費利浦·麥克莫蘭銅金 (FCX) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Freeport-McMoRan first-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 and good morning, everyone.

Welcome to the Freeport-McMoRan first-quarter 2016 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 FCX.com.

Our call today is being broadcast live on the internet and anyone may listen to the conference call by accessing our website home page 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 the 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.

I'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 2015 Form 10-K and subsequent SEC filings.

On the call today are Richard Adkerson, Chief Executive Officer.

We've also got Red Conger here and Mark Johnson.

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

As usual, after our remarks we'll open up the call for Q&A.

Today FCX reported a net loss attributable to common stock of $4.2 billion, or $3.35 per share, for first quarter of 2016.

The loss included net charges totaling $4 billion, or $3.19 per share, primarily for the reduction of carrying value of oil and gas properties, idle rig costs and other items.

After adjusting for the net special items, the first-quarter adjusted net loss you attributable to common stock totaled $197 million, or $0.16 per share.

Earnings before interest, taxes, depreciation, and amortization for the first quarter approximated $873 million and there's a reconciliation of that amount on page 32 of our slide deck.

Consolidated sales totaled 1.1 billion pounds of copper during the quarter, just over 200,000 ounces of gold, 17 million pounds of molybdenum, and 12.1 million barrels of oil equivalents.

Our realized price for copper during the first quarter was $2.17 per pound.

That was below last year's first-quarter average of $2.72 per pound.

Gold prices were slightly above last year's average.

In the first quarter 2016, our gold prices averaged $1,227 per ounce and our realized price for crude oil during the first quarter of 2016 was $29 per barrel.

That was significantly below last year's first-quarter price of $44.54 per barrel, which included about $12 per barrel in realized gains on derivative contracts.

We reported very good cost performance during the quarter and are on track to meet or exceed our cost guidance for the year.

The average cost of production net of byproduct credits for our copper mines averaged $1.38 per pound in the first quarter of 2016.

Those were lower than last year's first quarter of $1.64.

We had the benefit of volumes and also the impact of our ongoing cost reduction initiatives.

Our average cost of $1.38 was below the estimate we had provided in January 2016 of $1.44 per pound.

We generated operating cash flows totaling $740 million in the first quarter and capital expenditures were just under $1 billion at $982 million during the quarter.

We ended the quarter with $20.8 billion in debt and our consolidated cash was $331 million.

Richard's going to be talking on this call about our efforts to reduce debt significantly and our progress on our asset sale program.

We ended the quarter with availability under our revolver totaling $3 billion at quarter end and at the end of the quarter we had 1.25 billion common shares outstanding.

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

Good morning everyone and thank you for joining us on our first-quarter earnings call.

It's been a very active and encouraging quarter for us here at Freeport.

We're just mailing out our annual report and the theme of it's proving our metal.

That's the ability to face a demanding situation in a spirited and resilient way and I can tell you, our team here couldn't be approaching its work in a more positive way from that standpoint.

I'm very proud of all that our team is doing.

We have a clearly defined strategy that our Board has set and we're really focused on executing it now.

We experienced strong operating results in the face of weak commodity prices and we made a lot of progress in achieving our strategic and financial objectives during this quarter.

Our reported earnings were in line with our plans, actually a bit higher because we had somewhat higher copper prices during the quarter.

We did have a significant additional impairment charge, which was substantially all in our oil and gas business.

We have taken recent steps to restructure that business to reduce cost and that is progressing well.

We've got a really good operating team there and some good assets and we're focused on attacking cost aggressively and have begun to do that.

We're continuing to look for opportunities to sell or monetize assets in the oil and gas business, but we're now working with -- and it's a tough market, admittedly a tough market to try to do that, but we are working on our operating team on new plans to preserve and enhance value of our assets for the future.

With our mining business, we're performing well.

The Cerro Verde startup is proceeding exceptionally well.

We'll talk a bit more about that.

Mining CapEx are declining as we've been talking about in the past.

Volumes are increasing.

Costs are being constrained and copper prices have risen from the lows in the face of an admittedly uncertain global market, but there's been positive movements recently.

We are continuing with our efforts to improve our balance sheet and have increasing confidence that we're going to be able to do that in an effective way and after we get our balance sheet situation developed, we're going to have a -- continue to have an industry-leading copper Company and we remain very positive about its long-term fundamentals.

With the copper market itself, the initial benefit came of course from monetary policies, policies to encourage business activity in China and dovish position by the US Fed, initially created a positive -- more positive environment for copper and other commodities prices.

But recent data out of China's internal economy has been encouraging in the power grid business, automobiles; but recognize that it's a mixed situation there as construction remains subdued.

There is improved market sentiment, short positions have been closed, long positions have been taken which is just a function of the marketplace and globally demand is improving modestly.

The net of all this has been that the large anticipated surplus in the copper markets have not materialized.

Companies are reducing cost as we are and we're pleased with our progress there.

There's been some curtailment, not as much as might be expected but almost 800,000 tons year to date.

But the pipeline of new supply of projects is declining as companies are deferring projects, cutting CapEx and all of this is resulting in a longer term outlook for very positive copper price environment and that's what we're focused on, finding a way to structure our business to take advantage of that.

Page 5 is a slide that illustrates a theme that I've been talking about for years.

Existing base production is declining over the next 10 years.

Wood McKenzie predicts an 18% decline in production from just under 20 million tons a year to just over 16 million tons a year.

If you take very modest outlooks for global consumption growth, they use 1.7%.

You end up with a shortfall of mine supply in relation to consumption of 7 million tons.

Right now, Wood McKenzie estimates that highly probable mine development's only 2 million tons.

That leaves 5 million tons to be made up by other projects.

