費利浦·麥克莫蘭銅金 (FCX) 2016 Q3 法說會逐字稿

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

At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session.

(Operator Instructions)

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

Thank you -- good morning, everyone. Welcome to the Freeport-McMoRan third-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 www.FCX.com.

Our call today is being broadcast live on the Internet and anyone may listen to the call by accessing our website homepage and clicking on the webcast link for the 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 would like to remind everyone that today's press release and certain of our comments on this call include forward-looking statements and actual results may differ materially. I would like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in our SEC filings.

On the call today are Richard Adkerson, Chief Executive Officer. We also have several members of our senior operating team in the room including Red Conger, Mark Johnson, and Mike Kendrick. I will start by briefly summarizing the financial results and then turn the call over to Richard, who will be reviewing our recent performance and outlook.

As usual, after the prepared remarks we will turn the call over for questions and answers. Today, FCX reported net income attributable to common stock of $217 million or $0.16 per share for the third quarter of 2016. Our results for the quarter included net gains totaling $39 million or $0.03 per share, which reflected a nonrecurring tax credit partly offset by the impairment of oil and gas properties.

After adjusting for this net gain, third-quarter 2016 adjusted net income attributable common stock totaled $178 million or $0.13 per share. Our EBITDA -- or earnings before interest, taxes, depreciation and amortization -- for the third quarter totaled $1.35 billion. Our consolidated sales -- including the volumes from Tenke Fungurume, which is being reported as a discontinued operation following our agreement to sell our interest -- totaled 1.2 billion pounds of copper in the quarter, 317,000 ounces of gold, 16 million pounds of molybdenum and 12 million barrels of oil equivalents.

Our copper and gold sales were lower than our July estimates, principally reflecting lower mining rates at the Grasberg mine, which affected the timing of access to higher grade ore, which we expect to recover in future periods. Our average copper price during the quarter was $2.18 per pound. That was below the year-ago average of $2.38 per pound.

Gold prices averaged $1,327 per ounce during the quarter, which was above last year's third quarter of $1,117 per ounce. Our average net unit cash costs, net of byproduct credits, totaled $1.14 per pound of copper in the third quarter. We continued our trend of reducing cash costs, they were $1.52 per pound in the third quarter of 2015.

Operating cash flows during the quarter totaled $980 million. Those cash flows exceeded capital expenditures of $494 million during the quarter. As we previously reported, we commenced the registered offering at the market equity offering of up to $1.5 billion of common stock during the third quarter.

During the quarter we sold 33.5 million shares of common stock for gross proceeds of $415 million which averaged $12.39 per share. We ended the quarter with consolidated debt of $19 billion, and our cash grew to $1.1 billion at the end of the quarter. We had no borrowings under our revolving $3.5 billion revolving credit facility, and as you'll see in the slides, we have very little in the way of near-term maturities.

We had 1.36 billion common shares outstanding at the end of the quarter. As you'll see in our release and as Richard will be discussing more in-depth in his presentation, we had significant asset sale transactions that we expect to complete during the fourth quarter. A total of $5.2 billion, which includes the previously announced transactions for our Tenke Fungurume stake as well as oil and gas assets including the deepwater Gulf of Mexico and our on-shore California properties.

I would now like to turn the call over to Richard, who will be referring to the materials -- slide presentation materials on our website.

Thanks, Kathleen and good morning everyone. We are here with a beautiful sunrise here in Phoenix, and it is a good way to start our call off. I want to talk about where we've been and what we've accomplished here in 2016.

It was a year ago when our Board acted to restructure our Board and return our focus to our global leading copper business. And during 2016 we have made some significant accomplishments and we've positioned our Company for the future with these significant copper resources and with an improved balance sheet. But before I really talk about that, I want to address right at the outset the reason why our copper production volumes in this quarter fell short of the estimates.

As you know, we are mining in the last phase of the Grasberg open pit. In some ways it is hard to believe, but we started developing it in 1990, and here we are at the very end of the pit. It is at this point, physically a very confined area right at the bottom of the pit. The ore body extends lower, but we are going to mine that as an underground operation.

But we have current mining in an area that is constricted but it has extraordinarily high grades of copper and gold and these grades are increasing as we mine. During the quarter, our planned mining rate, the actual physical material we moved, that was about 15% short of what we had planned. As a result of that, we simply did not access as much of this high-grade ore as we expected and what our plans projected.

We will talk more about this later and we are certainly disappointed with this mining rate. A lot of it has to do with some worker issues that we are addressing, and we believe we can manage as we go forward. But we have the equipment, the mine designs, the people, and the ore grades to allow us to mine this material.

So what we are facing now is the fact that we didn't get to it this quarter means it is a timing issue. We will get to it as we go forward. We will make up a lot of it in 2017, it will have an impact in the fourth quarter, and we should finish mining it early in 2018, so this is not a valuation issue or a really significant economic issue, but really a timing issue.

Now looking back, fourth quarter 2015 was a very difficult time, but as we went into 2016, the first half of the quarter was really, really tough as you'll remember. We set out on a path to cut our debt. In response to one of your questions in our year-end earnings call, you pressed me to say what was our target for debt reduction and I said $5 billion to $10 billion.

At that point, to be really candid with you, the market was tough. I really didn't have a clear-cut view of how we were going to do it, but we were committed to do it. We set on this path, and now we believe we have clear sight to reducing our debt by $10 billion and we executed this plan in a way that will enable us to retain a core set of assets that will build a great company around.

It is characterized by good cause positions, long-term growth options when markets indicate that future investments will be needed and it will be and a balance of geographic diversity. So really pleased here, that we have a clear path now for achieving these objectives. As an organization, we were already on a solid path to cut our costs in our capital spending and our global team has really stepped up to this challenge.

