費利浦·麥克莫蘭銅金 (FCX) 2017 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.

(Operator Instructions)

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

Please go ahead, ma'am.

Thank you, and good morning, everyone.

Welcome to the Freeport-McMoRan Third 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 conference call today is being broadcast live on the Internet, and anyone may listen to the call by accessing our website home page and clicking on the webcast link for the 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 are Richard Adkerson, Red Conger, Mark Johnson and Mike Kendrick.

I'll start by briefly summarizing our financial results, and then I'll turn the call over to Richard, who will review our recent performance and outlook and will be using the prepared slide materials that are on our website.

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

Today, FCX reported net income attributable to common stock of $280 million or $0.19 per share for the third quarter of 2017.

The third quarter results include net charges of $212 million or $0.15 per share for nonrecurring net charges that are detailed on VII of the press release, which include a $188 million charge or $0.13 per share associated with accruals for Peruvian government claims associated with disputed royalty matters and $64 million or $0.04 a share charge for adjustments to environmental reserves.

After adjusting for these net charges, third quarter 2017 adjusted net income attributable to common stock totaled $492 million or $0.34 per share.

Our adjusted earnings before interest, taxes and depreciation, or EBITDA, for the quarter totaled $1.6 billion.

We've got a reconciliation of our EBITDA calculation on the last page of our slide deck.

For the third quarter of 2017, we sold consolidated copper sales of 932 million pounds, 355,000 ounces of gold and 22 million pounds of molybdenum.

Our average realized price for the third quarter was $2.94 per pound.

That was 34% above the year-ago quarter of $2.19 per pound.

Our gold price averaged $1,290 per ounce.

That was slightly below the year-ago period average of $1,327 per ounce.

Average net unit cash costs for the quarter were $1.21 per pound.

Those were slightly higher than the year-ago period of $1.14 per pound, primarily reflecting lower copper sales volumes.

We generated strong operating cash flows during the quarter, which totaled $1.2 billion, and those exceeded our capital expenditures of $308 million during the quarter.

We ended the quarter at September 30 with consolidated cash of $5 billion and consolidated debt totaling $14.8 billion.

We had no borrowings under our $3.5 billion revolving credit facility at September 30 and a strong liquidity position.

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

Thank you all for joining us on our call.

Kathleen and I are speaking to you from Jakarta, where we've made a series of trips this year to work with the Indonesian government on reaching a resolution of our issues involving our contract.

Our quarterly results, I believe, clearly show the strength of our company.

During the third quarter, we had strong cash flows generated by our operations, which were characterized by very long-lived assets.

We have significant growth optionality that I'll be speaking about during our call today.

And now we have the ability to consider these in light of our company's improved balance sheet and the improved copper market conditions.

This will enable us to consider future actions to build incremental shareholder value.

We're going to approach this in a very disciplined way, as producers are throughout the industry, but we have assets within our company that allow us to look forward to a period of future investments and future growth.

During the quarter, we continued to advance our key 2017 goals.

We're focused on safe and efficient operations, building long-term value through our operation of our business, the production of our reserves and focusing on our attractive portfolio of long-term copper assets.

And as I mentioned, we are working hard to resolve our long-term rights in Indonesia.

During the quarter, we generated almost $900 million of cash flows from operation in excess of our capital expenditures.

And for the 9 months to date in 2017, we have approximately $2 billion of cash flows in excess of our capital expenditures.

We are benefiting from the positive copper market that has resulted in higher prices than many expected.

The analysts who were predicting the so-called wall of copper have capitulated.

We were always skeptical about these looming supplies, but there are just underlying factors in the industry that continue to constrain supplies.

There's continued absence of major new projects, declining production from existing mines.

Exchange stocks remain historically low.

And as we look forward into the future, there are looming significant deficits that will require significant investments to meet to fulfill the global demand for copper, and the prices required to meet that demand are significantly over $3 a pound.

What's been a feature of the recent copper market has been positive copper demand globally.

Around the world, manufacturing sectors are performing well.

Chinese growth is exceeding expectations.

And with the recent congress of the Communist Party in China, the outlook for Chinese growth continues to be positive.

Growth is continuing in Europe.

And U.S. demand is solid with the prospects for future higher growth as the country addresses its tax situation and other regulatory issues that could unleash continued demand within United States.

Wood Mackenzie, one of the industry's analysts, estimates 5 million tons of new copper projects required over the next decade.

The top 10 mines in the world today produce less than 5 million tons a year.

So that shows the extent of the amount of copper projects that will be required to be developed.

As I mentioned, new mines require sustained copper prices of well over $3 a pound.

The lead time for developing new projects, which we know all too well, is in the range of 7 to 10 years, and there are very few really world-class opportunities available.

An emerging factor for demand in our industry is the electrification of automobiles.

EVs are copper intensive.

They consume 3 or more times more copper than traditional petroleum-powered automobiles.

And there's very strong potential for this marketplace.

The world is now looking for really expanded growth over the next decade.

This will translate into significant incremental copper demand.

And the prospects are there because of the economic and environment benefits of electric vehicles.

This is evolving much quicker than people are currently estimating.

This is clearly on an upward trend, and not only automobiles themselves, but the support infrastructure for charging and electrical generation will require copper in significant amounts.

We're presenting a slide that we historically presented.

I don't think we've used it quite as often recently.

But on Slide 6, we show the world's largest mines in terms of reserves and in terms of 2017 estimated production.

Our company has 2 of the top 10 in terms of reserves, 3 of the top 10 in terms of current production.

But we always point out the -- to note the dates in which these mines were discovered.

There simply has not been recent discoveries of world-class mines.

And when we look at the opportunities today, they're in the nature of brownfield expansions of existing resources as opposed to looming major new world-class mines being available to the industry.

All of this is very positive for market conditions and supports the industry from a supply standpoint in a way that's not typical for commodity producers.

When we look at our company's situation and look at the values that are available to us beyond our existing proved and probable reserves, we have optionality for future development, which will be driven by our assessment of value creation in a disciplined way.

But these are substantial additional potential from assets that we already own.

We're going to remain disciplined, but these are important to looking forward to what the future of our company can be.

In the United States, where we benefit from low energy costs, flexible workforce and improving regulatory environment, we have a very large footprint for large undeveloped sulfide resources.

These opportunities are supported by existing infrastructure, which would allow us to make expansions at a series of our mines in a low-risk, high-return environment.

In South America, our large resource at our El Abra mine allows us to begin planning for a large-scale mill project to develop the significant sulfide resource we've identified over the last decade.

Currently, we're advancing technical studies, and this would be a project that would, in scope, would be similar to our Cerro Verde expansion that we were successfully able to complete and begin production almost 2 years ago.

It's -- Cerro Verde has a large footprint, which allows it to continue to produce for many years at high levels and low cost.

And this will be true at El Abra.

It would be an extensive project because we would need to desalinate seawater and transport it to the altitudes there, but it's a large opportunity for us.

It's very attractive in light of the future copper projects.

It would be some time before we'll be going to our board for formal approval of this project, but we will continue to evaluate it.

We had a discovery in Serbia where we farmed out an upper zone to allow a smaller company to develop that.

In connection with that development, there continues to be drilling to the lower zone, which is a large high-grade, early-stage opportunity where we have a significant interest.

And that has the opportunity to develop into a world-class mine.

The Grasberg district in Indonesia, beyond its very large proved and probable reserves, has significant mineralized material that we will continue to evaluate and bring into our mine plans as we go forward as economics justify.

