費利浦·麥克莫蘭銅金 (FCX) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Freeport-McMoRan First Quarter Earnings Conference Call.

(Operator Instructions)

I would now like to turn the conference over to Ms. Kathleen Quirk, Executive Vice President and Chief Financial Officer.

Please go ahead, ma'am.

Thank you.

Good morning, everyone, and welcome to the Freeport-McMoRan First Quarter 2017 Earnings Conference Call.

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

Our call today is being broadcast live on the Internet, and anyone may listen to the 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.

We'd like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in our 2016 Form 10-K and subsequent SEC filings.

On the call today, Richard Adkerson, Chief Executive Officer; we also have Red Conger, who heads our Americas business; and Mark Johnson, who heads our Indonesian business with us today in the room.

I'll start by briefly summarizing the financial results, and then we'll turn the call over to Richard who'll go through our slide presentations.

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

Today, FCX reported net income attributable to common stock of $228 million or $0.16 per share for the first quarter of 2017.

We had a number of special items that are detailed on Roman numeral VI of the press release.

They net to an $8 million gain.

After adjusting for these net gains, the first quarter 2017 adjusted net income attributable to common stock totaled $220 million or $0.15 per share.

Our earnings before interest taxes, depreciation and amortization, or EBITDA, for the first quarter totaled $1.046 billion.

We have a reconciliation on the last page of the slide deck, which shows you how we calculate the EBITDA numbers.

We sold 809 million pounds of copper during the quarter, 182,000 ounces of gold and 24 million pounds of molybdenum.

Our sales volumes were impacted by regulatory restrictions on PT Freeport Indonesia's concentrate exports, which began in mid-January, and that resulted in the deferral of approximately 190 million pounds of copper and 280,000 ounces of gold.

As detailed in our press release, we do have approval to resume exports.

We've begun to load ships, and that commenced last Friday on the 21st of April.

Our first quarter average realized copper price of $2.67 per pound was over 20% above the year-ago period, which averaged $2.18 per pound.

Gold prices of $1,229 per ounce approximated the year-ago period.

Our consolidated average unit net cash cost for the quarter for our copper mines averaged $1.39 per pound of copper.

That was essentially similar to last year's net cash cost of $1.38.

We had lower sales volumes quarter-on-quarter, and that was partly offset by higher byproduct credits.

We continue to focus on generating free cash flows.

During the quarter, we generated operating cash flows of $792 million.

Those exceeded our capital expenditures of $344 million in the quarter.

At the end of the first quarter, our consolidated debt totaled $15.4 billion, and our consolidated cash totaled $4 billion, equating to $11.4 billion of net debt.

We ended the quarter with no borrowings under our $3.5 billion revolving credit facility.

At the end of March, we had 1.45 billion common shares outstanding.

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

Good morning, everyone.

I refer you first to Slide 3 where we have a cover -- picture of the cover of this year's Annual Report.

The title is Driven by Value, which highlights our resolve to deliver value to shareholders.

Last year, our Annual Report was entitled Prove Our Mettle.

And in 2016, we did successfully address our excessive debt level going into the year.

And we're in the homestretch of reaching a target that we set at the beginning of 2016.

That was a 2-year target to cut our debt in half.

We have a clear path to doing that now.

And our focus is now generating long-term shareholder values.

We strengthened our balance sheet and our liquidity.

We executed our operating plans.

We successfully completed the major development project at Cerro Verde, which was a significant accomplishment for our company and part of this long-term value proposition that we have before us.

We refocused our business to be a leader in the global copper industry.

We set out with the intent of reducing our debt, but leaving ourselves a set of assets that would provide the basis for future profitability and profitable growth.

The asset valuations that we were able to achieve in our property sales in a very tough market were attractive.

And recent market developments reinforced our optimism about the long-term fundamentals for the copper markets and reinforced our focus on what we're doing.

So we are -- going into this year, we're focused on Indonesia.

I'll be talking about that.

That's clearly a challenge for us, has been for some time.

And I want to make sure I address all of your questions about it and let you know what we're doing about facing that challenge.

With respect to copper markets, Page 5, beginning in second half of 2016, we saw copper prices rebound from -- to higher levels, and many in the industry and observers of the industry expected that.

That reflected improved market fundamentals, driven by Chinese demand, improvement in North America and Europe, and supply-side issues returned to focus.

We had a period of time before the current period of where supply-side disruptions had been less than the historical experiences.

And we had several situations involving important mines, including our Grasberg mine but also Escondida, the world's largest copper mine, which faced a lengthy labor strike.

And these disruptions are a feature of our business, and they will be issues that the industry will face going forward.

Underlying that is a real absence now of major new projects for the industry.

After the recovery from the 2008-2009 recession, a number of projects were initiated.

Most of those have now been completed.

And people in the industry, including ourselves, have deferred spending on new projects because of uncertainties in the global marketplace.

Adding all of that together, you end up seeing a near-term situation where the market is balanced at best.

And over time, without new projects coming on stream and the falling grades of existing producing mines, a significant require for a new copper.

Wood Mackenzie estimated that 5 million tonnes of new projects will be required in the near term future, medium-term future, at least.

These new projects require greater than 3 pounds of copper -- $3 a pound for copper to make them economic.

I'll just note that the top 10 producing mines today only produced 5 million tonnes a year.

So that puts parameters around the extent of the shortfall, projects require 6-, 7- to 10-year lead times.

The new greenfield projects are particularly scarce.

And so we have a looming significant deficit in this business.

