費利浦·麥克莫蘭銅金 (FCX) 2018 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Freeport-McMoRan Second 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.

Welcome to the Freeport-McMoRan Second Quarter 2018 Earnings Conference Call.

Our results were released earlier this morning, and a copy of the press release and slide material 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 conference 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 2017 Form 10-K and subsequent SEC filings.

On the call today, Richard Adkerson, our Chief Executive Officer; Red Conger, who heads up our Americas business; Mark Johnson who oversees our Indonesian operations; and Mike Kendrick, who heads up our molybdenum business.

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

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

Today, FCX reported net income attributable to common stock of $869 million or $0.59 per share for the second quarter of 2018.

Excluding net credits of $16 million recorded in the quarter or $0.01 per share, our adjusted net income totaled $853 million or $0.58 per share.

Our adjusted earnings before interest, taxes, depreciation and amortization for the second quarter was just above $2.1 billion.

And we've got a reconciliation of the EBITDA calculations on Page 29 of our slide materials.

We sold copper in the quarter of 989 million pounds.

Our gold volumes were 676,000 ounces, and molybdenum sales totaled 24 million pounds.

They were higher than our estimates in terms of copper, that primarily reflected higher mining and milling rates and higher ore grades in Indonesia.

Gold sales were slightly lower than our estimate, primarily because of quarter-end timing of shipments in Indonesia, but they were substantially higher than the 2017 sales of 432,000 ounces, reflecting the high grades of ore that we're mining at Grasberg.

At the second quarter 2018, average realized price for copper was $3.08 per pound, that was 16% above the year-ago quarter average price.

And gold prices averaged $12.74 per ounce, those were also above the year-ago period average price of $12.43 per ounce.

Our average net unit cash cost for the quarter, and this is net of by-product basis -- I mean, by-product credits on a consolidated basis was $0.96 per pound of copper for the quarter.

That reflected strong performance from our global operations and a continued focus on productivity and cost management.

During the quarter, we generated $1.3 billion of operating cash flows, those are cash flows net of taxes, net of interest cost.

And those exceeded our capital expenditures, which were just below $500 million.

We continue to strengthen our balance sheet during the quarter.

Our consolidated cash totaled $3.9 billion at June 30, and our consolidated debt totaled $11.1 billion.

That total debt number is down $2 billion since the start of the year.

Net debt at June 30 approximated $7.3 billion, and that was over $1 billion less than at the beginning of the year.

As you saw on the first quarter, our board reinstated a cash dividend on common stock and we declared a dividend of $0.05 per share under this new policy that will be paid on August 1.

I'd now like to turn the call over to Richard, who will be reviewing our results and outlook, and referring to the slide presentation materials on our website.

Good morning, everyone.

I'm briefly going to go through this overview material and then address your questions.

The positive second quarter results that Kathleen referred to reflected our team's focus on productivity, cost management and capital discipline, well ahead of last year's quarter, when we were affected by regulatory issues from the government on exports and labor issues, but we basically met our targets.

We would have exceeded them but for some weather delays in shipping concentrate out of PT-FI, which happens to us from time to time.

Kathleen noted our positive debt-reduction activities.

You may recall that 18 months ago, we set a target to reduce our $20 billion plus debt at that time by $5 billion to $10 billion by the end of 2018, and now we're at $7.3 billion.

We previously announced the Heads of Agreement that we've entered into with the state-owned company in Indonesian and Inalum and Rio Tinto on July 12, which establishes a way forward to resolve our issues related to the long-term stability of operations in Indonesia.

And we're going to talk about the advances we're making with our Lone Star project here in Arizona.

First, a couple of comments about copper markets.

Sentiment in mid-June turned significantly negative for commodities, including copper, all tied into this trade issues that we're doing with internationally now.

Copper is down 14% since June 15 after rising.

Many other commodities are also down.

There's -- as we sit here today, there is an anomaly between market sentiment and fundamentals in the marketplace.

We're continuing to see real demand being very positive for our global business, including our business in China.

The fiscal markets are broadly balanced globally.

Exchange stocks are actually down since mid-June and supply growth continues to be muted.

When Mackenzie said today's copper price is 15% below the real price that's needed for an incentive basis to develop new production, so we're likely continue to see under investment continuing, which this continues to build this long-midterm positive outlook for copper.

And increasingly, it's being -- it's clear that future copper demand is going to benefit significantly from the development of renewable energy projects being undertaken all around the world and the development of electric vehicles.

Now all this is in a context of declining ore grades from producing mines and a real lack of actionable projects expected to be contained in the -- for future supply.

So absent having some sort of global recession or major setback in China, market deficits in the copper appear to be inevitable.

And I'll just make a quick note on China's actions in the last few days to loosen its fiscal situation in this country to continue to support continued investment.

We don't do this very often, but I'm going to give a call out to Wood Mackenzie on their June 2018 report.