In Africa where we sold our Tenke Fungurume mine last year, we retained an exploration project that was nearby called Kisanfu.

It is, we believe, the largest undeveloped cobalt deposit in the world.

It has been drilled, permitted.

And we are considering it either as a standalone project or to be built in through process for nearby operations.

So we have this great portfolio.

In the Americas where we currently operate 7 open pit copper mines in the United States, along with 2 pure molybdenum mines in Colorado, we have 2 large-scale mines in South America.

This is a really high-quality portfolio of assets.

They currently have strong operating performance.

We sold 674 million pounds of copper in the third quarter.

The Cerro Verde concentrator averaged 379,000 tonnes per day.

It's really amazing volume for this concentrator.

Along with Escondida's concentrator, they are the 2 largest in the world.

We're continuing to focus on maintaining our cost position and managing CapEx, but as I mentioned, we're advancing studies for future growth and looking at this opportunity that we have with Cerro Verde in Peru.

In the third quarter, we had $719 million of cash flows above CapEx in the Americas alone.

And as we look forward -- and in the 9 months, it was over $2 billion.

And so as we look at our business overall for the year, we expect to have roughly 3.75 million (sic) [billion] pounds of copper sales, and roughly 2.7 million (sic) billion pounds of that will come from the operations in the Americas outside of Indonesia.

So we've got a great business in Indonesia.

But if you look at the operation in the Americas beyond Indonesia, you can see a business that has very substantial values in its own right.

In the Americas with our Bagdad; our operations in New Mexico at our Chino/Cobre mine; the El Abra operation in Chile; the Lone Star/Safford resource that I'll talk about; in Arizona, Morenci, Sierrita, this is a very unique portfolio.

It's got 60 million pounds of 2P copper reserves -- billion pounds of 2P will copper reserves that would be developable at $2 copper.

And then if you look at the mineralized material at $2.20 copper, you have twice that amount.

And looking at all the potential that we have at these mines, you get to a very large 266 billion pounds of copper.

So what we have here is a company with very strong current production levels, attractive cost levels, and they're built into our portfolio's future growth levels.

Lone Star.

Okay, so Lone Star is a long-identified resource that lies adjacent to our Safford mine in Eastern Arizona.

It's just across the mountains, 17 miles from Morenci.

We have 2 aspects to this opportunity.

The first is a significant oxide project, which we are proceeding towards utilizing the development of that oxide resource to use our existing infrastructure at the Safford mine, where our oxide resources are being depleted.

We have obtained the regulatory permits.

This has very low execution risk since we will just be mining the oxide near-surface resource, transporting it to Safford where we'll use existing processing infrastructure.

The estimated production is 200 million pounds a year.

It's got a 20-year life.

The capital costs are estimated at $850 million, which essentially for mine equipment and preproduction stripping.

Estimated unit costs would be $1.75 a pound.

When we begin, it will take about 3 years to get it in production.

It has a $2.40 breakeven price with an 8% return, and then a value of $1 billion or more at current copper prices.

Now besides being a good economic project for itself as an oxide resource, if you turn to Page 14, you can see the schematic that shows that below the oxide cover, there is a very large potential sulfide.

And you can see what our drilling to date has identified as a defined ore body, but note that we drilled deeper core holes that continue to find significant mineralization.

To date, the resource that we've developed shows a potential for 60 billion pounds of contained copper.

And what's happening is this leach project through the oxide that we will be processing will serve not only to generate profits by itself, but also serve to strip out the covered material for the sulfide operation and allow us to consider the development of a concentrator mill to take advantage of the chalcocite/chalcopyrite sulfide resource that lies underneath the oxide cover, a tremendous opportunity.

I mentioned El Abra couple of times.

It's a large high-quality opportunity.

The resource estimate is 2 billion pounds (sic) [tons] of 0.45% copper.

Like Cerro Verde, a very large, low-grade deposit that can be developed in a low-risk project.

We're advancing technical studies.

It would involve a 240,000 ton per day concentrator, which is similar to what we did recently at Cerro Verde.

The production would be 750 million pounds a year, 6- to 8-year lead time, including 3 to 4 years of feasibility study and permitting, followed by construction.

We are looking at what we did at Cerro Verde, challenging our team to come up with ways of reducing capital and doing this on a very efficient basis.

And we'll be keeping you informed as we go forward with these studies.

There's a schematic for this ore body that's on Page 13.

You can see what, to date, the drilling has identified as a mineralized material pit shell, reserve shell.

But also note, we continue to drill at depth and have positive drill results for mineralization that potentially can expand this ore body, another great opportunity.

So in Indonesia, at the end of August, after a series of meetings that we've been having during 2017, we, together with the government of Indonesia, announced a framework for an agreement to resolve the dispute that we've been discussing for several years with the government.

We are seeking, and the government of Indonesia is seeking, and the President was recently quoted on this, is finding a win-win solution.

We've been engaged in discussions on progressing this framework agreement.

Both the government and our company are highly motivated to resolve this, to eliminate the uncertainty and bring long-term stability of our operations, which is in both parties' interest.

In the interim, as you'll see, our operations have been going well, much improved over what we've had in recent times.

And we're generating good cash flow out of existing operations.

The framework agreement would involve converting our existing Contract of Work, which was signed in 1991, to a special license in accordance with the Indonesian current mining law.

This is called an IUPK.

But the IUPK that we are negotiating with the government would provide our subsidiary, PT Freeport Indonesia, with long-term operating rights through 2041, and it will provide certainty of fiscal and legal terms during the term of that IUPK.

We have agreed to commit to construct a new smelter in Indonesia within 5 years of reaching a definitive agreement.

This has been an important objective of the government of Indonesia, and we've agreed to meet that objective.

We've also agreed to divest to Indonesian participants 51% of the shares of PT-FI.

Again, this was a primary objective of the government, and we agreed to meet it, conditioned on Freeport receiving fair market value for the interest that are divested, and that it'd be structured in a way that we, Freeport, continues to maintain control over operations.

This is a complex business.

The development of the underground resources at Grasberg are at a scale that's never been done in the industry.

It's located in a very remote place in the Highlands of New Guinea, in the province of Papua.

Managing the operations, the capital project, the environmental issues, the social issues associated with this project are complex.

And for us to stay involved, Freeport is insisting that we maintain control of operations.

Where we are today is that we're actively engaged in negotiating documentation for this framework.

There are complex issues involved in those negotiations, and not all of those have been resolved.

But I am convinced that we have a mutual objective of reaching a resolution.

The government recently extended our export ability through the end of this year, and we are operating under the terms of our contract currently and operating very well, as you can see in the cash flow chart presented on Slide 14.

During the current third quarter, we generated almost $600 million of operating cash flows compared with $176 million of CapEx.

And for the 9 months this year, it's almost $1.5 billion of operating cash flows and less than $600 million of CapEx.

So we -- this is a great asset for our -- the partnership between the government of Indonesia and our company, and we are working hard to preserve that.

The future of this company (PT-FI) is going to be in the underground, where we have had significant operations and have operated since early 1980s.

The big underground projects that we are currently working on is the block cave resource that lies directly beneath the Grasberg open pit.

Our plans call for us to complete the pit next year.

And from that point forward, all the production would be from the underground.

This will -- our current project will allow us to begin block caving this resource in late 2018.

We can't begin block caving until the open pit is finished.

