費利浦·麥克莫蘭銅金 (FCX) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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

(Operator Instructions)

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

Please go ahead, ma'am.

Thank you, and good morning.

Welcome to the Freeport-McMoRan Third 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 call today is being broadcast live on the internet and anyone may listen to the call by accessing our website home page and clicking on the webcast link for the conference call.

In addition to analysts and investors, the financial press has been invited to listen to today's call, and a replay of the webcast will be available on our website later today.

Before we begin our comments, we want 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 want 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.

Richard Adkerson is on the call today as well as Red Conger, Mark Johnson, and Mike Kendrick.

I'll start by briefly summarizing our financial results and then turn the call over to Richard who will be referring to our prepared slides for today's call.

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

Today, FCX reported net income attributable to common stock of $556 million or $0.38 per share for the third quarter of 2018.

The results included net gains of $42 million or $0.03 per share, which primarily reflected adjustments to assets held-for-sale and the fair value potential contingent consideration, partly offset by nonrecurring charges associated with the new 3-year collective labor agreement at Cerro Verde.

After adjusting for these net gains, our adjusted net income totaled $514 million or $0.35 per share.

Our adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA for the third quarter totaled $1.8 billion, and there's a reconciliation of the EBITDA calculation on Page 27 of our slide deck.

We reported strong sales during the quarter.

Our copper sales exceeded 1 billion pounds of copper.

Gold sales totaled 837,000 ounces and molybdenum sales were 22 million pounds in the third quarter.

These sales, the copper sales were 8% higher than our previous guidance, and gold sales were 20% higher, and this principally reflects higher ore grades and operating rates in Indonesia as we mine the final phases of the Grasberg open pit.

In addition, we are confirming in all material respects our operational outlook guidance in the coming years.

Our third quarter average copper price realized was $2.80 per pound, that was below last year's third quarter average of $2.94 per pound.

And our gold average realization was $1,191 per quarter, and that was also below last year's third quarter of $1,290 per ounce.

For the third quarter, our average unit net cash cost for our mines averaged $0.93 per pound, that reflects a strong performance from our global operations and the continued focus on productivity and cost management.

The $0.93 also includes $0.07 per pound of copper associated with nonrecurring charges for the Cerro Verde 3-year labor agreement that I mentioned previously.

We generated strong operating cash flows in the third quarter, which totaled $1.25 billion.

And those exceeded capital expenditures of $500 million during the quarter.

We ended the quarter with consolidated cash of $4.6 billion, and consolidated debt of $11.1 billion.

Our net debt at the end of September was $6.6 billion, and that continues with our deleveraging that we've had over the last several quarters.

We ended the period with a strong liquidity position.

In addition to our cash position, we also have a $3.5 billion revolving credit facility and have no borrowings under that facility.

Our board also declared a quarterly dividend of $0.05 per share under the new policy that was established earlier this year.

And that dividend will be paid -- that quarterly dividend will be paid on November 1.

I'll now turn the call over to Richard who'll be providing additional details and referring to our slide presentation materials.

Good morning, everyone.

As we'll be talking about, as I do review these highlights, it's been a very active quarter for us here at FCX.

Results from our global mining operations have been solid.

Our teams continue to execute our plan in a very -- plans in a very effective way.

In Indonesia, we had an important milestone in our -- in progressing our efforts to reach stabilization of our business there in terms of our negotiation for the government, with the signing of definitive divestment agreements on September 27.

Operations -- current operations in Papua have been strong, and we've made important progress in transitioning the Grasberg orebody mining from open pit to underground, so we'll talk about that.

We are continuing our sharp focus on the important things about our business to build shareholder value.

Our unit net costs are $0.93 a pound, significantly below last year and in line with our plans.

It does reflect for the 9 months $0.02 as a result of the successful settlement of our labor situation at Cerro Verde in Peru, so that was very good.

Operating cash flows exceeded CapEx in the third quarter by $740 million over -- about $2.5 million.

To date, net debt as Kathleen mentioned, is down $2 billion from the start of the year.

And this agreement with INALUM is really important.

It establishes the path to reaching long-term stability and derisk our operations over the long term in Indonesia.

We're going to talk about Lone Star.

I mean, we're very excited about it in terms of the future of our company.

And this is an orebody that's been identified for decades but we're doing a lot of core drilling and the more we drill, the more optimistic we get about this orebody becoming a world-class mining operation in the future.

It's growing now and has the potential to grow in the future.

Slide 2, copper markets.

It's a paradox.

I'd be frank with you, it's a paradox right now.

Physical markets are tight.

Fundamental drivers remain very positive.

And yet, sentiment about the commodity and about companies like ours and the investor marketplace is what it is.

And you know their concerns about global growth in China and so forth.

But when you look at the fundamentals and look at this drop in global copper exchange stocks and to see the copper price in that slide parallel each other is very unusual in our industry.

Typically, when inventory stocks drop and they're also dropping at our customers, that indicates higher copper prices but that's not what we experienced since June.

But when you look at the fundamentals, U.S. construction and manufacturing remain positive.

Europe is steady and positive.

A large Chinese fabricator is running at high rates.

Our customers have strong order books for us in the United States and business in China is good.

Cathode availability is tight globally.

There's issues with smelters disruptions in Chile and elsewhere in India.

China's constraining scrap.

Global stocks are down 40% since the copper price was well over $3, $3 -- almost $3.30 in early June and this is the multiyear low stocks.

But speculators are bearish on sentiment and micro drivers and this is having a significant impact on price.

Long-term fundamentals are becoming increasingly strong.