We delivered completion of the Cerro Verde project on time and on budget. It was a very big, complicated project, and we moved quickly to adjust our operating plans and our capital spending, and have each one of our operations respond to the situation. Our teams have a long history with this.

The organization has operated low-grade mines in the US for over 100 years, and this has made the team that Red leads, and Mark Johnson leads, really good operators of doing this kind of environment. We operate all of our mines, so we can benchmark our operations and shared best practices and people and resources around the Company and across the portfolio. Our net unit cost averaged $1.14 per pound during the fourth quarter.

This is 25% below last year's third quarter, but before byproduct credits, costs were down 20% over the year. And at each one of our sites, we have really focused on cash flow generation and we look at our performance net of sustaining capital costs and we've been very tough on capital at this point. And despite these low prices, our team is very enthusiastic and focused and energized to maximize cash flows.

During 2015, our CapEx exceeded our cash flows. That was primarily because of the oil and gas business. We worked hard to reverse this and generated $500 million in cash flows above CapEx in the third quarter.

We expect, and are confident we can continue to generate free cash flow over the next several quarters even at low prices. Because we are going to constrain capital spending until the market warrants new investments and that will attribute to our debt reduction -- achieve our debt reduction targets. Year-to-date we have announced $6.6 billion in anticipated proceeds from asset sales transactions.

This does not include potential additional consideration of $680 million. We have to date received proceeds of $1.4 billion and expect to receive $5.2 billion by year-end from transactions that are under contract which we expect to close. These steps will enable us to achieve our de-levering objective with cutting our debt in half by the end of 2017 but keeping a really strong set of assets that over the long run will enable our shareholders to benefit as the market recovers.

Slide 4 is a summary of our recent announcements for our oil and gas transactions. You recall that at the end of 2015 we announced a process to evaluate options for this business. Our Board gave special financial advisors and we went into the marketplace to see in the first quarter if we could find a buyer for the whole business.

That was a really tough time to try to find someone to buy a set of assets like we had in oil and gas business -- it couldn't have been worse. By the end of the quarter, the first quarter of this year, we had concluded that we would likely retain these assets for a longer period of time and we would hold onto them and wait for market recovery. At that point, we reorganized our management of our oil and gas business, we changed it from being a standalone, separate business, to being a division of our Company.

We put together, from the existing group, a really effective operating management team and so that was the plan going into it. After the first quarter, and after we had announced what we were going to do, parties emerged with renewed interest for talking to us about buying sets of those assets and so we continued our process of discussions. I can assure you that we talked, we gave everyone in the marketplace the opportunity to come in and talk with us.

People knew it, bankers were out knocking on doors. So we really had a process that exposed these assets to the marketplace. And at the end of the day, we had a competitive process and we reached a transaction in September to sell our production in the deepwater Gulf of Mexico to Anadarko, and then in October we've now announced the transaction to sell our production on-shore in California.

In the aggregate, we will receive $2.6 billion in gross proceeds and $300 million in contingent considerations. And I will assure you we thought long and hard and had active discussions with our Board about selling these assets during this period of weak oil prices, and taking into account the current outlook of oil prices. But the nature of this oil and gas business is such that because of depletion, particularly in the Gulf of Mexico, it would require, over time, continued reinvestment to maintain the assets.

If you didn't do that, they simply go away. Then you have very significant reclamation obligations. And the government's rules for providing financial assurance for those reclamation obligations are changing and requirements are likely to be more significant.

And so we took all that into account and concluded that these transactions were consistent with our strategy and would allow us to focus on what our future is going to be. I can tell you I've read analysts who assigned a much higher value to these assets than what we sold them to, a theoretical value. Buyers weren't willing to pay that.

After a very extensive process that we went through, we got a very attractive prices for us. The purchasers will likely do well with these assets because they are good assets.

But for our Company, considering the total implications financially of continuing to be in that business and hold them, I'm very comfortable with what we did and very pleased that we were able to get that done. So that is summarized on page 4 and I will be happy to answer any questions about it.

Now, we continue looking at page 5 to progress -- the sale of our Tenke asset. You've all heard me say this is an asset that we sold with great reluctance. It was a great long-term asset.

It fit very well in our portfolio and I'm very proud of our team. When we started out in 2008 developing it in a very challenging environment, and going through the financial crisis and working on all the issues of doing business there. It has been a real pleasure to do business in the DRC and work with the people there and see what all our team has done.

But it is also an asset that value is going to be realized over very long periods of time and we were able to find a buyer at a valuation that's attractive in relation to near-term cash flows. China Molybdenum -- privately owned Chinese company that's making global investments in the mining industry is progressioning their transaction. The process has gone smoothly.

It is a public company, not a state-owned company and they have gotten their shareholder approval and other regulatory approvals within China that was necessary to go forward with the transaction. Where we are today, there's still a condition remaining to close, is resolving a transfer right that our minority partner, Lundin Mining has in the property and the contract is called a right of first offer or ROFO. And we've been working with China Moly and Lundin to resolve this.

We currently extended the timeframe for resolving it to November 15. You've also read that Gecamines, a state-owned mining company in the DRC has asserted that it has preemptive rights to this transaction. The transaction itself involves entities outside of the DRC at a different corporate level.

We disagree with Gecamines' assertion on this and our legal advisors. But we are working with China Molybdenum, with Lundin, with Gecamines and with the government so that we can all find a way forward to work together to resolve this issue. China Molybdenum has strongly expressed their commitment to closing this transaction as soon as possible and we're working together to find the appropriate resolution for the Lundin ROFO.

We still expect to close the transaction in the fourth quarter. It is $2.6 million in proceed, and $120 million in contingent consideration and we're also giving them exclusive rights to acquire an exploration property we have in the DRC and a downstream cobalt business. All of that is working to get closed in the fourth quarter.

