費利浦·麥克莫蘭銅金 (FCX) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan, Inc. 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. Good morning, everyone. And welcome to the Freeport-McMoRan second 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 conference call today is being broadcast live on the internet and anyone may listen to the call by accessing our website home page and clicking on the webcast link for the conference call. 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. 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 of FCX and Red Conger, President of Americas and Africa. I'll start by briefly summarising the financial results and then turn the call over to Richard who will review our recent performance and outlook. As usual, we'll open our -- after our remarks, we'll open the call up for questions.

Today FCX reported a net loss attributable to common stock of $479 million, $0.38 per share for the second quarter of 2016. As detailed in the release, the net loss attributable to the common stock included special items totaling $452 million or $0.36 per share during the second quarter primarily for the previously reported drill ship settlements and impairment of our oil and gas properties partly offset by net gains on the sale of assets.

After adjusting for these net charges, our second quarter adjusted net loss attributable to common stock totaled $27 million or $0.02 a share. Adjusted earnings before interest, taxes, depreciation and amortization for second quarter 2016 approximated $966 million. We have a slide in the deck that shows you the roll forward of getting to that number.

And during the second quarter we completed previously-announced asset sales for aggregate consideration of $1.3 billion. That include the $1 billion sale of the additional 13% undivided interest in Morenci during May, and also in May we entered into a definitive agreement to sell our interest in TF Holdings Limited for $2.65 billion in cash and contingent consideration of up to $120 million. In accordance with accounting guidelines as you'll see in the release, the results of Tenke are reported as discontinued operations for all periods presented.

During the quarter, our consolidated sales volumes totaled 1.1 billion pounds of copper, 156,000 ounces of gold, 19 million pounds of molybdenum and 12.4 million barrels of oil equivalence. Our average price of copper was $2.18 per pound. That was below last year's second quarter average of $2.71 per pound.

Gold averaged $12.92 during the quarter, that was above last year's quarterly average of $11.74. And our realized price for crude oil of $41 per barrel was below last year's quarterly average price of just under $68 per barrel which included $12 per barrel in realized gains on derivative contracts.

Unit net cash costs for the quarter averaged $1.33 per pound. That was lower, as expected, than the year-ago period of $1.50 per pound, and that primarily reflects the higher copper volumes and economies of scale that have come in during the quarter as anticipated and the impact of ongoing cost reduction initiatives, partly offset by lower gold and silver credits. We generated operating cash flows during the quarter of $874 million which exceeded our capital expenditures of $833 million during the quarter.

As previously reported, we have exchanged some of our senior notes into equity. Through July 25th, yesterday, we exchanged a total of $369 million in face amount of bonds at a cost of $311 million for approximately 28 million shares of our common stock in a series of privately-negotiated transactions.

Our debt at the end of June was $19.3 billion and consolidated cash was approximately $350 million. We ended the quarter with no borrowings under our $3.5 billion revolving credit facility. And we ended the quarter or currently have approximately 1.33 billion common shares outstanding which includes the shares that we issued through yesterday in connection with the settlement of the debt exchanges.

I'd now like to turn the call over to Richard who will be referring to our slide materials and discussing our operations and outlook.

Thanks, Kathleen. And thank all of you for joining us today.

I'd like to step back a moment and look at our overall situation a bit before we turn to the quarter. And we have some important facts to talk about, situations to talk about with the quarter and we'll cover those in detail. But it's -- I believe it's important for you to understand that we feel very good about the progress we've made during the first half of the year.

Late last night as we were putting the finishing touches on today's presentation, Kathleen and I were reflecting back about where our Company stood a year ago. A year ago oil prices were in the mid-$60 barrel, copper prices were $2.70. We were talking about controlling costs and talking about strategic alternatives for our oil and gas business.

As 2015 proceeded and going into 2016, oil prices dropped at one point below $30 a barrel, copper prices dropped below $2 a pound. There was a lot of uncertainties about our Company because of the debt level with the way our bonds traded and our CDS is traded.

We took steps, we reorganized our board, the board -- the restructured board emphasized our focus on the future of our Company being in the mining business, we restructured our management team and we took actions. When we had our year-end earnings call, there was a lot of skepticism about our ability to execute the plans that we needed to execute to address our balance sheet issues. A lot of skepticism. And internally there was a lot of -- there was a lack of clarity about not where we were going, we knew what we had to do, but how we would get there, how the market would react to it.

So looking back, we said then that we would sell assets, raise capital targeting $5 billion to $10 billion and we went to work. As we were doing that, Red and his team and our global operating teams focused on executing our business plans. And when you look at the charts on the side of page 3, slide 3, you can see how effective we've been doing that.

We've reduced our site production delivery costs before byproduct credits by 23%. Oil and gas business we've cut our production costs from $19 a barrel to $15 a barrel.

When we cut CapEx, we completed our major expansion project at Cerro Verde which a year ago was a significant undertaking risk for our Company, and it is a very complex project, you know, as it is completed, it was the largest processing facility in the history of the mining industry, and it was a big project, $4.5 billion-plus. We reduced CapEx in the oil and gas business. We undertook to sell assets in a market that had uncertainties.

We did this to strengthen our balance sheet, but it's a surprise to some people we were able to achieve valuations that reflected a positive view of the long-term copper market. We had that a year ago. We continue to have that today, and I'll talk about it.

Not only did this generate cash to reduce our debt, but it highlights the value of Freeport's assets as we go forward. We raised -- we have raised to date over $4 billion or in position to complete transactions to raise it by only selling 9% of our copper reserves.

We had an effort to sell our oil and gas business or assets. It was a tough time to do that. We restructured the business to operate within its cash flows, we reorganized the business, we dealt with some major obligations that had been committed to in past times when the strategy was to grow that business aggressively, and we made some tough decisions to restructure drilling contracts and other contracts. And we continue to view strategically how these assets fit into our long-term business, and we understand their values, and we will look over time to see how to generate value for our shareholders out of those assets.

Our copper volume is growing with the successful Cerro Verde startup, 15% quarter-to-quarter, year-on-year increase, and we'll step back and look at how our Company is now positioned for free cash flow generation. As we were talking last night, Kathleen and I and our management team feel that we have truly turned the corner for Freeport, and our ability to do that wasn't just clear cut as we started the year. We've proved that our assets are attractive and our strategy, and we'll talk about how our financial strategy fits with our long-term business strategy, is focused on leaving us with a core set of assets to build long-term value for shareholders.

It would be one thing just to sell assets simply to raise cash, but we've kept a view about what will Freeport be for the long term, and which of our assets will be there to allow us to take advantage of our core competencies as a Company and also to take advantage of what we believe will be a long-term copper market. So that was always in our minds as to what did we want to be left with after we sold assets.

So looking on page 4, we have set a target of reducing our debt to $10 billion. Our debt at June 30th is just below $19 billion and we have a contract to sell our Tenke asset with the related assets that we'll be selling for $2.8 billion.

Now, if we look forward at different scenarios of copper prices and with successful execution of our plans, you can see what our debt levels would be at $2 copper, $2.25 copper and $2.50 copper at the end of 2017. That reflects the transactions that we sold, that we have contracts for.