Deficits are inevitable, absent a significant downturn in China and the global economy.

And a lot of positives are happening in terms of alternative energy generations, electric vehicles and so forth for our projects.

Now what's this doing to us?

This uncertainty is causing us certainly to slow down our long-term plans to develop our resources.

I mean, we're going to defer those investment decisions until there's clarity in the marketplace.

We're continuing to work on them, do preparation for them.

We're optimistic about them, but the situation is causing us to defer and I believe it will cause other companies to defer.

And that will add to this impending supply gap situation for the industry.

So as I said, it's a paradox.

I was in London for LME Week.

Most industry executives I talked to there and on the business roundtable believe that this trade situation will get resolved in a way that doesn't disrupt the global economy, but investors are skeptical and that's what we have to deal with in terms of the current situation.

A slide that we commonly show or have shown for many years is on Page 5 and it makes an important information here.

It's very difficult to replicate a world-class resource.

The industry is supply-constrained.

Discoveries are rare.

There's 7- to 10-year lead times to develop new projects.

And when you go down this list of the day's major copper mines in terms of reserves and production, you see Escondida and Grasberg in the '80s, Las Bambas in 2000s and then other mines are 100 years old or more.

And with all the activity that's gone on since the super cycle started in 2003, there haven't been new additions to these charts.

We think Lone Star's going to be on this chart at some point, but it's important for our industry to note this issue of supply challenges.

And that points to the strength of our company with our strong current production levels and our future resources.

So operations update on Page 6. As I talked about, we're focused on productivity and cost management.

We've had some success with that.

There's some cost inflation, but we've largely been able to offset that through efficiency moves and you can see that in our numbers.

Our production and cost outlook is stabilizing as we see going forward.

In 2016, 2017, because of low copper prices and to some degree, because of the situation of our company, we cut back cost.

We constrained maintenance capital.

We were focused on cost principally.

Now we're looking to -- and you see this in our numbers in 2018, in the Americas, we're looking to maintain our production volumes going forward.

We had cut mining rates, and now we're increasing mining rates and that's involved some cost inherently.

But now as we look forward to our plans, we think our costs are stabilized.

And we do think we're going to be able to manage cost inflation in an effective way.

So that's an important part of what we're doing in operation.

We'll talk more about Lone Star, but beyond that, we're evaluating our project pipeline to consider alternatives, rank them, make decisions about what we might do in the future.

We're going to remain disciplined, and we have the chance, the opportunities to do low risk capital expansions when the market is right for doing that.

So in Indonesia, you can see we had really strong performance in the third quarter and year-to-date in 2018.

After an extended period of time of issues associated with our workforce, some of our operating systems and with security issues, we are now operating in a very effective way.

Safe operations, strong production, making progress on the things that we need to address.

That we're mining the final phase of the Grasberg open pit in the fourth quarter of this year.

I was there when we were drilling the core holes in 1988.

It's amazing to think about here we are, finishing the pit.

We're going to extend operations in the pit into '19 by mining.

Our guys came up with a great idea.

We had some haul truck ramps that have some high-grade ore in it, and so we were originally just going to abandon those and mine that ore from the underground.

Now, we're going to go back in, in the first half of the year and access some of those high-grade sections of the haul roads and mine that.

By mid-2019, we'll be complete in the pit.

And it will be -- it's significantly winding down now and going forward.

At the Deep MLZ mine, which is an important mine for our future, it's separate from the Grasberg Block Cave mine, which really has the bulk of our reserves over the remaining life -- remaining terms of our operating life, to 2041.

This Deep MLZ is a great mine.

It's a separate mineralization area that started with the Ertsberg pit years ago, and we began block caving that mineralization area in the early 1980s actually.

And as we commenced this in 2016, 2017, we started experiencing, for the first time in our operation, these mining-induced seismic events.

To address that, we're using a procedure of using hydraulic fracturing of the rock to manage seismicity and precondition the cave.

This is done in South America and Chile.

It's not complicated technology.

It's established.

And we've begun that process and to date, it's being effective in doing what we want it to do.

So it's given us increased confidence, derisk our plans for the mid-2019 startup of caving in the Deep MLZ.

With the Grasberg Block Cave, after years of investment plans, our infrastructure is now in place.

We're successfully testing a new underground rail system an ore flow system.

We've conducted initial blast for undercutting during the third quarter.

Rock testing confirms that this rock is suitable.

It's the same ore that we've been mining since 1990 in the Grasberg open pit and is suitable for really effective block cave mining.

And our company is the world's leader in underground mining, because of all the experience we have.

In terms of scale, this is going to be the largest underground operation ever done.

But in terms of the technical challenges, is things we've worked with for years, we're very comfortable in doing it.

So Lone Star.

Those of you who followed us know that this Lone Star resource is located in Eastern Arizona, adjacent to our Safford mine, which began operations -- was beginning operations 11 years ago when we acquired Phelps Dodge and now the Safford oxide ore is declining production.

And so we have excess processing facilities that we are going to use in mining oxide ore from Lone Star.

We're stripping this.

You can see the pictures of the progress we made.

By stripping it year-end 2017, reserves were 4.4 billion pounds of copper.

Only oxides, it's a $850 million project.

We're well into it, and it's got 200 million pounds annually of production for 20 years.

Now as we drill this orebody, the oxide resources are expanding.

And this has given us some opportunities.

And then we had previously drilled an underlying, what appears to be very large sulfide resource and our current drilling is confirming this and extending the sulfide resource.

So what we're doing now with the oxide project is, in essence, stripping this material to expose what could be a world-class sulfide resource.