So putting this all together on slide 6, you can see the aggregate steps that we have taken. If we look at the completion of these asset trails and sales transactions, completion of the previously announced $1.5 billion at the market offering, which to date we've completed about 25% of that $1.5 billion amount. Execution of our operating plans we expect to achieve our debt targets by the end of 2017, and we're well on our way of doing this.

We have the portfolio of remaining assets that we want to keep. We are not planning additional divestments. We may take some steps to deal with the remaining assets in our oil and gas business, and we are prepared to divest at Grasberg an additional roughly 20% interest pursuant to our discussions with the Indonesian government.

That is contingent on, conditional on, getting our long-term rights extended on the basis of giving us fiscal and legal surety, but we are committed to the government to sell an additional 20% interest. That is not in these numbers. At the end of the day, we will have a reasonable balance sheet an industry-leading portfolio of copper assets that would be available for long-term development, and these are the sorts of assets in the copper business that at best are very, very difficult to replicate, if at all possible.

So looking at those assets, on page 7 is an overview. We will have seven copper mines which will be led by Morenci, southern copper mines in North America, which will be led by our flagship Morenci mine, which is a fabulous operation. These mines are very long lived and give us long-term optionality on copper prices and future investment opportunities.

We will have two mines in South America. The Cerro Verde mine which today has the largest processing facilities globally, and is operating very well. And the El Abra mine in Chile, which has very significant long-term growth opportunities for us, as well as Grasberg.

We've managed these assets successfully over a long period of time at different price environments, and within these mines we have significant growth opportunities that we'd be prepared to pursue when the time is right. We show this on page 8, and this is our copper sulfide development opportunities -- an alphabetical listing, not a priority listing. We are still assessing from a priority standpoint which ones we would attack first.

Even though we are not spending capital on these projects, we are spending efforts to develop plans for future investments. They are sulfide opportunities that we have identified through our exploration drilling and exploration analysis with very large ore bodies where we could take advantage of existing infrastructure to add on to processing facilities that will allow us to develop these in a profitable way.

Now, copper market commentary and copper prices at today's levels is still very low and reflects the global economy and slowdown in China. But stepping back, the surpluses that were previously predicted are lower than what was expected. We've had recent supply growth and there are still a couple of projects being completed.

We were a big part of that. We had three big projects that we started in the 2010 timeframe that have been completed now, and with the current projects being finished, the recent supply growth is not sustainable. These long periods of low prices will impact future supplies.

Wood Mackenzie is showing a 4 million ton decline from existing mines and in the next coming years, 2025. The top 10 mines in the world today produce less than 5.5 million tons of copper a year. And Wood Mackenzie fills the incentive price to develop new mine supplies on the order of $3.30. Inventories have risen during the quarter, reasons for that level still remain relatively low by historical standards, and when you look at the total marketplace relatively -- or to say absolutely small increases in demand or supply disruptions could well move the market to deficit in a short period of time.

Page 10 is a slide, I don't think we have used recently but we have used over the years, which shows the 10 largest mines in the world in terms of reserves and copper production. We have three of those mines at Grasberg, Cerro Verde and Morenci. You can see -- what I referred to earlier -- these top 10 mines in 2016 are producing less than 5.5 million tons a year.

So to replace 4 million tons in the future in terms of what you're looking at, is really a significant challenge for the industry. Other than Oyu Tolgoi and Las Pelambres, Grasberg is the most recent discovery in 1988. Many of these mines were discovered back in the 1800s -- and here Grasberg completing mining of the open pit this year.

The point is, mining world-class mines is extremely rare and now we're in a period of time where -- and this is where we have gone through over the last 15 years, extensive exploration when prices were high and companies were investing. Even with all this investment, finding big new mines is really tough and having these kinds of mines in our portfolio is going to prove very valuable, I'm convinced, over time.

We haven't had any big technology revolution in the copper mining business. We made progress with technology and so forth, but copper as a commodity is very tough to replace. We haven't seen any Shell Oil-type developments in our business.

In fact, we are seeing SX/EW opportunities dry up and new opportunities are low-grade, and sulfide opportunities which require a lot of infrastructure and development, mining a lot of material to get the copper like we're doing at Cerro Verde. Now, what are we going to be doing in the meantime before we start reinvesting again?

We are going to look for every opportunity we can to continue to decrease cost and increase production. One of these things, and our challenge now. You see in our data we will have a fall-off in production in Grasberg in 2018 as we make the transition from the pit to the underground at the Grasberg block cave.

And so we challenge ourselves to mitigate these production declines while we spend a minimum amount of capital. In the meantime, one of the things we're looking at is pit wall designs to optimize our slopes to steepened pit angles to minimize stripping and add ore. This can reduce cost as we add ore, and we are having a strict adherence to doing this in a safe way.

But this is just one example of what we're doing to see if we can find ways of maximizing production safely at a time when we're going to be making this transition and we will be reporting to you on this as we go forward. I mentioned page 12 talks about Grasberg. We had to deal with labor grievances that had to do with some bonus issues and some issues about management, supervisor relationships with the workforce.

We had a 10 day work stoppage in late September, but this had caused us issues relating to worker productivity for a longer period of time and it was a principal reason why we had a shortfall in our mining rate. As I talked about earlier, this is a timing issue. The ore remains there.

We are not seeing any questions about grades in the ore, or its availability, and so we've developed new plans which we shared with you for how we will make up this ore that we have failed to mine in the third quarter. And this carries over, because grades are increasing and so forth as we delay this.

It has an impact on the fourth quarter but -- and it will extend by some period of time how long we will be in the pit and it now goes into 2018, but we will mine this ore and the economic impact will not be significant. We continue to have discussions with the government. There are two really key issues.

