費利浦·麥克莫蘭銅金 (FCX) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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

(Operator Instructions)

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

Please go ahead ma'am.

Thank you, and good morning, everyone.

Welcome to the Freeport-McMoRan First Quarter 2018 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 live -- 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 today's -- 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 would like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in our Form 10-K and subsequent SEC filings.

Now on this call today is Richard Adkerson; Red Conger is here; Mark Johnson is on the line; Mike Kendrick's here as well.

I'll start by briefly summarizing our financial results and then turn the call over to Richard who will review our recent performance and outlook.

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

Today, FCX reported net income attributable to common stock of $692 million for the first quarter of 2018, $0.47 per share.

That included net credits of $13 million or $0.01 per share in the first quarter.

Our adjusted earnings before interest taxes and depreciation for the first quarter of 2018 totaled $1.93 billion.

There's a reconciliation of EBITDA in the back of our slide deck on Slide 27.

As summarized on Page VII of the press release, our EBITDA was reduced by $135 million in the first quarter associated with the impact of the decline in copper prices during the period from $3.28 at the start of the year to $3.04 per pound at the end of the first quarter.

The adjustment relates to sales that were provisionally priced at year-end that were marked to actuals during the first quarter and sales that were opened at the end of the first quarter, and those were marked at $3.04 which was the forward price at the time of our quarter-end.

Our provisionally priced sales are mark-to-market until final settlements occur.

Our copper sales during the quarter were 993 million pounds.

Gold sales were 610,000 ounces, and we sold 24 million pounds of molybdenum.

Gold sales were above the year-ago quarter by significant margin but were about 10% below our guidance of 675,000 ounces because of maintenance on the ore flow systems in Indonesia.

Our first quarter 2018 average realized copper price was $3.11, that was above the year-ago quarter average of $2.67 and gold prices averaged $1,312 per ounce in the first quarter of 2018, that was also higher than $1,229 per ounce level in the first quarter of 2017.

Our unit cash cost, net of by-product credits for our consolidated operations averaged $0.98 per pound in the first quarter of 2018.

We generated strong cash flows above our capital expenditures.

Our cash flows from operations in the first quarter totaled $1.4 billion, and that exceeded our capital expenditures of $400 million.

We continue to strengthen our balance sheet.

During the first quarter, we repaid borrowings totaling $1.5 billion.

And in April -- in the second quarter, in April 2018, we repaid $454 million in debt associated with the early redemption of a higher coupon notes.

We ended the quarter with consolidated cash of $3.7 billion and our consolidated debt totaled $11.6 billion.

So our debt, net of cash was below $8 billion at quarter end.

We have a no borrowings and $3.5 billion available under our revolving credit facility at the end of the quarter.

We reported earlier this week that we have entered into a new $3.5 billion 5-year revolving credit facility to replace the existing facility, which was scheduled to mature in May of 2019.

We're pleased with the outcome of the new arrangement, which is substantially similar in structure and terms to the prior facility.

Also during the quarter, our Board of Directors reinstated the cash dividend on the common stock, which we'll talk more about our financial policy, but the first quarterly dividend of $0.05 per share will be paid -- has been declared and will be paid on May 1.

I'd now like to turn the call over to Richard, who'll be commenting on our slide presentation, which is located on our website.

Good morning, everyone.

Refer to Slide 3. Today, we're actually mailing out our Annual Report for 2017.

You see a picture on the cover and some comments that are summary comments from the Annual Report.

It reflects our leadership position in the copper industry.

We operate -- we're the largest operator of copper mines in the world.

We operate all the mines that we have interest in.

We have a set of high-quality assets that would be very difficult to replicate in today's world and very experienced team of mine developers and operators that are well-respected and have great success in developing and operating mines.

And our company has a focused strategy as we go forward.

With respect to financial policy, on the next slide, we have a balanced approach.

Over the past 2 years, we've been very successful in taking our debt down from unsustainable levels to below our targeted levels actually.

And as we look forward, we will be generating substantial cash flows in excess of our capital spending.

And we will use those cash flows to further reduce debt.

We're assessing future investments and we have a number of alternatives that we are pursuing and we'll move forward with -- in a disciplined way.

And we started paying a dividend now, and so we're focused on returning cash to shareholders over time.

We'll continue to delever.

We will invest in a disciplined way.

We will look to increase the dividend either as regular dividends or as special dividends we go forward in the future.

In the first quarter, we maintained our focus on productivity, cost management, cash discipline.

And as Kathleen said, our operating cash flows exceeded our CapEx by about $1 billion.

Our unit net cash cost were below $1, significantly lower than the year-ago quarter.

We repaid $2 billion of debt and our net debt is below $8 billion.

And we're working hard to advance planning for our development activities.

Copper markets.

Every quarter, I get a one-page report from our marketing team about copper markets.

And I'm just going to read the headlines from the report I received yesterday.

Copper demand, steady after a quiet spot market in the U.S.; Positive sentiment in China; European cathode consumption improving as scrap is driving up; Japanese copper sectors are positive.

That tells the story about where we are and today, Steve Higgins gave me a note saying that we are getting a great start off into the second quarter.

We supply about 40% or so of the copper used downstream in the U.S. market from our mines in the U.S. And right now, we are actually having to purchase cathode on the marketplace to meet the demands of our customers.

The long-term fundamentals for copper are increasingly strong, it was down at CESCO, and that was a common theme you'll hear from everyone.

Deficits appear inevitable, absent turmoil and downturn in China, the global economic situation and with a low carbon environment, it's very positive for copper with electric vehicles and alternative energy generation.

We have significant leverage to copper prices and we're positioned to take strong advantage of this.

In Indonesia, you're aware that in 2017, we reached a framework of our long-term resolution to provide stability, and that's our key, to have stability through 2041, the term of our existing contract with fiscal terms and legal terms that would be stabilized and not subject to further future changes.