Morenci is just over the mountains, very nearby.

This has the potential to be in a Morenci-type orebody in the future, and it's going to be a key part of FCX's future going forward.

So returning back to PT-FI in Indonesia.

Here's where we stand.

As Kathleen said, there are no significant changes today to our previous outlook.

Activities during this quarter have, in our view, derisked to a significant degree our ability to achieve this.

But we will have, as we complete any mining activities from the pit in mid-2019, we'll have 2 transition years in terms of achieving production rates for the Deep MLZ and ramping up the Grasberg Block Cave.

And when I say ramping up, you see the rust red part of these slides showing the block cave ramping up.

The purple slides above that showing the Deep MLZ mine ramping up, and that's supplemented by the existing DOZ mine, which is above the Deep MLZ mine, which is in its decline phase.

So we will have very significant copper and gold this year.

We'll have a couple of years, you can see all the numbers here shown for you below this chart.

And then we'll be reaching the levels that we will have for our long-term mine operations when all of this is fully developed and operating as planned.

And that extends through 2041.

This will be one of the world's largest copper mines, big gold mine, very attractive economics because of mixture of both long-term, low-cost operations.

So the agreement with INALUM.

The agreement with INALUM that we signed on September 27, in my view, is very important, and it's very positive outcome for all parties.

And when I say all parties, that includes the government.

Its state-owned company, INALUM, achieving objectives that they had clearly communicated to us over the years.

Our joint venture partner, Rio Tinto, is achieving -- will be achieving its objective of exiting this asset.

They were facing divestment in any event.

They have negotiated a valuation that's acceptable both to them and to the government.

And then to our shareholders.

I will tell you this, I'm much more pleased about where we are today than what I expected to be last year when we signed the framework agreement.

And the reason for that was the key to this being so positive for all the partners actually was Rio Tinto's decision to sell.

The government acquiring Rio Tinto's interest will ultimately be a 40% interest.

We're only having to divest and effect it just over 5% interest in the property a year ago.

We thought we might have to invest 27%.

So that avoided a very difficult valuation negotiation and so forth.

At the end of the day, PT-FI, the Indonesian subsidiary, will get bigger.

Previously, it was a joint venture partner with Rio Tinto.

Now Rio Tinto's interest will come into PT-FI.

PT-FI will then have the total operations.

The shareholder own -- and it will continue as an entity.

The shareholder ownership interest will be 51% INALUM, 49% FCX.

We have agreed on a shareholder arrangement that protects the economics that FCX had under the Rio Tinto joint venture agreement.

So we will be getting substantially all of the production through 2022.

We've agreed on a corporate governance operating structure where we will be partners with INALUM in terms of the corporate structure, but there will be a shareholders' agreement that will grant FCX control over an operating committee to ensure that operations are run in a consistent way with what we've done now and consistent with the long-term mine plan that we've agreed to.

We will have extension of rights through 2041 with assured fiscal and legal terms, and legal enforceability.

And there are no significant changes in those terms from our contract of work.

So all of this comes together that gives us a very positive deal.

Now one thing that I believe is very important is by having INALUM as a 51% partner, and they are -- they seem to be on the verge of commencing the activities of raising the bond financing to finance this acquisition from Rio Tinto, is that we'll now have an alignment of interest between the government in Indonesia and Freeport.

They will want to see the operations run with stability because they'll need cash flows to fund this significant debt they're taking on.

And the market's being very positive -- appears to be very positive in terms of being receptive to this bond offering.

And so they'll want to see the operation run smoothly, to generate cash flows, to service their debt and generate dividends.

So I believe firmly that this will create a better overall environment for operations than what we've experienced in recent years because of the divergence of opinions and views about what we should be doing now.

I think we're all going to be, together, aligned and that will be helpful.

So we have a very diversified global set of assets.

We're in a leadership position.

An important feature of our company is we operate all the assets that we own interest in, that gives us significant operational synergies, shared resources.

We can allocate capital in a way that's prudent and effective.

Large, long-term production capacity with long-term expansion.

3/4 of our reserves and resources are located in North America and South America.

In today's world, that's a positive.

We've got a great team experienced in operations, project development, execution, innovation leadership in the industry.

And in the United States, we benefit from the improved regulatory environment, but it's also because of the tax situation.

One consequence of the long gas deal was a very large tax loss carryforward, which means we're not going to pay taxes in the United States for many years.

And the recent tax reform act actually drops the effective tax rate for our companies -- for our company, absent the NOL, to around 10%.

That's a big difference from what you face internationally.

So that's going to be very positive for us in terms of looking at Indonesia.

Now market valuations.

Market valuation, I've been around long enough to know that's just what it is.

But the one thing the way we've looked at this recently, to think about, some thoughts about the valuation of our assets, is recognizing, going back to that chart of the major mines where we have 3 of today's major mines, that the portfolio that FCX have is very difficult to replicate.

Our copper equivalent capacity through our equity shares is about 4.5 billion pounds of copper a year.

When we look through projects around the world that we're looking at and others are looking at, we say it's $8 to $10 a pound to develop capacity.

And that means on that simple [hall] of a metric that the implied replacement cost for our current capacity is on the order of plus or minus $40 billion.

Just a thought for you guys to look at, but that's where we are.

Okay, so 2018 outlook is unchanged from previous guidance.

Copper at 3.8 billion pounds.

Gold's a bit higher at 2.45 million pounds (sic) [2.45 million ounces].

Molybdenum, 95 million pounds.