And the question is the timing for that deficit, which will be dependent on advancing China in the global marketplace.

Now where we're situated is that our company has significant strengths in facing a market that's going to require new copper.

We'll talk about our business in 2 basic segments now.

One is our mining operations and resources in the Americas, in North and South America, and we'll address Indonesia separately.

But looking at the Americas, we have a set of mines that have significant current production and long-term growth, with long-term established proved and probable reserves and incremental resources of real significance.

We have a lot of flexibility in the way we manage our operations and also in the way that we approach future development.

All of these mines are operated by our company.

And that gives us significant synergies in the way we manage the business and develop the resources.

The investment opportunities that we see are competitive in looking at the marketplace.

We have a flexible and skilled workforce.

In the U.S, we have no unions.

We have accesses to abundant sources of energy.

Again, energy costs in the U.S. have dropped dramatically in recent years.

With the shale oil and gas development, we can leverage our existing infrastructure.

These future development projects will have a relatively low risk associated with them.

So we get strong cash flow generators.

In the U.S., we have a very large, $12 billion approximately, NOL to shelter us from future income taxes.

And so on this chart on Page 6, you can see the very significant reserves that we have available to us and also the significant generation of cash flow that we have from our properties, with very low capital requirements because our assets today are fully developed.

These opportunities that we have before us are significant sulfide projects that's shown on Slide 7. We are doing planning activities.

We won't commit capital to these projects until we have clarity on the global economy and direction, but we're preparing ourselves to take steps.

They're listed in alphabetical order here.

The first project that we'll start on is the Lone Star resource that's adjacent to our existing producing Safford mine.

We're planning a project to mine an oxide cover over a very significant sulfide resource at Lone Star.

That will allow us to extend the production facilities at Safford.

At the same time, we're, in effect, stripping for the -- to expose the sulfide opportunity, which will require significantly more capital.

All of these projects that I believe will be required by the industry over time, they're in our inventory, and how we approach them will depend on market conditions.

The next major project is likely to be either Bagdad or El Abra.

Bagdad has the benefits of the factors about the U.S. competitives that I mentioned earlier.

And El Abra has turned out to be a very significant resource, and we're addressing it with our partner, CODELCO.

And Chino is an opportunity that we're developing.

We're getting more information on this very old mine in New Mexico.

And Morenci and Sierrita are long-term projects for us.

So we have internal development projects for a very long time horizon in the future.

Now turning to our important asset in Indonesia, the Grasberg mine in Papua.

Been a difficult year for us.

In January, the government of Indonesia issued new mining regulations that have caused us significant concerns.

The impact of these mining regulations would be to require us to give up our contract of work in return for our right to export.

The government, through the 2009 mining law and these new regulations, say that you could only export if you have a license, a special license called an IUPK.

And the regulations said, to get the IUPK, you had to give up your contract.

We weren't willing to do that, and we advised the government immediately after that -- those regulations were issued that we would not be willing to do that.

And we entered into a series of discussions trying to find a way to open up an opportunity to have discussions, negotiations with the government, to resolve this dispute.

By mid-February, we had reached an impasse.

And at that point, we began actions to adjust our operations, our capital spending, to reflect a business that could only ship domestically.

And on February 17, we issued a formal notification under the dispute resolution mechanisms of our contract of a series of actions that the government has taken to breach our Contract of Work.

That triggered a 120-day notice period, which extends to mid-June.

After June, we as well as the government would have the right to submit this dispute to an arbitration process as specified by the contract.

We continued discussions with the government.

And by the end of March, the government, through its Energy and Mineral Resources Ministry, amended certain of their regulations that were issued in January to enable us to retain our COW, to return to exports and to receive a temporary IUPK that would provide through October 10th an ability to have negotiations, continued export and leave our COW in place.

We, last week, signed a Memorandum of Understanding confirming all of this, and exports are now -- we're now loading ships to return to exports.

And we will immediately begin negotiations with the government.

And each of us, the government as well as our company, have expressed a commitment to reaching agreement on a long-term solution.

That -- those discussions will involve some very important issues.

They will involve our objective of getting assurance of our ability to operate beyond 2021 to 2041 as provided by our contract on terms that provide stability and assurance on legal matters and on fiscal matters.

The government wants to talk with us about divestment.

Their regulations in January provide for divestment of 51%.

Our contract has no divestment obligations.

We have communicated that any divestment would have to be at fair market value.

We had previously indicated that we would agree to divesting from the current 9.36% up to 30%, and so we will have discussions with the government on the divestment percentage, the process and valuation.

In addition, the government regulations require in-country processing of copper concentrates.

We developed Indonesia's -- with our partners, developed Indonesia's only copper smelter in the mid-1990s, the PT Smelting facility at Gresik, a large, world-class copper smelter.

We -- it currently processes about 40% of our copper concentrate production.

The remainder is exported.

And we will have discussions with the government about developing new smelter facilities.

So all of these things will be addressed as a package, and we will approach this in good faith.

I'm convinced the government will, too.

And the objective will be to find a mutual agreement that each other can accept.

We call it a win-win objective, and that's what we're going into to achieve, and those -- that process starts right now.

What we did in the first quarter.

We began a reduction in our work force.

We had, going into this quarter, roughly 32,000 workers.

That includes employees and contractors.

That includes people involved in operations, logistic support and capital projects.

To date, we have reduced that workforce for about 10%.

We've implemented efficiency programs for costs and capital spending.

We slowed investments in the Grasberg underground by about 1/3.

We're spending currently about $40 million a month on the Grasberg Block Cave.