We made continued progress.

We have a motivated parties to this, on our side, on the government side.

I met with the Finance Minister in Washington next week where she was there -- in Washington last week where she was there for the World Bank meetings and did a presentation and she reaffirmed the government, the President's objective of getting this resolved and was optimistic about it.

We are working to complete negotiations and the required documentation as quickly as possible.

Where we stand now, the government is in negotiations with our joint venture partner about the potential acquisition of that joint venture interest.

That would be very positive for us.

We're in negotiations of shareholders agreement to deal with the issue of management of the business.

It's important for us that we continue to have control of the way the business is managed and its financial policy.

We're working on the form of the stability agreement.

Both parties recognized the objective of stability, and we need to have this in a form that is satisfactory.

And we're dealing with some new environmental claims that have come out of the Ministry of Environment and Forestry.

These were really shocking and disappointing to us.

And they don't really deal with the technicalities of environmental management, but the new position really expresses the fundamental view about the ways the tailing systems is managed.

Back in the 1990s, in a transparent and comprehensive process, we, our joint venture partner and the government reached a conclusion to deal with the real complicated challenges of managing tailings at the Grasberg with its high elevation, high rainfall and extraordinary large volumes.

We all agreed at that time that we would use a river system that was designated to transport the tailings from the Highlands into a cordoned off area in the lowlands.

And the tailings would be a positive out there -- positive there with a portion going to Ajkwa into the Arafura Sea.

That was concluded to be the best systems in.

We've now operated it for 20 years.

The good news is it has operated and was designed with no one anticipated -- with no unanticipated impact.

Our tailings fortunately have chemistry that makes them benign.

There have been no human health issues or impacts on environment that wasn't anticipated.

It was also controversial, but it was a decision that was basically said, "Are you going to develop this mine in this location or not?" And it was agreed to, we followed it, we're going to work with the government.

In a complicated system like this, there are always technical and environmental issues to deal with.

We have and we'll continue to work cooperative deal with that.

But you simply can't say, 20 years later, "We're going to change the whole structure of what we're doing." You can't put the genie back in the bottle, and so we're surprised.

Others and the government are surprised, and it's just something that we'll have to work with.

I will tell you this, it has no impact on our view of the value of our asset.

Now, we did have a very positive development with the government.

Just last week, we have had an ongoing dispute with the province over the provinces in position of a surface water tax that was contrary to our contracted work.

I want to say, at the very outset, is that we want to support the province.

Since 1996, roughly 20 years ago, we've contributed over $700 million voluntarily to a fund to support the local community, and we continue to devote 1% of our revenues to support that fund.

Under the new agreement we are working with the government in terms of the taxes and royalties, a greater percentage of those payments to the central government will go to the province.

We're very supportive of that.

So it's not a question of Freeport not supporting the province, it was a large assessment that the province made arbitrarily, contrary to our (inaudible), our total exposure was on the order of $500 million, we were disappointed because the tax court didn't rule in our favor, but the Supreme Court did.

And the good news about it, in the Supreme Court's finding, they pointed out that our contract was approved by the government in 1991, that is binding on the government and on the regional government; that the contract is specific in nature of lex specialis, which means that is it a law that overrides general law and it governs the operations to the parties.

The contract provides, it should be carried out in good faith, it was a very positive decision by the Supreme Court.

And we congratulate the government in this step in establishing the rule of law, which will encourage further investment in Indonesia.

So we are encouraged.

We're continuing to work with the government.

The next step is completing the divestiture process.

Grasberg Block Cave had significant progress in the first quarter.

We actually commissioned the train and track that's a key part of the system for delivering ore to our mill from there.

We also commissioned a major offloading station, significant work has been done to develop this high-grade, large-scale mine.

This is the same ore body that we're mining from the pit.

We're just simply using Block Cave mining rather than surface mining.

It is the major resource, almost 1 billion tons of ore, that's over 1% copper and over 0.72 grams of gold over the life.

It makes it very profitable with a very low-cost system going forward.

As we look at what this is, it really -- as we complete mining from the pit, which we expect to do by the end of this year, there'll be a ramp-up period like a new project because we can't mine underground until we're out of the pit because of the subsidence of the surface underground.

And so this is really like starting up a new mine and there'll be a period of time of ramp-up.

Beginning in 2019, and within a 3-year period or so, we'll be up to full production from that.

The good news is we're ready to go with it.

I mean, the basic system is in place.

The big step like completing the mine at Cerro Verde.

I mean, as you looked at this project over a number of years, there were risks associated with it, and we said we needed those risks.

I want to address the Deep DMLZ mine.

This is a separate ore system, which Freeport began mining underground in the early 1980s and has successfully extended that ore body separate from the Grasberg ore body at deeper levels.

And the Deep MLZ is the most recent extension that started with a near surface mine and went to an intermediate ore zone mine, the DOZ mine and here we are now.

Now, it is a distinct host rock situation from the Grasberg Block Cave.

The rock here is much more competent, hard, it has substantially more -- it's substantially lower from the surface, and so it has a different rock characteristics and pressure environment.

We have a been ramping this mine up, and we began to encounter mining-induced seismic activities.

This is not earthquakes or natural systems but as we create the Block Cave, it has created seismic events that has caused us to slow down the development to manage this safely.

Our first priority is to keep our people safe, and we are doing that.

We had some new events in the first quarter.

And so we're not able to meet the schedule that we had planned going into the quarter.

But our team, and we got a world-class team of outside exports -- experts that's meeting with us continually on this, I had a report from this past week, and we have got a plan to help deal with this safely over time.

We do not expect this, and are confident that it will not affect our longer-term mine plans, or our ultimate reserve recovery.