Site production cost reflecting this $0.02 special item at Cerro Verde for the labor settlement's in line with where we are before.

After by-product credit's just over $1.

Operating cash flow's at $2.85 for copper for the fourth quarter, that would be 4.2 billion pounds -- $4.2 billion.

We are going to have some tax -- essentially, tax-related working capital uses totaling about $500 million in the fourth quarter.

And we, of course, have very highly leveraged copper prices for the fourth quarter, $0.10, means just over $100 million to us.

No real changes in our capital expenditures from previous guidance.

And so we're basically confirming the guidance we've given you previously.

Sales profiles are presented on Slide 12.

We've essentially brought forward some copper from the fourth quarter into the third quarter this year.

We always try to do that.

We'll try to do it in the fourth quarter.

But for the year, our -- we were up in the third quarter, keeping our year guidance consistent with where we are.

And you can see how the outlook goes for copper, gold and molybdenum.

When we look at the cash flow generating capacity of our company on Slide 13.

We are showing this to show the transition years, '19 and '20, and then the average for the years after transition, '20 and '21 -- '21, '22.

And EBITDA would be $4.3 billion at $3 copper, $7.1 billion for '21, '22 at $3 copper.

Operating cash flow's just over $3 billion to $4.7 billion.

And the $3.50, that grows significantly to EBITDA of $5.9 billion for the transition years, and over $9 billion for the subsequent years with cash flows, $4.3 billion to $6.4 billion.

So our company's characterized by the ability to generate very strong cash flows from our existing production facilities.

Capital expenditures, really no changes from what we've talked about.

We had a plan, we're sticking with it.

Financial policy, Kathleen talked about net debt being at $6.6 billion at the end of September.

In early 2016, we had set a plan to reduce our $20 billion of debt at that time by $5 billion to $10 billion over 2 years.

We've already done $13.6 billion.

And so we've really come a long way in addressing Freeport's balance sheet issue and we have a strong financial situation now after this strong deleveraging over the past 2 years.

And so we are, as I said, looking forward, continue to strengthen our balance sheet.

We have reinstated the dividend, we're looking forward to the time of paying higher dividends.

We've got growth opportunities.

We're going to be very disciplined about when we undertake those.

We're going to need to see clarity in the marketplace.

Some of these uncertainties resolved.

And we'll continue to review this financial policy as we go forward.

But I'm really pleased with the way our company is really set up for future success with our global portfolio of copper assets.

Copper is very attractive.

When you look at long-term fundamental market outlook, that's something you hear from a lot of others in the industry.

With our company, we have strong margins and cash flows, long lived reserves, good development opportunities, geographically diverse with 75% of our future appearing to come from the Americas, and we've got a great organization that's experienced and had success.

Now we've addressed our balance sheet, I believe the Indonesian overhang issue has been addressed.

We'll say we're no longer debating issues in Indonesia.

We do have to complete some documentations of our agreements prior to closing.

We expect closing to occur if not at the end of 2018, in very early 2019.

And today, I would suggest that our value attraction is -- our valuation is attractive in light of all these other factors.

And we are looking forward to outperforming and committed to that.

So I will open the line for questions.

I look forward to responding to any questions you may have.

(Operator Instructions) Our first question will come from the line of Chris Terry with Deutsche Bank.

Richard and Kathleen, first one I had is just on the capital allocation decision going forward.

I think you'd mentioned previously that you wanted to get net debt below $5 billion, $5 billion is your target?

So can you just talk through where you want the balance sheet to be at?

And then leading on from that, if you believe in copper, you've talked about the fundamentals and how you see it playing going forward, will you invest in new projects and potentially look at M&A, et cetera, if the settlement remains bearish, i.e., will you continue down the path that you see as the right way to add value even if investment sentiment isn't in the market for the next year or so?

That's the first question.

Chris, I'll take the first part of that and let Richard address the second part.

Our net debt target has been reached.

We had set out to get net debt to $10 billion and we reached that last year.

And so now we're just continuing to strengthen the balance sheet.

We've initiated the dividend to shareholders.

We'll continue to look at capital allocation and return to shareholders, but we feel good about the net debt that we currently have, and that is below our target.

So Chris, with respect to your second question, we're going to prepare ourselves for future investments, we got a number of alternatives and we're going through a ranking process to decide sort of which one to focus in on first.

And we'll do that.

I would say, thinking about what you said, to me, this is not a question of investor sentiment.

But it's really a question of where is this world heading?

On one hand if, and this is a consensus view of business people I talk to, that all of these issues between the U.S. and China today is posturing, creating a lever to try to address some fundamental industrial policy issues in China, and many people believe that there will be a resolution of that similar to what we just went through with NAFTA and so forth, that it's a question of style and strategy to reach a settlement, then that's one thing.

Because if that's reached, then the underlying economies are still really strong in China and globally, particularly in United States.

On the other hand, if this goes in a different direction and results in a significant impact in China, there are those who say that China has the ability to address a weakening of its export manufacturing economy by investing in infrastructure and this Belt and Road Initiative and so forth.

But all of that, it's a question of what really is the result of all this.

If that has an impact on copper demand and China's so important, then we're going to wait to see how that sorts out.

So we're not going to be bullheaded about this.

We're not going to be overly confident about our ability to predict it.

We're going to prepare.

We're not going to start investments until we have clarity about the ultimate outcome of all these current uncertainties that are weighing so heavily on investors' minds today.

We're going to focus on internal opportunities and increasing shareholder returns.

If we get a favorable outcome of all this and copper price recovers, we'll be making a lot of money.

