費利浦·麥克莫蘭銅金 (FCX) 2015 Q2 法說會逐字稿

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

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

(Operator Instructions)

I would now like to turn the conference over to Ms. Kathleen Quirk, Executive Vice President and Chief Financial Officer Please go ahead, ma'am.

Thank you and good morning, everyone.

Welcome to the Freeport-McMoRan second quarter 2015 earnings conference call.

Our results were released earlier this morning and a copy of the press release and slides for today's call are available on our website at www.fcx.com Our conference call 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 call.

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 the call include forward-looking statements and actual results may differ materially.

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 are Jim Bob Moffett, our Chairman of the Board; Richard Adkerson, Vice Chairman & CEO of FCX; Jim Flores Vice Chairman and CEO of Freeport-McMoRan oil and gas and we also have several others from our Senior Operating Financial team in the room today.

I'll start by briefly summarizing the financial results and then turn the call over to Richard who will start with the presentation material included in our website presentation.

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

Today FCX reported a net loss attributable to common stock of $1.85 billion which was $1.78 per share for the second quarter of 2015.

The net loss attributable to common stock included net charges totaling $2 billion or $1.92 per share for the second quarter primarily for the reduction of carrying values of oil and gas properties.

After adjusting for these special items, FCX's adjusted net income attributable common stock totaled $143 million or $0.14 per share.

Copper sales during the second quarter totaled 964 billion pounds.

We sold gold of 352,000 ounces and our oil and gas sales totaled 13.1 million barrels of oil equivalent.

We realized in the second quarter an average copper price of $2.71 per pound.

That was below last year second quarter of $3.16 per pound.

Gold prices of $1,174 per ounce compared with the prior-year quarter of $1,296 per ounce.

And our average realized price for crude oil during the second quarter 2015 was $67.61 per barrel which included $11.79 per barrel of realized cash gains on our derivative contracts.

We generated operating cash flows of $1.1 billion during the quarter and our capital expenditures totaled $1.7 billion.

We ended the quarter with $20.9 billion of consolidated debt and consolidated cash was just under $500 million.

We also ended the quarter with availability under our revolver of approximately $3 billion and under the Cerro Verde project loan of just over $500 million.

I'll now turn the call over to Richard who will provide additional details on our results and operations and outlook.

Thanks Kathleen and good morning, everyone.

Thank you for participating in on our call.

I want to report on the operating and cost performance highlights of our second quarter and the first half of the year.

Of course in the context of the weak commodity price environment but we have positive things to report.

Our Morenci project, which is an important project for us, is operating at full rates.

Our Cerro Verde project in Peru is progressing very well.

It's now more than 87% complete, in line to a startup later this year.

We are very pleased with the progress there.

We've had improved operations at Grasberg.

Our mining rate, our recoveries-- we are moving towards having access to higher grade ores in 2015, late 2015 and 2016 and 2017 as we complete mining in the open pit.

Our labor situation has been stable during the second quarter.

From a mining standpoint, we are positioned for near-term growth and production and also to get the benefits financially of declining costs and declining capital expenditures as we complete our expansion projects.

We had a good operating quarter in our oil and gas business that Jim will be talking about in a few minutes.

The Lucius Production reached full capacity.

We had positive drilling results with our tie-in projects for our Holstein and Horn Mountain facilities.

We now have seven top-ac wells available for completion that will provide incremental production volumes in future years.

We previously reported that on June 23 we filed a registration statement on Form S-1 with the Securities and Exchange Commission for our potential Initial Public Offering of a minority interest in our oil and gas subsidiary.

I'll just point out we are in registration so we have some limitations on what we can say today, but we can report on our results and our plans for our operations as we go forward.

Kathleen has reviewed the financial highlights and you can see that across the board our actual results were consistent with our guidance.

We were able to access some higher grade gold or Grasberg so our gold production was up roughly 15%.

Our cost performance was good with our net cash operating cost in our mining business being at $1.50 per pound and $19 per barrel in the oil and gas business.

Again, if you look at our financial highlights it reflects a strong quarter operationally.

Our Company remains highly impacted by copper prices, of course, and highly leveraged to the copper prices.

And copper prices have dropped here late in the second quarter and as we've gone into the third quarter.

Copper is, of course, the commodity that's probably most affected by global economic conditions in the current uncertainties there-- the stronger dollar have contributed to the current price situation.

The slow-down in the China economy is a factor and the carry-on effects of the drop in stock prices in China and the impact on financial investors is certainly being shown in the copper price.

Within China, we do our business there, we see requirements for copper growing in absolute terms and China continuing to being a significant consumer of copper.

And with the country's commitment to infrastructure investment, with the government's commitment to addressing the economic slowdown, we don't see China having a hard landing type situation that some are predicting.

But we have to be prepared to deal with the conditions as they evolve.

And we certainly will be able to do that as we've shown our ability to do in the past.

As we talk with our customers, our downstream customer in the US, and of course we are a very significant supplier of copper to the US, we see recovery continuing at moderate rates and our customers being well-positioned and confident about the outlook for the second half of this year-- a gradual recovery in Europe.

So as we have been for some time, we are facing near-term price uncertainty in the copper business.

And having to address our business in light of that uncertainty, you can develop reasonable scenarios now for prices either staying where they are, dropping or increasing.

But none of that deters us from our long-range positive view of the long-term fundamentals about the copper business.

The supply-side that miners face continue to be constrained.

Inventory levels, while they rose in the first quarter of 2015, remain modest by historical levels.