In fact, our new adjustment for our 5-year plan from the underground, we have higher volumes coming over the next 5 years than we did going into the quarter.

But near term, we are modifying our mine plans and we're continuing to review it.

And it's just one of those things about mining that you have to deal with.

And as I said, we're being cautious because we want our people to be safe, but we're confident we can deal with this.

So talk about another project, the Lone Star oxide development project that we reported on previously.

Reserve of 4.4 billion pounds of copper.

We have a project in place to invest $850 million.

And we will be able to use the production infrastructure and facilities that we have at the adjacent Safford mine, which is a mine that began production 11, 12 years ago and now has available capacity to take this new oxide ore.

We began pre-stripping in the first quarter.

It will be very profitable high-return project, 200 million pounds of copper a year with a 20-year mine life, a cash cost of $1.75, over $1 billion NPV, plus $3 copper.

But importantly, it will strip this oxide in waste layer from this area exposing and increasingly attractive sulfide deposit.

And to show what that is on the Slide 11, we show a recent intercepts of our exploration drilling, which we have done some in the past, and we are initiating a new program, and it's some very attractive intercepts in this area, in this environment.

You can see the last 2 intercepts are drilling that's been done this year.

We're continuing to drill.

This is pointing towards a mineral system that could well be consistent with the nearby Morenci mine.

It could be that large.

And so it's a great indication of the future of our company, right here where we have existing operations, in a community that's supporting of us.

And it could be very, very large and, this is new information for us in terms of the extent of this.

Page 12, I won't go with this because we review it every quarter, shows just the number of opportunities we have to develop our reserves.

Our 2P reserves are over 60 billion pounds of copper, and then at $2 copper.

This is in the Americas, in the U.S. and in South America, and we have huge volumes of mineralized material and potential associated with this.

This is low risk development extension of our existing operations.

We're doing trade-off studies now to see where our first step will be in developing these resources.

My personal view, this is the key asset of our company.

Our outlook for 2018 is presented on Slide 11 (sic) [Slide 13].

It's consistent with our previous guidance, and we'll be generating at today's copper prices, substantial cash flows well above our capital expenditures, which will allow us to progress our financial policy.

Our sales profile numbers is shown on Page 14.

2019 reflects the completion of the mining of the open pit at Grasberg and the beginning of the ramp up of the underground mine there.

The adjustments that you see there of about 150 million pounds reflects this issue that we have with the Deep MLZ and that reflects also, you can see the 2019 gold.

I want again to emphasize, this is not lost resource.

This is a question of the timing of when we access to it.

We're going to access it as quickly as we can, consistent with maintaining the safety of our people and our operations.

Our standard slide on EBITDA and cash flows is presented on Page 15.

Average EBITDA at $3 to $3.50; copper is roughly $6 billion to $7.5 billion.

This is a 3-year average from 2019, 2020, 2021.

Average operating cash flows from $3 to $3.50 is $4 billion to $5.5 billion.

Capital expenditures, roughly in line with our previous guidance.

The major projects include the continuing of Grasberg underground development and Lone Star.

We have been very aggressively, for years, constraining our stay in business, our sustaining capital and now we're having to spend some money to deal with the deferrals that we had in previous years, but we will be very disciplined in the way we spend capital and generate lots of cash flows.

A slide we're all proud of here at Freeport is on Page 17.

Going into 2016, $20 billion of debt, lots of uncertainties.

That time, some years ago, on this call, I said we would try to reduce our debt by $5 billion to $10 billion over a 2-year period.

We're now reporting we are less than $8 billion and as we look forward to the end of the year, we will have this debt down depending on copper prices on the order to roughly $5 billion to $6 billion.

So great success story.

A reference slide included there, so I wanted to quickly go to those slides to give us time for questions and operator, we'll open the call for questions now.

(Operator Instructions) Our first question will come from the line of Matthew Korn with Goldman Sachs

So you've taken down, looking at your slide deck, you've taken down 2019 expectations pretty substantially, making it even more of a transition year with the DMLZ, maybe, the main factor it appears.

Are there any other changes or reductions across the regions embedded in that 2019 number?

And then is there any reflects available across the other assets that could make up any of that production to the upside?

The answer to your first question is no, there's -- I mean, every quarter is, I think, you all know, we don't have an annual planning exercise.

We update our plans every quarter.

Just had Red's team in here last week and this is the normal ups and downs for the rest of our operations.

Outside of Grasberg, outside of PT-FI, there's really no magic bullet we can do in the short run.

We have a mantra of pushing safe production, and we do that continually and we'll continue to do that.

We are working to progress the Grasberg Block Cave mine and we're making some progress in seeing how to maximize that as we go forward.

Interesting time for the remainder of 2019, in the pit as we -- 2018 in the pit as we finish mining in the pit and try to get as much out of that as we can.

So this is -- this really a factor of having the seismic -- mining-induced seismic events that were not anticipated, not in our original plans, and so this is one of the things you just deal with in mining, and that's what's causing this impact.

Got it and let me ask more immediate then, could you tell us a bit more about what prompted -- what looked like the some expected maintenance activities there at Grasberg?

What's the status there?

And when you're thinking about today, looking through the rest of the year, what are the main risks you think the output reaching your expectations there at that mine?

Okay.

So you know the Grasberg development is now 20 years old.

I mean, we began production of the expanded facilities in January 1998, that was when we built our big SAG mill and the ball mill systems, we completed the ore float system using these ore passageways and developed a system of ore delivery from the passageways to the mill.

So the truth is, these things have some age on them, and we had a system of maintenance.

In doing a current review of that, these problems were really, in some ways, a function of the times we've gone through in recent years of where our prep production has been interrupted by export bands, labor issues, and so forth.