We'll have the chance to invest internally and increase our dividends.

We're going to be out there observing everything that goes on in the marketplace.

I can assure you we get contacted by companies and bankers about opportunities all the time and we're going to be open to those, but it's a high hurdle for an outside opportunity to compete with our internal opportunities because we have no value for those right now.

And we also have no taxes to pay on future operations in Indonesia -- I mean, in the U.S. Indonesia, we pay strong taxes.

But here in the U.S. -- and that's a huge advantage when you're looking at comparing after-tax rates of returns because resources are taxed heavily wherever they are in the world.

You have investment certainty in the U.S. that's stronger than anywhere else.

So anyway, that's where we are, Chris, and it's not -- I see it more as a fundamental question as opposed to an investor sentiment question.

Okay.

My second question is just around Grasberg specifically.

I assume you'll give guidance or you'll zoom in on the full year results in February.

But can you talk just a little bit more about 1Q and 2Q?

I guess, you've given guidance that the open pit will be complete by the end of -- or the middle of 2019, which is, I guess, the highest risk period in 1Q or 2Q.

Or how do you see those 2 quarters playing out specifically?

Well, the open pit will continue through the first half, and we're not expecting at this point for Deep MLZ to start caving.

So most of the productions that we're expecting in the first half is coming from established production, either the open pit or DOZ in the first half.

We have, in our estimates for Deep MLZ, incorporated some contingency plans.

And at this point in time, we still believe that the mid-2019 start-up is appropriate.

We do have a chance to potentially accelerate that.

And as we always do, we always look for ways to accelerate metal.

But we will begin -- as Richard said, we've got the Grasberg Block Cave infrastructure prepared, and we will begin activities in the Grasberg Block Cave in the first half, in parallel with completing the open pit.

So the Deep MLZ, as Richard said, is a very small portion of our 2019 production.

It's less than 10% of our ore through the mill.

And Chris, just refer back to Page 8, and you can see that Deep MLZ and the Grasberg Block Cave are both small parts of the annual production in 2019, growing in 2020.

And the pit is completed in the first half of 2019, DOZ is there.

So you can see from that really where we're doing.

And that's starts emerging in the second half of the year when we're out of the pit altogether.

Our next question comes from the line of Matthew Korn with Goldman Sachs.

Congratulations on a good solid operational quarter there.

Question on Indonesia.

In the context of the agreement, if you could help us understand a little bit more where we are regarding environmental issues.

I think it's an element I find investors are still somewhat unclear.

So first, have there been any changes so far as to what's actually been requested of Freeport?

Second, what part of the government are you interacting with?

And what's your read on what they want?

And then I think at the end of the day, do you expect that this is going to result in any kind of real material change to the operations there?

Okay.

Thanks, Matthew.

Good to hear from you.

The -- so the government is working in a coordinated fashion across the ministries: our Energy and Mines Ministry, which administers our basic operations, the Finance Ministry; the state-owned enterprise industry, which manages our new partner, INALUM; and the Ministry of Environment and Forestry, which deals with the environmental issues.

We are -- we have been given assurances that environmental issues will be resolved in a way that will not disrupt our operations or add significant additional cost to our operations.

And in fact, there's, today and recently, articles in the Indonesian press to that effect.

We are working with the Environmental Ministry to document how to deal with these new decrees that came out, I announced in our second quarter -- first quarter earnings call.

And so the objective is to come up with ways to amend those decrees, to achieve that objective of not disrupting our operations or adding additional cost.

All of us are working together with that.

As you can imagine, this is a significant matter for INALUM and its financing activities.

And we've been working with their banks and lawyers in terms of understanding that and working with the Environmental Ministry to achieve that goal.

So everybody's working with the same goal.

We just -- we have to get documentation for it.

It's necessary to have that done before we close the deal.

We also have some wording in the new license agreement to complete.

We're working on some agreements to give us international arbitration rights to enforce our rights going forward.

All of those things, as I said earlier, issues are not being debated.

Work is coming together to get documentation of what we've agreed to.

Got it.

I appreciate all that color.

It's very helpful.

Second one is simpler.

We saw the onetime charge for Cerro Verde that had been a big pending labor agreement for you all.

Cost-wise, what should we think -- how should the effect be in terms of P&D cost going forward for that region as a result?

Matthew, this is Kathleen.

We're not expecting any significant changes in our net cash cost in South America or North America as we look forward.

As Richard talked about earlier, we have been taking steps during 2018 to reinitiate mining rates and reestablish the production capacity following the curtailments in 2015 and '16.

But we're not, from here, we're not expecting the unit cost to change significantly as we look forward from 2018.

Yes, great.

And I'll compliment Red here.

That milling facility, I believe, is the largest in the world in the mining industry with our recent expansion and the sizable mill that we had there before and man, it's going great.

I mean, it is above nameplate.

And so all of that, it's a big low-grade deposit, mining is relatively easy, just a lot of work, a lot of material to move.

But that's a great operation with years of a lot of cash flows ahead of it.

And we were very pleased with the labor settlement.

We had this one-time charge, but it allowed us to meet the aspirations of the workforce and do it in a way that controlled our cost.

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

Richard, Kathleen, I wanted to follow up a little bit on the shareholder agreement that has been put in place to maintain the split of economics through 2022 and then beyond.

In the hypothetical case where maybe things take a little bit longer to ramp in Indonesia, would you still preserve the same split?

So in other words, if maybe production goes from 2022 to 2023, would that have any impact on your economics?

Yes.

The answer is yes, we preserve the economics.

We'll be in the same position we would have been in with Rio Tinto.