One is an existing regulation in Indonesia that prohibits exports of ores, and the government has defined copper concentrate as an ore, even though it is a commercial product which captures more than 90% of the value of copper metal. Under their regulations, they call it an ore, and the existing regulations prohibit the export of ore beyond January 2017.

There is a recognition and government that this needs to be addressed and I believe it will be. And we are working actively with the Ministry of Energy and Mines and other government officials on this issue. And then beyond that, the key issue for us is having the extension of our operating rights beyond the primary term of our existing contract which extends to 2021.

Under the terms of that contract, we are entitled to two 10-year extensions on the same terms as in the contract, and the government has agreed that it will not unreasonably delay or withhold approving that extension, but it has not been approved yet. Those are the two things we're working with.

Then a lot of political changes in Indonesia that have affected this, but we have -- we are committed to having a good working relationship with the new Minister, new Vice Minister and the Ministry of Energy and Mines and with the President and other government officials, so we are working amicably to address these issues. It is important for Indonesia as well as for us, and particularly important for the province of Papua. Page 13 shows our adjusted mining plan.

You see the schematic of the pit and the underground Grasberg block cave. The existing underground production coming from the DOZ and the DMLZ mines, so we adjust this every quarter and you can see what our new outlook for copper and gold production is coming out of Grasberg. In the appendix, longer-term projections you can see that.

Our outlook for 2016 now is 4.8 billion pounds of copper for the year, 1.26 million ounces of gold and 73 million pounds of molybdenum for the year. Site costs net of by-product credits of $1.20. Operating cash flows at $2.10 copper in the fourth quarter will be $3.6 billion, [leaves] $0.10 change in the fourth quarter have a delta of $150 million.

And our CapEx for the year of $2.8 billion, including over $1 billion for oil and gas, which was actually a carryover from spending that was done in 2015. Our sales profile for going into 2017 is shown on slide 15. You can see both our copper production.

This takes out Tenke and the incremental interest that we sold at Morenci to Sumitomo earlier in the year, but the gold carryover from lower volumes in 2016 into 2017 and into 2018. Page 16 shows 2017 EBITDA and cash flows, this excludes all the oil and gas business essentially with the deepwater California sales. It excludes Tenke, it excludes the incremental interest at Morenci.

And you can see EBITDA at $2 just under $5 billion; to $2.25 just under $6 billion; and $2.50 just under $7 billion. Operating cash flows of $2.6 billion, $3.4 billion, and $4.2 billion within this range of copper prices. It excludes working capital changes, we expect a positive working capital impact in 2017.

Capital spending, you can see just how our efforts we undertook cut capital is unfolding. I mentioned of the $2.8 billion for 2016 falling to $1.7 billion in 2017. That is essentially the spending that we will be doing developing the underground at Grasberg as well as the constrained, sustained capital for the rest of our business.

18 summarizes where we are with our debt structure. You can see, 9/30 we had $19 million of debt and $0.1 billion in cash pro forma for the asset sales transactions. But with no additional equity from the ATM offering, we would end the year with $3.3 billion in cash and our maturities for 2017 are $1.3 billion.

We have ample cash to deal with our near-term liquidity, and a good set of assets with dealing our longer-term balance sheet issues. We talked at the beginning of the year about execution and we are continually focused on that. As I mentioned, we are disappointed about the mining rate issues at Grasberg but are working on that every day.

We're working on securing our longer-term rights in Indonesia every day and feel good about our plans for debt reduction, building long-term value and safety in our business is a challenging part of it. We certainly had our challenges in the third quarter and that is one of the first things we talk about whenever we meet with the team and that overrides everything we do.

Thank you for bearing with me on this overview and I look forward to your questions.

Operator, we are ready for questions.

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

(Operator Instructions)

Matthew Bourne with Barclays.

Good morning, Richard and everybody.

Good morning, Matt.

So let me ask on this -- you had the mining rate issues this quarter. You had a labor stoppage and the implication seems to be that the problems over the third quarter that you saw are going to hamper production in the fourth quarter, effectively push some of that back into next year.

Can you clarify, are you more constrained in what you can produce over fourth quarter because of these enduring issues? Or does this move around out of any kind of conservatism? I'm just trying to understand how much of this shift is you responding to conditions at the mine? And how much, if any, is any market conditions, positioning as you negotiate with the Indonesians, et cetera?

There's just a physical aspect to it. As we progress our mine plan at this stage, we get to higher grades as we go forward. The fact that we were not able to mine the material that we planned to mine third quarter, means its just simply going to take longer to get to the higher grade material that we had originally planned to mine in the fourth quarter and that gets pushed out.

We can't do more to get to it quicker, because we are constrained by physical space. So our plan called for us to do everything we could do all along, and when it gets pushed back, it gets pushed back over time, physically. So it's not -- it's really not a strategic or tactical decision, but it's a physical consequence of what we face.

Now, we know we've got to be diligent about keeping our equipment operating and available, and so forth because delays in that can have an impact in the future. You know we're working hard to address these issues of concern by our workers. We've made some responsive steps to the issues they raise in terms of the bonus, in terms of the relationships between supervisors and the workers and that is an ongoing process that we will have to work with.

It is a complicated labor situation there in Papua with the nature of the workforce and how it's changed over the years. All of this requires a lot of attention and a lot of work. What it doesn't change is the high-grade ore that is there. That remains there and it is a question of getting to it as quickly as we can.

We want to do it -- safety is the first issue, but we're not trying to do any of this in terms of positioning with the government of Indonesia. We want to operate in an efficient, straightforward way. That's been our history and that's going to be our future. While we're doing this, I might add that our work in underground development is going extraordinarily well.

We are meeting our targets in terms of development and putting things in place. We are getting approvals from the government to do what we need to do. That is a big project that just kind of gets out of the spotlight here. But in total over time it is a $15 billion investment project.