And so now that we are operating in a normal fashion and our mill -- our mine rates, our labor situation has been very good, and we returned to a more normal function as we ramped up, and we found that we had these ore delivery system maintenance issues.

We realigned resources in Indonesia, but we also marshaled resources from our global team and have sent them out there to rectify the situation.

And so we are dealing with it.

This will be something that's important to us as we have the high grades from the pit in the remainder of 2018.

And then as we ramp up the underground, it's important that we have the ore delivery systems operating effectively.

We've also had, along with that, some issues related to the ore that we're feeding into the mill.

And that is a point-in-time issue.

We're not mining waste.

We're mining ore.

And some of that ore, as we've mined it, has been placed in the bottom of the pit, which conditions out there are very wet and that's created some of this ore having a stickiness to a clay-like situation to it, which is complicated both ore delivery through our ore passes and the feed into the mill.

So there are some special point-in-time operating issues related to where we are in the pit, and we're addressing those.

And the we're addressing these maintenance issues to not only allow us to operate effectively for the rest of the year, but also to then have the systems ready for the ramp up of the underground ore from the Grasberg Block Cave that's going to start very early in 2019.

Your next question comes from the line of Lucas Pipes with B. Riley FBR.

I wanted to follow up a little bit on the situation in Indonesia.

Richard, last quarter, you were pretty outspoken in terms of the likelihood of a resolution.

How do you see things -- where do you see things standing today?

How quickly do you think you can look towards a resolution at this time?

Okay, thanks.

I retained my optimism.

The reality is the government, late in 2017, concluded that they needed to do a due diligence process.

I mentioned this last time, they hired an internationally known investment bank, a major accounting firm, international lawyers and a mining due diligence firm out of Australia, to assist them with that.

That process took longer than I expected.

This is a government entity with a lot of players involved that aren't experienced in doing things like this.

So it's not surprising, but it took longer.

It appears, and these parties will speak for themselves because we're facilitating negotiations, but not participating in the negotiations, negotiations between our current partner and our future partner, so it's a sensitive matter for us.

And those negotiations have started.

You have an apparent willing seller, certainly a motivated buyer.

Indications are that the President remains -- President of Indonesia remains focused on seeing this deal through.

That's been expressed to me by government officials.

And while the process, because of the due diligence thing is taking longer, is still on track.

This environmental decree, and I'm concerned that behind it was political motivations rather -- it's certainly not technical motivations.

They're setting in the decree standards that don't apply to us as we speak but -- set a time frame of 6 months, it just can't be achieved.

We had an agreement with the government that over the life of the mine, we would retain 50% of the tailings on land.

They are now saying it should be 95%, which just cannot be done.

They set suspended solid standards that are actually lower than natural sediment standards that would go through the river system.

I mean, it's 200 versus an agreement that we've had for 20 years of 18,000.

So this is not good news, but it's so out of bounds that I'm very confident we'll get this done.

It's just it's taking some work to do it.

But it's not something that "I've got you on a technical issue".

It is a revisit of the whole system, and you can't revisit a system that was agreed to 20 years ago and has been operating effectively over 20 years with no unexpected environmental consequences.

The nontailings are being deposited in an area of where they can be reclaimed, we grow agriculture projects there.

The system meets drinking water standards.

There's no impact on marine life.

There's a thriving mud crab industry in the area.

People fish, offshore, where we are.

And so this is a distraction, but you all know over time we have to deal with political issues, and this is one of them.

I noticed there is a presidential election about 12 months from now.

Do you think there is a risk that negotiations will continue to drag on and potentially, reach a point where it just makes more sense to conclude them after a new President is elected?

Well, the presidential elections are -- will occur in 2019.

There's regional elections that'll occur this year.

About the second half of this year, it will be in full swing campaigning, and you have to say that, that's a potential risk.

It appears that the President would like to get this resolved before that.

He's very popular.

I mean, his favorable ratings are on the order of 2/3, and he's done a good job in managing Indonesia, such a large, diverse population and economy in a complicated world.

But realistically you'd have to say that, that is a risk.

We don't see a thing to interfere with our operations.

The government needs and desires now to make sure that we operate, and they collect their taxes and royalties.

And our positions about the long-term are very clear with where we are, it's important for us to continue to operate the rest of this year when we have such favorable ore to process and to profit from all together.

I mean, it's not just us, but the government also.

It's a reality and a potential factor that will have to bring into play.

We want to move this as quickly as possible and I know their government can do as well.

And maybe one last one to squeeze in and to change the topic.

You've obviously been very focused on the Indonesia situation, but more recently, thinking a little bit more about growth and then restarting the dividend.

From here on out, where do you think would you, outside of Indonesia, kind of spend your focus?

What is most important to you?

And to what extent does M&A also factor into those considerations?

So you're correct about focus.

I mean, 2016 was a focus on deleveraging.

2017 was a focus on Indonesia.

By the fall, I've been spending a lot of time with Red and his team, who've been working all through this period and running our operations and looking at the future.

And so I spent a lot of time in -- when I was in Santiago, talking with other companies about their plans, how people are sizing this up, what projects they have, when are they proceeding with them.

And so we are doing trade-offs about basically 2 large projects right now, and we have a series of others that will follow.

But it's looking at the El Abra opportunity in Chile, which would be a major Cerro Verde type project with the added requirement for a saltwater desalination plant and pipeline to take the water up to heights.

And we are 51% owner with CODELCO.

We met with the CODELCO people there.

They're positive about the project.

They're going through changes right now with the change in government.

And then our Bagdad mine in Northwest Arizona is -- Red might wince -- is a more straightforward project, because it's a basically mill expansion, but we have deal with tailings area and water, which we worked on for years.

And so those are the 2 that we're teeing up.

And so what am I looking forward to is announcing the new projects, announcing -- last time, I said I was looking forward to increasing the dividend, the board did that right after our call, and initiating the dividend.