There's a specified amount of metal that...

It's not a timing deal.

It's a specified amount of metal.

And one thing I should have mentioned when I was talking about this overall deal, when we were on the MPV of this operation under our COW and our joint venture arrangements with Rio Tinto, it's very much equivalent to what we'll have under this new structure.

And if you think about how far we've come to end up with an answer of where we've achieved our goal for our extension stability and preserved the FCX's economic interest in this great asset, that's a great accomplishment.

And we're not popping the champagne bottles until closing, but we're very optimistic about getting this done in the timeframe that I talked about.

Excellent.

Great job on it and yes, I look forward to the agreement coming over the finish line here in short order.

I wanted to follow up on the operations in Indonesia.

So Richard, I think you mentioned in your prepared remarks that you've derisked it.

Now when I look at your guidance, it hasn't changed materially.

So should we be thinking about you having narrowed the confidence integral around the mean, so if you could elaborate on that, that would be helpful.

And specifically to the DMLZ and Grasberg Block Cave, what are some of the milestones that we should be looking forward to over the next 6 months or so?

So this is what we've done.

With respect to our current operations, and it's the open pit mine, the DOZ essentially, but also running the mill with the ore flow delivery systems, with the concentrate delivery systems using the slurry pipelines to get to the port, with our relationship with our workforce and local community and security, all of those things are much, much improved and they're important.

Then, with -- in terms of the Grasberg Block Cave development, which, over the years, with all the disruptions that we had from export bans and security issues and so forth, that's just gone really good.

I mean, Mark Johnson and his team have done an acceptable job.

And now Mark, pipe up, but I say we are -- we have completed and met all the risks of infrastructure development for the Block Cave mine.

So that's important.

We're not -- that's not risk facing us.

We are addressing this seismicity issue at the Deep MLZ.

Early indications are that this fracking approach, which we've never used but is common technology in the industry, is going to be very effective in dealing with that issue for us going forward.

So that's a major positive.

So milestones to watch.

Beginning in the second half of 2019, we will begin block caving mining in the Grasberg Block Cave.

That's very similar to -- it's big, but it's very similar to what we've been doing now since early '80s.

We know the rock, fully drilled, same rock that we've mined from the pit.

So you'll be able to see the results of that in the second half of the year, the beginning results of it.

And then we will see, as we continue with this fracking operation in the Deep MLZ, we'll see the consequence of that.

But we're real encouraged about it right now.

So how do I answer your question?

There's always risk in mining, there's always risk in underground mining.

But Mark, why don't you...

Yes, just to elaborate a little bit on the GBC.

We announced last quarter that we commissioned the ore flow system, which was the big crushing conveying system.

We continue to ramp up the rail system, which what delivers ore from the mine to the mill or to the ore flow system, and that's ramping up as expected.

We took our first undercut blast in September, a little ahead of schedule.

And in January, we do our first draw bill in the Grasberg Block Cave, and that continues to ramp up the GBC.

The Grasberg Block Cave is a little different than some of our other block caves in that we have multiple working areas.

And so we're paging the -- ramp this same process throughout 3 different areas over 2019.

The Deep MLZ, as Richard mentioned, the hydro-fracking is working very well.

We're seeing the seismic response that we would like.

We're getting the seismic stresses away from our working areas and above the cave.

And we're seeing good signs that the cave is propagating vertically, which is what we hope for, and it's a very optimistic start.

Big Gossan, we don't talk about that a lot, but we're ramping it up to full production of 7,000 tonnes a day by the fourth quarter of 2019, and that's about a year ahead of schedule that we had a year ago.

And then the DOZ, we don't look past it.

It's still a significant producer.

We're continuing to advance the remote mining associated with the wet material that we're dealing with, and we're very encouraged by that.

We've had -- this last week, we're well over 40,000 tonnes a day, and that's where we need to be next year.

So those are the milestones that I see.

The mill next year won't be a constraint.

Power systems, we're going to be doing a lot of maintenance as needed and being prepared for the ramp-up 2020 and 2021.

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

Richard, in your prepared remarks, you talked about that you were slowing down some investments.

I guess, could you be more specific there, if possible, in terms of investments or projects that you're slowing down and also kind of the cadence of the slowdown.

Alex, maybe I wasn't clear, but it's not really slowing down things.

It's when do we initiate investments.

I mean, we're continuing with our Grasberg underground development, the Lone Star project and so forth.

So we haven't really slowed those things down.

We're obviously looking at costs and constraining them in this uncertain market environment.

But the issue is when do we start major new projects on our resources, and we deferred the decision to start those until we get market clarity.

And that would include our potential large-scale project in -- at El Abra in Chile where our -- with our partner, CODELCO.

We've completed pre-feasibility.

It's an attractive project, lots of capital.

We've got projects in the United States at various of our mines, including a mill expansion at our Bagdad mine in Northwest Arizona.

So we are -- what we slowed down is pulling the trigger to start, but that's where we are.

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

Richard, just wanted to ask to get a bit of color.

Just from some of the recent media articles where you've been interviewed, it seems to suggest that the company is open to a sale.

And I'm just curious how to think about that given your earlier comments about just all the resources you have on the ground and all the future projects and sort of how undervalued you are.

Can you maybe offer a bit of context on those comments?

Thank you.

I'm glad to.

Thank you for your question.

So I -- as most of you probably have noted, as we've been in negotiation over this extended period in Indonesia, other than our earnings call and investor conferences, I have really not been giving interviews to the media like I used to.

Trying to encourage our partners in Indonesia also to not do that.