And we're spending roughly $1 billion a year, and that is the future for us and our partner Rio Tinto as we go forward. As we are dealing with these important issues near-term in the pit, we are also keeping great focus on the underground development and it is going very well.

Matt, you can see -- this is Kathleen, on slide 12 we show the grades of both copper and gold in the open pit and because of the variability in the grades, we will be mining in the fourth quarter material that previously had a higher grade, but because we got behind in the third quarter, we will be mining material that we thought we were going to mine in the third quarter, that has a lower grade.

We do expect to get to all of it, because the open pit will be transitioned to the underground in 2018. So as Richard talked about, it is just shifting out by a couple of months, the access to the higher grade material. And that cascades into 2017 and 2018.

Got it, Kathleen. I appreciate the clarity there. Let me follow up with a question for you if I could? Looking at the language in your filings, there is the springing collateral trigger?

If the $3 billion threshold on asset sales isn't reached -- and you have been very clear, laying out your expectations for things still moving for the fourth quarter -- but in a bad outcome, let's say something happens with Tenke, or anything happens with Deepwater, what kind of collateral would we be talking about? What would that actually look like, numerically?

Well, the terms of our amendment that we did with the bank in the first quarter of this year have a springing collateral, really, for all the assets. And so our plan was, if we didn't get to the sales proceeds, the $3 billion, that we would sit down and discuss with the banks the nature of the collateral. As it reads right now, it's basically all the assets.

But we are very confident that we will be able to meet that task. We've got three transactions. We've already completed a significant amount of proceeds already in the first part of the year, so we're confident that we will be able to meet that task and avoid the need to grant the collateral, the springing collateral test that you referenced.

Great. Thanks very much, folks.

Matt, I'll just say that we have great relationships with our bank group and this goes back for years, or how we manage things, historically after the Phelps Dodge deal, deleveraging, how we manage the financial crisis in 2008, 2009, how we've dealt with this situation following the oil and gas leverage. And so we work very well, we have a lot of credibility. So we will continue to work together to represent each other's interests on this.

Thanks, Richard.

Chris Terry with Deutsche Bank.

A couple of questions from me. Just following up on Grasberg, thinking about the transition period between the open pit and the underground? So your latest mine plan, does that have the open pit finishing around the end of 1Q 2018? Is that correct? And you said that transition would be 2Q 2018 and is the underground all on track for that?

The answer is yes. Mark Johnson is here, he can --

The Grasberg block cave development has gone on without any interruption. We expect to have the ore flow system, which is one of the main systems for the Grasberg block cave to come online. That will be available to us at the end of 2017, upon advance of the start of the block cave.

The nature of the block cave mining is such that we will not initiate the cave, but we can do a lot of the preparation for the cave prior to the pit completing. As soon as the pit is complete, then we start a process of initiating the block cave and that ramps up process to take place with capacity coming online as we develop more drop points.

So it is on track. The DMLZ, we mentioned the cave earlier this year, and that continues to advance and we are well-positioned for that mine to continue to grow and capacity. By the end of the year we will be at 10,000 tonnes a day coming out of the DMLZ. By the end of 2017 that will be up to 25,000 metric tons a day. Both of these mines will be in a ramp-up process over the next five or six years to get them up to full capacity.

All right. Thanks for the color, and then the last question from me, just on the SG&A? Thinking about that going forward post- the two transactions in the oil business, have you got any more updates on that or thoughts about how 2017 into 2018 might look?

Yes. We are going through that process now, and obviously taking the steps to deal with the significant SG&A we had in the oil and gas business. But we're also continuing to look at our corporate G&A and so forth and our overall targets to return this to levels that were in place before we did the oil and gas deal in trying to find ways of reducing that.

Okay. Thanks, Richard.

Thanks, Chris.

Tony Rizzuto with Cowen and Company.

Think every much. Hello, Richard, Kathleen, Red, and Mark. First of all congratulations on all of the progress so far. You have really been doing some tremendous things so kudos.

I wanted to drill down in Indonesia and I was wondering, Richard, how would you describe the overall tenor of your negotiations with the government these days? Obviously, there have been a lot of moving parts with cabinet officials, et cetera?

Okay, and Tony, I know you are well aware of all this, but I just want to be clarifying, we haven't really been engaged in negotiations. We set a plan in the mid-2014, when we signed a memorandum of understanding about how to go forward. And that's when we agreed to pay higher royalties to divest up to 30% to develop the smelter.

In return for the government approving the extension of our contract beyond 2021 on the same fundamental terms as our existing contract and agreed to allow us to export. Since that time it's been more of a question of talking with the government about getting that approved as opposed to continuing negotiating terms. That MOU was extended once, in early 2015.

In October 2015 we received a letter from the government basically affirming all that, so there have been lots of political changes in Indonesia, but we have not been engaged in negotiations. It's just been more of a question of working with them to put in place the agreement that we previously reached.

I'm trying to get at, has there been, in your discussions, has there been a change in tone? Are they becoming a little bit more accommodative, do you think, it would be your expectation that we could see tangible progress on the export situation?

Obviously you got the license right now, but would your expectation be that a 2017 situation would be resolved maybe in advance and not having to go down to the wire again? Or is that --

Well, I went back and I read the transcript from last earnings call, and we talked then about needing to get the August extension of our export permit at the time. We got that.

Now we are faced -- and as these all have done, its gone down to the wire. Now we are faced with this January 2017 broader issue. It is not just a question of getting a permit for our Company, but it's a regulation that affects a number of industries. It is not just copper, but it affects other industries, as well. And the tone has been a recognition by the government that it needs to be addressed.

How they address it is a matter of great interest for us. And as has been the case, there are a lot of different views expressed publicly by members of the DPR and certain members of the government. But we believe in our discussion there is a recognition that this needs to be addressed and will be addressed. The discussions that we've had, the President has been very positive about the need for foreign investment, the need to treat existing investors well, the Vice President recently made some comments along this line.