It is excellent.

I mean, it sounds like I'm talking to an echo chamber when I read this thing, so I referred that to you and just answer any questions that I might be able to offer to any questions you might have.

We previously announced the Heads of Agreement on July 12.

It points to a new long-term positive partnership between our company and the government of Indonesia, and that's a long time coming.

It does not represent a final resolution in that we have to have a consummation of a series of agreements.

But all of this is envisioned by the agreements, understandings that we've reached in the Heads of Agreement.

From our standpoint, it would achieve our long-term -- our goal for long-term stability for our Grasberg operations with stabilized fiscal and legal terms that would be legally enforceable.

And importantly, with the way this thing is developed over the past year, this structure allows us as FCX to retain our current existing economics.

It preserves our share of cash flows and our net asset values.

It's not dilutive to FCX shareholders.

You may recall last August, we were looking at a situation where we're going to have to divest a significant part of our interest with Rio Tinto's decision to exit.

This allows us to avoid that and will allow us to continue to manage the operation.

This is something that I'm really looking forward to.

It would create a strong alignment of interest between the Indonesian government through this state-owned enterprise, Inalum, the local government in Papua and our company.

So going forward, we'd all be working together, what does that mean?

Regulatory issues are likely to be much less of a barrier, issues dealing with local communities are likely to improve, issues related to security, to regulatory changes, to all the things that had been distractions, sometimes barriers to us, and it would be positive for all the parties.

We're working on definitive agreements.

We'll say expected to close in the second half of 2018.

Indonesian government's officials are talking about a quicker closing.

Our operations were really exceptional.

Our team in Papua has just done a great job in dealing with all the issues there.

Our mill rate was 188,000 ton per day with plus 1% copper and 1.77% gold, which shows you the quality of this ore body.

We are -- while we're continuing construction of this underground infrastructure to allow us to move forward beyond the Grasberg open pit, we've had really strong reduction, the second quarter unit net cash cost was a negative $0.77.

That means the gold component of our concentrate more than funded our total operating cost and we paid 1.6 -- PT-FI paid $1.6 billion of dividend.

Now we had some mine plan adjustments that are reflected in the numbers we'll be talking about.

Part of this has to do with our efforts to deal with the seismic events in our deep MLZ mine, which we commenced last year.

We've run into some harder, more confident rock there that's led to this mining-induced seismic events.

We are being very cautious with these about safety, and so we're undertaking a remedial program to be able to mine this resource in a safe way.

And our current plan calls for us, and we're under way with this right now, to drill poles to allow us to use water to frac this confident material, which our plan indicates would lead to the initiation of caving in a normal way.

It's going to take some time, and so we have reflected that in our plans.

But we got a global team working with us.

We're confident this will be done.

It's been done in South America successfully.

And so it's not affecting the resource itself.

It's just a question of starting it up and ramping it up.

In light of that, we undertook a study of our open pit operations and we're announcing today that we're going to extend operations from the open pit through the first half of next year, 2019, at attractive economics and allows us to accelerate production that otherwise would have gone through in the Grasberg Block Cave.

I want to make sure that everyone understands that this deep MLZ mine is a separate mine from the Grasberg Block Cave.

The Grasberg Block Cave is an extension of the same ore body we've been mining from the surface that we now we'll be mining underground in Block Cave.

We know that ore body very well.

And its rock characteristics are similar to what we've dealt with in the open pit and will not be the same as this confident rock we're operating with the Deep MLZ mine.

The Deep MLZ mine is an extension of underground mineralization that we started mining into and there's a schematic on Page 23, that we began mining in the early 1980s actually, but now it's at significant depth.

The deep MLZ mine is at 1,500 to 1,800 meters underground.

The Grasberg Block Cave is 300 to 400 meters underground because of the pit being taken out of it.

And we just ran into some harder rock.

It's going to us longer to ramp it up.

Think of it this way, we're basically completing a mine, Grasberg open pit, and now we're starting like a new development with the underground ore bodies that we have at the Deep MLZ and the Grasberg Block Cave.

Over a 5-year period, the amount of copper and gold that we'll recover is virtually the same, but it will delay the startup of the Deep MLZ.

The bulk of the capital will be an extent in developing the infrastructure here in this time period, and so this is where we are on Page 7. You see that we will have a transition years in 2019 and 2020, and ramp up beginning at the end of 2020, so that by 2022, we would be in full production from our underground mining system with over 200,000 tons a day through the mill.

Volumes are high this year, as we complete mining in the open pit going into next year.

And after transition years, by 2022, we will be up to sustainable rates that would last through 2041 with little capital to be spent on infrastructure development and the only capital then will be on the ongoing development of the underground caves.

Now we're going to be talking more in the future about the resources that our company has available to it outside Indonesia.

Understandably, investor focus has been on the issues in Indonesia because of the size of that asset and the situation we've had with the government.