And our Company is strongly positioned with our large volumes of copper production, our very large inventory of reserves and resources to take advantage of what we remain confident will be a long-term positive future for the copper business.

Just to review something that I've shown some of you before but just to illustrate that in broad terms -- on slide 6, we show the largest copper mines in the world in terms of reserves on the left chart and in 2014 on the right chart.

There is a limited number of mines here.

The top ten copper producing mines in 2014 produced less than 5,000,000 tons per year.

Another factor when we think about supply situation in the copper business, there's 16 mines on these two charts.

Only four of them were discovered in the last 50 years.

The discovery of world-class copper mines is very rare.

They last for decades and these mines provide growth opportunities as you go forward, but it is a commodity of where the expectations or the likelihood of discovery of a new mine of world-class significance is something that is rare.

Then when we look at the longer-term copper market fundamentals, we used some WoodMackenzie data here.

Other analysts use other data.

Some are more optimistic.

Some are less.

But in WoodMackenzie's analysis, if you assume global growth at 2.4% a year for the next two years, which is not an aggressive view, and that would include Chinese growth for the next ten years at 3.7% where China has grown at roughly 10% for the past 10 years, you would see a requirement for copper of 7.6 million tons.

Over the same period, production from existing mines will decline as grades drop and as mines move underground and the expectation for WoodMackenzie is that would create an incremental requirement of 2.8 million tons.

When you look at growth at those levels, declining production from existing mines, there is over the next 10 years a 10.4 million ton shortfall in copper that would need to be made up by expansions, new projects, or scrap.

And as I mentioned, the top 10 mines only produced 5,000,000 tons last year.

So that's just an indication of the longer-term needs of the world for copper and why we believe our Company is well-positioned to benefit from that and we're focused on that.

Slide 8 shows our unit cost situations.

You can see that we were consistent in achieving our objectives.

Our consolidated net cost was $1.50 a pound showing some benefit of incremental gold at Grasberg which has had net unit cost of $0.81 a pound.

Tenke Fungurume in Africa is performing well at approximately $1.00 a pound cost and our North American operations are performing well.

You can see the production from our mines by region on the bottom part of this chart.

The growth in North America reflects the ramp-up of Morenci and it is up 40% from last year with our expansion capacity.

South America reflects the sale of Candelaria, which is in the last year's numbers and not in this year's numbers, and fell short of this production this year for operational regions.

But overall a good quarter.

Slide 9 looks at our three major Expansion Projects that we targeted in 2010 following the financial crisis.

We reviewed our portfolio and identified three major projects to pursue.

The Tenke Fungurume phase 2 expansion was started in the second quarter of 2011.

It was completed in 2013 meeting our targets for capital expenditures in incremental copper.

The Morenci project, the mill expansion, mine expansion there was completed last year.

It is completed to perform well and now Cerro Verde is approaching completion.

In total these three projects will add roughly 1 billion pounds of copper production for us and involves a total aggregate of expenditures of just over $7 billion.

Very proud of our project management team and our operations teams for effectively executing these projects.

At Cerro Verde which is a world-class project make it a world-class mine the detailed engineering and major procurement is complete.

On completion this will be the mine with the world's largest concentrating facilities -- 360,000 tons a day which is massive and impressive.

Construction is advancing on schedule.

It's more than 87% complete.

We're preparing to begin commissioning -- I'm getting videos daily of pieces of equipment beginning to operate.

Our team there is very excited and highly motivated.

We've been able to work closely with the community in doing this project and have had minimal interruptions from a labor and virtually none from the community standpoint.

Adding 600 million pounds of copper per year we will expect to complete this on our capital budget.

To-date we've incurred about $4 billion and committed for more than that, but it's going very well.

Slide 11 shows our growing copper production profile for the remainder of 2015 and what we are looking for in 2016.

We will be having increase in production as we go forward into the second half of 2015.

So here we've been working for a number of years to benefit from these projects by giving us higher volumes and lower costs and that's what we are achieving.

And you can see as we go forward the impact of that, using today's cost levels, of declining unit cost for our Company and also declining capital expenditures as we go forward.

An important area of attention for our Company has been working with the government of Indonesia in terms of securing a mutually acceptable agreement on our long-term operating rights.

We have in place a contract of work, our second contract that was signed in Indonesia but it was a contract that was signed in 1991 that had a 30 year primary term extending to 2021.

And, by its terms, giving us the rights to two ten-year extensions beyond that in accordance with the terms of that contract.

That contract provides us the necessary legal and physical assurance that gives us the confidence to be able to make the long-term capital investments.

And we're investing $15 billion to develop our underground resources to replace the open pit reserves as it is depleted.

This extension requires approval by the government of Indonesia, but under the contract that cannot be unreasonably withheld.

We've had discussions now for a number of months with the government on how to deal with our contractual rights with new mining laws and regulations that have been adopted in the country of Indonesia.

And what we have worked together with the government to do is to find a mutually satisfactory solution that provides our shareholders the confidence that the need for us to continue to make investments.

And also be responsive to the aspirations of the government of Indonesia and the new mining law regime.

The rights under our contract currently continue until we agree to find a way forward which may provide involve some amendments to it.

As part of our efforts to be responsive to the government, we are working on developing new smelting capacity in Indonesia and we've made some significant progress in terms of identifying sites and partnership arrangements and contract arrangements for that project.

That would be in parallel with our resolution of our COW situation.

We have submitted our application for renewal for our export license for the next six months, and believe we are making progress with the government in securing that.