It does not include any divestment of PTFI shares, and we have a strategy of working with the government of Indonesia to sell an incremental approximately 20% of PTFI contingent on our getting our contract extension. We will consider further asset steps, strategic steps. For example, this doesn't include any sales of our oil and gas business, and I want to emphasize that as we look at any divestment of PTFI, it's a condition that we sell those assets at fair value to our Company.

And so as we looked at this, we take into account the risk possibility of copper prices trading down. Throughout the financial community today and with many of the experts that follow the industry, there is a risk that because of lower growth in China and global economic uncertainties that we may have to deal with lower than today's copper prices in the short term. I'm going to talk about the longer term view, but we have to live through the short term to experience the benefits of a positive long-term market.

So we sit here with a balancing act. The balancing act was to look at these debt levels, understand what it's going to take operationally to get to those, then think about what next steps should we take to address the uncertainties of the short-term market. And we are still open and on the table for all strategic moves, whether that means selling assets, selling the Company. We're focused really on creating value for our shareholders, and to create that long-term value, our recent history with this Company shows us we need to have a strong balance sheet to allow us to be positioned to aggressively take care of the long-term values.

We've had ongoing discussions about other asset sales. We are continuing those. We look at capital market transactions, and today we've announced that we have plans to file the necessary documents to allow us to issue another $1.5 billion of stock through an at-the-market offering.

Our Company has had success with these in the past. We did one in the 2008-2009 crisis, we've done two of these offerings last year when our financial situation was more dire. What this allows us to do is to assess the market, and if the market is available to us on a day-by-day basis to sell shares into the marketplace when there's demand for them. And so we have -- we felt looking at these numbers that this was a step that if we can successfully execute it, you know absent just a collapse in the market, we basically have a path forward of achieving what we set out to achieve.

There is no requirement to sell further assets. There's no requirement to sell further equity. We've got it now, which we didn't have six months ago, a clear-cut path as to how to get our financial situation to the point where we wanted to get it to, and we will have done it in a way that we can hold on to what we believe is our highest-quality assets to build the Company for the future.

Now, those assets that transactions to date are listed on page 5. It includes the successful sale of an incremental interest, an incremental 13% interest to our long-time and highly-valued partners Sumitomo and Morenci. That transaction is closed.

We have a series of other smaller transactions and the Tenke Fungurume transaction which is where we have a contract and working with the buyer in China, molybdenum, they are proceeding with the necessary regulatory steps in China to get the transaction closed. Their reports are that that's going very well. They have to have a shareholder vote since there is a minority public ownership, so the shareholder vote doesn't involve uncertainties as to the outcome, but procedurally it has to be conducted. All indications are that this transaction is going to be closed as anticipated in the fall.

And so that would generate for us, considering all factors, something between $4 and $4.5 billion. Pleased with that.

Now, what then does Freeport have left? I mean, it's a great set of assets. We will have seven copper mines led by our flagship mine, Morenci in North America. We also have two molybdenum mines, we have a great molybdenum business, largest producer, lowest cost producer. We have two pure molybdenum mines in North America and byproduct produced at our other mines.

We also have two great mines in South America. Cerro Verde, which I'll talk about, and El Abra where we and our partner Codelco are doing studies now for the potential for a major expansion of that property only when market conditions allow.

Now, one of the things as we've really gotten into this and evaluated potential transactions and buyers is really a recognition of how much value we create by having this set of assets run together. These are mines which benefit significantly from the synergies of being able to share people, technology, equipment, to have the flexibility of focusing on growth projects at one of these mines or the other and looking at how to fit those together in a long-term plan for ultimately growing volumes.

They have -- you can see in these bubbles, really huge resources, over 30 billion pounds of copper reserves each in North America and South America, significant molybdenum, beyond crude reserves, huge amounts of mineralized material and future growth projects. We have a growth pipeline for this industry with these assets that extends as far as you can see.

We also have the ability of executing these when it makes sense. In undertaking low-risk, executable transactions without -- we're not having to do it, we can run a really rational business strategy of generating profits and focusing on long-term growth in a very business-like and rational way, and when we looked at how those values fit together, we felt really it makes a lot of sense to keep the assets together for our future. And Red and his team just do an outstanding job in running this business.

The Grasberg mine in Indonesia is a real special asset. I mean, it is special in many ways because of its physical location, but extraordinary because the high grades of both copper and gold in the same ore. It's a tough mine to run, but we've done it for a long time now. We began the development -- we've been there since the early 1970s in Indonesia and Papua and we've developed the Grasberg during the 1990s and now have operated so we can see the end of the life of the open pit, and the transition to an underground.

We've got issues to deal with. We've always had issues to deal with there, operationally, managed environment, working with the local community, working with the changes in the Indonesian government. But underlying that is an extraordinary asset, and we want to work cooperatively with the people of Indonesia and its government in a way to generate benefits that are mutual for both of us, and that's what we're doing.

Now, where are we today with copper markets? The surpluses today are relatively small in the marketplace, and lower than people expected not too long ago as to where they were. The new supply that people like us had initiated with projects following the financial crisis of 2008-2009, some have been delayed, some have been deferred, but the new supply is basically coming on as expected.

A recent feature is that there are significantly lower disruptions than had been experienced in the industry, disruptions from labor issues, disruptions from mining, operational issues from equipment issues. So we've had a case of where the industry has been producing basically what was available to it.

And even with that, even with the new supply, the lower disruptions, the lower growth in China, the lower growth globally because all the economic issues affecting the world, the projected medium-term deficits -- the projected -- the projected median turn, it looks like we're going to have be having deficits even with very modest demand growth. So rather than the market being overwhelmed with supply, there's ample copper around the world today, so the market is fully supplied, but it's not being overwhelmed with new supplies and continued production, even with very modest demand growth.

And as you go forward, existing mines will produce less. People aren't investing in new projects. There's barriers to project development that relate to environmental, community, country issues and as we've shown in this process that we've had about selling properties, there is a significantly higher than current price required to develop new production.

You just simply can't do it. And we know because we've got huge resources to develop, and we are working on plans to develop it. It will require higher copper price and absent a complete deterioration or significant deterioration, collapse in the China market or the global market, we're heading for a time when copper prices are going to be higher.

That is illustrated on page 8. Now, I want to tell you what this is and what it isn't. This shows projected existing supply before any disruption allowance from existing mines. It doesn't take into account new projects, even those projects that today look probable. But it just shows that over the next 10 years existing mines production is expected to decline on the order of 20%. That's roughly 4 million tons.

Today the top 10 mines in the world produce about 5 1/2 million tons per year. And according to Wood MacKenzie, the incentive price for new development is $3.30 a pound. We know how long it takes to develop new mines.

With all these resources, 100 billion pounds of reserves, 100 billion pounds of mineralized material, more resources beyond that, if we were to start today to say let's develop an AFE to develop a new mine, it's on the order of 10 years before we have new production and that can't be changed. That's not economic, that's reality of getting permits, getting mine plans, getting things organized. That's just the way -- that's just the way it's required.

Now, we did this with Cerro Verde. You know, Cerro Verde is a tremendous asset. You know it was started many years ago, it was discovered in the 20th century, or the 19th century, and it was started as a very small SXEW operation. As we acquired Phelps Dodge they were completing a major milling expansion in 2006, a little bit of a rough start off, as Red and I know then, and now we've done this $4.5 billion project on budget. We've taken our mill rate from a year ago from 116,000 tons a day to 352,000 tons a day. Think of that. 352,000 through the mill.