But we want to make sure everyone understands just how great this company has in resources in the Americas and the level of profitable production we're having now and also the future that we have for development in North American and South America.

We are currently engaged, as we've previously talked about, in developing an oxide resource at the Lone Star deposit adjacent to our Safford mining infrastructure and very near our big Morenci mine in Eastern Arizona.

We have 4.4 billion pounds of copper reserves, only oxide.

We're spending capital over time that will aggregate $850 million.

We commenced pre-stripping earlier this year.

And this stripping is going to provide us exposure to a very large sulfide deposit that lies underneath this oxide deposit.

Very low execution risk.

It's basically almost like strip mining, stripping of a resource, but it's going to be profitable in that oxide ore can be taken to our facilities that are in existence and underutilized at Safford, and we'll make money out of it as you can see on Page 8.

Now we have continued to drill the sulfide resource underneath this oxide deposit that we're developing.

We have 6 rigs going there now.

You can see the results of core holes that we had during the second quarter and this is very attractive mineralization for this area and for our North America in general.

This resource continues to get larger.

It has the potential over time of becoming another Morenci.

I don't say that with anything other than seriousness.

And we are very excited about this.

It will take time to get it.

But in terms of looking at what's ahead for our company to have this opportunity right in the midst of our existing operations in Arizona with a favorable regulatory environment that we have here and our established positive relationships with the local communities and the Native American communities, this is a real positive for our company.

Outside of Lone Star, in North America, at Bagdad, our Chino/Cobre operations in New Mexico, the Morenci mine itself and at Sierrita, we have significant undeveloped resources and we're in evaluating those for future development.

In South America, we're focused on a tremendous opportunities we have with our partner, CODELCO at our El Abra mine where we have again, a very large sulfide resource to look at.

We have this large footprint at Cerro Verde and at our meeting last week, the guys gave me an exciting piece of core from Cerro Verde as we're drilling there.

We're studying this now.

We have no plans to commence a major project in the current environment, but we're preparing for that.

And we have a very large portfolio within the company with many options to consider what's going to be our future steps for expanding the company's resources.

Turning to Slide 11.

Our sales outlook for copper, gold, molybdenum are unchanged.

Our unit costs are essentially in order to -- in line with what we've predicted earlier, what we forecast earlier.

And our operating cash flows at $2.75 copper would be $4.3 billion, if we meet our plan.

Obviously, this is affected by what we supported last quarter at $3.15 copper.

We're very levered and you know that leverage goes both ways.

For each $0.10 change in copper price, for the remainder of this year, it's $185 million of operating cash flow to us.

Capital expenditures are unchanged.

Page 12 shows our profile for our copper and gold sales for the year.

You can see '19 will be a transition year as well as will '20.

And at the end of that, we'll be -- our plans call us for to be in full productive mode as we go forward.

Page 13 shows the EBITDA and cash flow slides that we show each year.

We've done something a little different each quarter.

We've done something a little different this quarter.

In the first block, we show what those numbers, EBITDA and cash flow numbers, would be at different copper prices, ranging from $3 to $3.50.

That's in line with the current forward sales prices and showing what the average would be for 2019 and 2020.

And then showing what the average would be as we transition to the ramp-up of our underground mines in '21 and '22.

And you can see the significant difference that, that makes.

But we want to make sure you saw the full range of this at varying copper prices and $12.50 in gold and $11 molybdenum.

Capital expenditures are shown on Slide 14.

They are not changed from previous quarter.

Our financial policy is still focused on strengthening our balance sheet.

As I mentioned, we've made significant -- more than significant progress over the past 18 months.

And we believe we'll be in positive markets going forward and we continue to improve our balance sheet.

We have a disciplined approach to invest in attractive growth projects.

We're going to be driven by value.

We're not growing just for the sake of growing, that makes no sense.

But we have the chance to invest over time in a way that will add value to our company.

These resources receive very little value in today's stock prices.

As we are successful in finding ways to invest in a disciplined way, in low-cost expansion projects, that's going to create cash flows and values for our company.

We really have a strong team to execute this strategy.

We're focused on all aspects of the copper business, and our team has proven itself throughout the world in being able to develop and operate resources in challenging circumstances across the breadth of investments in operations in the copper business.

We're going to be driven by returns to shareholders.

Our board and management our team is totally focused on creating value for shareholders, and I want to emphasize this, in a disciplined way.

The Industry has learned a lot of lessons in recent years and that discipline extends across the industry and all that does is add for more support for future supplies.

So we reinstated a dividend.

We expect to be in a position over time to increase that dividend.

We have to see what these trade issues mean for the world's economy.

My hope and the hope, I think, of a lot of people throughout the American industry is that it's a strategy to deal with specific issues and it doesn't result in an all-out trade wars that results in a serious implications for the economy.

But we have to see what happens with that, it's uncertain.

We review this financial policy at every board meeting.

There's a number of reference slides here that are available for your future review.