We've had the situation of reshuffling of the cabinet and the unusual situation with respect to the Minister, and so we're just having to deal with all of that. And we keep emphasizing with the government our history of investments, the fact that we're providing work for over 30,000 people in Papua, the benefits that our operations have provided and will continue to provide to the government, and the government's fiscal situation is such that this is important.

Moreover, the role we pay in Papua. We are over 90% of the economy in the region -- in the region where we operate. The majority of the GMP in the province itself. So all these things are things we talk about and have talked about for a long period of time and that is what is going to lead to a positive resolution of this for us.

But the timing of it, Tony, it will happen but it may go to the wire.

Yes, and then just the new mining law -- I understand the new mining law is being drafted? I would imagine the export ban is obviously part of that is going to be addressed? And would it also be conceivable to see -- the government has indicated that you got the 2021 expiration of the current cow? That you put it really able to negotiate that until two years before the end of that initial term? With this conceivably be part of this new mining law that is being put together at the moment?

Well, there's actually -- I can identify three principal ways for the government to deal with this. One is changing the mining law, as you point out. That is complicated. The present law, in 2009 took several years and it was very complicated to get negotiated.

The government can deal with these issues also through changing regulations. The existing mining law has the flexibility of extending our contract and allowing exports and so forth without changing the law, but changing regulations, which is in the authority of the administration.

There's also a process of where the President can issue executive orders called purviews. So the government has alternatives of how to deal with this. It is going to be a challenge to get a new mining law done by early January, considering what has happened to date. We are just prepared to work with the government in whatever approach they decide to use.

The challenge of not addressing our contract until 2019 is, one -- we are simply unable to invest in the smelter without having our long-term contract assured. That is a huge investment, a significant investment, and we simply can't do it without knowing that we will continue to operate beyond 2021. We have also agreed to divest an additional 20%, which is a significant amount of value and clearly we could not invest with having uncertainty about our position to operate beyond 2021.

So offsetting -- and that's a regulation. That is not in the law, this two-year deal. Is these things, that resolution, there's there will be pressures to have a resolution with that before 2019.

Thanks for all the color, Richard. Appreciate it.

Thanks, Tony.

Orest Wowkodaw, Scotiabank

Good morning. I still have a couple of follow-up questions on Grasberg. If the export ban is upheld as it currently stands, can you give us an idea of what percent of the concentrate would be unavailable to go to Greswick next year and could be impacted?

Yes. It is a very large amount. Greswick is no more than -- could absorb no more than 40%, probably a little less than that. And as a practical matter with today's copper prices, I think most of you know that we were surprised when the government put in place an export ban in January 2014.

That lasted seven months. We continued the total operation at that time. It ended up costing our Company and the government, the government gets a bit more than 50% of the cash flows out of this operation -- it cost each of us $1 billion during that timeframe.

At today's copper prices, we simply could not continue our operations like we did in that timeframe. We would have to make very significant adjustments to employment and spending and so forth, so it is a very important issue for us.

So the export ban stays in place? You've reduced production pretty quickly?

We would have no choice.

In terms of the guidance for CapEx, I assume the 2017 guidance excludes any smelter spending, is that correct?

It does not include smelter spending.

Okay. In a terms of your long-range plans at Grasberg, it sounds like you're suggesting that you will continue to spend $1 billion a year developing the underground? Even without the cow extension -- is that the right way to think about it? It is with the smelter that you are holding back on?

That is correct. We have gone through several assessments over time about whether to continue spending or not. We've done it on the basis of assurances that we've received from the government in the MOU and in the October 2015 letter. That gave us assurances, which we have taken into account, as well as the negative aspects of suspending spending.

To suspend spending would result in delays of the development that Mark Johnson went over in terms of having the Grasberg block cave ready to go on stream when we complete mining the pit. It would involve significant employment reductions, and we operate in a very sensitive area in Papua that would have unknown consequences, and put a lot of people out of work.

It would require dismantling our team that we have there and the time it would require to put that team back together. We've relied on the assurances from the government to keep that spending going.

And if you decide that there is no resolution on the horizon and you do decide to pullback the spending, where would we see that in terms of the production profile? Would it be 2018 or 2019 where we would see the impact?

No question. If we don't have the block cave ready to start ramping up it would have -- you just push that ramp up back. You can see the time required to bring the new mine at Oyu Tolgoi up stream.

But have that same ramp up issue. It's just that is fundamental for block cave development. And we can't start caving until we finish the pit.

Got it. Thank you very much.

All right. Thank you.

Andrew Quail with Goldman Sachs.

Good morning, Richard and Kathleen. Just got a couple of quick ones, mainly just on net debt? You guys flagged the $5.2 billion in gross proceeds? I just to make sure I'm reading this right? That includes the preferred dividend and if we take that out, its more like a $4.6 billion that you guys would expect to receive in Q4?

Yes. We have a $582 million requirement for redemption of a preferred at a subsidiary level that would net out of those proceeds.

And that is obviously included in page 6 when you are talking about your net debt next year in different copper prices?

Correct.

And my last one is obviously you also talked about your about 25% of your at-market equity offering? Given the price that you guys have disclosed in your average share prices, is that something that we should look for in the next six months that you guys would be more comfortable transacting it?

You know, it's just a question of one of the reasons that it attracted us to this kind of equity rate is that we can time when we go in the market and not. So we executed it, we backed off, and we expect over the next six months or more to be back in the market when the market is -- when we feel better about doing it. It is totally at our discretion.

And one more, sorry? Said you guys, obviously, the balance sheet is well on the way to where you wanted to be? Does that mean that there's no more asset sales over the next 12 months?