We're mining over 600,000 tons a day, our sales have gone from 100 million pounds to 270 million pounds, our unit costs have gone from $1.87 to $1.22. It will be a very long-term contributor to the future of our Company. This is an asset that we could sell at a very attractive value.

We could conduct just a formal auction of this, it would raise a lot of money. But we believe that this is the kind of core asset that we need to keep, and our financial plan now will allow us to keep it. We weren't sure we could do that going into this year to build our Company around for the future.

We went back and looked at three of our key mines, Morenci, Cerro Verde and Grasberg, and before we really started on this process, we wanted to show just how the districts that we operate in have changed over the years and what we have to continue to build on. In 1988 Morenci, as we went through the 1980s, 1990s and early 2000s, there were reports talking about the death of the Southwest copper district in the US and Mexico. Morenci had relatively small reserves, we've had significant production since then, we have significant remaining reserves and potential beyond those reserves.

There'll be a time, and not in the very near term, but we'll be announcing a major further mill expansion at Morenci to develop the sulfide reserves. Cerro Verde now is essentially fully developed, but as we look below the existing outline for the pit that will support the expansion, there's further resources there, and at Grasberg, you know, Grasberg was discovered in 1988, developed during the 1990s to become one of the mining industry's great assets, and we've got 25 years left on our contract and a great future there.

Then when we look broadly, and as I said, we look at this set of assets in North America and South America as a set of assets managed together to take advantage, we have very large copper sulfate opportunities that have been much better defined since our Phelps Dodge acquisition through our core drilling and exploration analysis. And it's a consistent story. In mines like Bagdad, which is our mine for the long life, operational challenges because of principally water availability and some land for tailings and so forth, but has a very significant resource.

Recently at a 100-year-old mine in New Mexico, Chino, which has been viewed as being at the very end of its life, we've been able to recently produce some incremental volumes, by understanding of the ore body better and then identifying the potential for large-scale sulfide future development of Chino.

El Abra in Chile, I mentioned earlier, as we first got into this after the Phelps Dodge acquisition we saw this as a project with a very limited life. Exploration drilling and analysis have shown an enormous sulfide resource that requires some investments to get water and power to it and to develop the mine, but this is a -- this is a Cerro Verde type project for the future, and we're doing the work to position us for it.

Near Morenci is a mine called Safford which was also developed by Phelps Dodge right before our acquisition. It has an adjoining ore resource that's been known for years.

As we now approach the completion of the mining of the oxide material at Safford, we're looking at this Lone Star resource which has the opportunity to provide additional oxide ore to extend the life of the facilities at Safford, but a huge, huge sulfide resource underlying it. We're doing work to see how to take advantage of that. I mentioned Morenci, Sierrita is a mine with significant molybdenum resource, but again, very large potential resource development.

All of these developments I want to talk about them because of how it fits into our near-term financial strategy. We're retaining these opportunities to grow our Company in the future. Very simple. We're not going to start spending money on these capital projects until the market justifies it. But we'll have that underlying our Company.

Now, short term, Kathleen, I talked to Red about -- and his team about what they could do to mitigate production declines without doing major capital expansion projects, how to do it with minimal capital. And they are undertaking a project to deal with steepening pit walls around our Company. By optimizing slopes, it will allow us to target opportunities, to minimize stripping, and add ore. This would result in lower costs and adding ore available for current production without having to do major development projects.

This is a process that we're approaching very carefully because we want to do it by adhering to our established safety factors for protecting pit walls, but it allows us to have the potential to accelerate ore in the medium term, add incremental ore to our reserves. We're in the early stages of this, but we're very encouraged about what we might be able to do with it and we'll be reporting to you as we go forward.

Now at Grasberg. We are at a stage of this mine of where we're completing the mining of the open pit. If you can see the schematic of the ore bodies, we're producing now from the DOZ, we've developed the DMLZ extension of the DOZ and it has commenced production and it will provide significant ore to us going forward. We are continuing for the development of the Grasberg Block Cave, which is the extension of the ore body beyond the pit limits and we are prepared to do that.

It would allow us to continue operations beyond the depletion of the pit and begin ramping up the Grasberg Block Cave by having this infrastructure development. We can't mine from the block cave until the pit is complete because we use block caving methods which results in surface subsidence. And an ongoing issue we've had is the need to have an extension of our contract because the funds we're spending to develop the block cave are for production that will largely be produced beyond 2021, and so we've been having this ongoing assessment about whether to continue these capital expenditures.

If we were to defer those, there would be significant adverse consequences both for our Company and for the government of Indonesia because it would defer the initiation of the ramp up of the block cave going forward in the future. Today we have access to the ore at the very lower limits of the open pit. That means we're not doing much stripping at all. It has very high grade ore. Our mining rate is 2/3 lower than its maximum, 40%-50% lower, there's limited access to the pit, so that means it creates some operational issues for us.

And in this quarter we had a couple of things to deal with. One, we had, as we talked about on our last call, a -- a mechanical issue to repair with one of our big sag mills. That was done more quickly than we anticipated. And we have experienced some issues with part of our work force, and it's the work force that actually operates the big trucks and shovels in the Grasberg open pit. They've had some grievances. There's been some slowdown work there, and it had an impact on this quarter's volumes.

Couple of points to emphasize. Well, let me start by saying we are working with the union and the workers to resolve these grievances, and we're making progress with that, and we believe that we will be successful in dealing with that, but it was lower volumes now, but that ore is not going away. It will be mined and produced in the future. It's a matter of timing.

It may mean -- it will likely mean -- it will mean, let me quit equivocating. It will mean that we will be continuing to mine from the open pit into the early part of 2018 rather than completing it in 2017. So it's a short-term timing issue. We believe we have it solved. We're really focused on executing there and believe our team can do it.

We do have with the Indonesian government an export permit that will be required by the first week -- roughly first week of August, it's August 8. We have been given assurances from the mine's ministry and the highest levels in government that we will be able to get that permit and we expect to obtain it on a timely basis.

Longer term, we are having ongoing discussions following up on our letter from October of last year about the long-term extension of our contract. Those discussions have been constructive with the senior officials of the government clearly recognize the need for investment more broadly within Indonesia and to achieve that goal they have commented publicly on the need to -- the need to treat existing investors like Freeport fairly.

There's been some political realignment within the President, the Parliament, in the first half of the year. We believe all that's going to be positive for getting a resolution and feel that the timing for doing that now as opposed to where it's been over the last six months is much more positive and we're going to complete following up on that.

So that's kind of where we are at Grasberg. And I'll be prepared to answer your questions.

Slide 14 shows just how really good our mining business is. It shows in 2015 when copper price averaged $2.42, our EBITDA matched our capital spending. Now in the first half with the completion of Cerro Verde, the drop-off in CapEx, even at a copper price of averaging $2.16, EBITDA significantly higher than CapEx and as we look forward for the full year in 2016 with copper prices averaging for the remainder of the year at $2 to $2.50, we have substantially higher EBITDA than the $1.7 billion of expected CapEx for the year. The adjustments for EBITDA reflect the changes that I previously talked about at Grasberg, the sale of the interest of Morenci an other factors there, but it shows how profitable our business will be now and as we go forward.

