the play from what we see right now and also be a spectacular return for our royalty trust investors as well.

Jim, are you less optimistic about Davey Jones and Blackberry West than you were before based on reservoir quality?

There's no optimism, here. There's nothing but realism, Joe. It's going to be what it's going to be from a standpoint, but I'm just giving the comparison toward what we found and how we're improving the operations. This is what our shareholders pay us for is to make sure that we're always improving it and moving the needle toward higher quality margins, higher quality reservoirs. This has been a quantum leap in this Lower Tertiary Cretaceous play that I think will be very surprised with the people as it unfolds with all the data and the production test this summer.

Okay, great. Jim, you also mentioned $20 to $30 per barrel margin, cash margins. Were you specifically referring to Lomond North and Highlander? Could you give me the calculation, just a quick calculation on that?

You can back into it from a gas standpoint, of gas condensate, but if you're talking about 20 barrels per billion that will get you pretty close. When you talk about LLS prices at the volume we're talking about, you can get some pretty nice margins there. It's traditional gas condensate margins you're seeing, being in the Permian scene and the Central Oklahoma area and also North Louisiana when you talk about condensate rich plays, but when you're talking about high 50 plus million a day wells, you're talking about high volumes and great returns for our shareholders.

Great, and then just give us the update on the Gulf of Mexico asset sale?

We postponed it indefinitely because of the acceleration of a lot of the recompletions and behind-pipe reserves. At this point in time we're going to keep it going forward.

Alright, thank you very much.

Adam Duarte, Omega.

Two questions. One is, what are the next steps for Lineham Creek? Secondly, given your heavy completion schedule in the second half of this year on the ultra deep stuff, when do you see first distributions to the royalty trust units? Thanks.

On Lineham Creek, Adam, Chevron is the operator and we are -- Chevron is developing its completion plan and will be coming out with AFEs and so forth. I would expect Lineham Creek, because of Chevron -- this is the first well of this depth that Chevron's completed in this trend, taking their time and so forth. It may be first half of 2015 before we get completion at Lineham Creek. That's why the Lomond North, the Davey Jones 2, the Blackbeard West completions this year will be more significant to the distribution of the royalty trust. We think we'll be able to make distributions within four to six months of commercial production.

Okay, thank you.

Joan Lappin, Gramercy Capital.

Okay, I'm about to take off from Kennedy, so I'll ask my questions as long as I can. As far as Davey II, can we get more color? I may have missed some going through security, but I doubt it. What is your timetable for Ship Shoal 188 and the implications that would have for Treasure Island?

We're in the process of completing Davey Jones Number 2 right now. The West Blackbeard well you referenced would be the subsequent operation on the completion for that. Assuming the Davey Jones operation goes as planned, we should be completed with Davey Jones in the second quarter, be moving on to the West Blackbeard completion, which would be a third quarter completion there.

Okay, can you give us more color on what exactly you're doing? Why you think this is going to be different than Davey 1? I know Davey wasn't taken all the way to the bottom, which well is, etc. Would you give us more information please than that?

Right. It's hard to give you more information on what we're doing differently. We hope the reservoir performs differently and the relationship between the drilling fluids and reservoir, they will become the impediment that we think happened at Davey Jones 1, as well as we're operating in a much better environment with twice the hull size and more standardized equipment. Joan, we've drilled a lot of wells since we drilled Davey Jones 1. We've learned a lot of things that work and some things we still don't know. The one thing on the Davey Jones 2 it was the deepest well, stratographically, we drilled to date. That was before we had the sophisticated logging tools. We don't have as much diagnostic information as we'd like, like here on the Lomond well, on cores and logs and so forth, but drilling the Lomond well and having a lot of coral sands in the Cretaceous and also the Willcox is helping us through our completion process. You're going to get our best efforts, there's no guarantees or expectations of change other than we're going to try as hard as we can.

Okay, so the timetable is second quarter then, for any kind of testing or what?

If everything goes planned, that's correct. It's all subject to change and weather and operational challenges.

Okay. As far as what you know so far from Lomond North, do you plan to be buying more, being active again in the next lease sales or have you got everything on your plate that you want?

We would never comment on that, Joan. That's obviously a strategic reason and so forth of what we're going to do or not do. We're going to react appropriately to create value for you as our shareholder, and everyone else. We have a tremendous acreage spread here at Lomond, that, with a lot of drilling to do and a fantastic reservoir, so it's going to get a lot of attention early on.