So in LME -- around LME, we -- with the signing of this agreement, I've given a number of interviews, including one interview where at the very end of a large interview, I was asked the question, I didn't bring it up, that there had been some comments in the marketplace that Freeport could potentially be acquired.

I have a stock answers to that.

I'm saying, we have no plans to sell the company.

We're focused on our internal business.

Two, as a public company, we're going to be open to opportunities for our shareholders as they evolve in the future, and that would be a wide range of opportunities that we might have.

And so it was a stock answer.

One I've given for years, one I'll continue to give.

And in my view, it was mischaracterized in headlines in the way this thing was talked about.

I personally do not believe that in today's world, with these uncertainties, there are opportunities for big M&A transactions in the industry.

I certainly don't consider it to be something that we would look at in the near term given our share price.

Okay, perfect.

So it's not something you're actively pursuing?

No.

And I -- like I said, I don't think -- in today's world, with all these uncertainties, I think it's unlikely that anybody's going to be pursuing big-scale deals.

Okay.

And just one clarification.

In Slide 23, the Grasberg mine plan, can you maybe explain how come the gold at 1.9 million ounces in 2022 is the same when you show it on 100% basis versus including Rio's share and then PT-FI share, whereas obviously, the copper is different, I assume, because of the metal sharing agreement?

But does that not apply to the gold in that year?

It also applies to gold.

It's just that when you look at the years '19 through '21, there's no -- the production is less than the metal strip.

And when you get to 2022, there is some sharing in copper.

But the way the metal strip works for gold, all the gold in 2022 is -- substantially all the gold in 2022 is for PT-FI's interest.

So there's different metal strip for copper and gold.

These metal strips were decided in 1996, 1997, and they were just fixed.

And so that's just the way it works.

It was based on the old mine plan with old [government] capacity, and it was just a complicated part of that original agreement with Rio Tinto.

Okay.

And just finally, will you be continuing to consolidate Grasberg when this definitive agreement is completed?

Or are you going to change sort of the way you start reporting this?

So that's an issue we're currently studying as we complete this deal.

Normally, in consolidation, 51% is a criteria for share ownership.

This is different because we have basic control over operations through the structure in the shareholders' agreement.

So it's something that we are considering now.

I will tell you this.

In terms of it meeting our objectives -- Freeport's objectives of having authority to control the operations of the business, we're very satisfied with the way this thing ended up.

And when we have time with investor meetings and so forth, we can go through that in some detail.

But we have an operating committee that FCX controls, and its authority is broad and effective in terms of running the business.

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

Well, my 3 questions became 2 and now 1, but that's fair enough.

So getting back to capital allocation, disciplined approach is great.

Balance sheet appears to be where you want it to be, but you're still generating strong cash flows from operations.

So can you talk a little bit more about returning cash to shareholders with share buyback that some of your mining peers are doing, being considered in that?

So well, Oscar, we -- while we've met our targets in the uncertainties with today's world, excess cash flows will continue to be used to reduce debt.

Our cash flow will fall off in these transition years, so we face that circumstance.

And then with these uncertainties in the overall marketplace that I talked about with Chris' question initially, that's going to make us conservative and cautious about the financial policies.

So we're going to be solid with what we're doing, and it's driven by both the circumstances in the marketplace and our company situation of having these transition years.

But when we look beyond that, then we'll have lots of opportunities to do different things.

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

In terms of El Abra and Bagdad, potential projects that might move ahead in better times, roughly how many metric tonnes per day might the mills be at El Abra or Bagdad, roughly?

At El Abra, we're looking at roughly the size of Cerro Verde, 240 -- Cerro Verde 2, 240,000 tonnes a day, and at Bagdad...

120,000.

Did you hear Red, 120,000?

120,000, John.

Now these aren't equivalent projects.

First of all, El Abra and Chile have the 49% partner.

We have 51%.

It will involve a major desalinization plant, and the infrastructure to pump that water to elevation with the attendant energy cost associated with it.

It's a great resource, but it's a bigger project.

At Bagdad, benefits from no taxes as we go forward.

We've, for years, made plans for developing water resources for it, tailings areas, and so it's a smaller project in the aggregate.

We own 100% of it.

We own the land and sea there.

It's a remote area, great relationships with the local community, straightforward type project.

So those are the trade-offs.

And then in the U.S., we have the benefit of attractive energy cost today, good regulatory environment, a workforce that is supported by the community in terms of housing and education and health care and so forth.

People drive their trucks to work, bring their lunch.

It's -- so there's a lot of trade-offs, John, that go into those decisions.

And over the years, you remember, like I, too well, when the Southwest copper district was considered totally dead, with all those changes today, it is very attractive.

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

You brought up the tax advantage a few times.

So just very quickly, can you remind me where we are on tax pools in each of the regions?

So if I'm looking for after-tax cash flow or cash cost per unit of copper, I mean, you're sort of saying it's 10% or less in the U.S. Okay, is it 35% in Peru and Chile, and 50% in Indonesia?

I'm just trying to see the next couple of years if you have lower Indonesia earnings, whether -- how that's all going to blend in and you're going to generate after-tax cash flow.

So we're unlike many other global companies in that we pay higher taxes outside the U.S. whereas many companies before tax reform paid higher taxes in the U.S. We're taxed individually in those countries, in those tax rates.

In Indonesia, there's a 35% corporate income tax, there's a 10% withholding tax that's additional to that for funds that come out of Indonesia and then you have the royalties that you have there.

So all of that is there.