In the oil and gas business, we really had to focus on managing costs and enhancing, protecting the asset values. We reduced costs -- outside capital costs by roughly $150 million. That's about 1/3 or more reduction in G&A costs resulting in other costs.

We've restructured the really large commitments under the three deepwater drill ships that we had contracts for. We talked about that last time and that's in the supplementary side if you want to go back and review it. We've established production in the deepwater from five new wells that were drilled to tie back to our production facilities. There were three wells at hosting deep and two wells in the Horn Mountain area.

I'll talk about the hosting production because those wells, the production results have been disappointing. Disappointing for factors related to the quality of the oil and the nature of the reservoirs and that's just what it is. But overall the production from wells that we had previously drilled have come on as expected. Unfortunately these did not. But we have had favorable results from the development of the outside operator and large projects at Lucius and Heidelberg.

The -- but we have achieved our goal of ending the subsidy of our oil and gas operations from the mining business. And you can see that on page 16 where we show the oil and gas EBITDA at various prices. The CapEx in 2017 has been reduced to $600 million and you can see that what kind of EBITDA we would have at various prices ranging from $500 million at $35 to $1.5 billion at $65.

The deepwater business is built around these three assets, three production facilities formally owned by BP and Shell and they were 100% owned. They have significant processing capacity and significant unused processing capacity which creates value for both us and prospective purchasers of these assets.

Our outlook for 2016 updated for our experience in Indonesia continues to show copper sales of $5 billion, $5 million -- 5 billion pounds. Our Sierrita mine which we anticipate closing and went to work and found ways of providing some volumes at a very attractive cost level, that offset the lower production in Indonesia. The gold production reflects the Indonesia issues that we talked about.

Molybdenum increase is principally because of Sierrita, and because markets have improved some, and the oil production is lower. We have sold our interest in the Haynesville gas field, and so those barrels equivalent are out. There's been an operational issue because of the gas plant problem in Pascagoula, Mississippi that's limited some of our production as well as the startup production at the -- with our three new wells.

Operating cash flow is at $2.25 copper, our model to be $4.5 billion with substantial leverage of $260 million for each $0.10 change in copper price. Unit costs are consistent with previous guidance on this space is at $1.06 a pound and capital spending is couple hundred billion dollars less than previous guidance.

Our sales profile as we look forward from 2015 to 2016, we got 5 billion pounds that I just talked about. That would drop in 2017 principally because of the sale of Tenke is the big factor there, that is expected to close later this year and would reduce volumes. You can see the goal coming out of Grasberg as we mined into the pit and what our molybdenum and oil sales would be.

Our chart that we show each quarter for EBITDA and cash flows show at over a range of $2 and $2.50. It shows operating cash flows ranging from $3.5 billion to $5 billion over those copper prices, and then capital expenditures -- and we're going to manage this in relation to market conditions -- would be dropping from $6.350 billion in 2015 to just over $3 billion this year to $2.3 billion in 2017. So the cash flow numbers that we talked about earlier reflects substantial cash coming out of the operation of our business.

Kathleen went over with you the 3A9 exchanges in which we were able to retire roughly $370 million of debt at a cost in terms of the share price of $311 million. We'll continue to look for opportunities like this. And then when we look at our balance sheet and our ability to manage it, not only do we have a plan of getting our debt down to which we believe by the end of 2017 will be at an acceptable level to allow us to focus on growth as market conditions allow, we also have ways of dealing with our near-term maturities. Half the proceeds of the Tenke transaction will be used to reduce our bank term loans. Pursuant to our agreement with the banks, the remaining half will then be available as cash to retire to deal with our 2017 maturities.

So we've dealt with 2016, 2017, and we're going to continue to be looking at capital market transactions to -- with, let me just say, non equity capital markets transactions in a way to deal and maximize our maturity picture going forward. So this is a little chart we use as we talked about proving our mettle for this year in an enthusiastic and resilient manner and pleased to report for the first six months we've had a great track record of doing that and moving ourselves forward on a really clearly defined business and financial strategy.

So thank you for bearing with me with all of that. I felt like it was an important quarter to cover these things, and now I look forward to your questions.

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

(Operator Instructions)

One moment, please, for our first question. Our first question comes from the line of Orest Wowkodaw from Scotiabank. Please go ahead.

Good morning.

I was wondering if we could get a bit more color on Grasberg? Specifically, your five-year outlook for production really hasn't changed that much the last couple quarters. I'm just wondering how we should think about that production profile as you defer CapEx spending, given the uncertainty on the COW extension. At some point I would think that's going to have some impact on that post-2017 outlook. Any color there would be extremely helpful. Thank you.

All right. Yes. You know, that's a good point.

While we have found some ways and we continue to search for ways to defer capital, we've changed some mine plans and have done certain things. What we have not done yet -- what we have not done yet is defer the necessary steps that would allow us to begin ramping up the Grasberg blockade production once the pit is completed. Now that would be early 2018.

So the balancing act -- and this has been a major point of focus for us in the first half of the year. I went to Grasberg and I sat down with our team. We did a detailed review of what it would mean if we were simply to defer the spending of the $1 billion a year that we've been spending recently to develop this underground resource. What would happen -- it would be significant layoffs and we're over 90% of the economy in Mimika, the resulting social disruptions there, which are a significant concern, are unknown.

It for sure would do what you just said. It would result in a deferral for the ramp up of the Grasberg Block Cave, and once you demobilize the team that's been working on this, remobilizing that team and coming back in would be a significant exercise beyond just the time of spending it. And that would have a major negative impact, as I said, both on us and on the government.

Now, we are basing our decision to do this on the assurances we've received from the government in recent years, but most clearly articulated in the October 8 letter last year, that they will extend our contract. In my recent discussions with the highest level of officials in the government reaffirmed that commitment to doing that. So we are saying that we need to have that done in the near term, explaining to them the consequences to them as well as to us of deferring those expenditures. But to date we have not made that major decision.

So we're online -- that work, by the way, has gone exceedingly well and the underlying economics are strongly in favor of us doing what we're doing.

Is there a specific drop dead date in your own mind that, if you don't receive the COW extension by a certain point in time you will be forced to just pull back the CapEx spend?

There's some important dates along that line. One has been this August 8 this year, in the near term, for getting an extension of our export permit. We've been given assurances we'll get that. There is also an existing regulation in Indonesia -- it's a government regulation, not part of the mining law -- that prohibits exports beginning in January of 2017.

That regulation is going to have to be changed, or else that would be a major trigger point for us. And our contract provides that, if the government takes actions in any way, but through laws and regulations -- that is inconsistent with our contract, then we have legal rights to pursue damages against that.

We do not want to do that. We want to find a cooperative way of working this out with the government. The government is telling us they want to find a cooperative way of doing it, so we're going to take advantage of this common ground that we now have to deal with it. But those, in response to your question, are the real trigger dates for us.

And just so I remember -- so the beginning of 2017, officially Indonesia has banned all non-processed exports, is that correct?

That's correct. That was -- you had this 2009 mining law that was aimed at Indonesia exports of ore. We originally thought it didn't apply to copper concentrate; two years later there was a regulation passed that extended it to copper concentrate, and there was a regulation that said no exports of this ore would be allowed beyond January 2017.