We do have a long-term record that goes back 40 years now of working successfully in Indonesia in a positive way to partnership with the government and local community.

Our operations have been the primary economic driver for development in Poplin.

We want to continue to attribute to that, to be part of that as well as providing significant overall benefits to the Indonesian economy.

The direct benefits have been $18 billion over the past seven years and the split of those benefits has been 60% for the government, 40% for Freeport.

Our chairman Jim Bob Moffett has been in Indonesia directly involved in discussions with government officials.

He's there now and, Jim Bob, I'd like to turn the call over to you to make whatever comment you'd like to make.

I'll save other comments for the Q&A, but I just want to say that we're making good progress on extending our export license and we expect to continue under our amended COW which has a primary term until 2021 with two ten-year extensions.

So, I'm here trying to make sure that we get this right since we're talking about 2041 which is an important time.

Because in that period of time, we will be finishing our underground operations and going under the open pit mine and bringing our deep level mine zone on production and become the largest underground mine in the world, and as you've seen we continue to have made engineering successful in Papua.

So as you've seen from the press clippings, the ministry of mines has indicated it'll all be (inaudible) and we hope to get this concluded over the next several days.

Thanks Richard, and I'll save the rest for Q&A.

Thanks Jim Bob.

Turning to slide 13, operationally we've completed the development of access to these underground ore bodies which includes the DMLZ zone which is an extension of our existing producing underground mine and the development of the Grasberg blockade which lies underneath the pit and we expected the deep MLZ to startup late this year -- it's on schedule to do that and the Grasberg blockade to now begin production in 2018.

The key development activities have been involved with ore flow systems and Grasberg blockade shaft.

Development capital to date has totaled $3.3 billion, $2.6 billion net to BP Freeport Indonesia after Rio Tento's participation our share of underground mine development is expected to average $700 billion a year over the next five years.

You can see in the chart below when the deep MLZ comes on stream and then the Grasberg blockade, both these mines have very significant positive grades of copper and gold as does the Grasberg open pit.

And we expect after we move into the underground area to have large volumes of copper and gold with copper being in the range of 1.1 billion to 1.2 billion and gold 1.4 million to 1.5 million ounces annually from 2018 to 2022.

Now to conclude the opening part of our presentation, I'd like to focus on our really significant inventory resources on slide 14.

Our Company has proved reserves that are based on mine plans of $2.00 copper of over 100 billion pounds.

In addition to that we have mineralized material that is based on 2.20 copper of an incremental 100 billion pounds.

And beyond that we've identified additional resource potential at our existing mines.

These are not Greenfield projects but places where we already have infrastructure footprint operations of another 170 million pounds.

So we have, as far as we can see in the future, opportunities to invest in growth projects when the market warrants it.

We're going to be very prudent about doing that when we can do it in a low risk basis and use our track record of successfully doing projects in a consistent way when those opportunities warrant themselves.

And we are working diligently on looking at the next phase of growth projects as we look forward.

With that, Jim Flores is here to talk about our oil and gas business.

Thanks Richard and good morning, everyone.

I'm on page 15, the second quarter of 2015 oil and gas highlights.

A couple comments.

We've had an excellent quarter operationally both on the operating side but also on the financial side.

Getting the S-1 filed for our potential IPO later this year.

That will guide a lot of the restrictions on the comments I'll be able to make today.

From the operations standpoint, we focused on low risk drilling and tieback opportunities as stated here on page 15.

We've been ten for ten on very successful wells since 2014.

This has helped tie in all of our seismic and all the resources that we've captured over the last couple years in the lease sales and also acquisitions.

And now we're enjoying bearing the fruits of all that labor.

We placed three wells in production in 2014 and the first half of 2015 that have really impacted production.

You can see where production has increased in the second quarter over the first quarter because of that activity.

Our cash operating margin has increased mainly due to prices and also lower production costs.

We see our production costs going from $20.26 a barrel down to $19.04.

That trend is going to continue as we continue to add volumes to our fixed infrastructure and our fixed core structure out there.

When you look at the economics of our business, it's worth noting here that that is one of the key metrics-- we look at our cash operating margin, which is one of the industry lead cash operating margins from a standpoint because of our core structure is low, but also continue to trend lower.

We're forecasting going from $19 to $12 on our Eloise over the next 4 years to 5 years as we continue to ramp up production.

And our corporate costs are up $4.

We'll probably be able to cut those in half.

When you look at that, our cash margin has a real opportunity to grow by controlling on the cost side and even in this low price environment from there.

With our DB&A rate now around $26 and going forward and our F&D costs below $25 a barrel, we are basically going to be able to earn some money even at this $50 oil price.

It would be much better if it was $60 to $65, but we're tuning our business for the lower oil prices for as long as it takes before they adjust back to more normalized levels.

Back to the drilling, we've continued to have good success and a lot of tieback wells going forward in the next 12 months through 2017.

And what the investors will get a vision of is, as we pile up all these successes, is exactly what the timing of that production is coming on.

And the aspects of being able to build models as far as the value being created with the drillbit here is quite special.

With Lucius coming on at full rates we have a very successful project operated by Anadarko.

We have the sister project Heidelberg coming on mid-2016.

It's on schedule and the facility is in place and secured.

We've had a successful well in the Vito basin which is our Power Nap well and we've already spotted an offset opportunity called Deep Sleep that we have high hopes for as well.

The subsidy development tieback strategy that is going to drive a lot of value for our Company, our investors is off to a great start across the board.

In our 100% owned Holstein, Marlin and Horn Mountain facilities we've actually drilled and completed a well in each area or a couple wells in each area and tied back wells into Marlin and also Horn Mountain.