The top 10 mines in the world produce about that level, so that he shows the extent of the shortfall and one-third of that 5 million has to come from new projects that are not considered probable today; that's over 3 million tons.

That's three Escondidas, eight -- roughly eight Morencis, so there's got to be a lot of new mines developed.

The [centive] price even in today's world for developing new mines is at prices that are probably 50% higher than the current price.

So that's what we're in the business for and we remain confident about it.

What are we doing right now?

That's what's on everybody's mind and that's what we're focusing on.

We are executing our strategy.

We're going to strengthen our balance sheet.

We're going to maintain a high-quality portfolio of assets and we're going to position them for value creation.

We've adjusted our mine plans, curtailed some high-cost production, have contingency plans for taking further steps if need be.

That's going well.

We are completing our major projects.

With the Cerro Verde project, that's the completion of the third of three projects that we started in 2011.

All three of those have gone well and will be beneficial to us in the next -- in the coming years.

We've financially suspended our dividend.

We've issued $2 billion of equity in 2015.

Our asset sales progress, which we commented on in some detail in our fourth-quarter earnings release, is going very well.

We are really encouraged by the nature of those discussions and now we've taken steps through restructuring our management in oil and gas business, taking cost cuts to align that business with our corporate objectives of improving our balance sheet and reducing -- by reducing cost, approaching future investments in a different way.

And so, that is what we are doing and what we're all about.

In terms of cost experience in the mining business for the first quarter, you can see on slide 7 that we've made progress.

We're down -- we achieved levels at lower than our January guidance, at consolidated $1.38.

We're reducing that further as you'll see for 2016 as a year, particularly strong performance and Red Conger's here with his team in the Americas where we've come in below our fourth-quarter numbers and our guidance for site production and delivery cost in the Americas.

We continue to have our low-cost operations in Indonesia and Africa.

Volumes were good, consistent with our guidance going into the quarter.

So running fundamentals of our business is important and our guys are doing great doing it.

Asset transactions that we've announced to date includes the Morenci transaction and two smaller transactions.

Good values in those.

Morenci's scheduled to close in the second quarter, no hitches there.

We originally announced a transaction involving the Serbia exploration project, Timok, which we're getting both good initial values, accomplishing some strategic objectives and getting initial development going on the upper zone, while we were going to retain a significant interest in operational control of the potentially much, much larger lower zone.

That is going good.

We're advancing discussions on additional transactions, very pleased with that project.

Much more confident today than we were early during the first quarter when the market was in such a concerning situation.

What we're seeing here, and we're in advanced discussions, is the scarcity of quality assets in the copper business is attracting significant interest from potential purchasers who share our longer-term positive view of the marketplace.

We're confident that we're going to be able to achieve the goals that we set out and beyond that, we have other opportunities that are available to us that we're not currently pursuing but in which parties have stepped up and said they're very interested in those.

So while we don't have specific transactions to report today, I'm telling you that we internally are very optimistic, confident that we're going to be able to go forward and meet our goals in a way that's going to be positive for our Company and positive for our investors.

The reason we can do this is because of this portfolio of assets.

We got pictures here on page 9 of Morenci recently expanded, largest copper mine, very profitable in North America, very long lived.

Cerro Verde, as we developed it had the world's largest concentrating facility and it has ramped up very well and without the kind of typical startup issues you have in terms of cost and schedule and mechanical issues going forward.

It was a big project, $4.6 billion, but lots of support from the local community in the Arequipa region of Peru, great team, has gone very well.

Grasberg, where we continue to have discussions with the government of Indonesia on our contract, is a remarkable long-term resource, one of the industry's historically largest copper and gold reserves and it's an asset that is very important to our portfolio, important to the government of Indonesia, important to the province of Papua.

Tenke Fungurume is the most successful, largest mine in the copper belt region of Katanga and Zambia and operating extremely well and has a long life with very significant development opportunities associated with it.

Coming back to Grasberg, we of course want to refer back to the important letter that we received on October 7th when the Mines Minister, with the support of the President, indicated that the government would move towards granting our contract extension on terms that were consistent with our existing COW in terms of the financial aspects of it and the enforceability of it.

The revised revisions to the regulations that were anticipated then unfortunately have not been adopted.

Instead, the country is now working on revising its mining law and the related regulations.

The government officials continue to express support for the position in the October 7th letter.

We have agreed as part of that to divest incremental interest in PTFI at fair market value, up to 30%.

Press reports out today about a government position referring to replacement cost and a lower valuation than the $17 billion valuation we submitted in January of this year.

The official letter from the government did not give a valuation amount.

It's in the press but it wasn't in the letter.

They refer to regulations, not specifically replacement cost.

I want to tell you that in all of our agreements with the government of Indonesia, we have indicated any divestment would be at fair market value.

That's consistent with our contract and that remains our position.

Slide 10 shows the Cerro Verde project.

You can see you how well this thing has ramped up.

We began first copper in September and month by month we've increased the throughput through our new Concentrator 2 project.

In March we hit above capacity, 373,000 tons a day.

Strong performance on capital cost management startup.

That was an issue for us.

That was our objective a year ago to talk to you about, at this call, about what we were going to do in 2015.

Here's an example of how we execute.

Since we did the Phelps Dodge deal nine year ago now, I've talked, I think, on every conference call about the strength of Freeport has been in our copper resources.

Very large proved and probable reserves, very large mineralized material at our existing mines that provide assurance of the opportunities to invest when the market's fit and then potential that is huge that goes beyond that.

That's what we still have and this is what's going to allow us to deal with this balance sheet issue by raising capital through property sales or otherwise and then end up with a very substantial copper resource based Company as we go forward.