Okay.

There's a lot of pressures economically in Indonesia right now for them to relax that. The country financially would be harmed significantly by banning exports. We don't think they are likely to do that.

Okay. Thank you.

And just as a quick followup -- the reduction in Africa sales guidance for copper this year -- does that reflect an actual reduction in your volume? Or is that just a closing date affected by the closing date of Tenke -- i.e, you think it's going to close before year end?

Yes, that's what it is. We've forecast through a fourth quarter, middle fourth quarter closing date. So we've just forecast what we would have through that closing date.

Second quarter was a record at Tenke and they produced more copper in a quarter than we did last quarter.

Thank you, Red. Took the words -- that's great.

No. The operation there is going great. Our team is cooperating, our work with China Moly as we plan, transition is going very well. China Moly is committed to maintain the quality of operations, the standards of environmental and the social programs and so forth. So we're working very cooperatively with them. I think everybody knows this, but China Moly is a non-state-owned Chinese company.

Thank you very much.

Thanks.

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

Hello, guys.

Just had a couple of questions on operations and also the balance sheet. Maybe just start on slide 4 where it's good to get the progression in the net debt. Does that include the $1.5 billion equity raise, just to be clear on that?

No, it does not. It doesn't include ATM proceeds, it doesn't include any sale of oil and gas assets, it does not include any sale of additional shares in PTFI.

Okay. Thanks very much.

And then a broader question on your CapEx and cost reduction targets. You've been able to achieve and I saw that you mentioned another $150 million. Are you able to just step through the composition of that, and how you look at 2017 and beyond? And whether the cuts now and new CapEx have to be caught up in 2018 and beyond? Or whether they're sustainable?

Well, the $150 million you reference is a cut in non-capital cost with the oil and gas group. That's G&A and other costs that might be reported as lease operating expenses, for example. That reflects a major reduction in employment there, and we're still working on costs for office facilities and other support facilities. So that is sustainable.

We had previously, beginning in 2015 -- although we've had a culture of doing this all along -- have been very tough on managing costs in our mining business. Part that over time where we may end of having to increase some costs is -- Kathleen has been working really strongly with Red and his team about reducing maintenance capital in the mining business, and we've done a great job in cutting that back. Over time, we may have to spend a bit more capital in maintaining our facilities and so forth. But other than the Grasberg investments that I just talked about, we don't see major new capital projects in the mining business until the market warrants it.

Yes. And we're managing -- what you might be referring to, Chris, is the CapEx budget that we've reduced from $3.3 billion to $3.1 billion in 2016, and we've got slightly higher -- about $100 million higher in 2017 than the previous estimate. But we're continuing in this market environment that we're in to emphasize deferring spending.

Our team has done a great job in finding ways to use equipment that we have; we talk about buying at home. And so we have a real focus on cash flow, net of CapEx, and we've got the whole organization measuring on those bases. So we're working on lower for longer, and we hope that, that turns, but we do want to try to have sustainable long-term cost savings, both operating costs and capital savings as we go forward.

And I just want to say this: we had all of our mine managers that work under Red together week before last, and we have a great team. Everybody is highly motivated, understands the issues, working to achieve these objectives, and I'm really proud to be part of the team.

Okay. Thanks for the color. And just one final one.

Over the last three months or so, if we rewind, it seemed to be more about doing another asset sale. Whereas, you know, just hearing the tone of the conversation, seems like if you complete the equity raise and copper stays about where it is, you can get through without that? But you'll continue to assess it -- is that the right way to rate it?

It is. We started off the year saying that every asset we had was up for consideration for sale. And we made progress, we continue to have discussions, but we're still telling the market and tell bankers, if you got ideas for our business, come share them with us. We've had a lot of interest and a lot of discussions, and that's when I talk about the balancing act. The balancing act is what we can raise, what will we be left with to build a company around? And whereas the beginning of the year we didn't know -- we thought we might have to sell some of these core assets. We thought we might have to sell Cerro Verde. There was a lot of interest in it.

So you're exactly right. With the plan we have now -- as I said, Kathleen and I feel we've turned corner, we can see the way forward without further asset sales, without further equity sales. We still have strategic decisions to make about the oil and gas business and about PTFI shares as part of our arrangements with the government, and we've got market uncertainties that we're going to have to monitor as we go along. But as I said, we see clarity now that we didn't have before, and that clarity shows us the way to get to where we wanted to get to without having further assets. If we could have an asset sale that would be less dilutive than an equity sale, that's the way we've evaluated it. We want to get to where we need to get to in terms of having a good balance sheet and do it in the least diluted fashion that we could get to.

Thanks, Richard. Appreciate it.

Okay. Thank you.

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

Hey, good morning, Richard and Kathleen.

Hey, Evan.

So first question just on Tenke-- I was hoping you could address -- I don't know if I'd call them red flags, but a couple of issues with the closing. One is, DRC is obviously raised some objections to the deal, and I was wondering, what's behind that? Do they have any sort of legitimate claim? And what that might cost, if anything, to push that aside? Could that delay the deal? And then the second point was, recently Lundin got a five-week extension on their right of first offer. What was behind that? Could that similarly potentially delay the deal? I know you have to get this thing closed by December 31.

All right. You know, we have had just a great relationship with the -- Freeport -- with the government of the DRC. It was rocky at the start, but we built a great relationship. We've operated the mine in a first-class fashion. We've had a great relationship with Gecamines, a state-owned company that owns an interest in Tenke Fungurume mining, and acceptable relationship with Lundin, our partner there. You know, we sold Lundin our Candelaria mine in Chile.

And we loved the asset. We really liked having this as part of our portfolio. So when circumstances required to sell it, everybody was disappointed. We were disappointed, Lundin was disappointed, Gecamines was disappointed, the government was disappointed. And this was not unexpected.

So we've had to deal with that disappointment. We have confidence that CMOC, China Moly is a good partner and they are going to be a good partner for the country and they're taking steps to explain that both to Lundin and to the Gecamines and the government. The government would obviously like to get some financial compensation out of this, but legally this is a transaction that does not relate to Tenke Fungurume mining, which has a contract with the government. It's at a higher tier company and there's no legal basis for anything other than continuation.

So China Moly and Lundin are having discussions together about the future. Lundin has certain transfer rights that are publicly known and they mutually made a decision that they would like to have some additional time to consider those transfer rights and their partnership going forward. We don't expect any delay in China Moly reporting to us the approvals that they are getting in China and they have a strong economic interest to getting this thing closed and we expect them to do it.

All right. Thanks for that.

And they really emphasized in their communications process that the benefits to the government of the Congo and employees in the community will be sustained going forward. There's no changes in that.

Great. Thanks.

And then second question, just on leverage -- I appreciate that slide that you put out there, where you thought you'd be from a net debt perspective at various copper prices at the end of 2017. I was wondering, if you roll that forward in 2018 -- I know that's kind of the year where some of the production drops off at Grasberg -- what is the debt level as far as a ratio goes, a net debt to EBITDA? Where do you want to be at the end of 2018? What's the maximum leverage ratio that you would like to be at by the end of that year?