We also have the big Holstein deep development that we're going to be tied back next year in 2016.

Over the next two years as we bring these wells on it's going to require some downtime at each facility, a few weeks to hook them up.

It'll actually be the following 6 months to12 months after that you'll see full production response without any platform interruptions.

This will get all the success turned to the tanks.

A big key about our strategy in the deepwater that makes us so unique is the timing of these tiebacks, the cycle time.

We're making discoveries and having oil production barrels come on like in Dorado three months on page 17 on Holstein deep 12 months to 18 months and King 9 months to 12 months.

This will accelerate going forward as we get the initial subsidy template infrastructure in place.

As we add wells and flow lines to the sub-sea connections which is much easier than trying to bring them all the way back to the platform.

So we're off and running, the teams are all doing great.

We've overcome any kind of obstacles or challenges so far and we look like we have some blue sky ahead as far as doing things on a more repetitive basis and take some of the risk out of the situation.

On page 18 -- Lucius we talked about has been a great discovery made in 2009, it's up 80,000 barrels a day and it's actually processing 400 million cubic feet of gas, but about 100 of that is ours that we have an interest in.

And through six subsea wells, water depth at 7200 feet, it's really pushing the water depth up there and it's just been a fantastic project -- on time and at cost.

And the Heidelberg project, it seems to be going just the same.

It's moving forward a lot was learned at Lucius for helping us at Heidelberg and so forth and we have a smaller interest there, 12.5% but still significant for our 2016 volumes.

If you look on page 19, it shows the near-term growth in 2015, 2016 and 2017.

From the capital budget we have now, the production growth is going to be important but muted from 143, 151, 173 because of timing of spending to accelerate to production on wells that we've already drilled.

And that's one way we'll delay CapEx during this low price environment and manage our business.

We've been following S-1 for the IPO.

If we raise capital in IPO to accelerate our business, then you can look at the higher numbers of 143, 175 and 215 as potential flow rates as we put on wells faster that we've already drilled here this year and next.

When you look at page 20, it's kind of a sensitivity of what prices do at various production rates.

You can plug in whatever you want in your model and figure out where our cash flows live and so forth.

We're obviously planning on our side operationally for the low-end and the rest of the Company is hoping for the high-end.

You can look at that and you can see that growing the volumes does matter.

It would drop right to the bottom line and it's going to be a very significant part of our business is getting those volumes up to 225.

Part of helping sustaining that or increasing that from that 225 level is our Atwater Valley area.

We entered this space and post the be to discovery with an 18.67% interest in the Vito and we subsequently grow the power in that discovery with a 50% working interest.

We're very, very excited about that and now we're drilling the other side of the basin with our D fleet exploration well and we should be down sometime this quarter and hope to be getting results on that going forward.

On page 22 you can see the pipeline we have built of-- we think are a very strong set of projects that we own that are going to move the needle here at the Company.

So you can keep track of how we are doing and what projects going forward.

Hope to keep the success rate up and drive those volumes going forward.

Richard, I'll turn it back to you on page 23.

Thanks, Jim.

Just to update our 2015 outlook-- our copper sales outlook is the same as last quarter at 4.2 billion pounds.

The gold at 1.3 million ounces for the year and molybdenum down a couple of million pounds and with oil equivalent at 52.3 million barrels, 67% crude oil.

Our unit cost for copper we are not changing at $1.53 a pound.

That will depend on any number of factors including byproduct pricing which is built into here at $11.50 gold $6 molybdenum for the rest of the year and oil at $19.

That would model out with operating cash flows at $2.50 [per pound] copper or $3.6 billion.

Each $0.10 change in copper for the remainder of the year is $190 million.

Capital expenditures have been reduced by a couple of hundred million dollars as we've cut some capital in our mining business to $6.3 billion for the year.

Our sales profile, looking beyond the current year you can see the growth in 2016 and 2017 both from our Expansion Projects but also from the high grades that we'll be having with our mine plan and Grasberg.

You can see that in the gold sales going to 1.9 million ounces and 2.4 million ounces in 2016 and 2017.

On a quarterly basis on slide 25, as I mentioned earlier, we will be having higher volumes of copper in the second half of the year, strong gold quarters as we take advantage of the grades that were available to us at Grasberg and you can see our outlook quarterly for our oil and gas business and our molybdenum business.

Slide 26 gives the sales of our net unit production cost which consolidates $1.53 but you can see the strong numbers in Indonesia and Africa and, really, strong numbers in the Americas as well.

You can see our sales volumes at the bottom.

On a consolidated basis and looking at cash flows, we have shown here averages for 2016 and 2017 in showing copper prices ranging from $2.50 to $3.50 and EBITDA numbers at $2.50 copper of $8.5 billion; $11 billion at $3 billion.

And then with operating cash flows which would take into account cash taxes, cash interest, excluding working capital changes, so $6.5 billion for $2.50 and $8.3 billion for $3.50 or $3.

Sensitivities for that are shown for adjusting that as you see fit on page 28 and then our capital expenditures are shown on page 29.

You can see capital expenditures declining this year from last year and will decline further as we go forward with basically a constant level of spending under this plan for our oil and gas business dropping CapEx and our mining businesses complete our new projects.

Our Board is committed to balance sheet management and we've got a strong track record of doing that both in good times and in times with weak commodity prices.

We are able to do this because of our large resource base, the cash flows that it generates and our capital discipline.