This will then lead to a ramp-up over 5 or 6 years to annual production levels of 1 billion pounds of copper and 1 million ounces of gold, truly a world-class operation.

The reserves from the Grasberg Block Cave approach 1 billion pounds of copper -- 1 billion tonnes of copper at a grade exceeding 1% and with significant gold grades of 0.78.

So this is a tremendous fiscal project and world-class in every respect including the long life, low cost and economic returns.

A schematic of the operation is presented on Page 16.

You can see the Grasberg open pit.

The block cave is an extension of the resource that we've been mining from the pit to levels that can most economically be mined underground.

We're approaching this resource vertically to allow us to have access to it and process it.

We have additional resources that are potentially in our future, the Kucing Liar resource that's adjacent to the Grasberg Block Cave; the Big Gossan mine, which is a stoping mine that we've been producing.

And then set apart from the Grasberg complex is an underground resource that we began mining in the early 1980s.

We've been continuing to extend this resource at depth going from the original GBT Block Cave to the IOZ Block Cave that we began producing the 1990s, to the DOZ mine in the 2000s.

We started up the Deep MLZ mine 2 years ago, and it's ramping up.

And this will be an important supplemental production to the Grasberg Block Cave, which will provide feed for our mill at rates well over 200,000 tonnes of feed per day, approaching 240,000 tonnes per day.

So what does this mean for Indonesia?

Despite the current controversy and so forth and some of the issues operationally and with government regulations in recent years, this has been a very positive historical partnership.

Freeport began operating there over 50 years ago.

Since the new contract in 1991, we've contributed $60 billion to Indonesia's GDP.

We're by far the largest private employer in Papua, and we're significant economically to the region.

We're well over 90% of the GDP of the Mimika Province where we operate, Mimika Regency.

We're one of the largest taxpayers in all of Indonesia.

Since we began operating, we've generated significant taxes, royalties and dividends to the government of Indonesia.

And with the existing contract has gotten in excess of 60% of those revenues versus the dividends that have been paid to Freeport.

This, by the way, is the most favorable deal with a government of any place we operate in the world and arguably, the most favorable of any country in the world.

In addition to that, beginning in 1996, to support the local community, we've been contributing 1% of our revenues through a special partnership fund for the local community.

And that has accumulated almost $700 million for community health, education and welfare projects.

When we look at the current contract going forward to its end in 2041, future taxes, royalties and dividends at $3 copper, $1,200 gold would exceed $40 billion.

This is a major asset for Freeport and a major asset for the country of Indonesia.

And we all recognize that.

And we all recognize the best thing for both parties is to reach an amicable resolution, to avoid the necessity of our -- having to try to enforce our rights through arbitration, which our fallback alternative that neither of us wants to do.

And so we have great incentives to solve it.

We just need to continue to work cooperatively to do that, and that is our goal.

Turning to our outlook, and I mentioned we expect to produce 3.7 billion pounds of copper, 1.6 million ounces (of gold), 94 million pounds of molybdenum.

This is consistent with our prior outlook.

Our site production & delivery cost before by-product credit at $1,300 gold, $8 molybdenum would be $1.59.

After by-product credits, which are the gold in Grasberg and molybdenum in our Americas business, it would be at $1.19, again consistent with previous outlook.

And this would include at $1,300 gold for the fourth quarter, net unit costs of less than $1 a pound.

At $3 copper, this would generate $4.3 billion of operating cash flows.

Each $0.10 change in copper means $80 million to us.

Our current capital expectations for the year are $1.5 billion, including $900 million for major projects, $700 million for the underground development at Grasberg and $600 million for other mining.

Again, all this is roughly consistent with prior guidance.

So looking at our sales outlook on Slide 19.

Last year, we had 4.65 million -- billion pounds of copper.

That included assets that we sold, the Tenke Fungurume mine in Africa and an additional interest in our Morenci mine to our partner, Sumitomo, in Arizona.

Net of those volumes that were included in this number from last year, it would have been at 4.17 billion.

You see our outlook for '17 is 3.7 billion, 3.9 billion for '18.

The average for the next 3 years is 3.7 billion.

2019 is a year of transition.

It's expected to be below that average, and it would be about 3.5 billion pounds.

As we complete mining the open pit, our gold sales will increase 1.6 million this year, 2.4 million next year.

And then the 3-year average beyond 2018 would be 1.2 billion -- million ounces of gold.

Now that would generate, at copper prices varying between $3 and $3.50, as you can see on Slide 20, $1,300 gold and $8 moly, EBITDA of $6.4 billion.

This is an average of 2018, 2019 of $6.4 billion to $8.2 billion over that price range, and cash flows at $4.4 billion to $5.7 billion, strong cash flows.

And I'd point out, 2018 will be higher than this 2-year average.

You can see our capital expenditure management depicted on Slide 21.

Last year, it was $2.8 billion, including $1.2 billion for our discontinued oil and gas business.

This year, it's $1.5 billion; $2.0 billion, $1.8 billion for '18 and 19.

This includes roughly $800 million a year for our Grasberg underground development.

You will see that other mining increases -- has increased as we were dealing with the financial issues associated with our high debt levels following the oil and gas deal.

We really squeezed -- stay in business-type capital expenditures, and we got some catch-up to deal with going forward.

And you can see that has increased from $600 million to 5 -- $500 million to $1.1 billion in 2018.

Now a slide that I particularly like to see is how we've been successful in delevering our business.

We went into 2016 with over $20 billion of debt.

In our fourth quarter earnings call in January of 2016, when the price of copper was roughly $2 a pound and many experts were projecting it to be -- to fall below $2 and stay low for a number of years, we made a -- we set a goal to reduce our debt level by $5 billion to $10 billion over the 2 years ending at the end of 2017.

By the end of 2016, by -- through our asset sales and through raising some capital, we have reduced debt to $12 billion.

At 9/30, it's less than $10 billion.

And you can see, by the end of '17 at $3 copper, it would be approximately $9 billion, and we will continue until we make decisions to do otherwise through capital investments or shareholder return, to apply excess cash to reduce debt.

And if we meet our plan, which we have confidence in doing, and if copper prices average $3 or $3.25, you can see that by the end of 2018, our debt levels would be returned to very low levels.

And this, as I said, allow our -- allows our board to consider disciplined reinvestment opportunities.

And we look forward to returning this company to a position of paying dividend, returning cash to shareholders.

We have a very positive long-term outlook for our business.

The thing that has sustained us through the concerning period of time when our debt was so high and markets were weak has been a consistent positive long-term outlook for our business, our assets, our people and the copper markets.

And that's what we keep talking with each other about.

We have a great morale within our company, great capabilities, great assets.

And we are an industry leader in our industry with experienced people, operators and developers.

We've got a great, long-lived, geographically diverse portfolio of assets.

And now we're once again financially strong.

So this optimism about our future is nothing but reinforced.

So thank you for your attention.

I know you have questions, and we look forward to hearing them.

(Operator Instructions) Our first question will come from the line of Michael Gambardella with JPMorgan

A question on Grasberg and the negotiations with Indonesian government, when you guys announced the framework, a lot of the reports coming out from the Indonesian government was that Freeport has agreed to sell down to below 50%, and when you put out a notice that said, "We're willing to sell down below 50% obviously at a fair market value." And there's been reports from -- quoting people in the government, talking about how value shouldn't include reserves.

And I'm just thinking about valuation parameters to get real value for Freeport.