And we are -- it's great to see a future of where we can build shareholder value out of these resources where we're not getting value today.

We know we need to convert those resources into cash flows.

We will get value.

I'm very confident about the future of the copper business.

That confidence is shared by my peers in the industry.

And so we feel really great about it.

We don't have to do anything right now.

I mean, it's still a question with all these trade issues floating around.

We need to see how those sort out.

We're not, as a company, directly affected by, but copper is correlated to economic activity.

And if these trade things affect economic activity, that's a factor.

So feel really great about where we are, great about our company, our assets, our people and the direction we're going in.

And we'll always have issues to deal with like the Deep MLZ stuff and so forth, but that's just mining.

I mean, you go back and look at all the big mines around the world, have had times to deal with this.

The great news is the resource is there.

We're a long-term business, and that resource is going to create value for our shareholders.

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

First question is just relative to your -- to the costs in North America and South America specifically, it looks like they're -- they crept up a little bit from last year.

And -- but it seems like there's some of it, which should be somewhat temporary in terms of either lower grades or higher maintenance and repair costs.

The big picture question is, to what extent are you seeing kind of general mining inflation?

To what extent is this temporary?

And then also to what extent is this like you were saying, Richard, catching up from not spending on maintenance capital in the past?

And if that is the case, how long would you expect to have to continue to kind of catch up?

Okay.

So you start with the fact that a significant portion of our input cost are correlated with copper prices.

Does it make sense?

You think about things that drive energy cost and steel cost and contractor cost and all those sorts of things.

So our job is to find ways of mitigating these inherent increases by being more efficient.

Red made a presentation about that at the Cesco conference in Santiago.

Go to that website, and you can see what we're doing.

We haven't bought -- I mean, Caterpillar had great results today, and it's always a key indicator for us.

They're kind of an index on the infrastructure spending around the world.

So -- but we haven't built a new truck.

We haven't bought a new truck at Freeport since the financial crisis.

We're rebuilding trunks.

We're taking cranes and component parts.

We're extending the life of our tires.

We're using all these sensors on all of our equipment that's feeding all this data in to systems that make us better able to control what operators are doing and how we do that.

So you have this dynamic of input costs increasing, efficiencies have an impact on mitigating that.

And then the issues you pointed out about gradings and so forth, and that's going to go up and down within a relatively narrow range over time.

In the short term, we're also increasing the mining and the production rate at Sierrita and El Abra both.

Those are kind of front-end-loaded cost-wise before we really start to see the pounds coming out later in the year or so.

That's right.

That's a part of it.

El Abra was constrained.

Right.

So was Sierrita.

But prices were down.

Sierrita.

And those mines are making money now.

And so we're having to spend some money to take advantage of that.

So like -- so you're doing more stripping at the -- sorry.

Yes, I was just going to say, we're not showing significant changes in our cash cost trajectory going forward.

During 2015 and 2016, we took a lot of steps to maximize cash flows.

And we do have some catch-up that we're doing, but we're operating now in more of a normal situation.

And so we don't -- we're not seeing a lot of cost increases or decreases in the near term, except for the kinds of things Richard talked about, the things that will be correlated with energy prices or other currencies or other movements that are correlated to the copper price.

And our current outlook for sustained capital, I think, is a good longer-term outlook.

It's not something that's going to be increasing there, but we can't keep it to $500 million for an operation like this.

It's going to be more in the order of $1 billion a year.

Okay.

Okay, got it.

And then the second question is, on -- for Grasberg, on Slide 23 of the presentation, you have the -- your production outlook.

How much will you need to be mining from the underground in order to achieve that guidance?

And how much are you mining now from the underground?

And so I guess, my question is, what's your expected ramp rate from the underground?

And what are the real inherent risks to getting there and achieving this guidance?

Well, we -- as Richard said, at the end of 2018, we expect to see some mining in the open pit.

We will have some stockpiles that we'll mine, but those aren't anything of great significance for the long term.

So really, all of our production will start to come from the underground mines.

We're operating the DOZ mine currently, and our forecast includes roughly 40,000 tons a day from DOZ.

Our Deep MLZ ramp-up, we expect to ultimately get to 80,000 tons a day from that mine.

And right now, our projection is we'll get there in the 2021, 2022 time frame.

And in the Grasberg Block Cave, we'll be ramping that up, and we expect to get to roughly 100,000 tons a day from that mine in 2022.

And the ultimate production from that mine we expect to be in the 130,000 to 160,000 tons per day range.

But in terms of the Deep MLZ and the Grasberg Block Cave combined, by 2020, from those 2 mines, we would expect to average about 70,000 to 75,000 tons a day combined in 2020 on average versus capacity, which will be 80,000 plus 130,000, so something on the order of 200,000.

We do have -- and Mark Johnson is on the line and he can comment about this, so we do have, in the Grasberg Block Cave, access to higher-grade material in the earlier years.

So even though we're in a ramp-up period, we still will have the benefit of accessing some higher-grade material from that ore body.

As Richard said, it's the same ore body as our Grasberg open pit, just a different mining method.

But Mark, I don't know if you want to add anything to the comments about the ramp-up?

Yes.

Unfortunately, the highest grade ore in these ore bodies is also the most capable.

So it makes sense that we start there from both an economic and a mining method approach.

As Kathleen said, in the early years of Grasberg, it's well above the ore body average.

We're well above 1.1% copper and 1 gram -- 1.2 grams for much of that ramp-up period.

And same for the Deep MLZ.

We have exceptional grade.

We start off in 1.6% copper and about 1.6 gram per ton gold.

So both of those are -- offset the lower tons as we ramp up.