We have and will continue to take steps to reduce costs in CapEx, look for opportunities to bring values forward through asset sales, of course we have suspended our common stock dividend, look forward to the time when we can restore that.

Everybody is committed to returning cash to shareholders but increasing volumes, declining CapEx will enhance our credit metrics even in low commodity price environments.

We have talked about looking for external funding in the oil and gas business through this IPO that we'll be considering.

That has to go through a SEC review process which we are making progress with now to give us the opportunity to look to go to market during the second half of the year and for other opportunities that might be there as well.

We have $3 billion of liquidity under our FCX revolver and $0.5 billion under our Cerro Verde facility.

Our total debt at the end of the quarter was $20.9 billion with $500 million of cash.

As I said, we're looking forward to improving credit metrics.

In conclusion, our three priorities are going to be focused in this kind of commodity price environment on protecting our balance sheet.

We'll do that by managing our operation in CapEx to maximize cash flows.

We're looking for oil and gas funding to take advantage of these near-term growth opportunities that Jim talked about.

We are totally focused on completing our Cerro Verde project and taking advantage of our expanded operations at Morenci and Tenke Fungurume and generating values in the long run from our larger resource base.

So execution, execution, execution is our focus during these challenging market conditions.

With that, we would like to open the line for questions.

(Operator Instructions)

David Gagliano, BMO Capital Markets

My first question, given the decline across the board in pricing, I'm wondering, are you considering additional asset sales in this environment in addition to the energy IPO?

We're looking at all alternatives.

Asset sales is potentially one.

Other alternatives will be dialing back some of our operations to reflect the economics of the current environment.

For example, we are doing that in our molybdenum business where prices are weak.

We benefited in that marketplace because of our really strong position.

80% of the market of the chemical business to focus on that where realizations are higher, but we may limit molybdenum production in some of our byproduct operations in response to prices.

In 2008, we curtailed production at high-cost mines to reduce costs, and we're looking at that.

Presently, all of our mines are tied to cash flow generators, But if markets degenerate further, we are prepared to take steps to be responsive to that.

Dave, we're looking across the board at opportunities.

Asset sales in the mining business are a possibility.

The market is not great, as you can see from recent transactions.

And with our long-term positive view of the marketplace, that will be taken into account.

But all things like that are on the table and under consideration.

That's helpful, thank you.

On Indonesia, it's a two-part question.

First of all, on the export permit, can you talk us through in the event that it's not renewed, what does happen there given what's happened previously?

And then the second part of that question, any other dates that we need to be thinking about for Indonesia?

I thought there was a labor contract coming due at some point in 2015.

That's it.

Let me start with the labor contract.

In Indonesia, we have to negotiate new labor contracts every two years; that's by law.

So we do have our existing contract expiring in the second half in the third quarter.

And so we're engaged in negotiations with the Union now.

And all reports are that those negotiations are going well; and we expect to get that contract renewed, as we did with our last contract.

Actually, as I mentioned, the labor relations at our operations are really good right now, are positive.

With the export permit, we expect that to be renewed.

We've met the requirements of the government.

And then we're going through the process of working with the government to get that done as we speak.

So we expect to get it renewed.

It is important to us at the present time.

Without the export permit, of course we can't export.

And right now, the PT smelter at Gresik has faced an operational issue that's requiring some repairs; and it's currently shut down.

So it's important to us to get this export permit.

We believe we've got a process going that it will allow us to do that.

It's not in anybody's interest -- government, communities, workers, of course our shareholders -- for that not to be renewed.

We expect it to be renewed.

Tony Rizzuto, Cowan and Company

I wanted to also focus on the cash burn, just to follow up on Dave's question a little bit.

I was very pleased to hear you, Richard, mentioned about throttling back possibly in the production side and asset sales as well.

Do you have any further flexibility in terms of capital spending?

And also, what about the possible equity issuances beyond an oil and gas IPO?

How would you view those other options, or are they options?

As I said, all options are on the table.

None of us wants to sell equity at this stock price.

That's not something that any of us as shareholders -- and, as you know, we're all shareholders -- would want to do.

Ultimately, the Board is going to protect the balance sheet.

So we're going to look at all options and see what we might need to do.

As we look forward in running our business, we are going to be prepared to act, to be consistent with what the market brings to us.

So if in fact prices do deteriorate, we have flexibility in our business to cut certain costs, both in the mining and in the oil and gas business.

And we'll have contingency plans that allow us to do that.

We are optimistic about markets longer run and prepared to deal with short runs' uncertainty.

Prepared to bridge our business if we have to do it, and operationally we have the capability of doing it.

And, Tony, I know I don't need to remind you just how effective we were in doing that in 2008 to 2009.

I think that would be well-received if that was possibly joined in terms of efforts to throttle back on output.

Because the market surplus, at least what the consultants are saying right now, might not be that much out of whack.

And if there were some movement sooner rather than later, it might help the market from getting too far out of whack.

I think that would be well-received.

The other question I had was on Indonesia.

And there's some reports that have indicated recently that you have agreed to a transition from a COW to a special mining license.

First, are these reports accurate?

And then if you could help us understand what the main differences might be between the COW and this special mining license.

Would the new license arrangement -- would it afford you similar levels of protection, or might it be more subject to more frequent changes?

Is there anything you can comment on at this point?

There has been a wide range of options that have been discussed with the government.

And different ideas have been raised for consideration at different times.

There has not been a decision to convert from the contract to a mining license.

If that were to be done -- and I'm not suggesting that that's likely -- but if that were to be done, it would be done on the basis of having an accompanying contract that would give us the kinds of assurances on fiscal terms and legal terms that we would require.