That's our strategy and that's -- this is the reason why we will be able to execute it effectively.

Now, to show you -- and I think those of you who follow us know we've got a great copper business underneath all this market issue and the issues associated with oil and gas investment.

The Company has a remarkable copper business.

This is shown that by in 2015, when we're still investing in Cerro Verde so aggressively and we had EBITDA that matched our CapEx.

Going into 2016, as we were wrapping up Cerro Verde and copper, even lower copper prices averaging $2.17, EBITDA substantially exceeded CapEx.

As we look forward to the year 2016, at varying copper prices from here forward, first quarter's in the books, but if it's $2 for the rest of the year we would have $4.6 billion of EBITDA; $2.25, it's $5.7 billion; $2.50 it's $6.8 billion, and our CapEx is only $1.8 billion as we've completed Cerro Verde and as we're continuing to invest in Grasberg underground and managing maintenance capital in a very effective way.

So we've got a business that is generating substantial cash flows to help us with our financial objectives.

Now, in the oil and gas business, the debt level that we have of roughly $20 billion was created by the initial oil and gas investments and subsequent spending in that business on an aggressive growth profile.

That was really upset by initially the fall in oil prices and then with copper prices fell, that took away the ability of the copper business to support it with its own cash flows.

That's why we're having to take these really aggressive actions now to rectify our balance sheet.

We've got a new organizational structure in the oil and gas business.

It's now being integrated into our Freeport-McMoRan corporate structure, being run as an operating division as opposed to a standalone cooperate entity that is -- has been doing since the acquisition in 2013.

This is allowing us to reduce cost.

Last week we reduced employment by roughly 25% and we're continuing to look for ways to reduce cost through looking at office facilities and other cost elements.

We're going to align the way we spend money in that business with our corporate objectives in terms of how do we generate cash flows, how do we contribute to our balance sheet improvement activities.

We're winding down significant capital spending.

We have recently completed a series of tieback wells to our production facility.

That's going to allow us for a period of time to maintain near-term production without additional drilling.

In the Holstein Deep area we've commenced initial production just this month.

Two additional wells are coming on in the second quarter.

At the Horn Mountain and Marlin tiebacks, we commenced production on the D13 King well in the first quarter.

The Kilo/Oscar, Quebec/Victory tiebacks are in progress and we have four additional drilled wells that are in our inventory, including Horn Mountain Deep, that we're going to be able to bring on production without drilling new wells.

That's going to allow us to maintain production for the foreseeable future.

When you step back and look at these assets, they're very attractive.

It started with the acquisition prior to the merger of three underutilized deepwater platforms in the deepwater of the Gulf of Mexico, the Horn Mountain, Holstein projects and Marlin.

That's where our tieback activities are going.

We also have interest in the nonoperating new producing projects at Lucius and Heidelberg and a long-term development project in the Vito area in Mississippi Canyon.

This is the structure of our business.

We have significant production in California, but these are really good assets.

We looked for potential buyers for the business during the first quarter aggressively.

The Board had special financial advisors.

We worked with our established bankers and canvassed the market and because of the conditions in the marketplace, with low oil prices, with credit pressures on companies from the very largest through the business with the lack of credit, we just concluded at this point that the values that might be available in sale or monetization transactions simply didn't reflect the long-term value of these assets.

That's why we've taken the steps to restructure our business.

We've got an operating team there that's really impressive.

They're experienced.

They're well recognized in the industry.

They've got a great track record.

And so we're very comfortable with our ability to manage this business in an effective way and realize long-term values for our business.

Now, turning to slide 15, you can see the leverage to prices that our oil and gas business has and at $35 Brent we have $600 million, but at $45 it's $1 billion, $1.4 billion at $55 -- these are EBITDA numbers -- and $1.8 billion at $65.

We've reduced CapEx for 2017 to $500 million.

We do have some idle rig costs of about that amount that we're dealing with.

It is a business that is leveraged to oil prices.

No guarantees but there's certainly opportunities for oil prices to increase.

We can maintain production, continue to monitor the marketplace and look for ways of contributing to our strategic objective of improving our balance sheet.

We've updated our numbers for the outlook for 2016.

This does reflect the closing of Morenci transaction where we're selling an additional 13% interest in Morenci and so that's the basic adjustment for copper and other adjustments are more in the nature of just typical ongoing adjustments.

I'll point out that the unit cost for copper has been dropped to $1.05 consolidated.

That's down from $1.10.

Reflects some improvement in gold price byproduct but also the efforts of all of our team to reduce cost before byproducts.

Strong production cost of $15 a barrel, $14 a barrel from -- for our oil business, which is down $1.

Operating cash flows, as we've talked about earlier, at $4.8 billion at $2.25 copper.

And each $0.10 change in copper for the remainder of the year, the last nine months of 2016, is $340 million variance for us.

CapEx are in line with our previous estimates.

Sales -- as we look forward to 2017, we will see copper at 4.6 billion, gold sales rising as we complete mining the open pit at Grasberg, molybdenum sales being adjusted for the market and as I pointed out earlier, oil sales being maintained at the current level of close to [160 million] a day.

EBITDA variations are shown, and cash flow variations are shown, on slide 18.

Starting with EBITDA, this includes first-quarter actuals and sensitivities for the remaining nine months averaging 2016/2017.

At $2 it's $5.6 billion; $2.25, $6.7 billion; $2.50, $7.8 billion for EBITDA and cash flows varying over prices going from $2 to $2.50 between roughly $3.5 billion and $5 billion.

Capital expenditures are dropping.

Page 19 we have cut capital in half for 2016 and cutting it another 50% for 2017.

You can see how that splits out between our oil and gas business, our major mining projects.