And then as we get up to a steady state on the production rate over about a 5- or 6-year period at the Grasberg, and we expect the same with the Deep MLZ after we get the seismic event or seismic event -- or seismic situation resolved.

These ramp-up rates are what we were able to do in the DOZ 10 years ago as we ramped up.

So a lot of the ramp-up is based on how quickly you can advance the undercut.

You concurrently develop extraction level, which is the drop belt and sequencing of the mine over the long term.

So these are things that we've done in the past with the DOZ, and we're applying.

We've got better construction techniques now.

As far as the ore flow systems, going forward, Richard mentioned that a lot of the infrastructure that we have now is dated.

As we shut down the pit, much of that older system is mothballed, and we'll be relying on the -- majority of the ore flow system will be brand new systems that we built for both Deep MLZ and GBC.

So we'll be starting fresh with new infrastructure that's all been done at a very high standard.

So we're very optimistic on the ramp-up of both of those mines, both the Deep MLZ and GBC.

Big Gossan also, smaller mine but, very high grade.

It's about 2.5% copper equivalent, and we're ramping it up also.

It has a potential of about 100 million pounds a year and about 60,000 ounces.

Not a large mine for PT-FI, but still a very significant contributor to what we're doing in the future in the underground.

Okay, got it.

Okay.

So in 2020, because of the higher grades, you only have to do 70,000 tons per day from the DMLZ and the Grasberg Block Cave combined.

And then you'll -- as you ramp up the throughput from the underground to 2021, 2022, the grades will decline and that allows you to achieve the -- and then eventually, even 2023, you should even see a bigger increase in -- or as you progress in 2023 and beyond, a bigger increase in throughput.

And should production increase in 2023 and beyond?

Or will grades, like, continue to decline?

I guess, it's far out.

It's fairly steady.

It's fairly steady.

We get up to the 200-plus -- 200,000 ton-plus range that Kathleen mentioned.

And then the grades in the Grasberg, steady for quite a while.

We end up with a little bit higher grade towards the end again.

So it's somewhat variable, but we've got a long-term outlook that shows us very much over 1 billion tons a year and gold, very -- we've got slides, I know that we've shown in the past, that show the underground era.

And it's in that 1.5 million ounce range longer term.

Yes.

And that's 100%.

So we would have 50% of that.

So our reference slides have that.

I mean, we're just casually mentioning an underground operation feeding 200,000 to 240,000 tons per day of ore to a mill.

I mean, I've talked to others in the industry, and people are just -- they're just amazed by it.

And it's -- the infrastructure there is truly amazing.

So first time ever and we're very confident with it.

Okay.

Let's go on the next question.

Our next question will come from the line of Oscar Cabrera with CIBC.

Just going to start with your development projects.

I must admit that until you started focusing on Lone Star, didn't realize that the resource grade was 0.61%.

So as you're looking at the future of the company with El Abra and Lone Star, could you comment on what you think is -- you look at the projects and what's more favorable to you?

Is it all of the advantages that you have in the U.S.?

Or is it -- is Chile now with requirements for desalination on that sort of like second on the list?

Well, that's what we're trying to decide.

I mean, it's in some ways comparable.

When we -- 11 years ago, when we bought Phelps Dodge and we looked at El Abra, we -- all we could see was the oxide project and the Sulfolix project, and that was it.

We drilled these core holes, found this enormous resource, and now we're working to take advantage of it.

People have known about Lone Star going back to the 1960s.

And now we're drilling it, and we're getting real stars in our eyes about how really big this thing could be.

I mean, we're talking about something that might could well be, over the years, another Morenci type deposit.

But that's going to take some time.

We're going to evaluate that.

We have, as I said, a much more straightforward expansion project available to us at Bagdad, and that's where the trade-off that you're talking about really come into place.

Lower energy cost in the U.S,; no labor unions; much flexible ability to adjust the workforce; communities that provide education, health care, housing for people as opposed to our having to do all that; the workers driving their Forward trucks to work with the lunch pail.

It's -- all of those things add up to making investment in the U.S. relatively more attractive than it's ever been.

And so that's what we're doing those trade-offs for.

And the Lone Star deal is a -- is more of a bigger picture, longer time frame type asset, but it's going to create a lot of value for Freeport shareholders.

Now that's for sure.

And then before I ask you the next question, it might be worthwhile just adding like a cross-section of the Lone Star sulfide, just to get context.

And then lastly, just a clarification on your comments on your disclosures with Indonesia Ministry of Environment.

Are they expecting changes in 6 months?

Is that the -- part of the discussion, because with -- I don't -- this is not realistic, and as you said, might be politically motivated.

But can you provide a little bit more context on those discussions?

Well, I'm as perplexed as you are.

And we're having dialogue.

We'll continue to have dialogue not only with the environmental and forestry ministry, but with the ministers that are working directly with us on our contract situation.

So this is -- we were not expecting these decrees.

I had to tell you about them, because they came.

They cannot be put in place.

It's not just Freeport.

Nobody could mine this ore body in consistency with these decrees.

You just physically can't do it.

So it's some of the noise that happens from time to time, and we're going to deal with this in a constructive dialogue to explain -- we're already doing that, to explain the situation and talk about what realistically is doable or not.

It's addressing a problem that isn't there.

There's no problem here.

No, that's what it sounds like.

The non-tailings that are being managed, as we said we would, and nobody can identify impacts of significance that weren't anticipated.

It almost goes back to the issue, are you going to develop the mine or not, because there's no way to store tailings up in those mountains.

And we looked at every conceivable alternative.

I mean, we had experts from Indonesia and around the world.

It's a public process.

The Indonesian environmental minister at the time said, it was the most comprehensive environmental study ever done in Indonesia.

And we all said, "Okay, this is way we were going to do it." And this is the way we've done it.

So anyway, I had to tell you about it.

I'm confident that this is going to be dealt with.