So that's what we're really focused on -- is how do we have a preservation of our rights to operate beyond the primary term of our existing COW.

It has a 20-year provision for continued operations.

And then to ensure that the terms, fiscally and legally that we have beyond the COW or through an extension of the COW, give us that degree of assurance.

We've indicated a degree of flexibility in working with the government, so long as that's achievable.

Achieving that within the framework of the existing laws and regulations in the country is complicated.

Probably the most straightforward way would be to find a way of reaching a mutual agreement on continuing the COW.

But we've expressed that we would be flexible in dealing with that so long as we could achieve our fundamental objectives of assurance about operating rights, fiscal terms, legal enforceability, for the long run.

Is an additional sell down of the stake in PTFI -- is that also part and parcel part of these discussions as well?

Absolutely.

A year ago we signed a Memorandum of Understanding that covered six points that we indicated we'd be prepared to go forward with in conjunction with achieving the continued rights to operate with the assurance of terms that I just mentioned.

And one of those is that we agreed that we would agree to sell an incremental interest in PT-FI's equity to get up to a 30% Indonesian ownership.

Right now, the government owns 9.36%.

We agreed to do that provided we had the extension of our contracts and our acceptable terms, and that that would be done at fair market value.

But that was part of the Memorandum of Understanding that we have had with the government now for roughly a year.

Michael Gambardella, JPMorgan

Just a follow-up question on Tony's on Grasberg and the contract.

Is it your understanding, or the Company's understanding, that you will not go forward without some type of whether it's the COW, a hybrid between the COW and the licensing agreement, but that one provision that you need is some certainty of operations through 2041?

That's right, Mike, because right now more than 75% of our reserves are going to be produced after 2021.

And so these investments that we are making right now to develop the underground -- and we've agreed to develop smelting capacity -- all of that is for the benefit of operations beyond 2021.

So we need to have those rights under acceptable terms to justify the investments that we've already made and the continued investments.

And the government understands that.

And that's what we are working to deal with.

And the complication has been, how do you do that in the context of the current laws and regulations in Indonesia and how that interrelates to our contractual rights.

But that's a necessary element.

What's the government's response when you tell them that your contract that you signed back in 1991 supersedes any changes in Indonesian government law?

There is an issue with the public perception of how does the contract interact with the laws.

The legal situation is clear-cut.

And so we have opted -- and I really believe this is the right answer, and our Board, Jim Bob (inaudible)support it -- is that we will be much better suited if we can find a way of dealing with this in a cooperative fashion that is responsive to the public opinion and aspirations of the government, rather than just digging our heels in and saying the contract is a contract.

Mike, we've been through this before in other countries and other places; and so that's what we're trying to do.

We're trying to achieve our objectives in a way that's cooperative, that preserves the partnership, and that is sensitive to government officials who are subject to elections in a democratic process.

They have to be sensitive to public opinion.

This is Jim Bob.

Let me just comment on a couple of things.

As you've seen in the press the last couple of days, the government has indicated that they're going to extend our contract.

And they're going to use the export license.

We and they are talking because as a matter of fact when the MOU expires on July 25, two days from now, the new COW is what becomes the controlling document.

That COW, other than the few amendments we've agreed to, is still in force in effect until 2021.

We've made agreements that are still in force in effect.

And as you've seen in some of the government announcements, it basically says that we have not changed anything.

And the reason that we are [staying] our current [process] is before we make any kind of concessions or the government makes any kind of concessions, we're trying to end up with a win-win situation.

And that's where this thing is headed.

One last question on Grasberg.

On slide 29 of your presentation today, where you talk about the CapEx for the Company going through 2017, I'm assuming that does not include any assumptions for a new smelter in Indonesia.

Is that correct?

That's correct, Mike.

The new smelter would involve an aggregate investment of $2 billion to $2.5 billion.

And we are working on a structure that would involve project financing for it, as we did for the smelter that we built in the mid-1990s.

And also the potential involvement of the partners in it.

But that is not included in our CapEx numbers.

The bulk of that CapEx will be spent beyond 2016/2017, because we'll do substantial work between now and then.

But a lot of that work will be done on site preparation.

There's substantial amount of reclamation of land and preparation of building sites because this will be located in Eastern Java in the Gresik area near our existing smelter and the fertilizer operations at Pertokmia Gresik, the state-owned fertilizer company.

From the estimated to the $2 billion to $2.5 billion cost and then using, as you said, bringing in partners, project financing, how low can you get that down to for Freeport?

Can you get it down to $0.5 billion?

Let me do some calculations in my head.

I was going to just answer you as low as we can get it.

We're going to do it as low as we can get it.

If we say (multiple speakers).

Yes, that could be in that range.

Also not included, Mike, is also the proceeds that would come to us from these divestments that we talked about.

We're talking about a substantial value for just over a 20% interest in DTFI.

And that would occur over time, but those proceeds are also not included in our outlook numbers.

Brian Yu, Citibank

I've also got a question on Indonesia, Richard.

I think in the past you have laid out numbers about the financial benefits to Indonesia under the COW and then under the new mining laws.

As you are going through the discussions, as we look at the possible financial impact, if you were switch to new mining laws, is it still correct that financially there would not be a material impact between royalties, tax rates, and other pieces to those?

When they talk about going to a new mining law, they are insisting that we continue with our current 35% income tax rate, which is higher than the general income tax rate in Indonesia of 25%.

Beginning last year, we agreed to pay the higher royalties under the mining law to get the export ban out of the way.