And we're prepared to suspend that if we have to.

Doing that has some long-term consequences that are negative for all the stakeholders because it would delay -- the resource remains there, but it would delay the ramp-up period.

And that involves costs and economic consequences for everybody.

It would affect the workers because if we totally suspend that, we've got about 5,000 workers that would be out of work.

It affects the local Papuan communities because in the Mimika Regency, we represent over 90% of the GNP.

It affects a large number of Indonesian suppliers, not only in Papua, but throughout the country.

The government has lost almost $500 million in taxes and royalties for the 3 months or so that the exports were suspended during the first quarter of 2017.

And of course, it affects Freeport and our partner, Rio Tinto.

With all this going on though, because of our efforts to constrain spending and capital spending, we generated positive cash flow at PT-FI during the first quarter.

So we have an ability to do that going forward, even if we're suspended from exporting.

But it's in all of our interest to get this long-term solution, and as I said, we're approaching it with an objective and with confidence that, that will be achieved.

But it'll be complicated discussions that start right now.

Looking at that Grasberg Block Cave, this is a remarkable opportunity for us.

Grasberg district has been one of the mining industry's great mining discoveries, operations, developments in the history of mining.

But just focusing on the extension of the resource that we've been mining and are mining from the open pit to its extension at depths where we mine in this massive Block Cave operations, it is a tremendous resource.

It's got 964 million tonnes of over 1% copper and with 0.78 grams per tonne of gold.

The reserves themselves and the metal -- copper metal that we reproduce, for example, are about 50% larger than out of Morenci.

And in addition, you have this enormous gold component.

To date, we spent about $3 billion on the development of the Grasberg Block Cave and the common infrastructure to allow us production.

We're just over halfway through the development -- the initial development for that resource.

It's transformational.

It's a state-of-the-art underground development.

And it's a source of pride not only for our company, but for our workforce and for the good part for the country of Indonesia.

High-grade, low life, low cost, and it's an important part of our future, and we are working to find a way to make it so that all of us benefit from it, including the government.

Under our contract, the government of Indonesia has a very attractive current proposition for participating in the operations.

Our company just celebrated the 50th year of its doing business in Indonesia.

Since 1992, when we signed -- after signing this current contract, we contributed $60 billion to the national GNP; by far, the largest private employer in Papua and one of the largest taxpayers in all of Indonesia.

We've contributed, voluntarily, this is not an obligation, about 1% of our revenues to the local community through our Freeport Partnership Fund for Community Development.

Over the past 11 years, that's generated almost $700 million of voluntary contributions to the local community.

If we look at the contract, the government receives a majority of the cash benefits from the operations, more than any other government in the world receives from mining operations.

Over the last 10 years, the government has gotten 62% of the direct financial benefits of this business, and that doesn't include the multiplier indirect effects on the Indonesian economy.

And when we look at the existing contract, future taxes and royalties and dividends through 2041, the term of our contract, are expected to exceed $40 billion.

So this is a big asset not only for our company, but for the government and particularly important for the province of Papua.

So turning to our outlook.

We've adjusted our 2017 projections.

We've had to take into account the suspension of exports in Indonesia.

It's had an impact in Peru, at Cerro Verde.

We've had to face an incredible weather situation.

This is one of the driest places in the world, and they've had 3, 4, 5x annual rainfall, and it's caused a lot of damage, injuries, deaths, and damage to the infrastructure throughout the country.

And we had a strike, which did not have a material impact on first quarter production, but it affected our mining rate and will have an impact on productions for the year.

So we dropped our outlook for 2017 from 4.1 billion to 3.9 billion.

The gold reflects the situation in Indonesia at 1.9 million.

Molybdenum with the 93 million is roughly what we've guided towards previously.

Our expected site delivery production delivery cost at $1.55 is up slightly.

After byproduct net unit cost at $1.08 was previously $1.06.

Provided we're able to operate throughout the year in a normal fashion in Indonesia at $2.50 copper, we're looking at $4 billion of operating cash flows for the year.

Each $0.10 would be a delta of $275 million.

Our capital expenditures have been reduced from $1.8 billion to $1.6 billion.

And this is $700 million on sustaining capital in the Americas and some in Indonesia, but $900 million on the major projects, including $700 million in Indonesia, which is down $200 million from our previous guidance.

You can see our outlook on Slide 13 for 2016, '17 and '18 as well as our gold and molybdenum outlook.

And on Slide 14, we showed our EBITDA as an average of 2017 and 2018 at copper prices ranging from $2.50 to $3.

EBITDA goes, during that period, from $5.6 billion to $7.4 billion over that price range, and operating cash flows would vary from $3.4 billion to $4.7 billion from $2.50 to $3.

Our sensitivities for copper, molybdenum, and gold and currencies is shown on Page 15 to help you with your modeling.

Capital expenditures on Page 16 show that what we incurred in 2016, which included $1.2 billion of oil and gas, and then looking forward, spending that would be incurred with continued Grasberg underground development and continuation of the current positive market conditions that we have.

The big issue in this is assessing the Grasberg Block Cave.

And it is totally dependent on our progress we make in our discussions with Indonesia.

And if we are successful, as we are working to achieve, then we would continue that project because it's important to all the stakeholders.

If not, we prepared contingency plans to defer that project, and that would have a significant impact on capital spending and employment and also future revenues.

Page 17 shows the progress we made with our balance sheet that I referred to on my initial comments.

The net debt going into 2016 was over $20 billion.

Going into 2017, it was down to $12 billion.