Okay. Would it be fair for us to assume that as far as the shallow water is concerned there will little or no drilling in the future and then it will all be onshore?

I wouldn't make that assumption, Joan. I really wouldn't. Probably, we need to move on to some other questions at this point in time. So, stay in touch, appreciate it.

John Tumazos, John Tumazos Very Independent Research.

Thank you for the presentation and the good results. On your slide 34, the long term Grasberg profile, in 2017, do you forecast 900 million pounds of copper and 1 million ounces of gold? Presumably that's after the open pit mining has concluded. Do you expect to produce that from the Block Cave in 2017, or will part of it be from the IOZ separately and from stockpiled open-pit ores carrying over? It's quite remarkable that you're avoiding a bigger down dip.

Yes, John, you're remembering past years where we did show a much bigger down dip. One thing that's happened, our continuing exploration delineation, the IOZ was the older mine. It's went to the DOZ, the deep ore zone, all this is a continuation of Block Caving that started back in the early 1980s. We have an extension of the DOZ because the deep MLZ, which we are targeting to bring on in 2015, and that mine's early years has some very good grades of copper and gold. That has really helped us mitigate the impact of the transition from the pit to the Grasberg Block Cave, which lies underneath the pit, which we can't start mining until we get out of the pit because of subsidence. That will ramp up, but won't provide much in the way that 2017 will include the DOZ and the deep MLZ and some stockpiles from the pit that we'll have.

Thank you. If I could ask a second question. On the slide 33, the oil and gas hedging, those are put and swaps, so there's nothing that caps the upside, or is there?

John, the swaps do. That's obviously a fixed contract, but the puts do not.

Thank you.

And the swaps are just on the natural gas.

On the natural gas, John.

Thank you.

Paretosh Misra, Morgan Stanley.

Question on your Gresik smelter. What is the maximum amount of copper concentrate that Freeport can send to that smelter? Particularly is there any rule that limits the amount that your competitor can send to that smelter?

Well, the sales of concentrate to that smelter are like, they are under the rest of the global industry, they are on the basis of sales contracts. The smelter has a capacity of about 1.2 million tons of concentrate. Currently, we supply about 90% of that, I believe. Going forward, it will depend on how those contracts play out. There's no regulations that govern that. That's strictly commercial negotiations between PT-FI and PT Smelting. We are part owner in PT Smelting. The other Indonesian copper producer has been providing some concentrates there, but there's nothing that legally gives anybody any rights or any roadblocks to providing that. It's strictly driven by the smelter's capacity and its existing contracts.

Understood. Have you already informed your customers that you might not be able to supply copper concentrate?

We have active communications with our customers. Several things are going on in the smelting business right now. The Bousip smelter is down from the storm. We've always been able to work cooperatively with our customers, with the timing of shipments and so forth. We don't have a real short-term issue of problems to deal with.

Thanks, Rich. One question for Jim actually, I was hoping you could provide fourth quarter production rate at Marlin, Horn Mountain and Holstein?

Fourth quarter production at Marlin, Horn Mountain and Holstein, to get the exact numbers, I'd have to get back to you.

I'll tell you what. Why don't you just follow-up with David on that?

Yes.

Okay thanks.

Thanks Richard.

Brian Yu, Citigroup.

I've got a couple questions. First, Rich, just a clarification. In terms of delays to the export, is that having an impact now? If not, when could it start having an impact, if you don't get to a resolution?

It's having an impact now in the sense that because of the new regulations and the fact that the full regulatory scheme has not been finished yet and communicated, we're currently not exporting. We had some ships that loaded early in January that was, that had permits that carried over from 2013. We've had shipments on that basis. We would have shipments to PT Smelting. We've timed everything to give us some working room here as we deal with this issue. Over time, the ultimate event that would start requiring us to do more significant scale backs would be not having space to store the concentrate that we produce.

Got it. The second question on a different topic is, some a little gas business in terms of the cost guidance for 2014. It is going up to $20 per BOE. I was wondering if you guys could give us a break down, maybe by the four regions? Is there any particular one that's accounting for the increase, or is this more of the greater output from California, which inherently has good margins but also higher cost?