So the financial impact right now would be essentially the same that we've had under the COW.

The issue for us is to fix these terms so that we would not be subject to imposing incremental taxes, fees, import fees, either by the duties either by the central government or the provincial government.

We haven't been arguing about increasing fiscal terms for the government.

We've all kind of agree on that.

The issue for us is, okay, we agree to this.

This is what we live with going forward and not be subject to potential imposition of new taxes, royalties, duties, and fees by the succeeding government over a long term.

And when you look at our deal with Indonesia, where the government now gets 60% of the financial benefits, that's stronger than anywhere else in the world.

By international standards, this is a very positive deal for the Government of Indonesia.

Switching topics, page 19, where you outline potential growth on the energy assets, what's the incremental capital that would be required to get to 215,000 barrels per day?

And then along the same lines, it was commented that you would do it only if the IPO was successful.

Would you have to raise more than what's required to bridge the existing free cash flow shortfall?

Or is there some number that you can guide us to, to figure out when you might go forward with the more accelerated rate?

Brian, this is Jim.

I think the questions are one and the same, right?

It's what the capital is going to take to get to 2015.

That's the whole purpose of doing the IPO.

It somewhere between $1.2 billion and $1.6 billion, depending on how we time everything of additional proceeds to get there.

So it depends on how much money we raise in the IPO and what percentage of the Company we want to sell and how fast we accelerate.

It's strictly about laying flowlines and umbilicals and hooking up wells already drilled.

It's just timing of capital.

If we don't hit 2015, if we only raise $500 million and we want to face in the spending and we want to hit 215,000 in 2018, we can time that as well.

So we've got a lot of flexibility as to how much we raise and how fast we spend it.

To support this plan, it is between $1.2 billion and $1.6 billion.

If I understand correctly, let's say that the IPO order would go through.

Whatever funds that would be raised would be targeted towards growing production, not necessarily bridging the existing free cash flow shortfall?

Is that correct?

Well, the aspects of that -- it would allow us to spend that money earlier and get the production up.

And you have a lot less free cash flow shortfall with 215,000 to 225,000 barrels a day.

And therefore your free cash flow shortfall would be a lot smaller.

Oscar Cabrera, BofA Merrill Lynch

Just staying with oil and gas if we may.

Jim, you commented that you can get your operating costs in your oil and gas operations down to $12 POE.

What level of production would you need to get to that number?

About 250,000 barrels a day.

The key about that, Oscar, is where that production comes from.

When it comes from our existing 100% oil platforms, that has the highest or the most dramatic impact to lowering the LOE costs.

Obviously because we're just doing division there with higher volumes versus the same cost structure.

And that's where we are focused -- all our dollars.

Got to ask a question on Grasberg.

There's a comment on your press release that states that you may reduce or defer investment activities pending negotiations on the amendment of the contract award.

Would you just put context around that?

Would this be if there is no resolution by the July 25, 2015 deadline?

How are you thinking about this?

The comment is just a statement of fact that without resolution of the long-term situation, we would be faced with discontinuing spending money for that long-term production need.

That's what we've been trying to avoid.

That's not in our interest, our workforce interest, the local community's interest, or the government's interest.

That's just a consequence of what would happen if we have a failure in getting this resolved.

Hopefully, we'll get it resolved.

As Jim Bob said, the government is saying we're going to get it resolved.

We believe that's what will happen, and so far we've continued to progress our development activities based on our confidence that we'll get it resolved.

In your development topics of $3.3 billion, that increased a little bit from the previous quarter.

And in some of the projects, the developments around the world, CapEx has been coming down.

Is there any reason for the increase?

Anything to do with the metallurgy or something that's happening in the underground that's increasing the CapEx there?

Oscar, are you referring to the $3.3 billion that we've incurred to date; or what number are you referring to?

This is a slide where you quote the amount of money that you are spending per year.

So $700 million now, it was $600 million last quarter.

Yes, there were some timing changes in some of the underground spend.

And it worked out, from a rounding standpoint, to get from $600 million to $700 million.

But there was no material change in any of the plans.

And the progress on the underground development continues to go very well in us achieving what we set out to achieve in terms of the development.

But there have been no significant changes from last quarter, just some timing things that came into the five years and some rounding changes.

John Tumazos, John Tumazos Very Independent Research

Thank you very much for the generous call and the length of the call and accepting my question.

Concerning the Grasberg contract negotiations, is there any guidance concerning the proceeds from the government stepping up to 20%?

Will FCX get any cash to make a dent in the debt, or would that be financed by an earn-out or a loan from FCX to the government?

Secondly, could you talk a little bit about the $1.2 billion mining CapEx budget for projects for 2017.

Does that equal $0.7 billion for Grasberg underground, and what would the other pieces of it be?

Thirdly, could you tell us what are the bigger bites in the $2.9 billion oil and gas CapEx, say in 2017?

Let's start with the questions in order that you raised.

On divestiture, there is a process that we've established in Indonesia of where incremental interest would first be offered to the government, as you suggested.

It would not be all at one time, but it would be done in steps.

And any transaction, John, with the government would be a cash transaction where we would not be providing financing.

If the government opts not to buy the shares itself -- and that may well occur -- we have talked with the government about the possibility of having an IPO of PT-FI shares on the Indonesian stock exchange.

And that would be a standard IPO that would be syndicated, and we would receive the cash proceeds from that.

We've also talked about the possibility of having some interest, certainly not a 20% interest, but some smaller piece of that perhaps going to the provincial government in some sort of trust form.