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

Sorry to keep popping on Indonesia.

But a couple of questions, if I may.

You talked about the ministry, they're trying to impose new environmental standards.

But there's also been reports in the local press about them making a very substantial claim for damages.

I think it's been reported around $13 billion, something like that.

Is -- are those press reports accurate?

And is that an official claim from that ministry, a legal claim?

Or is this just noise...

No, this came about because of governmental audit group that in some ways, not totally like our GAO.

It was a centralized audit group that came in.

And that claim is based on degradation to the tailings deposition area.

They're -- it's a large area of land, and they say that, that area was degraded by environmental impact.

Of course, it was.

I mean, we had over 2.5 billion tons of ore to process, take the concentrate out and deposit those tailings somewhere.

And that's where we did it.

Not to come back and say, "Okay, you've got to pay some financial fine for doing something that the government approved." It's outrageous.

But they haven't presented any kind of claim.

It says, it's in their report to this government ministries of what a number of what in potential environmental damage could be.

So it's just a number.

It's not like...

An academic group did a theoretical study to say, what happened with this tailings deposition.

And they used some approaches to measure environmental damage that's used around the world.

But it's not something that is outside of what was approved.

It's strictly in this designated tailing deposition area where we built dikes to cordon it off and agree that's where we were going to put this billions of tons of tailings.

And that's what we're doing.

That's very clear and very helpful.

And then just to follow up on the Deep MLZ, are you considering any impact there of the slowdown beyond 2019?

And I noticed, when you look at the guidance, you expect some makeup for the slowdown beyond 2019.

But I guess, at a practical level, how is that going to happen, because if...

Some of the makeup is from what Mark was talking to you about with the Grasberg Block Cave.

So you're looking at the total production, which includes Deep MLZ and the Grasberg Block Cave, and to a smaller degree, the Big Gossan.

Now the unfortunate thing about this unexpected occurrence was the Deep MLZ, because of what Mark said, having these 1.6% copper grades available to us, when we looked back a couple of years ago and saw this coming, we said, well, this previously expected falloff in 2019, it was earlier years then, was going to be offset by this ore from Deep MLZ.

Now we've had these seismic events, and that's been pushed back.

So we have to be candid.

We are dealing with this.

There's some uncertainty as to how long it's going to take to get this Block Cave operating in a way of where these seismic events are not of the nature that they create risk to our people.

We have a plan.

We're going to report to you how that plan goes over time, but it's all dependent on the timing for that.

And you can appreciate, we're being very conservative with it.

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

So touching on kind of what you were just saying.

The Deep MLZ, you guys took down your mining profile out to like 2022 if we look at kind of what you guys had last quarter.

Is that just the mining, the seismic activity bringing down all the out years as well?

Or what's the driver of that?

Well, if you look at the slide for the 5 years on Slide 23, the actual total production over that period, net to PT-FI's interest, is 5.4 billion pounds of copper, which is similar to what we had -- I think we had 5.3 billion in our last plan over that period of time.

And gold is similar to what we had in the last quarterly update.

But what we're seeing is a shift out of 2019, and the outer years are higher than what our plan was, because Deep MLZ is shifted out.

As Mark said, the beginning of the year -- beginning production ramp-up of Deep MLZ has higher grade.

So that shift will just continue to shift it out.

And then also with the progress that we've made on the Grasberg Block Cave and the position we're in, in terms of the commencement of the cave in early 2019, those 2 factors combined bring us to where we've got better.

Over the long term, it's essentially the same as where we were before.

But we do have this impact in 2019 that at this point, our mine plans don't show being able to make up, and we're going to continue to work on that.

Got it, that makes sense.

And then looking at your CapEx, it looks like you reduced your spend for the long-term PT-FI investment plans to $0.8 billion from $0.9 billion; however, net to PT-FI remained at $0.7 billion.

Would you mind just running through why the net to PT-FI number doesn't change despite the CapEx number decreasing?

Yes.

Listen, this is -- some of this is rounding.

In other words, we give numbers that are rounded.

So...

Yes, we did reduce -- over the 5 years, we did reduce 100% Grasberg CapEx by about $300 million associated with the timing of power requirements.

And as Richard said, in terms of the sharing mechanisms, it's going to be in a large part rounding.

But some of the projects, we share differently than others, so it's -- and we can talk to you offline if you want more of a deep dive into it.

I mean, we have this ongoing process of where our whole team is looking at these CapEx.

Engineers questioning them, saying that they have ways to do it cheaper, better, that we have to do it now, can we defer it.

It's all part of maximizing the economics of the operation, and that's ongoing.

Fundamentally, nothing has really changed.

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

Maybe one last one on Indonesia, hopefully.

But just going back to that Ministry of Environment and Forestry issue.

Just to clarify, so obviously, you mentioned it could very well be political.

You're saying that technologically, it may not be feasible.

Within that, are we basically saying, yes, that even if -- I mean, the statement was saying that it has to be a 6-month transition period, even if the government came out and said, you know what, we'll give you 24 months or 30 months or whatever.

You're basically still saying that it could be done.

Does that mean that theoretically worst-case scenario, that production lines will halt?

Or does it mean that production potentially could come down 50%?

What would be the operational outcome in the worst case scenario here?

I want to clarify something you just said.

You said may not be achievable.

I want to be clear.

It is not achievable.

There's no may about it.

It cannot be done within 6 months, 24 months, 5 years.

This just -- this is so far out of bounds.

It cannot be done.

And as I said, it's addressing a problem that doesn't exist.

The reason I say politically, it's a revisit of the decision that was made back in the 1990s, are you going to develop this mine?

I mean, we looked at pipelines, we looked at sea disposal.

We looked to build a pipeline on the other side of the mountain.

We cannot store these tailings in the mountains.