The remaining major mining project is the Grasberg underground development and then what we've done with maintenance capital.

I keep mentioning we're committed to improving our balance sheet.

We are going to get this $20 billion debt level down.

We're going to do that by running our business right, constraining cost and capital spending and also raising capital through asset sales.

The improvement in our share price and our bond trading may give us some opportunities for capital market transactions but for the time being, we're really focused on these asset sales discussions that we're advancing.

We have a very manageable near-term debt maturity schedule.

We have roughly $3 billion available under our $3.5 billion amended bank credit facility, have $300 million in cash, virtually no -- very low maturities at least in 2016 and manageable maturities in 2017.

So from a corporate standpoint, from a corporate standpoint our near term liquidity is very strong.

Come back to saying we're focused on execution, had a great quarter in terms of execution for -- to begin the year off with and I'm very confident we'll continue that track record as we go forward into the year.

That's a quick overview and I wanted to run through it so we can have time for your questions.

Tony, I see you're first up.

(Operator Instructions)

The first question does come from the line of Tony Rizzuto with Cowen and Company.

Please go ahead.

Thanks very much.

Hi, Richard, Kathleen, Red and Mark.

It's good to see the progress thus far.

Thanks, Tony.

I've got several questions here.

The first one on Indonesia and I was interested in the comments about capital spending deferrals.

I was wondering if you can comment about that a little bit further.

And then also, the mill issue that you experienced during the quarter and you applied a temporary fix to it.

Just wondered if you could just talk about that a little bit more and what you're doing there and that type of thing.

I've got a couple other questions about different areas.

Okay, Tony.

First of all, we have taken steps to reduce capital.

Mark Johnson's here -- to reduce capital.

We revised some mine plans and we are reducing capital.

What we have not done yet is defer the fundamental development of our underground resources.

We completed the deep MLZ extension of the DOZ mine.

That's really a long-term extension from our initial Block Cave development beginning in the early 1980s.

This was the most recent major extension on that.

That was completed last year and is ramping up.

The underground development of the Grasberg Block Cave, which is really beneficial to the asset, beneficial to the government of Indonesia and of course Freeport, for us to continue with that so that when the pit is completed roughly at the end of 2017, we would have that mine ready to begin ramp up.

And so we've been very reluctant, remain very reluctant to suspend that, but that is drawn into question seriously by not having the regulations amended and getting our contract extended.

We obviously are spending that money in expectation and confidence that we will get extended and the government officials keep saying that but have not taken the actions that are necessary to document it yet.

Roughly 75% or more of the production from the underground's going to be realized after 2021 when our primary term ends, so we're currently engaged with the government in explaining that to them.

We also have the issue there with the smelter that we've agreed to develop, provided we get our contract extension and we're unable to spend substantial money on advancing the smelter project without having the contract extended.

That's the big issues we face.

Discussions are ongoing as we speak and our Board is considering what actions we should take for it.

With respect to the mill issue, Mark, why don't I let you explain that briefly.

Yes, Tony.

In late January, we had a bolt fail in our 38-foot Siemens wrap-around mill.

It's a gearless motor, electric motor.

The bolt failed and it ended up shorting out about seven of the coils.

There's about 648 coils that are part of the stator.

As you mentioned, we initially were able to bypass that damaged segment and we were able to run the mill fine, about 5% derated.

Since that period we've evaluated the longer term repair and got prepared for it and determined that we should take it down in April, which we did, just over eight days ago.

We took the mill down.

We've got Siemens there to help us, some other contractors.

We're just eight days into the repair but it's going very well.

We've scheduled about 32 days of downtime for this repair, but we're pretty confident where we sit right now that, that will be closer to 24, 25 days.

In addition to repairing the mill, we're going to look at some of the issues and we think we can address any of the issues that might have caused that bolt to fail in the first place and we're also obviously taking advantage of this downtime to do some opportunity maintenance throughout the plant.

All of these things are reflected in our outlook, in our costs, in our production volumes and so forth.

First time this has happened in 20 years of operation of this mill and it's happened in other places and we're confident of getting it fixed on the schedule that Mark talked to you about.

Thanks, both.

Richard, just a follow-up on Indonesia in terms of the bigger picture from a standpoint of the negotiations, the discussions with the government.

Is it still the biggest log jam there, is that still the refusal to this point for the government to want to discuss this extension only until two years before the original COW is due to expire?

That is the current regulation.

Our legal position is that regulation doesn't apply to our contract but so far the government has not taken steps to revise that regulation.

My observation is that there's a wider recognition of that being a problem, not just for Freeport but for the mining industry in general, and the anticipation by many is that, that would be addressed in the revision to the mining law and the regulations.

That is a current issue for the government officials.

We thought it would have been resolved by now.

It has not been.

Now the government's working with the DPR to address it that way.

That has an uncertain time frame for getting done and you have to admit uncertain outcomes because of the different political views.

Anyway, we're continuing to work with them.

Okay, Richard.

I want to ask a question with regard to the asset sales process.

I think you mentioned in your comments, you mentioned something about other opportunities and I didn't quite know what you meant by that.

Let me address this, Tony and then we're going to need to let others come on and ask questions.

Okay.

Understood.

All I'm doing is referring back to my original comments in the fourth-quarter year-end earnings release, to convey to the market that we're putting our highest priority in fixing our balance sheet and that we would look for opportunities involving any of our assets.

What we've done since then is we focused on transactions that would help us achieve our transactions in a positive way.

We're going to work and I believe we will get those transactions completed but beyond that, we have other assets that are not part of our current transactions that we would turn to if we're not successful with this initial round of discussions.

I'm telling you, I believe we'll be successful with the initial rounds of discussions but if for whatever reason we're not, we have other alternatives to turn to.