First of all, it's hard enough to come to a conclusion on what copper price to put in when valuing Grasberg.

But how do you deal with the situation where, supposedly, the government is thinking about not including reserves?

Well, we -- so the background for that, Mike, is in Indonesia, the government owns the resources.

Now that's true with governments around the world.

Around the world, governments own the resources.

And even in the United States, of course, significant resources are on federal and state lands.

And all the ore resources and the offshore Gulf of Mexico or offshore anywhere are actually owned by the federal government.

And governments give operators, like Freeport in Indonesia, the rights to operate and develop and produce those reserves.

And so any valuation that we are talking to the government about would involve the value of our business today, including our rights to develop, operate and produce resources that we have identified through our past exploration and development operations.

For example, we have already spent -- besides the infrastructure that we put in place to enable our operations to continue, in recent years, we've invested $6 billion of capital to develop these underground reserves that will essentially be produced beyond 2021.

So any view of valuation of our business would have to take into account the rights that we have beyond 2021 to 2041.

And in our discussions, the government recognizes that.

You mentioned copper prices, we had the same issue dealing with the use of copper prices last year in our negotiations with China molybdenum on Tenke Fungurume and with Sumitomo on Morenci.

That was during the first half of 2016 when the world's view of copper prices were decidedly more pessimistic than they are today.

But I think many people were surprised that we were able to, in that environment, negotiate deals that were positive for our company in terms of the valuations that we recognize.

And we're approaching these negotiations in the same way.

Indonesia is a country that has -- is a democracy now.

It has free press.

There's opportunities for many people who may be in government or are of influence to speak to the press.

Often, the comments you see are made by people who are not involved in the negotiations, just like you read comments in the United States on matters and you have to take into account the source of the comments.

But I can tell you that we are working positively and amicably with the representatives of the government.

At the same time, we are going to be relentless in representing the interest of our shareholders.

And so we are not in a position of where we have to concede to unreasonable positions, and we're not going to do that.

And assuming you could come to an agreement on value, it would seem that the raw size of that value to sell to private sector would be enormous.

Would the government buy that position from you directly, and then sell it to the private sector over time?

Because it seems like that would be a big chunk to sell to someone in the private sector today.

Well, they're -- we're talking with the government now about not only valuation, but the structure of the process for selling these interests.

And that includes the alternative of the government of Indonesia through potentially a state-owned enterprise of acquiring and holding this interest.

There's also under consideration, the provision of a portion of this interest for the province of Papua.

The Indonesian economy has grown, Mike, as you know.

And there are substantial private business interests here who have the financial capability of doing large-scale transactions.

It's unclear whether all of this would be done to a single buyer.

We have suggested to the government that the first step that should be considered, in our view, would be an IPO of the interest on the Indonesian Stock Exchange, which has developed into a large liquid marketplace.

To date, there's been reluctance on the government to accept our suggestion.

My point is there are a number of alternatives to deal with this issue of the structure and timing of divestment.

And that's one of the issues that we're having these current meetings about.

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

First of all, congrats on hitting the targets this quarter as well.

Somewhat related to the previous questions, I do want to ask, just a clarification on the wording on the press release and commentary in Indonesia.

It says the parties continue to negotiate documentation on a comprehensive agreement.

And obviously, that goal is to complete the required documentation by 2017.

So I just want to clarify, will that documentation, by the end of this year, include definitive agreements and definitive plans on things like the structure and the timing of the divestment and the construction of the smelter?

Or is that documentation going to be something else?

No, the final documentation would address those issues, all of those.

It would be a comprehensive conclusion to the issues of -- that we talked about with the framework, the August framework agreement.

And we are working with the government to have a complete resolution of those issues.

And the current goal that we're both working on there is by the end of the year.

And so it was an agreement to take future steps, like building a smelter, undertaking the divestment.

But it would be a comprehensive and final agreement.

Okay, great.

Thank you for clarifying that.

And then just somewhat related, the -- can you remind us again, when do the capital spending deferral/reduction decisions for the underground development, when do those really need to be made?

How much of an impact would those have on the 2018 to 2022 mine plan that's been laid out?

And when would that start to really cut into that mine plan?

We have -- David, earlier this year, we have [deferred] some of the spending.

We cut the spending in the underground by about 25%, and you saw the impacts of that earlier this year.

We are continuing to spend at a reduced level to prepare the Grasberg Block Cave for startup when the open pit is completed late next year.

And economically, that's what makes the most sense.

As you can see from the numbers, the investments that we're making are less than actually the cash flows being generated from the business.

So the business is generating more cash flow than what we're reinvesting currently.

But we could make a decision if we reach an impasse to suspend those investments.

And those would have an impact on our production because the Grasberg Block Cave starts to ramp up during 2019.

And as Richard said earlier, it eventually gets to over 1 billion pounds of copper a year and over 1 million ounces of gold.

And so that would get pushed out.

So economically, we're incented to continue to make those investments, but we're not going to make them if we reach an impasse and have to go another direction.

But at this point, our belief is that we'll get this resolved and be able to continue to proceed with our long-term investment plan.

So would that effectively tie into that 2017 year-end time line?

Well, it's a continual thing.

They -- in other words, if we run into an impasse, which we don't expect, before the end of the year, then we would take those actions.

We -- our goal is, and the government is supportive of this goal, getting this resolved by the end of the year.

If we are continuing to make progress, and for whatever reason, it's not done then, then we'll assess that circumstance when it comes about.

But we've been talking about this so long, and I recognize that all of you have heard so much about this.

But we really see the most positive objective that we've seen by the government in reaching a resolution.

And now, not only do we have a sense of urgency to do that, we're seeing that on the government side as well.

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

My questions are on Grasberg as well.

In the framework where you discussed divesting your ownership down, the PT-FI ownership down, I guess the 49%, how does that work with be Rio Tinto JV?

I.e., with their 40% kicking in, I think around 2023, does that mean you would drop down to an effective 29% stake starting around 2023?

Well, just for everybody's information, the project out there and the contract itself is actually a joint venture between us and Rio Tinto.

It's a complicated joint venture agreement that was negotiated in the mid-1990s.

And under that agreement, Rio Tinto has the right to come in now at roughly, say 2022, for a 40% joint venture interest.

Rio Tinto faces a similar divestiture obligation that PT-FI faces.

And PT-FI's interest currently, the government has a 9.36% interest.

So PT-FI has roughly over -- FCX has roughly over a 90% interest in PT-FI, which would, after Rio Tinto comes in, represent a 90% interest in 60%.

And so after that, if we divest 51%, our interest would be, in PT-FI's operation, 49% of 60%.

49% of 60%.

That's (inaudible) but one thing you should appreciate is the cash flows between now and that time frame, where it drops to 60%, essentially close to 100% going to Freeport.

So there's differences between the 2 interests, and we're generating a substantial amount of free cash flow within that time frame between now and 2022.

I see.

And with respect to potential funding for the smelter, I don't believe that's in your CapEx guidance moving forward.

How much would that add if that smelter was approved, say for 2018, '19?

The smelter itself is estimated to be, if we do it on our own, a $2.5 billion to $3 billion project.

Our intention would be -- and this only gets built after we reach a long-term agreement with the government.

That's one of the issues that we would be dealing with, with the government.

And it's not something that we can start developing until the long-term agreement is reached.

And so our framework calls for a 5-year period after signing the final agreement.