We may use some of them in answering questions.

But with that, Regina, I'd like to turn the call over to questions.

(Operator Instructions) The first question will, from the line of Matthew Korn with Goldman Sachs.

So we noticed in the guidance changes here on Grasberg, we noticed a little bit of a pushback tilting away from '21 or '19 and '20, a little bit towards '22.

Is that largely DMLZ?

Are there other challenges?

Is this essentially tied to the Slide 7 where you look through and you're showing us to changes in the ore mill per day?

How does that all fit together?

It's Deep MLZ.

I mean, if you go back -- for several years now, we've been developing this Deep MLZ with the expectation that it would be ramping up actually in 2016, 2017 and it has very high grades available to us.

And as we got into mining that ore body, we encountered unexpectedly harder rock than we had experienced as we mined the same ore mineralization area for years.

And the original mine mark was the GBT and the intermediate ore zone, the deep ore zone and now the Deep MLZ.

We got the deep MLZ.

It's much farther underground and the rock is harder and we started running into these seismic events, which happen other places in the industry.

It causes us to be cautious.

We got a plan now to use water to frac this ore body to prepare it for caving.

And so that whole thing is driven by that one factor.

Everything else is going fine, everything else.

But as we saw this being pushed out now to 2021, as always, we start looking at ways to mitigate that.

And we found a step to mitigate that by extending the life of the Grasberg open pit, mining some very high-grade ore into the first half of next year and what you see is the net effects of that, of a deferral of the Deep MLZ and a continuation of mining from the open pit.

And the numbers you see are the net of those 2. And I want to just keep coming back and emphasizing this because I read articles in the press, as we all do, and we want to make sure that people understand that this is a different rock environment, different rock characteristics than the rock, it will be mining in the Grasberg Block Cave.

As I said, that's just an extension of the same ore body that we've been mining since the early 1990s, and we drilled, Mark, thousands of holes into it?

And so we really understand that and don't expect this problem that we have in the Deep MLZ to be experienced in the Grasberg Block Cave.

Got it, I appreciate the clarity because we saw when you listed your near-term objective there in block cave over the next year, all that seem like that it had held in place.

Let me just mention one thing.

We've had a series of milestones in the development of Grasberg Block Cave, including this week, this week, for the first time, we delivered ore from that Block Cave through our ore delivery system that is using a train system, first time we've done that.

And we've actually, this week, delivered the ore from the Block Cave to the mill.

So through all of this stuff with export bans and negotiations with the government and all these other things, this team has just been relentless in developing this infrastructure, and it's achieved milestone after milestones, so we're ready to go.

And like I said, it's like finishing up -- it happens to be mines in the same mineral district, but this is like totally finishing up one mine and starting up a new one and that ramp up is just like people will face in starting up new mines in Mongolia or in Arizona or anywhere else.

So you need to think of it in that context.

All right.

Got it.

It's a very clear.

Let me ask in context of all that's been negotiated with the Indonesian government, still needs to finalize.

How does this work with the aim to maintain the cash flows through and over the next 5-year period as they were under the existing JV.

For example, if there's more issue with the Deep MLZ, you're still working through, you're still developing the mine plan, if there's more slippage and some of these mined areas that are part of the plan you don't get to until 2023, is there a risk that you would lose some of that attributable copper?

Or would it still be based on no, we're not in the mining sections yet, in which the additional stream out of the JV would activate, if that makes sense.

Matthew, this is Kathleen.

The economics of the Rio Tinto deal joint venture will carry forward under the new structure.

So there's a certain quantity of metal, as you know, that is 100% for PT-FI's interest.

And then the increment produced above what that is shared 60-40 between PT-FI and Rio Tinto.

And so that would continue.

The existing shareholders, PT-FI, would continue to have the 100% of specific volumes whenever they're produced.

And currently, that's expected to be produced by the end of 2022.

So we're not expecting a change in this new structure, and we're working with our new partner to make sure that those cash flows go to the existing PT-FI shareholders and then the new shares that they'll get, they'll have 40% after a certain period of time.

So let me -- thanks, Kathleen, but let me tell you how we're doing that.

With Rio Tinto, there was a joint venture that was going to continue to 2041.

Rio Tinto never owned shares in PT-FI, never talked about owning shares in PT-FI.

The government wants to own shares in PT-FI.

And so in a step to cooperating with the government achieving its interest, we agreed to convert that to 2041 -- I mean, to shares, but there would be a dividend agreement that we will receive dividends with respect to those shares until this Rio Tinto cut-off date would have been reached.

Our next question will come from the line of Lucas Pipes with B. Riley FBR.

I wanted to follow up a little bit more and I know you spoke about this both in your prepared remarks and just in the previous question.

But can you maybe elaborate a little bit on what's driving the increase in 2022 from that 1.6 to 1.9 on the gold side?

It's just the ramp up.

It's the ramp up.