Understood, Richard.

I appreciate that.

I'll get back in queue.

Thank you.

Thanks, Tony and I just want to say, you've got to appreciate that these are confidential discussions.

They take time and due diligence and a lot of issues go into it.

But I am feeling much better today than I did in January.

Thanks, Richard.

Your next question comes from the line of Evan Kurtz with Morgan Stanley.

Please go ahead.

Hi, good morning.

Good morning, Evan.

I had a question on Cerro Verde.

I guess there's been some reports out that the water allocation issues with Rio Chile, and it seems like from your guidance that you're managing to move through this without any sort of issue.

I'm just wondering if there's any risk to that.

Well, the reports came about because this El Nino effect's having weather consequences throughout areas where we operate and there was a drought period there.

The river was affected by it because of the upstream dams and so there was some allocation deals.

There's been returns of replenishing rains and we worked this out.

We don't anticipate that being a problem at all.

Got it.

Thanks.

And then one question on the Heidelberg.

Cobalt had put something in their 10-K that I picked up on, something about the appraisal well leading to them, I can't remember the exact language, but concerns that there could be a material downgrade to plan.

Is there anything that you can comment on there as far as what you're seeing out of that?

Sure.

First of all, when you look at these earnings releases of different companies, they acquired their interest in different ways and so their book carrying values are going to differ company to company.

The geology at Heidelberg is the geodelical analysis has changed.

Some of the locations of the wells are being revised.

Our team still has confidence about the resource and this will be handled and so what you're seeing now is the effects of some of the initial development wells having to be relocated in terms of where they're being drilled to access the reservoir.

I visited with the team last week and they feel confident that it's not really a detriment to the overall resource that's available there.

Thanks.

Just maybe one final one, if I may.

At the last half of the year, at the market equity raise, the stock price was actually lower than where it was trading today.

I'm wondering given the rebound in the equity if that's something that you may consider following up on.

Well, I made a brief reference to that, to the fact that share price is up and the trading in our bonds has really improved over the last six weeks and so that opens up consideration for other types of capital raises for us.

We currently believe that it's beneficial to us for us to first look to asset sale transactions because we believe that we're going to be able to accomplish those in a positive way and hopefully -- and the market's going to be driven by a lot of factors, that they'll be well received by the market and that might give us opportunities in the future to do better.

That's kind of the strategy of what we're looking at.

Got it.

Thank you.

Kathleen's giving me a note, just to remind everybody that the basic source of our mill water at Cerro Verde is not from the river or the dams, for expansion at least, but from this waste-water system that we put in for the city of Arequipa.

The issue that Evan raised was the downstream water was affected by this lower flow through the river and that was what led to it.

But our water's coming from the waste-water system for the expansion.

Your next question will come from the line of David Gagliano with BMO Capital Markets.

Please go ahead.

Thanks for taking my questions.

I just wanted to drill down a bit more on the divestment plans on the mining side.

First of all, in Indonesia, what are Freeport's alternatives, if for whatever reason the Indonesian government doesn't agree to Freeport's expectations regarding the fair value of that ownership interest?

That's my first question.

Let me answer that, Dave.

The ultimate resolution mechanism that we have is international arbitration.

That's a provision that's in our contract and based on all the legal advice that we've gotten over the years and recently, our position in an arbitration proceeding would be very strong, because the legalities.

The contract is available on file with the SEC.

You can read it.

It's straightforward.

It's been in place since 1991 and so we believe it's ironclad.

We're trying to avoid that.

It's such a long-term asset.

We're trying to avoid going into a legal proceeding like that but that's our ultimate fallback.

Under our contract, we have no obligation to divest.

That was acknowledged by the government of Indonesia in the mid-1990s in a letter that we have on file.

All of our discussions since then where we voluntarily offered to divest to try to be responsive to the new mining law and to the aspirations of the government has always been at fair market value.

Okay.

Okay.

Just as a follow-up to that, is there any specific deadline or time line that we should be thinking about here for this or it's an open-ended negotiation?

There's not a specific time line but we are spending so much money, together with Rio Tinto we're spending $1 billion a year on this underground development, and we simply can't keep doing that without bringing this issue to a head.

The government wants us to proceed with this smelter and best case for constructing a smelter based on global experience, all the smelters that have been built in China, is that starting all out today would require us to go to 2019 to build a new smelter and without having contract assurance beyond 2021, we simply can't do that as a practical business matter.

That's the message we've been conveying to the government.

That makes sense.

My separate question related to the divestment plans, just regarding the comments about discussions on additional transactions, which of the mining assets specifically are actually currently being negotiated for sale or JV, et cetera, aside from Grasberg.

Obviously not looking for anything other than just the assets that are currently under negotiation.

Dave, because these discussions involve multiple parties and we have multiple alternatives to consider, I just don't think it's an answer I should publicly state right now.

I know all of you want to have more details.

We want to get this thing done.

We have a real sense of urgency for it.

I'd just comment to you the process is one that involves a great deal going into it in terms of negotiating the details of the transaction and people conducting due diligence.

These mining assets are complicated; complicated assets.

We've got great assets and lots to support the values.

All I can tell you is I feel very good about where we are.

I wish I could share more details, but I simply can't.

Okay.

I appreciate the position you're in.

Thanks very much.

The next question comes from the line of Matthew Korn with Barclays.

Please go ahead.

Thank you for taking my question as well.

Question on the copper market.

We had CESCO a couple weeks back.

Most folks seem to come out of there with a sense that the copper industry really sees cost cutting, not curtailment of supplies, is the best path to take in the current market.

I was wondering, Richard, if you believe we're going to need any more cuts in production over this next year to help support pricing given some projects ramping over the rest of the year, given Grasberg ramping up.