And as we look forward to the end of the year, you can see it drops below $10 billion, depending on prices.

Our objective is to achieve further debt reduction and get our balance sheet to a position that as market conditions improve in the future, we can then look at resources to invest in growth projects at that time, depending on market conditions.

And we look forward to the time, with this set of assets, to be able to return to the Freeport tradition of returning cash to shareholders through dividends and potentially stock buybacks.

Our near-term debt situation is very manageable.

You can see, we reduced gross debt by $500 million during the year.

We have $4 billion -- over $4 billion of cash, and our maturity schedule is attractive, and we have access to capital.

So we're continuing to look for opportunities to improve our long-term liquidity situation by managing our debt schedules.

So we're very pleased with the progress.

We've got a lot of work to do, and we're going to prove our mettle again this year by addressing the issues that we have.

We've got -- we went through all of this.

What we've experienced over the last 3 years, we've maintained an industry leader copper position, couldn't be more prouder of our team for the way they operate and develop the business.

I've said it many times, we can do any copper project anywhere in the world.

And we've got this long-lived, geographically diverse portfolio of assets, and we're financially stronger today after what we did last year, and we're going to be focused on maintaining financial strength and flexibility as we go forward.

So with that, Regina, let's open the line for questions.

(Operator Instructions) The first question comes from the line of Chris Terry with Deutsche Bank.

A couple of questions from my side.

Just in terms of the guidance for this year, is it right to assume that in 2Q, you basically would sell most of the concentrate that was sitting at port plus what you produce in the quarter?

Is that fair for 2Q?

Well, there is -- in general, that's true.

There is a ramp-up that we have to go through.

And we also have to coordinate shipments with our customers who had to make other arrangements for supply when we were shut down from exports.

But we do have a series of ships, one is having loading completed as we speak.

We had close to 100,000 tonnes of copper concentrate at our portsite and storage facilities.

These ships are 20 -- 25,000 tonnes, and so we'll have a series of ships to reduce that inventory.

We're beginning to ramp up -- we have plans to ramp up our mine rate and to return our mill to full production.

Now there is labor issues that we're facing in Indonesia at job site.

The leader of the union that represents PT-FI's employees, which is about 12,000 of our 30,000-plus workforce, our employees, is undergoing a trial for corruption allegations in Timika.

And there've been demonstrations by workers in support of their leader.

There was an incident with the police, in which some rubber bullets were fired, some people were injured in the last 3 days.

That has resulted in absenteeism at our work place.

And then overlying that are concerns by the union of our plans to -- that we put in place to reduce employment.

And they're concerned as we are about the long-term impact of that.

And so we are engaged with the union in an effort to get them to return to work.

We're getting support from the government, from the local police.

During all this quarter, this social situation and security situation at job site, which was a concern when we suspended operations, has been relatively peaceful.

But we do have this current, unusual situation with the demonstrations and the absenteeism.

That's all of our projections are predicated on getting that resolved and getting people back to work.

Okay, okay.

And just in terms of the longer-term profile, it looks like, roughly, you've delayed some of '17 into '18.

But then looking at further out, the 2021, 2022 numbers look a little different, particularly 2021.

Is that just assumptions around where the underground is at?

Or what's moved those sort of medium to longer-term numbers?

It's really a slowdown of the Grasberg Block Cave compared to our prior assumptions.

And these are, at this point, assumptions and assume that we continue to slow Grasberg Block Cave throughout 2017.

As Richard talked about earlier, the timing of that will depend on the progress we make with the government with respect to our long-term agreement.

So what we've assumed here is a slight delay in the development of the Grasberg Block Cave.

So Chris, our long-term plan for several years had been to complete mining the pit in 2016, in early 2016.

And now, with the issues we faced over the last 5 years in terms of the issues with the government and the strikes and so forth, that has been pushed out to 2018.

The ramp-up of the Grasberg Block Cave is a 6-year-plus event.

So the more this thing is delayed, the longer that ramp-up occurs.

And that's what I was saying, it's so important that we reach an agreement with the government so that we can move forward, complete mining the resources in the pit.

We haven't lost any resources throughout all of these deferrals.

But it's in -- economically, the sooner we can begin completing the Grasberg Block Cave development, begin ramping it up, the better off we all are.

Okay, that makes sense.

And just the last one on the CapEx, just to be clear.

The latest number that I've seen for the smelter if you would get on that route is $2.5 billion.

Is that correct?

And also in your guidance, there is no CapEx included in future years for that at this stage until you get resolution on the ownership agreement.

Is that right?

That's correct.

No CapEx are included.

Our plans are to finance this on a project basis.

There would be other partners involved in our plans, and we would get project-type financing for it, which requires that we have a contract for the PT-FI's operations, because that's a source of supply for the smelter.

$2.5 billion, there's working capital requirements and so forth, so it would be somewhere between $2.5 billion and $3 billion, depending on that.

We've done a lot of preliminary engineering work with our -- with the Japanese construction firm that designed our initial smelter.

We've done site studies and site analysis, but we have not entered into contracts on the timing of spending new capital, and that's dependent on reaching this long-term agreement with the government.

And the government has agreed, and the MOU that we signed in 2014 has recognized that there have to be certain financial incentives provided by the government because of the poor economics of this investment.

Your next question comes from the line of Orest Wowkodaw with Scotiabank.

Richard, just curious on your statement earlier.

What gives you any confidence that the Indonesians are, I guess, willing to negotiate beyond the initial terms that was set out under the new mining laws around Grasberg?