And where that ramp up was going to start earlier, it's going to start now.

It's very high grades of copper and gold in this Deep MLZ, and so we just shifted the ramp up time.

It's nothing more than that.

Can you explain to me what's driving the specific -- the increase from 2022, out, should it continue to operate at this higher level?

Or is it really kind of a 1-year bounce in 2022?

Well, we show a 5-year estimate on that ramp up slide.

So you can see what the next 5 years looks like on an aggregate basis, and you can see it's pretty similar.

In 2022, we reached 103,000 tons a day average for the Grasberg Block Cave, and that will increase to the 130,000 to 160,000 ton range.

So the Grasberg Block Cave will become the largest part of our production profile after that.

But really what you're seeing in terms of this shift to 2022 has to do with what Richard just said, that we have higher grade the Deep MLZ earlier on, and those have been shifted from 2020 to 2021 and 2022.

And then the Grasberg Block Cave kicks in and will start increasing.

That's why you see on a 5-year average, after 2022, it remains very similar.

But in the aggregate, there's not any spike here.

There's not a spike here like you suggested.

We build up to full production level, 200,000 plus through the mill that essentially extends through 2041 and with very high grades of copper and gold, and all of this will now be within PT-FI and we'll have 50% of the shares of PT-FI.

So half of it is ours and half of it is the government.

That's very helpful.

And maybe one more follow up.

When I look at the transition year 2019, 3.3 billion pounds and then that kind of ramping up on an average 2020 through to 2022 to 4 billion pounds.

Could you maybe disaggregate a little bit, I know you break down the Grasberg production in greater detail in the latest slides of the presentation.

But from an aggregate production level, would it be possible to break down 2020, 2021 and 2022 in a little bit more detail?

2021 and 2022 is similar, and this is PT-FI.

This is FCX consolidated under the current scheme at about 4.2 billion pounds.

And 2021, at this stage -- I mean, 2020 at this stage is 3.5 billion pounds.

Got it.

I very much appreciate it.

Just to give you a quick flavor on that.

The Deep MLZ in 2020 should be around 300 million pounds of copper, and more than doubling that the next 2 years.

The Grasberg Block Cave would be 200 million pounds in 2020 and by 2022, it'd be over 800 million pounds.

So that's the -- we got 2 ramp ups going here with the Deep MLZ and the Grasberg Block Cave, which is going to be the cornerstone of our future.

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

My question is also around the Deep MLZ.

The hydraulic frac-ing technique.

Is this something that Freeport is currently familiar with?

I know a couple of other mines, Block Caves that are doing the hydraulic frac-ing, but I wasn't sure if it's something that you're already doing at Grasberg.

And then the second part to the question if I may, how confident are you that this is going to resolve the seismic issues?

And, I guess, how concerned are you overall about the Deep MLZ and the risk that there is a significant problem there rather than a minor problem?

This is Mark Johnson.

As far as the hydro frac-ing, it's not something that we've ever applied to an ore body before.

We've had the equipment since the end of 2017.

In the first half of the year, we've been doing testing that was required to calibrate how the density of drilling that we would need.

So we've had a period of time where we've gotten familiar with the equipment, the geologic setting, our drill teams have been trained.

We've had vendors in and we've met with various consultants.

We've also collaborated with others in the industry that have been using it for some time.

So we feel very confident that we have the crews, the equipment and understanding the geologic setting and the density in which we need to drill it.

So it's new to us.

It's not new to the industry.

CODELCO's used it.

Newcrest has used it, and it's been very effective in their setting.

The consultants that have worked with Newcrest and CODELCO are the same consultants that are working with us.

So we have a high level of confidence in their judgment and their guidance, the modeling that they're doing on how it's going to affect and allow us to advance the cave in the Deep MLZ.

To us, it's not a matter of if the Deep MLZ is going to cave.

It's how do we cave it safely, how do we cave it in a controlled manner and that's essentially what we're doing.

We still have some unknowns.

As we drill these holes, we'll be starting, as Richard mentioned, we've already started drilling the holes.

We'll begin frac-ing within the next couple of weeks.

And it's not really a very complicated technology.

It's fairly simple equipment.

It's high-pressure pumps.

It's packing, it's been used -- it's a much different type of application than the oil industry, but from a pumping standpoint, it's not that different.

So we feel very confident that we're taking the right next step.

And as Kathleen mentioned, we've given ourselves some time.

We've built in some contingency in our schedule for some of the unknowns.

And I'd say that 3 months from now, we'll be able to give you much more accurate estimates as to how that cave is going to start up.

Our company has had experience with fracking in the oil and gas business.

So we spent a lot of time talking about the differences, this is frac-ing over a much narrower area and so forth, and it's much simpler.

But a lot of that frac-ing technology has been developed extensively in the oil business.

So I think Mark's point was it's not a question of if.

It's a question of when, safely.