Well, as we go forward, because we're constraining capital so much, we continue to generate, even at the lower Grasberg volumes, excess cash flows. In '18, it's essentially breakeven, but as we look beyond that, as Grasberg grows and ramps up, we have a future of generation of excess cash flows, and we will continue monitoring the time that we start reinvesting in our copper resources based on market conditions then. And as we look at what the debt levels would be, it won't be any arbitrary ratios or so forth, but it would be based on a then assessment of what market risks are, market conditions are.

And, you know, I'm looking forward to the time when Freeport returns again to thinking about increasing dividends and returning cash to shareholders. So we have a future that allows us to look forward to that day based on the rectification of our balance sheet now that we've got the clear line of sight after dealing with the losses we had from this oil and gas deal.

Great. Thanks for that

Your next question comes from the line of Andrew Quail with Goldman Sachs. Please go ahead.

Richard, Kathleen, thanks very much for the updates. Just a couple.

First, on gold at Grasberg -- obviously it's heavily weighted to Q4 this year. Looks like the grade's going to have to jump up almost 50% on my numbers. Is it -- looking to '17, obviously there's a big jump in gold; it's good for [garieties] -- is that going to be evenly spread next year? Or is it going to be similar to this year and back-end loaded?

There will be variability, you know, from quarter to quarter, and a slight change in grade can have a big impact. But we expect, as you see, with 2.5 million ounces -- that's our share -- we'll have a strong quarterly gold volume throughout 2017. There will be some variability, though.

is it going to be --

Andrew, this is something we've been seeing and talking about since the production of the -- going back to 1998 when we first stood out on this -- we designed the ultimate pit limits and so forth. I mean, this has been in our plans ever since then. And the thing that Kathleen is talking about is, when we get to the bottom of the pit, there's only one access road, and so depending on how things go, just a little bit of change in where we mine, our production issues can push things from quarter to quarter.

Yes. And then on CapEx guidance for 2017, looking from Q1 -- it's pretty steady from the 2.2 to 2.3. Does that include Tenke, or has Tenke been taken out of that? And how does that remain constant?

Yes. That does not -- we assume that Tenke sale in the fourth quarter, so that does not include any CapEx from Tenke. We had scaled way back the CapEx from Tenke in 2017 following completion of the asset plan this year. So we had very little capital in any case projected previously for Tenke.

So it's, what, the next year in 2017?

Correct.

Thank you.

It's out but it wasn't large.

Okay.

It was less than $50 million.

Okay. And then, is there any new hedging on the oil an gas?

No.

Okay. Thanks, guys.

Thank you.

Your next question comes from the line of Tony Rizzuto with Cowen and Company. Please go ahead.

Hello, Richard, Kathleen, and Red.

I wanted to start off with a question on oil and gas. I see the US Bureau of Ocean Energy Management is set out -- they've set out some new requirements as it pertains to plugging in abandonment liabilities. And I'm wondering if you can discuss the ramifications? And does this shrink the pool of potential acquires of the oil and gas business?

That's a good question, Tony.

These are new rules and the process was started midyear last year. Rules have been published, but how the rules would be administered is still unclear. And our team is monitoring this, prepared to work with the government on it, and all I can say is we're going to work with them and deal with it as best we can. We've had experience with this, as you well know, Tony, because we have to deal with financial insurance obligations with states and our mining business now, and the federal government through EPA talking about this.

So this is a growing area of emphasis and globally, with events that have happened it's put emphasis on. So we just have to deal with it and we got uncertainties and we'll report to you as we go along. But you're right, Tony, this has had an impact on potential buyers. It's a different situation from an established operator in the deepwater to having either a smaller company or a financial buyer which would have to deal with these in different ways because the way the government has historically administered -- and we aren't sure exactly how it's going to go forward -- but they've provided some waivers into these kinds of obligations depending on the scope of an operator's operations in the Gulf.

Okay. Richard, I want to make sure I understand a comment you made when you were talking about turning the corner with all that you've done to date without the need for further -- I wrote down copper asset sales -- but did you say without the need for further asset sales in total, including --?

No. Let's see, make sure I can address this in the right way. Without a need to do it, but strategically beyond just meeting the financial objectives of balance sheet management could lead us to make decisions about selling interest in PTFI shares or doing something with the oil and gas assets. But we're not forced to do anything now to meet our financial objectives. We have a plan that allows us to do that and now we can step back and deal with these other things strategically rather than as financial imperatives.

Understood, to garner the best valuation possible type of thing.

That's correct.

Just so if I could go back to Indonesia: with so much complexity there, I was hopeful that the government would treat you guys more kindly since Newmont basically announced that it's going to be selling out of Indonesia. And I'm wondering -- has there been any change in tone since we saw those developments? And obviously it's not a done deal, and there's probably a lot of complexities involved there. But I'm just wondering how all these moving parts could play out.

Yes. I will tell you, the tone we've had with the senior government officials has been good for some time now. I've had the chance of watching President Joko Widodo closely, as he's been in the United States and as he talked internationally about foreign investment and so forth. And there's not an issue of tone there. Within the country politically there is a feeling of resource nationalism, which is true lots of places around the world today. Witness what's going on here in the United States. But I'm convinced the President and his senior advisors understand the issues from an Indonesia standpoint.

They've had -- we've had some complicated political circumstances in Indonesia over the past, say, nine months or so; and those have made progress. And I think that's had more of an impact on my sense of where we are. The Batu Hijau mine that Newmont managed and had a significant interest in is apples and oranges to Grasberg in terms of size, grade, profitability, and so forth. And I think the country is taking pride that an Indonesian group is stepping up to buy it. Many people there would like to see Indonesians own more of PTFI.

Biting off managing Grasberg is a whole different situation than managing Batu Hijau, just in terms of its complexity and its location in Papua and the development of the underground resources and environment, et cetera -- environmental management, et cetera. So I think the other factors are more encouraging to me than the Batu Hijau thing.

Okay. It did look like it was -- if we can believe what we read, it looked like a pretty good price for an asset that's got a much smaller reserve base -- what? 1/20 of what you guys report at Grasberg, though, but that's one thing that kind of caught my eye on that as well.

Well --

Lower quality, too, I think.

Our friends in Newmont were pleased with the transaction. We're working with the government, to have them understand the fair value of our asset.

Understood. Thank you very much, Richard.

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

Thank you very much for taking the question. And congratulations. It looks like you've just about made a profit if not counting the $291 million impairment.

Could you talk a little more about the six copper sulfide projects you're studying -- El Abra and I guess five in the US? If there's one or two of them, that really seems to be a barn burner with a lot of upside, maybe a better grade or a lower strip; and if the better one or two of them are, say, 120,000 ton a day grinding mill expansions as opposed to the 240 at Cerro Verde.

Right. So let's start at El Abra, because -- John, you know that these are like Cerro Verde: relatively low-grade deposits that are very large. And so to make them economic, you need to have substantial grinding capacity -- processing capacity. So Cerro Verde -- what's good about it is the exploration work is done, the core drilling has defined the resource so we don't have the risk of the resource. The issue is -- and it's things that we do. Execution of the plan is something we're very confident about; it's just the capital to the desalination plant and then transports that water from sea level up to -- Red, what's the --

10,000 feet.