My direct discussions with the senior government officials.

I mean, I've been in continual conversation with people, and they've made public decisions now.

Indonesia is a country that has a democracy, it has freedom of press.

And for those of you who read the media, in Indonesia, you know that there are a lot of comments made by many different people.

Some informed, some less so.

But in terms of my direct discussions with the government officials, we have committed with them to approach this in a good fair base basis to reach a resolution.

And in fact, we are beginning those discussions immediately, and I'll be spending a good bit of time in Jakarta in those engagements.

There was a visit to Jakarta last week by Vice President Michael Pence on his tour of countries in Asia.

He met with the President and spoke with him about our situation, and it was a positive conversation according to the reports that I received.

We have had tremendous support from others in the U.S. government, in the State Department, the Commerce Department, and in business groups that deal with Indonesia-U.

S. bilateral relationships.

So it's in everyone's interest at the end of the day.

It's been a complicated situation politically in Indonesia, but that's the basis for my comments.

And does that mean you're holding off pursuing the international arbitration to protect the COW?

Well, having said all of that, we're not underestimating the challenges because these are issues of where we have significant disagreements on.

Now we have triggered the 120-day notice required by the contract, and that notice period continues to run.

And so after mid-June, we and the government would each have the ability to commence arbitration proceedings.

We hope not to do that and -- but we have that as a right of ours under the contract.

That process requires a significant amount of time, procedurally, to put in place.

So that is, let me say, something that's running in parallel.

It's a fallback that each of us will assess after mid-June to see where we are in the discussions.

And whether or not to proceed with arbitration, it is my hope that we do not have to take that step.

But if we have to, we'll be prepared to do it.

I see.

And in your disclosure, you talked about potential significant reduction in capital spending development at Grasberg if there's no resolution.

Would we see that impact as early as 2018?

Or is that something really that...

You potentially could see it in 2017.

I mean, it's a step.

The next major step we would have would be to suspend the Grasberg Block Cave spending, which we're spending roughly $40 million a month on.

And that involves a set of workers, principally contractors, of about 5,000 people.

So we're continuing that.

We had plans to suspend it.

Those plans were averted by this recent agreement that we reached with the government for this temporary IUPK.

And so all of that is -- we still have those plans ready to execute if we have to.

Orest, we've taken the number down by about 25% for the Grasberg Block Cave, and the number Richard's talking about, $40 million, is the reduced number.

We have the ability to take that down to 0. Economically, we prefer not to because of the -- of what it does to our production schedule and NPVs.

But in terms of how we're progressing with the government, we're assessing it on a week-by-week, month-by-month basis, and have plans, as Richard said, contingency plans, if we need to take that number all the way to 0.

I see.

Just final question, if I may.

What percent of the '18, '19 copper production can be attributed to the Block Cave here?

Very little in that time frame because...

So it's really later in '21, '22?

That's right.

And as I said, it's, let's say, roughly a 6-year-plus ramp-up.

So we're about just over halfway through the initial development.

We'd be mining the open pit into 2018.

We can't start that ramp-up until mining in the pit is completed, because it's directly underneath the pit and you have some subsidence.

So we have to complete the pit, and then begin the ramp-up of production.

And that goes out for 6-plus years from whenever we start.

So it's not much impact on production during that time frame you referenced.

There is the capital that will be spent, which we'll have to adjust that capital if we have to live within lower cash flows by not being able to export.

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

I just have a question, to actually continue along the same lines in terms of the longer-term mine plan at PT-FI.

I'm looking at the slide on Page, I think it's 26.

2022, it shows no change versus 2021.

Obviously, down a little bit.

Well, anyway, 2020, 2021, down versus previous.

But my question is, 2022, does that include, I don't think it does, Rio Tinto's interest?

No.

This is all net, net to PT-FI.

This is all net to PT-FI.

And let me just -- I think everybody understands this.

While we operate broadly with Indonesia under the name PT-FI, the operation is a joint venture between Freeport's subsidiary PT-FI and a Rio Tinto subsidiary in Indonesia.

And all the numbers that we show financially in our presentation are Freeport's subsidiary numbers.

And currently, that subsidiary is owned 9.36% by the government with the remainder owned by FCX.

So all of that just reflects PT-FI's net interest.

Last year, in January, when we filed the valuation of PT-FI with the government that showed a $16 billion valuation at that time, that was strictly PT-FI Freeport's net interest and excluded any values for the Rio Tinto or devalues for Rio Tinto's interest in the joint venture.

Okay.

So -- but I guess, I don't know why I'm still confused on this.

But if you go to 2023, 2024, et cetera, what -- the PT-FI mine plan doesn't change, but Freeport's ownership of PT-FI changes, correct?

That's correct.

Right now, that was originally -- and this was an agreement that was signed in 1995, and it was structured around that all the reserves at 12/31/94 would be retained by Freeport PT-FI, and they were scheduled to be produced by 2021.

And Rio Tinto was scheduled to come in for 40% beyond 2021.

Well, because of the delays in strikes and export suspensions, that 2021 date now goes out to roughly 2023.

So Rio Tinto's 40% kicks in...

2023.

In 2023, sometime during the year 2023.

And of course, that's going to be dependent on our resolving all these issues.

Right.

Okay, and I guess, the reason I'm asking -- because I guess, I'm still trying to figure out the economics.

Can you give us a little more color on the economics associated with continuing to spend to go underground, continuing to spend to develop obviously the Grasberg Block Cave when -- by the time it actually really ramps up, the ownership really switches over to Rio Tinto.