Our next question will come from the line of Orest Wowkodaw with Scotiabank.

Two questions.

First of all, I was wondering, your revised mine plan here for Grasberg.

I mean, how aggressive do you think this ramp-up schedule is now when I look at the ore mill in terms of throughput.

And just curious if you see potential more downside risk to that in terms of the level of the ramp up, where your comfort level is?

And then the second question just had to do with Richard's comment in the press release about the company willing to adjust "your plans" if necessary to respond to market conditions.

I was hoping you could maybe elaborate about what you mean by that and whether that implies potential production cuts or what in terms of if copper prices weaken?

This is a Mark again.

As far as the ramp-up of the GBC, we feel very confident.

The geologic setting, what we call the hydraulic radius that's required for us to cave the Grasberg Block Cave, is very similar to what it was in the DLZ, it's around the number of 30.

We feel that we took a central estimate on our ramping up of the GBC.

We've got much better access to the ore body.

We have a lot more flexibility than we had in the DOZ.

We feel very confident in the ramp up and that there's, like I said, a central estimate.

There's obviously some downside, and we also see some balancing upside.

So that is a much different, it's much similar to what we've seen in the previous caves, in the Deep MLZ IOZ area.

The one thing that we have to manage there, we've got a very good start on, is the managing of the water from going from the pit to the underground.

And we've got extensive efforts there to ensure we don't build up any inventory of water before we start the Block Cave.

Having access in the pit, we've got extensive monitoring, much more than we've ever had in the past.

And I just believe our caving knowledge, as a result of some of the issues that we've had in that Deep MLZ, that we've learned a lot globally on how to cave.

It's also lent itself to more confidence and a more robust GBC plan.

Sorry, does that imply that you expect to reach full kind of nameplate throughput in 2023, based on the 2022 level?

Yes, we will ramp up -- we'll be ramping up obviously from 0 starting at the beginning of 2019.

We have essentially 2 DOZ-sized mines that we're establishing in the Grasberg and we're going to be ramping those up to a 130, 140 level in that time frame up to 2022, 2023.

The Grasberg by itself will be in the 130-plus range.

Okay.

And then in terms of...

So Orest, that comment was kind of stating the obvious.

I mean, here we've -- since mid-June, for the past month, we've seen the price of copper go from $3.20, $3.25 to $2.75.

And we've got all these uncertainties overhang the world's economy because of the trade talk and the trade actions.

And we're showing operating cost numbers that are based on this current situation, and we really haven't taken the steps that we would take if the global economy gets disrupted or China turns down.

We've got a great track record.

All you have to do is look back at what we did in 2008, 2009 and then what we did again, in 2014.

We have the flexibility to adjust to a lower price environment if we have to.

A lot of our input costs are correlated to the price of copper.

So we just want to make sure the obvious was there.

We're not locked into this cost structure.

If prices deteriorate, we have, and would again, adjust our operations to make sure that all of our mines are cash flow positive.

We would defer expenditures, we would adjust operating cost as well as deferring capital expenditures, and we'd hunker down again, for a period of time and our company would continue to be cash flow positive.

And that's strictly a contingency plan.

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

Just getting notification on Mark's last statement in terms of reaching the Grasberg block caving capacity of 140.

Was that 2022 or '23?

In 2023, in our current plans, we're at 130 and we have a potential of going up to 160.

Okay.

So the nominal capacity of the mill is 240,000 tons per day.

So is that still the case or you're running at that a little bit higher?

Or could ...

Well, as it's shown there in that one slide that Kathleen referred to, we're 215 in 2022.

Between now and then, we put about $300 million into -- of capital into the mill.

One of the things that we have to do is add additional horsepower into the mill to get up to that capacity.

One of the benefits that we lose when we move away from the Grasberg pit is that we currently drop the rock down these 600-meter high ore passes.

That has an impact on breaking the rock.

We essentially build that capacity up by adding more horsepower in the mill.

But we do have a plans in place of what we would be required to get the mill back up to a 240 based on the rock types that we'll be mining in the future, the grinding capacity that we would need to get the recoveries, and that's all part of our long-term mill expansion plan.

Okay, that's helpful.

And then if you could, like I mean it seems like there's still a lot of really good grade on the Grasberg open pit.

If I remember correctly, you said that once the block caving starts, then you cannot have access to that.

So would it be possible to just mine some of that 2% copper equivalent grade at a later date?

Or is this something that's just going to be left there for eternity?

No, what we leave behind in the pit gets picked up very quickly in the Block Cave.

I wish it was as easy.

And what we're doing with this pit extension is about 2/3 our way down the pit, along the ramp, we have the opportunity to re-mine the lower portion of that ramp.

It's a relatively minor volume, it's about 5 million tons but of very good grade, and it makes an impact, as Richard mentioned, this pit extension.

We've had further modeling from our geotechnical experts that indicate that we can have 6 months of concurrent block cave development, along with this remining of the ramp.