And the question of this stopping operations, it's not going to happen.

Indonesia is looking to relying on the financial benefits that's coming out of this mine to deal with its budgetary issues.

The taxes, royalties that they are receiving is on the order of $40 billion, I think over the life of the mine, and the province needs this economic impact.

This is a province that doesn't have a lot of jobs.

It wants to have economic development.

We are 95% of the economy of the Regency of Mimika.

And so this is not going to stop our operations.

It's a matter of education.

I'm proud of the way we've run this environmental thing, I expressed that to the ministers in Washington last week, we don't need to be defensive about this.

We are managing these environmental issues in an admirable way.

So we can show that it can be reclaimed.

We can show that we're meeting drinking and water standards.

So we're -- we have land that with appropriate fertilizer can ultimately become crop land.

And so there's nothing to be defensive about.

There's no possibility that this is something that's going to disrupt our operations.

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

A lot of mine have already been answered, but one different question I had.

You're in 2018.

It's kind of a, I guess, a nitpicky question.

Net debt target for year-end 2018 increased.

It was $4.8 billion previously.

Now it's $5.5 billion.

If I look at the differences, I think dividend and working capital changes account for about $200 million of that increase.

Lower CapEx is about $100 million swing in the other direction.

So I'm just trying to reconcile what caused the other increase of about $600 million to the targeted net debt figure for 2018?

Which case are you looking at, Dave?

I'm comparing the 4Q slide on net debt target by year-end 2018.

For which price case?

The Page 17 on the slide deck.

You're in 23.

Which one you've got?

No, I know.

Which slide?

$3.25.

$3.25, okay.

So part of it is we didn't get $3.25 all year, right?

I mean, we're already through part of the year, and we're less than that.

Also, the previous slide was before we did our dividend.

So this is net of the dividend.

The other differences are the differences in the operating cash flow changes that we -- that are on the previous slide.

So we can walk you through it.

But the main thing -- the main difference from what case you're looking at is we didn't get $3.25.

This includes actuals for the first quarter and estimates for the balance of the year based on these prices.

And then we didn't have the dividend in the last case.

So Dave, David Joint will call you and walk you through the analysis on that.

There's nothing there other than what we just talked about for the rest of the group.

Our final question will come from the line of Michael Dudas with Vertical Research.

I'll try to make it brief.

Just 2 quick questions.

First, now with the environmental issues that you discussed during the call are out in the open, what can we look for as a milestone or timing to figure out how things are working out just on that issue specifically and how it ties into the overall discussion regarding the potential transaction?

So I've expressed the concern that these environmental issues represent a distraction from going forward with the plan we're working on.

And so we have to deal with that.

And at this point, the milestone, we'll be making sure that the ministers we're dealing with on the broader issue understand what this is and what this isn't.

And so we're engaged in that education process right now.

I mean, we've presented, written, had meetings.

I'm reaching out to meet with the environmental minister to deal with this.

I just have to tell you, this just came up.

I mean, when was it?

It was last week?

Mid-April, yes.

Yes, mid-April.

So you're getting this, as we've gotten it, and we've got to respond to it.

So I just want to keep coming back, it's addressing a problem that doesn't exist.

That's very helpful.

And just my final follow-up, Richard.

When you think about the plan, Freeport 2.0, once this -- once Indonesia gets resolved, is there going to be acceleration on the plans you're talking about in Latin America and North America from a capital growth standpoint?

Or you -- do you need to wait to resolve Indonesia to really get yourself set to track those plans?

Or is it better just to harvest things before you get some clarity on the other end?

I'll always say this, I don't think given the improvement we have in our balance sheet and given where we are with Indonesia that -- it's a factor, but it's not a major constraint in what we decide to do going forward.

We certainly have the financial capability of doing it.

Quite frankly, we're not out looking for partners on this thing.

We already have a partner at CODELCO and El Abra.

We are -- there's nothing compelling us to act quickly.

But as we get -- the clarity that I think we need to have is on the global economic situation.

And this trade issue was a curveball for everybody, and that's obviously every day -- debated every day in the paper about whether that's going to be a negotiating strategy to deal with some obvious issues in China for competition or is it going to lead to a tit-for-tit deal that's going to have a significant global impact.

But for me, that's the big issue.

You scrape that away and look at the underlying numbers, China grew at 6.8%.

Business in U.S. is really good.

Our customers feel good.

Europe and even Japan is growing.

I mean, it's the first time we've had this.

And I told people in the industry that I've never seen, have been around in this industry now for a very long time, I've been CEO for 15 years, I've never seen a more positive outlook going into a year as we head in 2018.

And then we get this trade deal that's got people scratching their heads.

It clearly had an impact on investor flows.

And that can -- that affects prices at any point in time.

But there's nothing in the underlying economies that change anything.

Nothing has changed the supply situation.

There's -- and even these projects that people are considering are so long-term, and they're just going to be needed, because Brook Hunt talks about having a need for 4.5 million tons of copper capacity over the next 10 years.

And when you -- and that's about the size of the top 10 copper mines in the world.

And so the world is going to need this copper.

And increasingly, every day, you read about people wanting to move more towards electric vehicles and alternative energy sources, electric vehicles, 3, 4x more copper, alternative energy sources.

There's 4x more copper than conventional power generation.

And you've got all the support that goes on with that.

I mean, this is a good outlook for demand.

And the best thing about copper is that it's supply constrained.

You've got to CODELCO facing challenges of maintaining production.

And you've all heard me say this for a long time, but I'm believer and I think there's consensus now.

Thanks all of you.

We appreciate it, and we look forward to reporting on this -- on our progress and milestones as we go forward.

Appreciate your interest in our company.

Ladies and gentlemen, that concludes our call for today.

Thank you for your participation.

You may now disconnect.