Well, I think we like our assets that we have in our mining business and we would not expect to have sales there. We have some relatively minor oil and gas assets that we may find ways of doing transactions there. But no, we are basically done with asset disposals.

Okay. Thanks very much.

Thank you, Andrew.

Your next question comes from the line of Chris Mancini with the Cabelli & Co. Please go ahead.

Hello, everybody. Just a quick question on the copper sulfide opportunities. With this essentially entail, if you were to go ahead with a modification to the backend of the plant and then lay backs on your current pits? Is it similar to what you did at Morenci?

And then, what copper price do you think you would need to incentivize the development of these sulfide opportunities? Like for example, if your balance sheet were, if you had no net debt for example, would you even potentially proceed with some of these projects now?

I think it would be unlikely to do it now, because I will answer that because we are at $2.10 copper and there is still significant questions near-term about where the global economy is going, where China is going, so it's not just us. You are not seeing others doing projects. Some are completing projects that they started some time ago.

You know, even if we had all the cash in the world, we would it be pursuing these projects as we speak right now. Now, the development of sales varies depending on the ore body. Let's take, for example, El Abra, which has, and we didn't know about this when we acquired Phelps Dodge, but subsequent exploration has shown an enormous sulfide resource there.

And to date that operation has been an SX-EW operation, oxide and sulfide so that would be a Cerro Verde type project with a very large mill required, you would have a desalinization plant and the transport of water to more than 10,000 feet. It is a big capital project.

At Lone Star, we have an existing operation there at Safford, and that would be done in stages of where we would have an oxide development, which actually would be stripping us down to a sulfide project which would require a major mill investment. At Baghdad, We have a big sulfide resource, we require mill expansion, saline expansion, and investment in water access.

Every one of these has its own story and there is trade offs. Lots of advantages in the US today that weren't there historically in terms of energy cost, labor flexibility. So it is really a matter of trade-offs. We are doing technical work so that we be in position of doing it. It would require a long-term copper price $3 or better to have us make these sorts of investments.

Okay. Great. So it's the kind of thing where you think of this as optionality and when the copper price does eventually reach $3 you will start potentially thinking about deploying capital to exploit all the vast resources there?

Right, it is going to be an outlook. We will progressively do steps to prepare ourselves because all of these are very long time frames. We are a view of the industry. This is just not us.

This is the way the copper industry is, and so these delays in spending are going to match up with declining grades, depletion of existing production and I'm not saying this is this year or next year, but a looming shortfall. Unless you see the world really turning upside down economically, it's clear that there's going to be in need for copper, it's going to require a significant price increase to justify the spending, and that's why we feel very good about our long-term strategy.

Okay, great. Thanks a lot.

Next question comes from the line of Karl Blunden with Goldman Sachs.

Good morning. That's for taking my question.

Just wanted to focus briefly on the balance sheet. You've announced a lot of actions over the last couple of quarters. One thing that a lot of other mining companies have done is issued debt now that the markets are relatively favorable and extend their maturities. Is that something that you'd consider at all, just to get a bit more cash on the balance sheet as you head into a time when in 2018, 2019, 2020 you have quite a few maturities coming due?

We have really been focused on taking debt down. Once we achieve our debt levels that we are targeting, we will look to what makes sense in terms of any refinancing. But we've really been focused on taking absolute levels, debt levels down as opposed to refinancing existing debt.

That's really our priority, is to reach these targets, which we are well on the way to. And then we will look opportunistically as to whether we should take steps to extend debt maturities once we get to the targeted debt levels.

That makes sense.

The cost of our debts changed significantly over the last six months to nine months too. So that has been a factor and we believe as we improve our balance sheet, we could well be able to do what you are suggesting and lower costs.

I think that makes sense. I think one other low cost option, nearer-term, is as you look to your credit facilities, I saw on page 18 and appreciate the clarity you provided there, the pro forma for the asset sales, it looks like it is your intention to pay down the bank term loan and the revolver as well and keep those paid down.

At some point in time, would that be something that you would consider going to, to get a bit more funding there? Presumably you can do it much more cheaply than in the open bond markets? And do you think you could do that without having to provide a security to those lenders? In other words, could you get unsecured bank lending to bridge you through this period while you are continuing to repair the balance sheet?

Well, the slide that we show repaying the full term loan is really essentially math, the 50% of the proceeds being applied to the term loan. In terms of whether we could get unsecured bank debt today, I think that's a difficult question to answer. The banks are all under a lot of pressure in the sector about regulations and I think they would be looking for a new deal today as looking for security given the company's credit rating.

What we're working to do really is to improve the whole balance sheet and to allow banks, and others as they are looking at the Company, to look at it as it is pro forma for all these transactions. And as we continue to de-risk the balance sheet, we think there are going to be additional options available to us to finance the company long-term and that's what we are focused on.

Got it. Appreciate that. Thanks very much.

Our final question will come from the line of Matthew Fields with Bank of America.

Hi everyone. Just wanted to ask a couple.

One more question on Grasberg, and then a bigger picture question to finish it out, given where we were three months ago with the mine plant in Grasberg and where we are today, it seems like there is a lot of a shortfall and I know that production stoppages are for 10 days are unforeseen. But it seems like you would have anticipated that the physical area of the bottom of the pit would be smaller and that the -- it seems like the shortfall in production that you are anticipating is more than just unexpected stuff. So my question is, what happened that you weren't expecting and is there a chance that could happen in 2017, as well?

Well, our talk about the physical constraints is to explain the consequence of these unexpected things happening. And so we built all that in to the plans that we went into the third quarter with. We absolutely knew that we had unlimited amounts of area and we projected, based on our past experience, on equipment availability, and workforce productivity, what we would achieve. Then we were faced with these issues related principally to the workers and that had the consequence that it had.