For you, would you consider fully idling in the assets where you're currently at half rates or so?

The realities of this, and I've been you through a number of these cycles and gone through this, is that decisions to shut down mines are very complicated because of the transition cost that you incur in having to do it.

Not only is there an issue of the, and this varies country by country, depending on labor laws, but the cost of employee severances.

It also often triggers reclamation obligations and shutdown obligations because a mine is an operating system and when you operate that system, you're able to manage a lot of environmental issues in a particular way by the way you process material.

Once you shut it down, then you often have to come up with new systems of how to operate water flows and so forth.

That's one of the things we faced at Sierrita.

Those are complicated.

The barriers to shut down mines that you're seeing across the industry has to do with these transition costs.

And sometimes those costs are economically more significant than operating losses at marginal profitability or even losses.

Now, clearly the lower prices go, the more pressure will be and the more shut-ins you'll have.

We would have some more.

For example, at our -- and sometimes it's not the entire mine.

It's segments of the mine, which we did at Morenci in 2008, 2009, when we cut back our mill processing and cut back our mine rates and the crushing rock we put on our SXEW stacks, our lead stacks.

For example, when we cut back El Abra by half.

But the remaining half that we're operating at El Abra is profitable at these prices and at lower prices.

It's a dynamic situation.

It will be driven by prices.

But what we're seeing is people are really focused on cost.

The thing that I think that we're looking at in a positive way, and I would suggest that the market looked at, is what is the price of replacing this shortfall that's looming for the copper industry.

I gave you number 10 years out.

You know the market does not have a significant surplus balance today.

Who knows what's going to happen.

There's risk in the global marketplace but there's opportunities and this thing could come back and even today the incentive price to develop new production, and man, we know this is, because we've got all these resources.

We've been studying for years.

It's going to take a very high price, $3, $3.30, to develop new resources from known resources.

They're not major new discoveries.

The expansion projects that are available to the industry are either expensive underground projects or projects that require low grades and lots of infrastructure development.

Absent just a calamity in China or the global marketplace, I still am very positive that this copper business is going to be a great business to be in and that Freeport's going to be a really strong leader, player in that industry.

Thanks.

That actually leads well into my next question.

Given your position as a leader in the industry, when you're looking and considering the sale of the mining assets, how important is it for you that you still maintain operating control over that asset?

I'm wondering whether that has limited the opportunity set, the set of potential buyers who may not be interested if you're really just talking about minority stakes.

If you just listen to what I just said, you know how bad I feel about selling any of our assets.

I mean, we have put together a great Company that had a diverse set of assets and now circumstances have led us to have to do something we really don't want to do.

That answer to your question varies asset by asset.

When we look at our business, there's certain of our assets that we create a lot of value for by having them managed together.

We're able to share equipment, technology, people, resources, and that's a huge benefit for us.

And so one thing we're looking is, how can we do transactions that retain that ability for Freeport to create value?

Other assets, which we don't want to sell but we have to look to sell, would involve a transfer of ownerships.

There's certain companies in the world today who would only do a transaction if they can be operators.

You read about it every day in the paper.

We're having to look across the board for that and at the end of the day we're looking for transactions that are executable at acceptable values and in ways that help us meet our financial objectives.

Got it.

Thanks much and best of luck.

Thank you so much, Matthew.

Your next question comes from the line of Jeremy Sussman with Clarkson.

Please go ahead.

Hi.

Thanks very much for taking the question and certainly good job on costs this quarter.

In terms of the asset sales process, I guess you've announced $1.4 billion since mid February.

Obviously in your release you noted that you expect to show additional progress.

I think specifically in Q2 was what was mentioned.

I know there's a springing collateral and guaranteed trigger that was added, which basically means I think you need to total $3 billion in aggregate announcements by mid year.

Assuming my math is correct, that's another $1.6 billion or so in announcements in the next couple months.

Do you feel comfortable with the timeline and maybe just conceptually, how would you sort of describe activity level relative to your initial expectations in terms of just parties at the table?

Any big picture color would be great.

The answer is yes, we really expect to meet that springing collateral test in the second quarter.

Very confident about that.

I've tried to get across, and I've done my best to talk with you today knowing that I can't meet the hopes that many had that I you could give you very specifics but to tell you how much more positive I am on this call than I was on our call for the year-end earnings release.

This year started out really tough.

I'm not telling any of you that.

It really started off tough with uncertainties in the global commodity space and uncertainties about China and copper, a lot of unknowns as to how we receive it.

We thought internally as we talked among ourselves about how we'd approach the market that we would get good receptivity because of the high quality of assets.

Now we know we're getting good receptivity.

We know it internally.

We're confident we're going to get this done in a reasonable way and now we're going to be charged with executing that and reporting to you the results as we go forward.

Richard, that extra color is very helpful.

I'll turn it over.

Thanks very much.

Okay.

Thank you, Jeremy.

Your next question comes from the line of Chris Mancini with Gabelli & Company.

Please go ahead.

Hi there.

Just a quick question.

Most of my questions were answered.

In terms of cash management when you do realize the proceeds from the sales of Morenci and your JV with Reservoir, do you intend to buy back some of your higher yielding bonds at that point or are there covenants in your credit line that would require you to told a cash balance or pay that down first?

Chris, this is Kathleen.

We have agreed to a cash flow, asset sale cash sweep to our term-loan lenders of 50% of asset sales and if our leverage is greater than six times, which we're not currently, they would get 100% of proceeds.

We'll have opportunities, we believe to not only repay term loan but also look to repay other debt in the capital structure and take care of the upcoming maturity.