Is there any -- like what's the economics associated with the upfront CapEx considering that?

I mean, they are very attractive.

Even with the reduced...

The rate of return.

And when you say shifts over, I mean, we still own 60% of this business and I mentioned just how large the resource is.

So I haven't seen every economic analysis for future development in our industry.

But my sense is this is -- perhaps, this is probably the most attractive rate of return investment in the mining industry today.

And Dave, I understand all this has been a moving target in change.

And what we would plan to do as we -- when we complete our long-term agreement with the government, is have a face-to-face session with analysts and investors and walk through this in some detail so that we make sure that there's a clear understanding of the value of this business.

And we haven't done that to date because we've been so focused on trying to resolve the issue with the government.

And all these values are dependent on getting that resolved.

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

Just along -- just a quick question along those lines of the agreement with Rio Tinto.

The -- under the current contract, how much would they have to spend on this underground capital development in Grasberg in order to maintain their 40% stake?

And have they committed to that because I've read in the press that they were questioning their commitment to Grasberg at this point?

So Chris, the way this works is capital expenditures are divided on the basis of whether they are replacement capital or expansion capital.

The Grasberg Block Cave is deemed to be replacement capital.

And so Rio Tinto's share of those costs are relatively small.

They pay the same percentage of that, that they would pay as determined by their share of revenues and how much operating cost they pay, and that has been relatively small to date.

The Deep MLZ project is a growth project and they pay 40% of that.

And we, years ago, entered into an agreement that the common infrastructure that's used to develop both of those resources and ultimately, the Kucing Liar resource is shared 50-50.

So they are making some capital commitments, and they've made those consistently all along.

The bulk of the capital is funded by Freeport under the current situation.

And I will say, we have an excellent working relationship with Rio Tinto and have had from the start.

They are engaged in what we do.

We're transparent about everything.

They have input.

There is one contract that's shared by Freeport and Rio Tinto, and they have the right to approve any changes to that contract that has an adverse impact on their company.

So it's important that we are aligned and to date, we are aligned.

We're all concerned, we're both concerned about the future and recognize the importance, particularly important for Rio Tinto because without getting this extension, they actually have no value to speak of in the business.

Okay.

So over the next -- sorry.

Chris, I'm just going to add that we manage the development of these ore bodies based on the aggregate 100% economics.

They -- we do what's best for the overall operation and don't get into trying to say, "Well, you're only funding a small part of this and getting 40% or you're funding 40% and only getting a small part." We manage for the overall NPV as the aggregate resource, and that's worked out over time.

It's been pluses and minuses on each side, but it's worked out to be a good long-term partnership.

And the agreement has a kind of do-right provision.

And over the years, each of us have approached it in that standpoint.

It's a complicated agreement.

It doesn't -- spend any time that we wish we should have done it in a different way back in the mid-90s, but we are where we are and they're very good partners.

And we feel the very strong responsibility to represent their interest in the right way and we'll do that.

Okay, great.

Of the $1 billion that you expect to spend on underground development over the next few years, how much of that per year do you think would be Rio Tinto?

I understand it depends on -- if you're in, I guess, the DMLZ.

But do you have a sense as to how much they'd have to spend?

It'll vary somewhat, but it's roughly $200 million a year.

Okay, okay.

And -- okay.

And then going to Safford.

So it looks like you have around a year left in your reserve life at Safford right now under the current reserves.

And so this Lone Star would essentially extend the life of the Safford mine you said?

So would it be able to produce, at similar rates, around 200 million pounds of copper a year?

And I mean, I guess, the question is, what kind of IRR are you expecting from the project?

And kind of what can we infer then in terms of what your required IRR would be for future expansion projects for things that are like that you described earlier?

Red can add to this, but the Safford production is -- goes out to 2021.

It declines from here to there.

But what we're doing really is essentially bringing in ore from the adjacent Lone Star mine and using the same infrastructure and tank house that we have at Safford.

Most of the cost is stripping and it's -- so it's an attractive project from the perspective of low capital intensity.

But we do have a several year stripping program that's several hundred million dollars, I don't know.

Red, would you add?

Red Conger runs our operations in the Americas.

Red?

Yes, Chris.

So we're producing about 60 million pounds a year there right now, and as Kathleen said, that will go out for another 8 years.

And that gives us plenty of time to get the stripping done and maintain the continuity of the operations.

So it's attractive and we're just -- we should have permits here midyear that would allow us to start developing and getting some of the early mining done.

So we're on it.

And that project - to your question about IRR - that project, in and of itself, is a good project from an IRR standpoint.

But what we're really doing here is exposing the longer-term resource at Lone Star, which is an enormous resource.

And so this -- while this will produce cash flows and a return on investment, it opens up a very long-term 50 billion pound resource, sulfide resource, that we can consider for future investment.

So it's part of a long-term district play.

Okay.

I mean, would we expect -- or could we to see feasibility studies on any of the development project that you mentioned, Bagdad, Chino, El Abra, so that we could get some parameters around what the economics would be depending on the metals prices and things like that as you do complete these studies?

Yes.

I mean, what we're doing now is going through the portfolio.

We've got a preliminary feasibility study on El Abra and that's going to be updated.

But the rest of the portfolio in the Americas, we're going through it to identify what the project -- defining the project.

And what we're challenging our team to do is to find ways to cut capital.

We've been focused on keeping operating costs low in the Americas.

But what we're challenging the team to do now is how do we develop cheaper mills and how can we get these projects be more economic because many of the projects require, just like the rest of the industry, $3 copper, for them to make sense.