10,000 feet, and then build a big processing facility. That's a lot of capital, so that's basically what you have there. In the US, there's similar situations that -- at Baghdad, it's very large low-grade deposit. The one that I would -- and we have those similar situations in Chino in New Mexico, Morenci.

The one project that really looks exciting in the US that has a little different characteristic to it is the Lone Star deposit. And we've talked about Lone Star since 2007, but now we're reaching the end of the oxide life of Safford. We have those facilities. And we can work our way into Lone Star by mining the oxide cap there, which will allow us to use these facilities that are available in the adjoining Safford mine and that would ultimately expose enormous sulfide resource -- big, low-grade -- which would allow us to take a step towards getting the benefits from it and then have the opportunity to do a large-scale concentrator development.

There's also a sulfide deposit at depth at Safford. So how we deal with those together gives us a way to phase into it that's not available with other projects.

When you said there's a sulfide deposit at depth at Safford, you're referring to the prior pit, not Lone Star?

That's correct. This is a sulfide below the existing oxide.

So there's a lot of fun you could be having with grinding mills over the next 5 or 10 years?

Absolutely. And I want to tell you -- that's been the strength of our company. The early development at the sag mills at Grasberg was a big deal. The development now of high-pressure grinding roll mills at Grasberg and at Cerro Verde -- that's one thing it allow us to do at Cerro Verde in such an efficient way.

And then, Red, talk a little bit about your mill at Morenci. It's amazing.

John, at Morenci we're doing 75,000 tons a day through one high pressure grinding roll. And we've had days that approached 100,000 tons, so we're -- those are low-energy consumption, high-efficiency -- and they also help with recovery more than what we see in sag mills, so we're very pleased with all of that.

It's brand new technology. And it's amazing to see how much material can go through it at such a smaller size than the big sag mills that I was used to at Grasberg, and at what energy efficiency. So it's fair to say that we're at the cusp of technology in operations throughout the copper mining industry, and that's what we do.

We're going to be very disciplined. I want to tell everybody else: we're planning these. It is fun, John, to work on it and our team is really excited about it, but we're going to be very disciplined about spending capital and we're going to be confident that the market needs this copper. It will need it. I'm confident of that. It's just a question of time.

Thank you very much.

Thank you, John.

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

I have a question -- on slide 16, when you talk about the CapEx profile for the oil and gas business and the various amounts of EBITDA that can be generated at different oil and gas prices. I guess my question is, to what degree is that run rate of EBITDA sustainable with that level of $600 million of CapEx? And will there be an eventual reinvestment cycle, so to speak, in that business, in terms of having to invest more CapEx in order to be able to maintain the same amount of production from those wells? Or is that like -- what's the life of production with that 2017 run rate as it's indicated on slide 16?

Well, that's what we're spending a lot of time on with our team in Houston. I was just there last week, and that was the key focus of what we're talking about. You're right in saying the nature of oil and gas production in the deepwater Gulf of Mexico involves inherent declines. We have the benefit for several years now of wells that were drilled since we acquired Plains in 2013 that we have hooked up and have begun production on, and the effect of that is deferring the time when the decline hits us.

So, like what we're doing here in the mining business, we're looking at different scenarios of where can you invest over time at the lowest risk, minimizing capital kinds investments to arrest that decline. We have several years to deal with that, but looking out in the long-term future would require reinvestment to maintain these levels of production. And respectively for buyers, there's ways of growing it, because we've identified a number of potential drilling opportunities that don't require new platform development because we have all this unused capacity in the existing platforms, so there's great opportunity here.

It does require capital in the deepwater -- significant capital and time to bring in production on stream. And there's Vito Basin area -- there's tremendous opportunity. And that's what I'm saying is, strategically we're saying our focus is going to be on the copper business. We want to make sure that if we talk to people about buying the assets or joint venture relationships for people who might want to come in over time and invest with us to help minimize our capital, these are good assets and there's great opportunities for it.

Would there be an option, say, to run the assets for cash flow at these kind of levels as indicated in the slide? And then, if that were to happen and the wells were to deplete, per se, would you still then be able to maintain the optionality of having those reserves in the ground? Or is there a certain point in time where you would have to spend in order to be able to maintain that optionality?

There's certain things you have to spend. One of the things has to do with partner commitments. In other words, you have other partners in some of these opportunities, and you either have to participate or not; and if you don't, you lose the opportunity. There's some timing on lease requirements. So we have some flexibility, as I said, for several years, but long term to be in this business, you got to have a reinvestment opportunity and you gotta have a view for growth.

So we restructured the business in a way where we don't have required commitments, but we are working with a team to develop capital allocation strategies that allow us to retain value in the assets while not requiring CapEx above the cash flow being generated. So we're developing plans to allow that business to continue to generate cash to cover its CapEx; and because of the money we've spent historically, the lease acreage position we have, the strategic position we have around these strategic platforms, we do have organic inventory that we can manage over time, and that's what we're really trying to do. Like Richard said, if another buyer came in, they may do things differently than what we're doing, but we're allocating capital of the business in a manner that protects the asset values but doesn't require cash above its internally generated funds.

And I'll say this -- my direct management of this group really started this quarter, and we have a really good professional team of technical guys running that business. They are impressive. They're recognized within the industry. My biggest concern was safety, as you can imagine, and everybody is committed to having safety as the first priority. Really good guys, really know what they're doing -- and we've worked out arrangements with them to be consistent with our corporate strategies, so I feel very good about the way all that's working

Okay. Great. Do you think we should see an updated capital allocation strategy, say, by the end of this year? By the end of 2017? Is that --

Listen, we're going to give you a quarter-by-quarter update of where we are. We here at Freeport have a tradition of every quarter assessing where things are. We don't wait for any annual planning session. It's a continual basis of allocating capital, making decisions, and we're going to inform you guys of how we're doing that.

Okay. Great. Thanks very much.

Your next question comes from the line of David Gagliano with BMO Capital Markets. Please go ahead.

Thanks for taking my questions. A lot of them have been addressed, but I may have missed one thing.

I wanted to ask a little bit more, just on the oil side -- what was the reason for the roughly 16% decline in the guidance for 2017 versus three months ago?

All right. Well, the big issue had to do with these three new wells that we had in what we call Holstein Deep. These wells were drilled. The logs on the well -- electric logs that analyze the reservoirs prior to getting production -- were very strong. Unfortunately there was limits because of the nature of the wells, the depths and so forth of where certain aspects about the quality of the oil, the permeability, the viscosity, were simply not available. And the initial projections were based on [analogous] data from the area, from other experiences. And so there was just limited data.

This is common in the industry, and when these wells came on stream, it was readily apparent that the crude oil quality, permeability throughout the field, was different than expected. The viscosity was measurably higher than the pretest expectations, and so it was just a case of where the wells weren't able to produce what they were expected to produce. And it was fairly significant.

At the outset, the three wells -- we were looking at 24,000 barrels a day. We have lowered it a bit for our second quarter plans, but they're producing at 8,500 barrels a day, 9,000 barrels a day well.

Dave, and another factor is the sale of the Haynesville gas, which impacts volumes, but not really cash flows. So you have probably 2/3 from well performance that Richard talked about, but 1/3 of it is related to this Haynesville transaction which we report on an equivalent basis, but it really had very little impact on our cash flow for 2017, net of capital spending

Yes. Industry standards have this equivalency at six to one. Relatively sale prices today are 15 to one, so we were calculating barrels equivalent six to one. And I went back and looked, and since we acquired Plains, we've had basically zero cash flows out of Haynesville, and yet that's going to show up as that number of barrels equivalent. It's just a problem with the way the industry reports stuff.