That is what we're thinking at this time and as Richard said, the debt levels, the trading levels have improved from where they were earlier in the year, which opens up other opportunities.

But we're focused on absolute leverage reduction but also giving ourselves enough runway over the next several years in terms of maturity schedules.

Okay.

Great.

Thanks a lot and good luck with the asset sales.

Chris, I can't tell the frustration of looking six weeks ago at where our bonds were trading, where our stock was trading and not having the money to buy them.

Right, yes, no, I bet.

For sure.

Thanks a lot.

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

Please go ahead.

Thank you.

I was studying slide 23, which has the oil and gas output price realization and direct cost and it looked like the margin was $7.96 per BOE times the $12.1 million, or $96 million for the quarter, if I'm reading it right.

Put a different way, a $0.09 upswing in the copper price would give you as much cash flow as oil and gas had in the March quarter, admittedly probably at the bottom of the oil price, we all hope.

Do you think it's worth just shutting in all the oil and gas output and preserving the resource and waiting for a better day after the market gives us $0.25 of upside on copper?

Well, you know, John, that's the kind of scenario analysis that in hindsight you could say maybe that would have been the right answer.

We can't live in that world.

The nature of oil production is such that you just cannot make decisions like that and preserve the reservoir, preserve the asset.

I recall back in 2008, you may have been at a meeting I had one time when somebody said, why don't you just shut in all of your North American production.

The market doesn't need it and it would balance the market and it's not -- my answer then was, running these kinds of assets is not like managing a portfolio of stocks and bonds.

You can't just sell something and get out of it.

You have to manage a lot of complicated operating factors in doing it.

I understand your financial analysis.

The practicalities of it are that we can generate some cash to help meet our obligations that we have.

We're cutting these costs aggressively now.

We'll continue to do that.

We'll take the actions to preserve these assets and create some incremental value over time.

We're working on contingency plans now, for example, of how do we look forward in terms of drilling some of the really attractive tieback opportunities.

We're not going to spend money now but we're going to be prepared to as markets increase to help arrest the natural decline.

There's a big difference in these average numbers that you talk about between California, which is a significant production, and the Deepwater.

California doesn't have the decline issues that the Deepwater has and we're able to basically break even out there and preserve all of the resource but continue to operate.

If you were to try to shut in that California production with the nature of the way that it's produced, you're doing that.

The oil and gas business is in tough shape.

It's just in tough shape because our plan was to have it fund its own CapEx and there were all, besides the acquisition, I mentioned there were all these commitments made to fund an aggressive growth project that was then -- the legs were cut out of that by the drop in oil prices.

Now that business has committed cost and obligations that's well over its current resources.

We know that because we just tried to sell those resources.

We've got a profitable copper business.

We've got to manage this oil and gas business in a different way to reduce cost, focus on how to preserve the asset, because the offshore depletion will happen at some point in the future, not in the next period of time because of the success we've had in drilling, but it's a challenge.

I'm not going to pull any punches on it.

But we've got a good team.

I'm really enjoying getting to work with these guys directly.

They're doing a great job.

They're well respected in the industry.

I know that because I've talked to a lot of people outside our Company about how they run their business and we're going to find a way to get value out of these assets.

Thank you.

If I can ask a simpler question, just about the accounting.

Over the last six quarters the oil and gas charges have been about $22.9 billion.

Is there only about $5 billion in carrying value left?

What was the 12-month average oil price for the March quarter, full cost test?

Would think that at some point the balances would wind down and the charges would pretty much be de minimis.

John, it's Kathleen.

If you look at the balance sheet, we separately identify the capitalized cost for oil and gas and we've got, at March 31 we have roughly $3.4 billion, which includes $1.7 billion that's subject to amortization, which is part of this full-cost ceiling test that you referenced and we've got about just over $1.7 billion not subject to amortization and those are things where we don't have proved reserves booked at this point.

In terms of the 12-month trailing average that we used at March 31 for the ceiling test write down, it was $46 a barrel WTI.

Thank you very much.

Your next question comes from the line of Chris Terry with Deutsche Bank.

Please go ahead.

Hi, guys.

I'll try to be quick.

You've obviously talked about asset sales and mentioned around your views on equity raisings.

What's your thoughts around streaming or royalty transactions?

We've had a lot of discussions about that recently and over the years.

I mean, going back 25 years or more, we've looked at doing that.

The asset where we have the biggest streaming opportunity is Grasberg with the big gold component associated with it.

That gold component is what makes Grasberg such a strong strategic asset for us and reduces our cost and it's not an inexpensive place to operate.

We've got 30,000-plus workers there and one of the world's largest mills, what will be the world's largest underground development, complicated environmental issues to maintain, complicated community issues and community support issues, logistics issues.

Really, we've concluded, and thank God we didn't succumb to that idea in past years, because today that would have been a bad decision.

But we really believe having the gold component of Grasberg, together with the high copper grade, is what makes it such a great strategic asset for us.

We look at that.

We watch what's going on in the industry.

We talk to companies involved and bankers and if something makes sense, we'd be open to it, but to date we've concluded that it has not made sense.

Okay.

Thanks very much.

And just a final one.

Given the importance of the second half of Grasberg and the mill issues you've highlighted, can you just remind us, what's the mill split between the open pit and the underground for 2016 and 2017?

Right now, this is Mark.

Right now the underground provides about 45,000 tons of ore out of 200,000 tons, so the remainder's coming from the pit.

That will change next year.

In 2017 the pit starts to wind down a bit and the underground ramps up.

It's more like 130,000 tons and 70,000 tons, 130,000 tons from the pit and 70,000 tons from the underground.

Okay.

Thanks very much.

We vary that from time to time based on the nature of the material in the pit.

We're looking at the highest value material we send to the mill.