We have some additional opportunity, if for whatever reason that the interaction didn't happen as quickly, we have some capability of continuing on for several months, but it's not a long-term pit extension.

We would have to really go up to the top, mine through extensive waste stripping.

That's a much bigger multiyear commitment, that that's not what we're embarking on right here.

It's relatively simple, relatively straightforward, a remining of the ramp.

That wouldn't just economic.

I mean we've known that since the '90s, to continue to widen and deal with it.

Mark, correct me, but Oscar, it's not you leave that there forever.

That ore is going to cave into the Block Cave.

It's just going to be diluted with lower grade material.

So from the pit, we can get directly to the access.

All that ore is going to come down, get mined, but it's going to be mixed with the lower grade material and ultimately processed.

Got it, I think regardless, it's pretty impressive, guys.

Right, and Oscar, also we want to just keep in mind, even though we're talking about these transition years at Grasberg, we're still going to have very low cost.

Grasberg will continue to be a low-cost mine in the portfolio, even during the transition years and then getting to 2021, 2022.

By 2022, we're back into a net credit position from a unit cost standpoint.

So even during the transition years, given the high grade of copper and gold in the ore that we're mining, our net cost will still be our lowest cost.

And then we'll have significant improvements as we get to 2021 and 2022 with the volume increase.

And while I've made a comparison to completing one mine and starting another, Mark just said something, we're going to be able to develop these new mines by investing $300 million in the mill.

And you all know how much new mills cost of these days.

So are going to benefit from all this infrastructure that's been developed since going way back, but especially, during the 1990s to be able to achieve these levels of volumes.

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

If we look at your unit production cost in North America, South America and Indonesia, the production delivery costs in North America have been steadily and somewhat materially increasing.

I think over the last year, unit costs were up around 30%, whereas in South America, they've been more flat and Indonesia has been pretty good as well.

So the first question is why have you experienced this pretty significant steady cost inflation in the U.S.?

And then the second question is how should we expect that to trend over time?

Where do these assets sit in the cost curve in 5 years' time?

Obviously, if the Grasberg Indonesia deals gets done, you will be relatively less exposed to the Indonesian asset and more exposed to the North American and South American asset.

I think they'll become more of a focus.

Just trying to understand the competitive positioning in those assets longer term, that will be my first question.

Red can answer, but the big change we had in North America has been more driven by ore grade changes during that period that you referenced and also, an increase in our mining rates.

During the downturn, we did take steps to park trucks and do what we could to reduce cost as much as possible and mine different shapes.

Now, we're mining more in a sustainable sequence.

We're not showing in our numbers any step change in North American cost from where we are now.

We have been experienced here in recent months some inflation dealing with energy prices, freight cost, sulfuric acid cost.

But in terms of the big change, that was more volume ore grade related and an increase in our mining cost to give us a sustainable level of future production and ensure capacity going forward.

But if you project out our cash cost, leaving commodity inputs flat today, we're not showing any significant changes in our North American cash cost from where we are now.

One other thing I would add, North America's very sensitive to volume prices.

So movements in volume prices change North America quite a bit as well.

Right, I guess, I was looking more at the production and delivery cost, before netting out the byproducts.

And I know that part of the reason for that cost inflation, obviously lower grades, also higher input cost, higher capping price as well.

But I was a little bit concerned about the second quarter cost being somewhat materially higher than first quarter, even though the copper price fell a little bit from first to second quarter.

So it just sounds like it's a function of grades and maybe just some inherent industry-wide inflation, is that right?

That's correct.

And I'll just comment, it's still a very profitable, profitable business for us, high volumes with cost -- with good margins.

And the industry, I mentioned earlier, a lot of input costs are correlated to copper prices.

Now we've had this unusual situation over the last month where we were at $3.20 and now $2.75.

So it's really kind of a distorted situation currently.

But at the end of the day, whatever economics globally results from what's going on right now, it's going to affect all commodities.

And so our costs will track what happens with copper prices.

We think copper price is going to go back up.

We have to fight this increased cost of energy and transportation and things like sulfur.

I mean, we just had a meeting last week as we do the week before every earnings call, where we had 65 of our mine managers in and all we were doing is harping on this issue of fight this, fight to maintain our margins, fight to -- how we can be more efficient, how can we use -- we're using all this data analysis now.

We're putting sensors on all of our trucks and trying to get more and more efficient, and we're making progress there.

But that's an everyday fight in our business.

Every day.

Your next question will come from the line of Christopher Mancini with Gabelli & Company.

Quick question -- on a couple of questions on Grasberg.

In terms of the CapEx, is it around $1 billion per year until the end of 2022, when the underground is mostly developed, and then should the sustaining capital at that point drop down below that $1 billion level?

Just trying to get some sense for CapEx going forward.

Yes.

We're spending on the order of $800 million a year over the 5-year period, and that's $700 million, net to PT-FI.