Now we would structure the ownership interest in the smelter and the way of equity partners contributing equity and then obtaining financing, debt financing, for a substantial portion of the cost of the capital.

So the amount of capital that would be required to be contributed by PT-FI would be reduced by the debt financing that would be negotiated with it and the equity participation of partners.

We are in discussions with an Indonesian company called Amman, which acquired Newmont's Batu Hijau mine in Indonesia.

And they have plans to develop a smelter.

And we are in discussions with them about potentially doing a joint venture project for a larger smelter with them.

And in that case, they would be a partner in the project as would we.

And we would have a copper concentrate supply agreement with them that would have to be appropriately structured.

So there's a number of moving parts here with how we proceed with the smelter project, including the size, location, the potential partnership with Amman, that all would be triggered by the completion of our negotiation on the global contract resolution.

Okay.

But on a kind of high-level basis, if you're divesting your ownership stake, and then Rio Tinto's got a 40% JV, is it conceptually correct that Freeport might only have to fund 29% of the total CapEx like excluding any -- where the funding's coming from?

Well, it would be -- PT-FI would be funding it and if you look through PT-FI to Freeport's net interest in that, it -- you're correct.

Now one of the conditions that we are -- as part of the global agreement that this is another current point of discussion is while we've agreed to divest 51%, our position is, is that we maintain control over operations and the company.

And so even though we would only own 49%, with that control, we expect that we would continue to consolidate PT-FI in our financial statements.

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

Just on the -- on getting back to that Rio situation relative to Grasberg.

I mean, like the way that I thought about it was that there's a certain net present value that would -- that can be attributed to -- for Grasberg that can be attributed to Freeport, and a certain net present value of the mine that can be attributed to Rio, based on the cash flows that each entity would be receiving during the years in which Freeport owns 90.6% and Rio -- and then during the years in which Freeport has what the 50-whatever percent based on the current structure.

And so then like therefore, if there were a divestiture under the current scenario that it could end up such that Freeport would end up having, at the end of the day, still more than that 30%.

Because -- the way that I calculate it is that the net present value of Grasberg is something like 65% to Freeport currently and 35% to Rio, so that if there were a divesture now of a certain portion of the value to Indonesian entities, that it wouldn't be like if that, that Rio wouldn't get 40% of your 50% kind of thing.

You know what I mean?

First of all, we would not agree with your PV analysis, okay?

And -- but we're not in a position to disclose that, but I'm just going to comment on that.

So all I'll tell you to do is think again.

And then you have 1 contract where you have currently 2 assignees of interest in that contract.

Rio Tinto has an assignment and PT-FI has an interest.

We are negotiating on behalf of PT-FI, and the Indonesians, as part of our deal, we're agreeing to a divestment.

Indonesians will also be looking at Rio Tinto's interest and expecting a divestment of that interest.

And so while they're 60-40 beyond 2022, as Kathleen said, and it will depend on copper prices and so forth, but there are substantial values between now and 2022 that will be going to PT-FI that will not be going to Rio Tinto.

Rio Tinto has some obligations to contribute capital, they'll get some dividends going forward, but the bulk of the dividends will be coming to PT-FI.

So the relative values are affected, particularly when you look at present value calculations, by the fact that near-term cash flows are going to PT-FI, longer term, Rio Tinto comes in for a 40% interest, but that's subject to divestiture as well.

I will tell you this, Rio Tinto has the right, under our joint venture agreement to -- of approval for any changes we make to the contract.

We've had an extraordinarily positive relationship with Rio Tinto.

They've been great partners.

We feel an obligation to be good partners to them.

And this has been going on now for 20 years.

And we will work together to achieve the mutual goal of building values in this asset that would benefit both parties.

It's not a question of competing interests with us versus Rio Tinto.

Okay.

So -- right.

So it's not -- so the way that -- so again I mean -- so I guess I was thinking a bit wrong in that after 2023 -- or sorry, after 2022, the way that you understand it now is that Freeport will own that 29%.

But before -- through 2022, Freeport will have, under the current scenario, 90.6% of the cash flows from Grasberg.

But after this agreement, we'll have -- like after this agreement is struck, we'll have only 49% after it's...

Well, as I mentioned, one of the matters under discussion is the process and timing for divestitures.

We're not talking about a divestiture at 1 point in time, but a series of steps towards that.

And we have not yet agreed on that.

But it's not likely that you would expect Freeport to retain 90% through 2022.

But it's also likely that there would be steps taken along the way to work towards that goal.

Okay.

All right.

And then a quick question is in terms of the ability to IPO a portion of Grasberg on the Indonesian Stock Exchange, how much do you think you could -- I mean, how much liquidity could the market bear at this point, do you think, of Grasberg stock?

So could there be $1 billion issuance, do you think?

Or a...

Yes.

The exchange has had offerings of that size and slightly more.

We're confident.

We were suggesting perhaps a 10% float of an IPO, and that would be an amount that would be in excess of $1 billion.

There's 1 more point that I think is important to build into your analysis is that as we divest, we are going to be receiving fair market value for the divested interest.

And so while our interest in the participation in Grasberg would be reduced, we would be receiving cash from that interest, which would reduce our exposure to Indonesia.

There's positive and negatives to that, and -- but it will provide cash for us to supplement achievement of our financial goals for the rest of our business.

Yes, that's the idea, is right, that getting the full value or the fair value, the full value is what you've been talking about.

Okay, great.

Your next question comes from the line of Chris LaFemina with Jefferies

It seems like the biggest issue regarding Indonesia is just the bid-ask spread around the majority stake.

And back in early 2016, you had said that you valued all of PT-FI at something slightly above $16 billion.

There were some reports at the time that Indonesia had said that it was worth about $6.5 billion.

I think you had said that, that was never a formal response from Indonesia.

And in fact as far as I know, you've not gotten a formal offer from them yet.

Recently though, the mining minister in Indonesia said that based on Grasberg being 40% of your profits and based on your $20 billion market cap, that would imply that your ownership stake in Grasberg is worth about $8 billion.

And there were some reports as well but he said, we understand that to buy a majority stake, we have to pay some premium to that.

Is that not accurate?

I mean, is that just some reports from Indonesia telling about the accuracy?

Your press report was accurate, but think about this, if -- and I'm not agreeing or disagreeing with Grasberg being 40% of Freeport's assets.

Let's just -- that's what he said.

But you wouldn't apply the 40% to the equity value.

It would be to the enterprise value.

So besides the $20-plus billion of equity value now, we have $10 billion of debt.

And so 40% would be applied to $30-plus billion and that represents 90% of PT-FI because the government owns 9.36%.

So you would have to gross it up for that 10% to get a number that would be comparable to our $16 billion number.

Right.

So your $16 billion is for 100% of PT-FI.

Their $8 billion for the 90-plus percent stake implies $8.8 billion for 100%.

And regardless of how they got to that number, I guess...

Well, but before you say that, just remember that if you're talking about the percent of an asset to an enterprise, it's not logical to look at the equity market value.

You need to look at the enterprise market value, so with the equity plus debt.

So it'd be $30-plus billion.

And following that analysis, you'd say 40% of $30-plus billion is over $12 billion.

That's 90%.

So you need to gross that up to 100%, so you get to something over $13 billion.

Now I'm not agreeing or disagreeing with that analysis, but I'm just saying to be a logical analysis, that's the process you'd have to go through.

But I guess my point is that ...

So the difference between those 2 is not as great as the press accounts would have shown.