Okay. That's helpful. Thank you.

And then, just stepping back for a sec, the bigger picture commentary that you made throughout the call regarding turning the corner and really addressing the balance sheet issues -- as you look ahead now to 2018 and beyond, Cerro Verde is ramped, Morenci expansion is done, obviously a pretty significant drop-off here at Grasberg that we've all known about or should have known about -- but, still, where do you see the best -- I'm trying to figure out where the growth is going to come from basically in 2018 and beyond. Do you turn to investments outside of Freeport -- and that's capital-constrained, obviously -- but I don't really have a good source of growth. I'm wondering if you could help me out there.

Well, that's what the market is leading us to right now. We could well have a period of time of where we will have announced new projects to develop and been engaged in developing them, just like we were from 2011 to 2016 with Tenke, Morenci, and Cerro Verde. If market conditions improve by then, what you could hear us say is, okay, we're going to start on these projects, we're going to have this capital plan to execute it and it's going to take time to execute it.

And so the stock at that point would be reflecting that growth plan. We might, depending on market conditions, have excess cash flows. I'm fine with having those excess cash flows go to shareholders. We clearly could be in a position of being reengaged in the market, looking for other opportunities, but that's an option. We wouldn't feel any imperative to do anything other than focus on building our business long term, and if we have cash flows, return them to the shareholders. To me, philosophically, that's what a natural resource company ought to do -- not feel compelled to invest just because you have the money. But have the opportunities to have capital discipline, good rates of return, show how growth would occur through that process.

I keep telling all these people that are sitting on another table about negotiating right now, I wish I were in your shoes. I wish we had a company where we could be buying assets now rather than selling them. But we're not. You can't wish that away. We are what we are. But, look, Dave, I'd be fine to be in that condition -- to have good markets, long-term investments, and if you generate excess cash, over funding those investments, get a right capital structure, the earlier question of what would be a good debt level to have in that environment; if you got excess cash, pay your shareholders.

Okay. That's helpful. Thank you.

Your next question comes from the line of Jeremy Sussman with Clarksons. Please go ahead.

Thanks very much for taking my question.

Richard, I just want to go back to something you said early on in the call, where you noted that you were open to everything, essentially; and if I heard you correctly, I think you said including the sale of the Company. Just trying to interpret this. Is this a process that's actively ongoing? Or is it more along the lines of, somebody brings you an attractive offer, you know, the Board is obligated to consider this as usual.

Right. Well, you're right. There are legal obligations that, as a public company, a Board is saddled with. But, look, there's one thing that we share with our Board now and our management team -- we're all in this to build shareholder value. And we're all committed to it; we're all trying to find the best way to do it. My only point was, that's what we're about. It's kind of like my response to Dave's question about investment in growth. So we've told the world that, if there's some way of generating shareholder value now that's reasonable and attractive, there's not going to be barriers to our Company considering it.

Understood. That's very helpful.

And just -- the only quick followup I have -- the $1.5 billion ATM, to reduce I think, quote, ongoing indebtedness, unquote -- is there a particular focus such as some of the shorter-dated maturities? Or how should we think of the proceeds here?

No. It's going to be used in an overall management process of what makes sense. We had a later slide that showed that we basically covered our maturities through 2017 and so we're going to be examining how to manage those maturities for 2018 forward, and this will be part of the ingredients that go into that analysis for it. But there's nothing specific that we've targeted for right now.

Understood. And good luck. Thanks very much.

Thanks, Jeremy. Appreciate it.

Our last question comes from the line of Lucas Pipes with FBR and Company. Please go ahead.

Good morning, everybody.

Richard, earlier in the call you mentioned trigger dates in Indonesia in fairly short order -- August 8 and January again. And I wondered, would you also expect a final word, so to say, on the smelter? And also the progress on the divestiture within that time frame, of -- call it six months or so?

Okay. Thank you, Lucas.

Those two specific issues are part of a package of resolving our contract situation. We've been very clear with the government, we can't build a smelter without a contract extension. That is a major construction progress; we've done a lot of work on it. We've got site selection done, we're working with preliminary engineering, design, we've got a real clear view of what would be required, but we can't spend significant capital on it without having a contract extension.

Just think about it. You know, we start today, the smelter construction period extends at least into 2019; and if you don't have assurance on your contract, you're not going to build a smelter and not have that assurance. The same way with divestiture. We've indicated a willingness to invest, even though our contract of work has no requirements that we do legally. In terms of trying to meet the aspirations of the people of Indonesia and its government, we've said we would divest an incremental 20%-plus. But, again, that would only happen if we have a contract extension.

The valuation of this business -- if you just say we got a contract through 2021 -- is unreasonable, based on the investments that we've made. Investments we've made have been to develop this resource for the next 25 years; and for our shareholders, we couldn't sell it without getting a return on those investments and a fair valuation for operations extending over the next 25 years. So that's conditional on the contract as well.

Got it. That's helpful. Thank you.

And then my second question is -- regarding 2018, I wondered if you have maybe a date in mind for issuing that initial guidance? I'm looking forward to how production would evolve longer term, given Grasberg, and then also on the O&G side of investments there. Do you have any data mind for disclosing that 2018 production outlook?

Well, we do disclose five-year outlook for Grasberg, so you can see the impact in between 2017 and 2018 in Grasberg, principally on the gold volumes. And we'll be updating our numbers and we'll get -- we haven't set a date for disclosing 2018 on a consolidated basis, but the biggest impact you'll see is the decline at Grasberg in 2018.

And that's slide 30, Lucas.

Yes. Got it. Cool. Well, thank you very much.

Let me just say one thing about slide 30. It's out of perspective because we've always said -- I mentioned this earlier -- we were always going to have these exceptional years in 2016, 2017 because we're down at the bottom of the pit, high grades, no stripping, et cetera. So historically, we never expected, as we first got into this expanded operations at Grasberg in 1998, to be able to have this level of production of copper and gold after the pit expired. The resource has grown so much, the way that we process it has been established, so these numbers are relatively consistent with what we had before these exceptional years in 2016, 2017. So the resource is very large, in terms of both the copper and gold production, that the unit cost will be low. It's a world-class asset. Beyond 2017.

Great.

I think also, just one followup on that. It also is going to be market-driven as well. We still have some production curtailed, and so that'll be -- our mine plants will be reviewed on an ongoing basis depending on market conditions. So we've got some -- both in North America and South America, we've got some production still curtailed.

And just as a point of information, this is net of Rio Tinto's interest here. After 2021, Rio Tinto has 40% as a joint venture partner in this. These numbers that you see on slide 30 are not consolidated, but net to Freeport.

Yes. Got it.

I'll now turn the call over to Management for any closing remarks.

We could go on forever and some might say that indeed we have today. So in any event, we wanted to try to answer your questions. We appreciate your attention, and we are available to follow up through David Joint if you have further questions. Thanks, everybody.

Ladies and gentlemen, that concludes our call for today. Thank you for joining us; you may now disconnect.