Okay.

All right, great.

And then I assume right, then it should drop down to a sustaining level, which should be materially below that, once it's all fully developed?

Yes.

We'll have another mine called the Kucing Liar mine that is currently contemplated to be developed.

We'll have to look at the economics on that one as we get closer to it.

But as Richard said earlier, the infrastructure, all the money that we've invested to date, is largely in place.

We've got some mill enhancements to make.

But going forward, it's more the development that you do over time in the block caves.

So in terms of infrastructure cost, those are largely behind us.

Okay, great.

And then also, Kathleen, you're talking about the mine continuing to be a low unit cost mine during this kind of ramp-up period in 2019 and 2020.

Is that -- so I mean -- can we assume then that the total operating cost at Grasberg will decline as you're mining less -- or mining and processing less ore there, so meaning that it seems like the production cost at Grasberg are somewhere around $1.8 billion a year now, and should we assume that in 2019 and 2020, those production costs will decline as, I guess, as the open pit labor in the open pit declines, and you're spending more on capital than on operating cost?

Yes, and the mill rate will also go down in '19 and '20 from where we are today.

So we will have lower absolute cost than we have currently.

And then what I was referring to is really looking at our net unit cash cost after the gold credits will still be our lowest-cost operation in the portfolio and then get to this net credit position that we're enjoying in 2018.

Right, okay.

I mean, could you give us a sense as to what we expect the cost to be once you're fully ramped at Grasberg in that, say, in that 2023 to 2027 time period?

Yes.

Well, we've given a number before being less than $0.60 a pound.

In these earlier years, it will likely be less than that.

Like I was saying in 2022 currently, we're projecting it to be a net credit.

So that was -- the less than $0.60 a pound was more of a life of mine.

But in this period, you're talking about it's likely to be lower than that.

Your next question comes from the line of Timna Tanners with Bank of America.

I hope you don't mind if I change the subject real quick, but wanted to know if you could provide us any new color on the Cerro Verde labor negotiations.

You noted in the release did that's coming up for a decision by the end of August.

Yes, Timna, we're working closely with the union leadership there, discussions are ongoing, all under early negotiation parameters.

So we're cautiously optimistic that all of that is going to come together.

But right now, discussions are ongoing and going well.

But it has not been settled.

There's a lot of labor contracts in South America, and so far we haven't had a sort of disruptions that potentially were there.

But we've got some big contracts, including ours that's still up in the air.

Got you.

Is it fair to say that if Escondida is delayed or it hits a snag that, that could have a knock-on effect on the Cerro Verde negotiations?

Or do you think those are separate?

Well, I'm always said strikes are contagious diseases.

So it's clearly, union people communicate, watch what's going on.

So we don't have an answer to that question.

But, clearly, there's a relationship.

Okay.

And then my other question is just if you wouldn't mind helping us understand maybe the parameters around the next move in the dividend.

I know you mentioned that that's something that could be revisited certainly, with strong cash flows.

But any sense of how the board's thinking about priorities or what the parameters might be for a further increase?

Well, we have expectations, and we're looking forward to further increases.

But we're going to have to get past this current uncertainty with the global economy from all these trade talks to see how that goes.

So right now, that's deferred depending on that situation.

And at copper price mean at the higher level.

Is what you mean by that?

That's correct.

Yes, you cut right through the bottom of it.

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

Richard, just quick on Lone Star.

Where do you stand relative to equipment orders?

How much is first copper produced in 2020, first half, second half?

And have you hired EPCM to look at the sulfide and potential there or any help on prefeasibility on that type of an investment?

So let's divide it between the 2. The oxide project is now underway.

We're actually -- I mean, it actually looks like a mine now.

Beginning earlier this year, we began transporting materials.

So that's under way.

There's not really, right Red, any real significant equipment to go.

We still have...

It's mainly trucks and shovels and we've got that.

Which we own.

We didn't have to go buy a new one.

And so we expect first copper there by 2020.

Year-end 2020.

By year-end 2020.

And so then you turn to the sulfide and right now, it's understanding what it is.

I mean, we're -- like I said, we've got 6 exploration oil rigs working out there now.

We're analyzing these recent results of our drilling we've done to date.

We're defining -- the ore body keeps being extended East and West and at depth.

And right now, we're in that stage of understanding what it is.

And our development team is beginning to think about what this would be, how large would the initial development be and how you stage that in terms of making sure you have access to the total resource.

So it's in the early stage of definition.

And Kathleen, how much of the growth capital that's budgeted for '19 is allocated here at Lone Star, approximately?

I don't have the number right in front of me, but it's probably in the order of $300-plus million.

We'll now turn the call back to management for any closing remarks.

All right, thanks, everybody, for participating and for your interest and look forward to speaking with you as we go forward.

Ladies and gentlemen, that concludes our call for today.

Thank you for your participation, you may now disconnect.