That drives that determination.

I visited there and went through the team and it's -- and I've been around since the initial development of the Grasberg and to see the technology advances, it's what we're able to do underground is remarkable through remote mining equipment.

The safety factor of that is -- but also the efficiency we have.

We're working very well with our contractors and our team there is doing that.

This, where -- once at this point in time, we were looking at having a significant reduction in mill throughput as a result of going on ground.

Now we look at it and we're going to be able to keep our mill filled.

We're going to have to actually some enhancements over time in the mill.

The resource has just grown and the economics of mining, large scale underground mining, have become much more attractive than we would have thought years past.

Thanks very much for the color.

Thanks, Chris.

Your next question comes from the line of Matthew Fields with Bank of America.

Please go ahead.

Hi, everyone.

I just wanted to ask, there's been -- I know you're laser focused on asset sales and it seems like you're pretty confident about hitting that June 30 deadline to avoid the spring collateral, but -- and I probably shouldn't ask this as a credit analyst, but what's so bad about secured debt?

I mean, if I'm an equity holder I think I'd rather grant the bank security over some assets rather than giving away a chunk of future earnings.

I think as an investment-grade Company, we worked hard to have a structure, a flexible capital structure where everyone was secured.

Our objective, as Richard has talked about, is to take down leverage very significantly.

We think over time we have the ability to convince the rating agencies of the strength of our assets and we'd like to return to investment grade and we also see the benefits of having an unsecured capital structure.

Having said all that, we recognize the relationships we've had with our bank group, the commitments they've had to support our business and we're going to work cooperatively to make sure that all the lenders are protected but also just to make sure we have an ongoing continuation of bank relationships that will allow us flexibility in the near term to navigate through this situation.

But we worked hard to get to a completely unsecured structure and we want to get our balance sheet back and restore the strength that we had previously.

I know it's a tall order but we're very focused on taking the steps to get there.

Okay.

I think just one more follow-up.

I think earlier on the call you said that the proceeds from Morenci, you obviously have that 50% cash flow sweep but that you could look elsewhere in the capital structure.

I think in the press release when you announced it you said that FCX expects to use the proceeds to repay borrowings under its bank term loan and revolving credit facility.

Is that still the thinking for that $1 billion of proceeds?

Yes.

We have, as you saw, we had $500 million drawn roughly at March 31 under our bank credit facility and we've got the mandatory prepayment on the term loan and we'll use the balance to reduce borrowings under the revolver.

Okay.

And then just sort of lastly, just real high level on this whole asset sale versus secured debt question, because I get it a lot and it's something we talk about a lot in the credit world, is obviously there's a disconnect between the way your securities are trading when we see the spot copper prices and where strategic assets trade on a sort of future basis with obviously a much higher longer term price deck.

Is the tradeoff do I sell assets at this valuation versus a secured debt deal that could clear my runway for a number of years?

What's the tradeoff there?

Just to be clear, we're not doing these asset sales to avoid secured debt.

That was just a provision that we agreed to in our bank facility.

We're doing the asset sales to repay debt and restore our balance sheet strength.

It has nothing to do with secured versus unsecured.

It simply is the reality of us needing to accelerate our debt reduction and that's what we're focused on and we're looking for ways to do it in a way that reflects long-term values in these assets.

Not the kind of spot pricing that's currently reflected in the market but long-term values for these assets, as you saw with the Morenci transaction, where we were able to demonstrate very significant value.

It's reflective of that long-term asset of the resource there and the price view of other participants in the industry not to use spot pricing but a longer term view of prices.

Thanks for the perspective.

Just one last, real quick.

Is the priority overall debt reduction over sort of just clearing the deck for the next four, five years of maturities?

Matthew, let me just make a broader comment.

Our Company is over-leveraged.

I mean, in the nature of the business that we're in, where you have such high operating leverage from commodity prices, you just should not be this leveraged because when conditions unfold, as they do from time to time, and your revenues drop because of what's going on in the global commodity prices, having this kind of debt is a killer.

Unfortunately we're in the position that we're in.

From a broader perspective, we've got great assets.

We need to get back to where we have a balance sheet that does not put us in an over-leverage situation and that's what we're about fixing that.

It's unfortunate.

We got here and now we've got to fix it.

All the other issues about managing maturity levels and doing that is part of the tactics of how do you do that.

But at the end of the day, we have good assets.

We have great resources.

We can create a good Company.

We're going to have to give up some of those to get us to a position of where we're not over-leveraged.

All right.

Thanks very much for the perspective.

Your final question will come from the line of Justine Fisher with Goldman Sachs.

Please go ahead.

Thanks.

I'll make it quick since it's been a long time.

Just on, Kathleen, on the working capital comments in the press release, you said that based on certain price assumptions the Company expects $4.8 billion of operating cash flow this year, including $800 million from working capital and other tax payments.

My question is how sensitive is that $800 million to pricing, i.e., if we have a different price deck than you guys, could we assume that most of that $800 million might still materialize?

Because that number was a much larger gain that what we had expected.

I just want to know how much certainty we could have around that number if our price deck is different.

It wasn't materially different, Justine, at $2 copper.

We're getting, and we've received some already, but we're getting some refunds, tax refunds in 2016 related to payments made in previous years and then also with our international business the timing of when we pay taxes based on the prior year has an impact on it.

We did, going into the year, expect a working capital source and it's somewhat price sensitive but not significantly price sensitive.

All right.

Fabulous.

Thanks very much.

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

Once again, thanks everybody for your interest in our Company and participating in the call.

We look forward to our next opportunity we have to get together.

Ladies and gentlemen, that concludes our call for today.

Thank you for your participation.

You may now disconnect.