Right.

But I guess my question is regardless of how he got to that number, the point is he did say $8 billion for the 90-plus percent stake.

And then I think he also said that some premium for a majority ownership might be required.

The question really comes down to whether or not that offer is on the table to Freeport.

Is that something that they presented to you?

And then...

No, no.

And in fact, well, let's see now, I've got -- that's not what the government would say today even in talking about it.

I mean, they recognize what I just said about the difference in equity value and enterprise value.

But we are working with the government.

They have indicated fair market value is the right standard.

And now, we've got to negotiate what that fair market value is, just as we had to negotiate with China Moly and with Sumitomo and with others who were trying to look at buying our assets.

So we've had a lot of experience with this.

They're going to get expert financial advice.

And we will sit down and find out -- and determine what's the fair value.

Again, we believe the best way to do it is to allow us to do a -- to do an IPO on the exchange and that way, the market determines it.

They, so far, have been reluctant to do that.

So we will engage in these discussions, but it will be on a rational basis for coming up with a fair market value.

Do you think that the $16 billion estimate that you provided in January or February 2016 is a stale number, now that copper markets have improved and you've invested more in the asset?

In other words, in your mind, is $16 billion too low now?

Well, the $16 billion number, just like in our 2016 transaction, was not a number that was based on the then existing copper price.

It was based on what people like Wood Mackenzie, sell-side guys like yourself, what's your outlook for copper prices were.

So since that time, we have updated that valuation.

It's part of private discussions with the government.

You would have to take into account, we've produced 1.5 years of those values in our current operations and received cash for it.

We've had some adjustments to our mine plans and the copper prices are what they are.

So we're at a number.

But in terms of what you are perceiving to be significantly higher, there are some things going in the other direction that affect that number as well.

And I'm sorry, just 1 last quick one for me.

So let's assume that an IPO is ultimately not an option.

Therefore, it's about a negotiation and the bid-ask spread, it never closes.

In other words, you can never come to an agreement.

Would Freeport -- and this might be too hypothetical to answer, but would Freeport be willing to accept an offer that is below what you deem to be fair market value in order to avoid the potential lose-lose scenario of arbitration?

In other words, is there an opportunity cost to not getting it done, even if you were to accept a price lower than you'd like?

Now, Chris, if you were in my shoes, would you answer that question?

No.

Hypothetical, sorry.

So I'm not going to answer the question.

And I'll also point out that the $16 billion number that we disclosed then was 100%.

We own 90% of that value, because the government already owns 9.36%.

Okay?

That's just a fact.

Your next question will come from the line of Andreas Bokkenheuser with UBS.

Actually all my questions were answered.

So thank you very much.

I appreciate the clarity.

Okay, Andrew.

Thank you.

Your next question will come from the line of Lucas Pipes with FBR Capital Markets.

So Richard, you drew a couple of parallels to negotiations that took place in 2016, which were all market-driven in my opinion.

So would you say you have agreed with the government of Indonesia on the set of assumptions that go into fair market value?

Not yet.

I mean, we've agreed on a concept of fair market value, but that's been part of the process of getting to where we are now.

And so the next stage is to deal with those parameters.

Got it.

That's helpful.

And then, here we are kind of at the midpoint between the framework agreement in late August and at the end of the year.

And what progress would you say has been made since the announcement of the framework agreement?

Let's see.

Kathleen's going to kick me, but not as much as I'd hoped for.

But I think the clarity of the government's desire and sense of urgency for reaching a deal has -- that was my hope when we announced the framework, and I think that is coming into play.

We've made a good bit of progress on -- and all of these things are incredibly complex, but we made a good bit of progress on fixing the financial and fiscal and legal terms for the extension.

We're still having discussions on the form of that.

We are working to get that documented in a contractual agreement between us and the government, that gives us the ability to defend that and not be subject to future changes in laws and regulations.

So that's the place where we've made the most specific progress.

We still have to firm up the form of that.

But the big issues on divestment -- the valuation issue we've made progress in dealing with this issue that was raised earlier about not considering reserves.

And I think you might remember Gambardella's first question, the issue about whether it's to 2021 to 2041.

All of those things we've made progress with the teams we're talking to with Indonesia.

That's very helpful.

And then maybe a follow-up on the Rio point.

So if the government of Indonesia were to buy Rio's stake hypothetically, would that satisfy your portion of the local ownership rules?

Well, there's -- there's kind of 2 aspects to that.

I mean, there is a possibility that Rio could stay involved.

In other words, they could continue to own 49% of their interest.

They publicly commented on questioning whether they would do that or not.

And if they do decide to exit, we would work with them to achieve their objectives, and then work with the government to see how that would fit into our overall divestment situation.

I can't say more than that, but that's part of the discussions.

Got it.

Right.

And then I have a quick operational question as well.

Last quarter, you mentioned some seismic activity in the DMLZ zone.

And I don't think it was mentioned at all this time.

Could you give us a quick update on where that stands?

Sure.

We did alter our plans last quarter, as we mentioned.

And this is one of the things going back to Chris's question about how this affects value.

But we altered our plans and it effectively was to slow down some of the near-term production at the DMLZ and we have followed those plans.

Feel good about the progress we're making in terms of the plans and the ultimate resolution of that, but it's -- the reason it's not highlighted in our report is that we've operated according to the plan that we set out going into the third quarter.

And Mark Johnson, you're on the call.

I think that summarized it, but if you have anything to add, feel free to.

Hey, Mark, are you there?

Mark's line is on mute.

Mark, could you unmute your phone?

Okay, I opened your line.

Yes, Richard, you're right.

We, after the June event in DMLZ, we came up with a revised plan that had 2 months of undercutting of focus on the undercutting.

We're nearing the end of that undercutting activity.

The mine's performed well.

We haven't had any unexpected seismic activity.

We expect in mid-November after we continue to assess the situation, that we would initiate a period of production.

So we're feeling confident that the changes that we made to the plan, that the mine's reacting well, and we're on schedule.

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

Just a quick follow-up on Grasberg.

I think at some point, we had seen a local media article that had suggested that Freeport might give up the right to international arbitration as part of the new framework.

That seems very unlikely, given your previous very clear comments on that issue.

But could you just quickly comment on that?

No, that's part of our position and -- when we use the term legal certainty in talking about the extension with fiscal and legal certainty, that means defining taxes, royalty in fiscal terms and legal enforceability, which would include international arbitration.

Okay.

And just turning elsewhere, with copper back about $3 a pound, is there any -- been given any consideration to resuming full mining rates at El Abra?

And what would be the cost of doing that?

Well, in El Abra, it's really not really a significant cost in doing it.

I mean, we have reduced mining rates so there would be some incremental cost, but it's not significant.

What's really factoring into that is the planning we're doing about the major project and when that might be commenced.

We haven't -- as I keep emphasizing, we haven't made that decision.

We have a lot of work to do before we do that.

But part of the mine rate decision is more coordinating that with the potential commencement of the major expansion project.

And Alex, if you remember, we had cut back production at El Abra and also at Sierrita.

We've been gradually bringing some of that back on and again doing it in a manner that would allow us to continue to preserve our operating cost position and also part of the reason why we cut back was to defer capital spending.

So we're -- we are bringing some of it back on-line but we're doing it in a very careful manner so that we don't alter in any significant way our cost structure or capital spending plans.

Okay.

And then just very quick on Cerro Verde.