We took it into account. We said we were 15% short of our mine-rate, so that's what it was and it had the consequence of changing our production profile. Do we have risk going forward? Yes. Going forward we'll need to operate our equipment well, we've had a long history of doing that. We will have to deal with our workforce. We have been doing our utmost to do that. But yes, that is always one of the risks of our business.

We have a great history of meeting those risks, but it is particularly significant in terms of near-term cash flows because the grades and physical situation of the Grasberg pit. But yes, it is a risk.

Normally, and historically with Grasberg and other open pits, you would be mining in multiple sections so you have a lot more flexibility to make up things. Here it's a very focused area, very high-grade area, so even a small amount of downtime on a truck or a shovel can have more impactful variances than what you have seen historically in another pit or historically at Grasberg.

But we are very confident that while we could have blips in the volumes, we're very confident that over this period of time, relatively short period of time, we will be able to access very significant volumes of both copper and gold. It is not a question of day by day predictions or forecasts, it's really looking over at this period. And we feel very confident will be able to -- we have the plans in place to obtain these volumes.

One thing I would like to add, this is Mark Johnson, is that even though we've had some production delays, deferrals, a couple of things that we have accomplished is that the high walls that we mine are very robust. We have implemented a very comprehensive final pits blasting, final wall blasting process, which will provide us possibly some upside on the keeping the pits similar to what Richard had shown over in the slides.

That could provide some upside as the amount of metal we get from the pit. We also put into place a pit dewatering system that essentially we are keeping the pit completely dewatered right now without pumping and that is unique within the mining industry and is going to provide some opportunities for us as we are in the pit bottom to have that water managed in the way that we have and to provide some upside.

One of the other aspects that we are dealing with is that the workforce is aware of the upcoming transition of the workers from the open pit to the underground. I think it has created a little bit of apprehension within the workforce, that we are working closely with the workers and the union to make sure that everybody understands that they are all going to have an opportunity elsewhere within our mining areas. We've got jobs opening up in the underground and some of the other logistics and levy construction.

That's one aspect, too, that were dealing with. We've got about 1,600 people in the pit. We will need about 600 beyond the finishing of the pit mining for a reclamation effort for a number of years. So we're working very closely with the workers to explain what their future looks like within PTFI, but it is another aspect of some of the issues that we've had over the last couple of quarters.

Is that maybe some of the disparity between this mine plan from three months ago and this mine plan is that more worker instability in the fourth quarter?

The Grasberg is quite a -- we have been able to demonstrate the mine rates and what we look at a lot is our sinking rate. How many push backs we mine in a year. I would say we have historically been very aggressive on that. We've had push backs where we do over 18 benches a year.

We based a lot of our mine plans based on that ability, which takes into account the limited mining space and were looking at somewhere to 15 to 16 as we complete the pit, 15 to 16 benches a year. So it's something that we've been able to do before that accounts for space and equipment sequencing. We feel comfortable. We did make some adjustments to our mining rates in the fourth quarter.

Our previous forecast had slightly higher mining rates. We're currently projecting that for the remainder of the quarter that we are going to in the order of 180,000 tons a day. We feel comfortable with that plan. We have some things that we will manage on a day-to-day basis.

We are working closely with their supervisors and communication plans with the workers, so it's -- there's multi-elements of how we are approaching the productivity issues in the pit. We've also brought some resources from Red's team over there. We have a couple of people there now that are helping us look at sequencing and making sure that the pit blasting is going on as scheduled.

We're throwing a lot of resources at it and we understand the importance of it. We are, like I said, focused on the quality of mining. We want to ensure that everything we're doing doesn't limit our ability to complete the pit in a safe and efficient manner.

We are one of the deepest pits in the world, very steep high walls. We've been able to manage that well and we'll continue to focus on that also.

Let me just summarize this. We have to execute these plans and that's what were working on. We have to execute these plans.

If we don't execute these plans, then the ore gets deferred. It is not a big economic issue, because ore is there we'll get it over time but we have to execute the plans to meet these numbers We give you our best outlook in what we are doing and now we have to try do it. If we don't do it, it just means we will mine it over time.

You said you have one last question, Matt.

Yes, you touched on the sulfide expansion opportunities earlier. I am wondering longer-term after the really high gold years at Grasberg and longer-term down the road when you give it more economics Rio Tinto in 2021, can you rank your best expansion opportunities to get copper back up to 4 billion pounds a year longer-term whether it is a sulfide expansions or some new development project or even some M&A down the road?

Well, the M&A down the road is just going to depend on circumstances as we go forward. That is always out there. We are not counting on that, but we will be in the marketplace and see what (inaudible). But really, it is the sulfide projects in how we time them, how we go after them.

We talk about 4 billion to 5 billion pounds a year. We have 100 billion pounds of crude and probable reserve. We have more than 100 billion pounds of resources in addition to that. So we have huge set of resources to work on, to plan, and so we've got opportunities for long-term growth in this business as far as you can see.

Richard, I have one last question. Do you have a cameo in the upcoming Matthew McConaughey movie?

Well, you know, I am interested to see it, because I was living it all and we'll just have to wait and see. They have not signed a release for me, so I don't know. (laughter). But I will tell you listening to Mark, I made my first trip to Grasberg as they were drilling the second drill hole out there in early 1988, and so I have lived through this great ore body and what our team has done over the years and I'm amazed every time I go out there.

In the early years when we fall short we always had another place to go mine to make it up and so we had a lot of these same issues, but we had a lot more flexibility. Now that flexability is gone and that is why we are dealing with these quarter to quarter issues that we have.

Absolutely. Thank you very much for the update.

Now we will turn the call over to management for any closing remarks.

Well, thanks everybody for your interest, and as always if you have any follow-up questions contact David [Joint] and we will get them answered. We look forward to talking to you next quarter.

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