That's not the case of Lone Star oxides.

But some of the larger projects, because of the high capital cost of the mill, require higher copper prices.

And so what we're doing first before we go prepare feasibility, is to challenge our team to find ways to be more creative about how we can develop projects on a lower capital cost basis.

And so these are long term, Chris, in our portfolio.

We're not spending much money now, but we're preparing for the future long term.

And I don't want to drag this out too long, but that's been the strength of our business.

I mean, we go back years -- through the years, as Phelps Dodge was the leader in SXEW, but it was also active in developing mills over time at Candelaria, for example, and PT-FI was a real leader in developing large-scale SAG mills and then high-pressure grinding rolls, and we've taken that experience and brought it forward to the expansion project that we had in Morenci where have a new mill design, the recent expansion at Cerro Verde with a new mill technology.

And now we want to keep building on that, working with our suppliers and contractors, as Kathleen said, to have these opportunities with much improved economics and energy efficiency and so forth.

Your next question comes from the line of Alex Hacking with Citi.

My first question is just coming back to Indonesia.

Is your sense at the moment that you're negotiating against a single party there?

Or there's still a lack of divergent viewpoints on the table on the Indonesia side?

Well, I'd say yes to both questions.

The Minister of Energy and Mines is taking the lead and has been authorized by the President to represent the government.

So he is the point person in these negotiations and he's a guy with a good business background, and we can talk with each other in a very straightforward, candid way.

The Minister of Finance is also involved in a significant way.

And -- but there's -- in a country like Indonesia, there are divergent views.

And so our challenge will be to find a way to reach an agreement that is acceptable to the Minister and to the President and that works for us.

Okay, great.

And then just a follow-up question.

You mentioned that you've entered into an MOU recently in Indonesia.

Does that MOU locks for -- I guess, is there a tenure on that MOU or is it indefinite?

No, it's 6 months.

I mean, it's -- this temporary IUPK lasts until October, and so we need to get a long-term resolution during that time frame.

Okay.

And then at the end of that period, would your Contract of Work still be valid?

Yes.

Yes, and the MOU makes that clear.

The issue is we would then fall back with their regulations, which would restrict our rights to export.

But the time frame, and this was -- we had suggested this back in January, was to give us a period of time to negotiate a long-term solution and during that period, allow us to export and allow our contract -- recognize that our contract stays in place.

And that's what the MOU does, and this MOU will be filed publicly.

So just one final question, if I may.

Are you -- I think you answered this earlier, but just to clarify, are you still allowed to move to arbitration according to the terms of the MOU?

Does it restrict your...

Well, the MOU doesn't address arbitration, but the notice period has been initiated and that will run through the end of June and under the terms of the contract, which remains in place.

Either party has the right to move to arbitration after mid-June.

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

More short-term questions on some of - in Indonesia - on our models.

What do you sort of foresee going back to -- on a 1,000 tonnes per day basis, the operation in the next 2Q and maybe 3Q given the dip this quarter?

Are you talking about mill rate?

Mill rate or...

Yes, mill rate.

Mill rate.

And then Mark.

This is Mark Johnson.

Our forecast right now, pending this -- the issues with the -- our workforce, is that we'd be up near 200,000 tonnes a day again.

We'd be producing upwards to 10,000 tonnes a day of [ common, ] but averaging somewhere around 7,500 for the quarter.

And 200,000 bought for -- in 2Q or was that more at 3Q, 4Q?

It's really the 2Q, and then for the remainder of the year, we'll be at that sort of rate.

Just really depending on the hardness of the material coming out of the mines, but it'd be more or less normal operations as we've seen in the past.

The mill has performed over 300,000 tons a day at a peak and it's typically kind of that 200,000 to 220,000 based on material types.

Yes, and we manage our business on the basis of metal output as opposed to mill rates.

And then the mill rates will vary, as Mark says, depending on the nature of the rock, and we're in really high-grade material now, so we need to...

But we'll average less than 200,000 in the second quarter because we're not -- just ramping up now.

But with Mark's -- we get to by the end of the second quarter, the 200,000.

You get to that, right, Kathleen.

Yes, okay.

So -- because you said on the 21st of -- okay.

And then, well, you had pretty good recoveries last quarter in both copper and gold.

Do you expect that to sort of continue going forward?

And that again is the quality of the ore because we 92% on copper and that's very much driven by the high-grade portion of the Grasberg, which we'll be mining consistently through the end of the pit.

Okay.

So I get it, I suppose it's good.

Okay.

And then I mean, it's a bit of wee one which should be -- you might laugh at this one, but just a bit mumbling.

The way your price realized for molybdenum of $8.70 was much higher than we expected.

Is there is something we're missing there when you look at spot prices on molybdenum?

What you have to take into account is that we sell a significant portion of our molybdenum output in a chemical form as opposed to looking -- the quoted price is for molybdenum metal.

And the chemical product is a much higher valued product.

This is -- greatly, this is the result of investments that were made over many years.

And then we enter into supply contracts to refiners and others who use this chemical-grade molybdenum, and its realizations are significantly higher than metallic molybdenum.

Your next question comes from the line of Michael Dudas with Vertical Research.

Regarding -- if you decide to suspend Block Cave investment, can you reverse that in 2 weeks?

Or is it like once you get going with that, is that going to be a multi-week, multi-month process?

I mean, can you just give us a sense of when you talk about that -- I know it's a very serious decision, but how that would play out.

And if you had to change it, how quickly you could get it back into gear?