I don't -- if I remember right, Cerro Verde hasn't been paying a dividend to its shareholders for a while, given the expansion and the spending there.

Is there any timing on when Cerro Verde is expected to resume paying dividends, cash dividends to shareholders?

That is under consideration.

As you've seen, we did complete the expansion.

And we refinanced the loan at the Cerro Verde level, which allowed us to repay shareholder loans that were made from the shareholders to advance into Cerro Verde to fund some of that project.

And so we do believe we will be in a position to resume dividends at Cerro Verde and that's under consideration as we review the outlook.

You've probably seen in the press release the royalty matter, which has created some uncertainty in terms of the timing of when any payments would have to be made in connection with that.

But even after the royalty matter, we do believe we'll have flexibility to resume dividend payments at Cerro Verde.

And so we're currently assessing the time frame and the extent of those dividends.

Okay.

And just on the royalty, I think in the slide you said, you paid $135 million so far.

Is that against the total amount, or against the -- your net amount?

That's the -- that's of the 3 -- the gross amount.

So that's the amount at Cerro Verde that's in place.

And that's an accrual.

But we have been paying.

We've paid $135 million under the installment method towards that.

Okay.

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

I'm thinking about dividends, as I ask the question.

In terms of the Kisanfu exploration project, the Serbian deep stuff, smelter in Indonesia, the heap leach at Lone Star, the sulfide mill at Lone Star or the sulfide mill at El Abra, are all of those things likely to be 2020 or later outlays that really don't influence the decision as to how much of a dividend to pay in 2018?

And could you just talk to the question of dividends?

Happy days are here again.

Well, the answer is yes to your first question.

Those are 2020 projects and beyond.

The big issue on dividends rest with our success in reaching a resolution on this Indonesian question.

And so as we go forward with success on that and with copper markets, which we believe will be positive, we'll be looking at debt levels, the potential for capital spending.

And we will be, what can I say, I'm confident, our Board will be very positive about paying dividends when the stars align.

So the bond rating agencies might be, in a way, pleased if a quarter or 2 is going to go where you just put all the cash to reducing debt while you're settling those affairs.

Well, I can tell you that the bond rating agencies are extraordinarily pleased with what we've done over the past almost 2 years now and in seeing where we are and the cash we're generating.

And like you say, if we continue to reduce cash, we get Indonesia settled, we will be in good shape with the rating agencies, even with beginning to pay a dividend.

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

Richard and Kathleen, a couple of questions for me.

Just in terms of the export license that you've renewed until the end of '17.

I'm just curious on that.

Normally, it's a 6-month renewal, I think, going back with the last couple of years.

Was that your call or the government's call to try to just lock that in?

And I assume that's to try to push the agenda along on settling this dispute.

Is that how we read it?

Or how did that come about?

That's exactly, right and it was a mutual decision.

Okay.

And then, you've touched on the Grasberg CapEx, what you're spending now and then going forward on a couple of questions earlier.

And it doesn't look like you've changed the guidance at all for that.

But based on 2Q -- the 2Q presentation and the 3Q, there's a small adjustment down in 2019.

It's only minor, from 0.8 billion pounds down to 0.7 billion.

Is that just around the edges?

Or has there been any change, I guess, in the last 3 months to what you're actually spending on the underground?

Or is it still like Kathleen said, about 25% down on the start of the year, what you're expecting?

Well, we go through a process every quarter.

Here at Freeport, we don't have an annual planning process.

We have a detailed review of capital allocation, capital spending every quarter.

We meet with all of our mine managers and review results and outlooks.

And we challenge people on capital spending and we defer where we can.

So particularly in Indonesia, we want to -- we're making efforts to reduce capital spending to the maximum level we can, while achieving our objectives of moving forward this project so that we could begin caving at the end of next year.

But the production change you're talking about is just that.

It's around the edges, rounding numbers change in 2019.

And over the 5-year period, it really wasn't a significant change in the overall copper or gold production or a significant change in spending.

Yes, understood.

I recognize that moves around a little bit quarter to quarter, and I think it's done that in the past.

So I'm just trying to check whether the last say, 3 months, anything's moved on the underground.

And the last question I had is just on Lone Star, the $850 million CapEx.

Do we think about that as being mainly spent in 2019, 2020, or into 2021?

Or what's the profile on that?

Well, it depends on when we start it, but it's roughly 3-plus years.

And the bulk of it is for mining equipment and the start, the preproduction and stripping.

But you could spend roughly $800 million of the total in '18, '19, '20 ratably if we were to move forward in the next several months, but it's still under consideration at this point.

Your next question comes from the line of Oscar Cabrera with CIBC World Markets.

Just in terms of the capital spend that you are deciding whether Grasberg gets the sulfur or not, and it's good to see that there's other projects that could [serve as] value within the company.

Kathleen just mentioned 2018, '19 and '20 for CapEx in Lone Star.

Is that based on a go-ahead or no-go-ahead decision in Grasberg?

No, no.

That's -- we're at the point now with our improvement in our debt levels in our balance sheet, that that's an independent decision.

So going forward on Lone Star is not dependent on having success with Grasberg.

Okay.

And then -- I'm sorry, go ahead.

No, I was just going to say, it fits in with the timing of the declines in Safford and how to best maximize the NPV of the project in connection with the expected production at Safford.

Because what we're doing really is leveraging the existing infrastructure.

And so as long as that infrastructure is being used for already developed reserves, we're better off deferring the spending at Lone Star.

But we're getting to the point now, and we've gotten the permit, et cetera, we're getting to the point now where we can see line of sight in terms of when those 2 intersections will cross.

And so we are going to be considering with our Board the timing of that project.

According to your 10-K, the life in Safford ends in 2024.

So you're saying that the new or the grades at Lone Star are better than what you're currently mining?

Yes.

And it ends in 2024, but it has a -- it will start falling off before then.

Yes.

It's -- the oxides at Safford are nearing the end of their lives.

This would be a whole different project if you had to build all this processing facilities and infrastructure to produce those reserves but when you have those available to you with excess capacity to deal with it, that's what makes it so attractive.

And for 200 million pounds of copper a year with that kind of cost structure, the payback for this investment is pretty quick.

Yes.

And I think I'm going to manage to ask another question without asking about Indonesia.

So on El Abra, you are quoting a 6- to 8-year of expected lead time.

If a new government gets elected in Chile, do you say you can accelerate that process?

And if so, CODELCO has quoted $40 billion in expenditures over the next 8 years.

Is -- I'm assuming El Abra is not part of that.

No, El Abra is not part of CODELCO's capital spending.

They're -- I think most of you know, they're our 49% partner, but that would be funded within the company itself.

The government issue, I don't believe, will have an impact on the process.

While there may be a potentially more favorable outlook for the industry, like around the world, in Chile environmental concerns are significant and widely held.

And so I believe we'd go through the same permitting process regardless of the government.

And this is a project being a brownfield expansion in this mining region near Antofagasta.

It's a -- it's the kind of project that Chile would welcome regardless of the government.

And regardless of government, they -- we'd want to make sure that the planning and environmental management's handled in the right way.

Your next question will come from the line of Brian MacArthur with Raymond James.

I hate to go back to Indonesia, again, but just -- 1 of the points you make all the time is how much benefits the government gets out of this.

And on the slide, you talk about $40 billion through to 2041.

And I'm just -- there's been talk about changing taxes in Indonesia as part of this or whatever.