Brian, that's a good catch. I meant to bring that up. Our actual costs are $17 a barrel, but when you shut in Marlin, which is 30,000 barrels a day for 90 days, it has a dramatic affect on the overall and it kicks our overall Company-wide cost up to $20 a barrel. The next year, we think our costs are going to be somewhere in the $18 a barrel range. Again, that is absorbing the shut in at Holstein, which is about 16,000 barrels a day, and then Horn Mountain, which is another 14,000 barrels a day. That gives you the artificial inflation to our costs at the $20 barrel for this year and $18 barrel next year. You'll see our cost go down towards $15 a barrel in 2016 just because we won't be suffering those shut ins. There's no movement in costs other than those shut ins. I appreciate you bringing that up.

It's just volume driven.

Okay, so it should be tracking that $17 the first half, and then it will increase in third Q and maybe a little bit in 4Q as modeling is shut in?

Yes, and then that's going to change as depending if it's we're planning a 90-day shut in, if weather goes our way and things happen maybe it's just a couple weeks earlier. That all has a dramatic effect, so we hopefully that's a number that's an outside number at this point.

Okay, thank you.

Daniel Rohr, Morningstar.

Thanks a lot. Richard, I was hoping you could update us on your current thoughts regarding medium-term Chinese copper demand? You touched on briefly in your introductory remarks the changing composition of Chinese GDP. Curious as to what you think that means for Chinese copper demand growth over the next five years?

We continue to be very optimistic about China. In the global copper markets are tight. In China you have, and you can see that with premiums that are paid with falling exchange stocks around the world, it just have dramatic today fall. In China you do have this copper that's in the bonded warehouses that are off exchanges, so it's depending on how that goes, depending on how these financing deals go. When you just look at the performance of the economy in China, even though there's some slowdown, the size of the economies grown to the extend that those somewhat lower percentages still translate into very substantial amounts of copper demand. We're optimistic about it. We're also realistic to know that there could be changes depending on how they manage the inventories, how these financing transactions work and just how their global activities go. We're optimistic about it, and as I said, I think in general, the market's much more optimistic about it than they were a year ago.

Do you see the main growth drivers from an end-use perspective shifting over the next several years, or is it still going to be mainly infrastructure, mainly construction providing that incremental demand?

It's clearly shifting. I think China's automobile production is way up, I mean way up. The things for consumers, air conditioners and the like are up, but at the same time for that, China's going to have to continue to develop infrastructure to deal with the underdeveloped large population they have on the interior. And China has the financial resources to do that. It will be a combination of a increasingly important internal consumer-based economy as well as continued infrastructure development.

Thanks for your thoughts on that. Appreciate it.

Let me just comment on exploration. This is Jim Bob again. We hear on some of the increases in our CapEx are because we have more opportunity that we've been seeing in the deepwater. For instance, the DP purchase, the Plains made that we acquired. A lot of work has been done under those big platforms. The sub-shelf had not been explored and hadn't even focused on it, so we're finding prospects in the sub-shelf under the big platform out there. The prospects that we see as a result of this, with this well and wheel house in Tuscaloosa opens up the whole onshore to us. Once you understand the impact of that, the Lomond well is the only well that's been drilled onshore between the Tuscaloosa trend and Baton Rouge and the wells that drilled along the coast. The entire 100 mile square area of new trends been opened.

When you think about our exploration in the minerals business, our exploration is all brownfield because we've got big ore bodies that have not been drilled and explored as deep. When you look at that and then we have a few greenfield (inaudible), we see some really good intercepts. Our story is so big based on current production. Remember, we have the big production and we also have the big growth story, and as we get we have the best prospects in the minerals business, we have the best space to find ore is underneath ore. We got the best prospects in the deepwater for the best places to find oil and gas and unload oil and gas. That's coming true. The Lomond well, that we had in the Cretaceous and the kind of porosity as far south of the Tuscaloosa trend, is just like some of the stuff that we saw in deepwater. We're cabled in. I think the Miocene was rich deposit out there and on the Wilcox. But, this things just getting started, so that's why I wanted to comment a minute on the production profiles look great but our exploration looks even better. Thank you.

Alright, thanks Jim Bob. Thanks, everyone, for participating in our call. We'll be keeping you informed as all these things progress. I'd just echo what Jim Bob said. We've got a great Company and great team here, great assets and great growth opportunities. We look forward to working on it as diligently to create values for you our shareholders. Thanks very much.

Ladies and gentlemen that concludes our call for today. Thank you for your participation. You may now disconnect.