Yes, that's a really good point.

And that is what has led us to be reluctant to turn it off because this is a highly skilled group of workers that are involved in this Block Cave development.

And if we demobilized that group, then we would be faced with a period of time to remobilize them and get them back to work.

And it's not a matter of weeks, but it's a significant operational issue for us to disperse that team and there are other major Block Cave operations going on around the world.

And then to bring them back together would be a period of time measured in months rather than weeks.

Understood.

I appreciate that thought.

And just a follow-up, Richard.

As you look out through 2017 in the marketplace and of course, you've had some labor issues yourselves, do you anticipate we're going to see more difficult negotiations among some of the -- your peers and competitors around the world as labors starts to feel a bit better about their positioning?

Well, I was just down in Chile at the Cesco group and saw a number of my associates in the industry, and we were all talking about that.

First, there's a correlation between copper prices and labor problems.

And so as the copper prices increased, that's heightened our aspirations of labor for better deals.

And then I always say that labor problems are a contagious disease that once someone experienced one, they tend to happen in other places, and we've certainly seen that with Escondida and ours, the Southern Copper situation and unions are talking everywhere about the situation.

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

The mine output appeared to fall at each of the copper mines.

And I tried to adjust for this sale of 13% of Morenci and 56% of Tenke and estimated that the continuing copper output fell about 11% or 89 million pounds.

Could you talk about the rebounds to tonnes and grade at the mines other than Grasberg to meet your 3.9 million -- 3.9 billion pound forecast for the year?

Yes.

There was some impact in Cerro Verde from the weather and the strike situation, the principal impact that, that's going to be longer term than I mentioned because we kept our mill basically running during the quarter, but our mine rate was -- in the month of March, we have about half of what it has been in the first 2 months.

Now we returned that to that level, but that's going to have some ongoing impact.

The rest of it, John, is just normal issues you face in running a business like ours.

But we're not showing -- John, we're showing the first quarter looking pretty similar to the rest of the year on a quarterly basis in the Americas.

So really, it's -- Indonesia is the change.

So there's really not a big change in the overall output in the Americas compared to the first quarter.

Your next question comes from the line of Novid Rassouli with Cowen and Company.

I was curious if the Indonesian government has backed off the divestment requirement at replacement cost or if there have been any developments there.

Well, that was the subject of one of the new regulations that was adopted in January, and that regulation is still in place.

And that's going to be one of the issues under discussion as we enter into these negotiations.

Got it.

Two other quick ones.

Can you just comment on Cerro Verde's production profile over the next 3 years and maybe the stability that you see there?

Yes.

We're expected to be just shy of 1.1 billion pounds at Cerro Verde this year, and it's pretty consistent over the next few years.

Great.

And then lastly, I know it's a small piece at this point, but any guidance that you can provide on the oil and gas production with respect to either revenue or cost?

In terms of oil and gas, it's -- I mean, it's down to a very small number.

We're producing in the Shelf of the Gulf of Mexico, we've got something onshore in the Gulf Coast region and then offshore California.

But it is from an overall EBITDA standpoint, it's a very small contribution.

It was slightly negative in the first quarter.

And the more significant issue we're working on to manage is the abandonment costs that we faced as a result of this business.

So that's something that's getting a lot of attention.

And we're continuing to unwind some commitments on cost that there's a carryover for certain facilities and office space and so forth, but we've made a lot of progress with that.

Our final question comes from the line of Evan Kurtz with Morgan Stanley.

So just one more on Grasberg.

I just one of the issues, I guess, key sticking point here is this 51% number that's out there.

And I know in the past, you seemed fairly reluctant to give up majority ownership of PT-FI.

And I just kind of wanted to take your temperature, is that something that you'd be a little bit more open to than you have been in the past?

And is that really on the table?

Or was that something that you're going to really push back on hard?

Evan, the worst thing I could do is get out in front of the negotiations and discussions in answering a question like that.

As I mentioned, the issue of divestment is on the table.

And that's going to cover the range of issues, including the percentage of the investment, the process for divesting, the valuation for divesting and the carry-on issues related to operatorship and governance of PT-FI.

So I think, at this point, the only thing I can say is that those are on the table.

Our broad objectives as we go into the negotiations are going to be to protect the value of this asset for our shareholders and to find a way to reduce the risk that's overhanging the situation now and provide a stability for the long term.

The -- and we need to have that stability to warrant these investments.

I mean, we've been running this business for years and the government has been cooperating with us on it by making investment for production that's to be received beyond 2021.

So we have to get that situation clarified and derisked.

The one thing that we will insist on, that any divestment be made on the basis of the fair value of the assets.

Okay.

And maybe an easier question to answer.

But I know that part of the deal with China Moly included a later negotiation on selling Freeport Cobalt, the Kokkola operation.

Is that something that happened and maybe it's just too small to report?

Or is that still underway?

That has not happened.

And with the dramatic change in the cobalt market that's occurred since we closed our deal with China Moly, that matter is under discussion.

So it is -- let me just leave it at that.

It hasn't happened.

It's under discussion.

Great.

Does that mean that you might be able to keep that?

Or have you committed to sell it at this point?

No, we didn't commit to sell it.

We committed to give them an opportunity to negotiate with us for it.

But we didn't agree, there wasn't a price that was agreed to and there was no firm commitment on either party to close the transaction.

Okay.

Thanks, everyone.

We look forward to reporting further progress.

Ladies and gentlemen, that concludes our call for today.

Thank you for joining.

You may now disconnect.