I'm just curious, to the extent you can, what you actually assume to get the $40 billion?

Did you assume the current structure going forward?

Is that your share?

Does that include Rio?

Or what actually went in that?

Yes, that's the total for the project, and it includes the current contract tax and royalty provision.

We -- as part of our agreement, we've agreed to increase royalties to the royalty levels that are currently applicable under the new mining law.

And then we're working on new fiscal terms, so that the fiscal burden on our business would be equivalent to what it has been under the COW.

So the government would be receiving more benefits, which has been one of their objectives.

Those incremental benefits would come from higher royalties, but we're working together to reshuffle the cards somewhat on the taxes and other fees.

But the objective would be that the burden for our business would be equivalent to what it has been.

And Brian, we've been paying the higher royalties since 2014.

You'll remember that, that our royalty rate, we're paying more than what's under our COW today.

So we're not anticipating a material change in the aggregate of our fiscal terms.

Right.

And I assume and I guess -- but you assume through the 2022, you've sort of worked under the strip and everything the same and then switch to 60-40 there.

And spending, I mean, roughly are you just going to kind of make it work it out so it's neutral?

Yes.

Well, the way it works now is PT-FI pays its taxes.

Rio Tinto pays its taxes for this joint venture.

So I mean -- but you know this.

Let's remind everybody else.

We have a 35% income tax rate, whereas the general tax rate in Indonesia is 25%, and they're talking about potentially reducing it.

We also pay a 10% withholding tax for dividends that are paid from Indonesia to FCX.

So there is a very substantial tax burden already in place on us for which, as I said, is the highest of any country that we operate in.

Your next question will come from the line of Michael Dudas with Virtual (sic) [Vertical] Research.

That'd be Vertical.

And I'm sorry, I have to -- no Indonesia question here.

Just interested, Richard, your thoughts on early part of the cycle.

Are you getting some in-ditching pressures from your vendors, equipment, labor, contractors?

Is that something you've been able to push back?

Or is that something we're going to see as we move forward as the cycle strengthens?

Well, it's just natural that you go from a period of very low levels of activity with vendors to an increased level.

There's going to be a price impact with that.

We are such a large customer with our vendors that we have a partnership with them.

And so we work together to get the fair deals with them.

But I see some of the analysts already commenting on some cost increases in the industry.

And obviously as prices rise, you can expect cost to rise.

There is a correlation.

One of the reasons we've never been attracted to hedging is there is a correlation between copper prices and many of our input costs.

And so that's just -- that correlation is going to continue.

And I will just complement Red, Mike and their teams for the jobs they do to find efficiencies in everything from truck usage to tires to engines.

And we've done studies.

We've had to do that because we got these low-grade mines.

And our guys have done a great job.

We've benchmarked our operations against other mining operations around the world.

And when they show that to me, I get very proud of our team.

They're just doing a great job.

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

I was wondering if you could give your thoughts on the potential Chinese scrap import ban, and if that is affecting, or if you guys are seeing that affecting Chinese domestic buying behavior at all?

Or any thoughts surrounding that would be greatly helpful.

Well, there's so many moving parts in China today with the issues related to scrap, with their focus on environmental management, with -- they're taking steps to deal with inefficiencies in their industry.

And that carries over to the copper processing industry.

And then their efforts to continue to stimulate their economy and build infrastructures and now with the One Belt, One Road initiative to devote spending to infrastructure development in other countries, you add all of that up and what you see in China is growth at a much lower -- absolute level of growth than in the past.

But with the size of their economy which, by many measures, is the largest economy in the world now, and even lower growth with absolute levels, you end up with very significant amounts of copper demand.

But what's happening too in our industry is whereas China, for many years, was a source of all the growth, today growth from year to year is now coming from outside China.

With the recovery of economies in Europe and in the United States, perhaps 1/2 of the growth now is coming from countries outside China.

And so that's what is fundamentally good about our business.

We're so correlated to general economic levels in the developed countries.

And then when you have countries like China and other developing countries that are spending money, it creates good demand.

I was counting today the building cranes outside my window here at the hotel in Jakarta and I counted 18 high-rise building cranes going up and that's just 1 instance of growth in a southeastern Asia economy and the demand for copper that, that creates.

Great.

And then just 1 follow-up.

Going back to Slide 22 with respect to leverage, I just wanted to see longer term what's your goal or what do you have in mind for maybe a long-term average kind of debt-to-EBITDA level that you'd be comfortable with, just so we can get a sense of kind of how things could trend and what type of bandwidth you might have for future investments?

So we've never managed our business to have any kind of targeted debt to EBITDA.

We do a series of long-term forward cash flow analyses using different scenarios of copper prices.

And then we match capital spending to go with that, and we manage our debt levels to be comfortable with that.

I mean, we're at a debt level now that we will be comfortable with living with for the long term.

But because we're not prepared to commit to long-term capital right now, and we have this overhang of the Indonesian situation, we're going to be using cash flows to continue to reduce debt.

You may recall that in 2011, at the time they announced an oil and gas deal, our company had 0 debt and we were paying substantial dividends.

So we don't have a targeted debt level.

It's all based on cash flow analysis.

And we'll continue to run it on that basis and make disciplined decisions about investing capital when that's warranted.

Your next question comes from the line of Piyush Sood with Morgan Stanley.

First one, I just want to understand the optionality you have at Grasberg, where you could advance mining of some higher grades in 2018 and 2019.

So can you give us some idea on what's the upside here and if that could keep the open pit running longer than expected?

Well, we are going after the highest grades available.

And all of that is a function of the pit design.

We're at the very bottom of this pit right now.

And so Mark and his team are constantly looking for opportunities to get the highest grade available, consistent with maintaining the integrity of the pit and the safety of the slopes.

So there's not a question of having opportunities to high grade.

We're going after the very highest grade that we have.

Now we are -- as we get to the bottom of this pit, we're looking for opportunities to maximize PV and that's an ongoing mine planning exercise.

And so that may well be that we can find some opportunities for temporarily extending the pit.

But that's just going to be something at the margin.

We are -- and that would be a trade-off for what we can get through the pit and how much we could get from committing the block caving underground cost.

To the extent that we defer that, then you're deferring the ramp-up.

And so -- but it's strictly a safety-first exercise and then maximizing NPV for deciding where to access the ore.

That's helpful.

And switching gears to El Abra, I now realize the project is in its early days.

The technical study is a few years out.

But I just want to check if that's an operation for a world where copper's at $3?

Or is it maybe a project for $3.50 or $4 copper world?

It's more in the range of $3.

It's not a $4 project.

No, it's a -- we have reserves at $2, but we're not -- we wouldn't run the mine plan on that.

But it would require confidence that you've got a $3 copper price to proceed with.

And by the way, that's the industry we live in.

I mean, we look at -- always look over all these analyst reports before our earnings call.

I mean, Wood Mackenzie's long-term incentive price for copper is $3.30.

That's just what it is.

I'm not commenting on it one way or another other than saying that's what their analysis shows for the industry as a whole.

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

Well, those were good questions, not unexpected questions, I'd say.

But we appreciate your participation, your good questions.

We look forward to reporting our progress as we go forward.

If you have any follow-up issues you'd like to get clarification on, please contact David Joint, and he will arrange for us to respond to any questions or comments that you might have.

So thanks, everyone.

Have a good day.

Ladies and gentlemen, that concludes our call for today.

Thank you for your participation.

You may now disconnect.