And we might drive some financing for that piece.

Otherwise, other Indonesian investors might have an interest in doing it.

And those would be on a cash, business-to-business type basis.

(multiple speakers)

John, it's Kathleen.

The second part of your question regarding the--

John, does that cover your question?

That's very helpful.

I was just going to say, on the CapEx, in addition to the underground development spend, we also have $200 million for the smelter expansion at Miami.

And then we've also got in our plans to commence the stripping for the Lone Star project, which would extend the life of the Lone Star oxide, which would extend the life of Stafford.

So we've got some stripping costs reflected in 2017 as well, and those are the three major components of that number.

John, on the oil and gas side-- this is Jim -- you've got about $1.7 billion in Marlin and Horn Mountain and Holstein, which are our three key projects.

About half of it is Horn Mountain, and the second half is split between Marlin and Holstein.

We spent about $300 million in California and about $650 million in the Vito basin and then $100 million at Lucius and another $90 million in our gas business.

And then you've got a corporate allocation of about $220 million on top of that to get you up to the $2.9 billion.

Brian MacArthur, UBS

Sorry to go back to Grasberg again.

I still have the same question John did.

Just so I understand this, if you did a provincial thing, it may be likened to what essentially was done in the past.

So that's the only piece that you would actually potentially provide financing, and the rest would just be either sell down to whoever either the government or someone else where at that time you would get cash in.

And if that didn't work, that's when you'd go to the public markets and just take whatever the valuation was at the time?

No.

And this is still a work in progress, Brian.

But we and the government officials for some time have seen the benefit of the public market listing.

That would -- first of all, Indonesia's stock exchange has developed into an actively traded fair marketplace.

And we all see mutual benefits of having PT-FI listed as an Indonesian company on that exchange, provided we get a fair market value, which we could in that marketplace.

We think that would probably be something that we would pursue with the government, following the government's decision on its own desires for investing in the shares itself.

So really, the concept is giving money to the province like (inaudible) was probably very low on it.

So you're really thinking about any way you'd do it, it would be cash in the door right away at the time?

For the bulk of what we're talking about, for community relation situations and again to be responsive to the aspirations of the province, we can see some benefits of working on a structured deal with the province from that standpoint for our portion of this interest.

But that all has to remain to be worked out.

The province has indicated to us they might provide third-party financing for that.

We and the central government want to ensure that if we do a deal with the province.

It benefits the people of the province itself and not any third-party investors.

So all of that has to be factored into the process.

Steve Bristow, RBC Capital Markets

Did I hear Jim Bob right -- that you expect to reach an agreement on the contractor work and also those permits in the next couple of days?

That's exactly right.

Let me just read you the Dow Jones clip that came out yesterday on July 22, 2015.

You can look it up in the latest clips.

It talks about the investment that we're going to be making and extending the contract for another 20 years.

This is coming from the minister.

The minister cited earlier the government of Indonesia does not have any intention to terminate the contract after 2021.

The government and we both have tried to get the agreement finalized here.

And if you go down to the next clip, which was from July 22, 2015 by Indonesia Finance Today, it's a Bloomberg announcement, it says from the minister once again "Freeport still has a contract valid until 2021.

The President said prepare for an investment, not to cut ties."

The answer is, the reason why it I'm trying to measure my words when you're in negotiations it is really hard on a call like this to talk about the negotiations, but the answer is all the public statements you've seen is what the government has done and which you can verify, that they want us to continue.

And we obviously have every reason to continue under proper terms.

The proper terms are going to be we need to get the certainty that we can continuously get the contract to work whether you are talking about a mining license, IUPK or COW.

We need to have the same fiscal certainty and that's why I'm staying here to make sure that we accomplish that.

Jeremy Sussman, Clarkson

Going back to slide 19 and whether or not you go through with the incremental, I think you said $1.2 billion to $1.6 billion in CapEx to potentially accelerate drilling.

Is this more about how much money you might raise in an IPO or more about where prices are or a combination of both?

This will be me and my team's third IPO.

It's about to solicit funds and attract investors, they've got a get return for that new capital coming in the door.

So I expect is going to have a growth component but what we're basically able to do is accelerate putting these wells on and create more cash flow to the product going forward.

I think the investors will have a positive look on oil prices longer-term irrespective of what oil prices are at the time of the IPO.

In a sense, lower is better because higher is the future.

The aspect of that is if you look at the higher volumes and better prices, by 2017 cash flow neutral is a reality.

If you look at lower prices longer than higher volumes, you're going to push that out to 2018.

It's really going to be how you look at the business and your viewpoint going forward as far as what the investor appetite is.

When it comes to size, we can sell up to 19.9% of the business and still achieve our objectives here at Freeport.

If we sell 8% of the business, 10%, 12%, 15% based on price that amount of capital will regulate how our business will be run going forward to make sure we get into a cash neutral situation.

That's helpful.

Is there a potential update on timing of when you might look to do this?

We're still hoping this fall.

Like Richard said, it's up to the SEC They've been going back and forth on our document and we're making progress there.

Everything looks like it's on track to be available.

Obviously market conditions are going to be something we're going to be watching.

We think we'll be actual this fall.

Good luck.

We will now turn the call over to management for any closing remarks.

Thanks, everyone, for joining us today.

We look forward to making progress on all these issues that we talked about today.

If you have other questions, please contact David and he will see that you get your answers.

Thanks for joining us.

Ladies and gentlemen, that concludes our call for today.

Thank you for your participation.

You may now disconnect.