And in the U.S., we have a very large tax loss carryforwards so that our tax rate for a long time will be 0. And when that expires, many years in the future, under the current tax laws, the effective tax rate on our operations in the U.S. would be about 11%, and that's because percentage depletion was retained under tax reform.

And so that's where we are in South America that you're...

It's around 35%, yes.

You're right.

And those are cash taxes, right, as opposed to effective accounting taxes?

Correct.

Yes, we write checks internationally like everybody else.

Perfect.

Great.

It's just -- you brought it up, but you said it.

Your, obviously, cash flow is going down, but your after tax is being somewhat more efficient across the U.S. versus Indonesia as we go forward, right?

So it's not going down as first if you looked...

Well, U.S. production is not going -- U.S. production and South America production is not going down, it's only Indonesia, and that will be shielded to a degree by taxes there.

That's an important thing in looking at the smelter obligation too.

The smelter cost will be -- will have a tax effect associated with it.

Great.

And that's all embedded, which, I assume, is, well, when you look at that chart in Page 13, you see the EBITDA over the transition years compressing down on the average operating cash flow.

It doesn't go down as much you think because you're getting all those tax benefits.

Well, yes, tax consequence.

Tax consequence.

Exactly, it's not a benefit, I get it.

Okay, great.

That's very helpful.

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

Looking at your capital spending plan over the next few years in the chart, I notice the increase in the maintenance or non-growth spending.

Is that all catch up?

Is there some equipment fees or any unusual opportunities that you're going to see there for the next few years or are you anticipating higher vendor prices over what you're going to be investing?

Well, some of it is -- we had deferred maintenance during 2015, '16 and into '17.

So some of it is catch up, but this is -- I mean, these are very reasonable levels of maintenance capital for an operation our size.

There's nothing unusual there, and we've done some great things like -- Red, when's the last time we bought a truck?

2008, a new one.

A new truck in 2008.

We rebuild all of our trucks.

We've got great deals with our tire -- we're constantly working with our suppliers to mitigate cost increases.

And when you step back from this, this is a very reasonable level of maintenance cost for an operation of this size and this nature.

Yes.

And to answer the latter part of your question, we're not seeing, of course, on the edges, we've always got cost inflation to manage and work with our vendors.

But that's not the reason why we've got capital where it is.

It's more this effort to stay in our operations, rebuild the equipment, add equipment to increase mining rates and -- which we believe will drive long-term value.

Our next question comes from the line of Chris Mancini with Gabelli & Company.

Just a quick question in the North America operations.

You're saying that the cost there were a little bit higher in the quarter because of higher mining rates and Richard, you kind of referenced this in your opening comments that you're mining more now relative to what you were doing when you were trying to cut cost.

Is this laybacks at some of the mines?

And is it -- when these are completed, will the cost -- will the unit cost come back down in North America?

And then also, is there an opportunity to reopen the Miami mine?

So Chris, this is Red.

The mining rates are at levels that we can sustain long term, gives us the flexibility to be able to blend ores, and all those kind of things that are important to us, higher copper prices and longer-term outlook for those mines.

And the cost will come down a bit as we get all of that dialed in.

We are planning to catch up right now.

We constantly look at the resources that we have.

We don't see anything out in the future for Miami, but it's not off the list either.

Yes, we have an ongoing program of environmental management there.

And when -- we discussed with other operators in the area, things that might be possibilities.

We are very encouraged about our Chino mine in New Mexico, which we thought would be -- it would be completed by now, but we're finding resources at depth.

So we started this Cobre project there to help current operations, and our guys are doing a great job managing that currently and it has some potential for the future as well.

Our next question will come from the line of Matt Murphy with Barclays.

Richard, just another question on the pipeline in the Americas.

I'm interested in what you think your response time could be?

If at some point, you feel more comfortable on the copper price outlook, how quickly you could put some of these options into production?

So the -- I think the most shovel-ready type project we have is at Bagdad, and it's 5, 6, 7, 8 years from pulling the trigger to go to getting production out of it.

Now you've seen the Lone Star production that we're expecting to come online at the end of 2020.

And as Richard was talking about earlier, as we strip, we're really going to expose additional oxides.

And there could be a project at Lone Star to increase from 200 to higher rates.

We'd have to put in some additional tankhouse capacity.

But that one could be quicker in terms of adding volumes because we think the resource is there, adding some capacities that would be quicker than putting in a new mill, for instance.

But -- so Lone Star, keep on the radar for potential increases to the 200 that we've got at the end of the 2020 period.

Our final question will come from the line of Timna Tanners with Bank of America Merrill Lynch.

Just one question.

Wanted to ask if you could please give us an update on any details regarding the Grasberg smelter.

I noticed the small change in language between the 2 releases.

And also, as you were talking about cash flow expectation for the next several years, I didn't hear a mention of the smelter.

So if you could just provide us your latest thinking on timing cost and split with INALUM, that would be great.

So it is one -- it's the commitment of our companies that with the completion of the extension, the documentations, resolution of environmental issues, all of this comes together as a package at one time, the share transfers, the shareholders' agreement, all of that, it's a onetime closing of a number of these different things.

And with that completed, we will undertake to fulfill our commitment of PT-FI to build the smelter.

It would be, on a standalone basis, a $2.5 billion to $3 billion project.

We've said we would do this, and we're committed to do this within 5 years of signing this document.

It would be a commitment of PT-FI, so INALUM would be a 50% owner of that commitment, and they've agreed to participate in any equity capital costs that might be required for that.

We have plans to develop a project-type financing with that to -- as we did with the existing smelter back in the 1990s.

And so we would proceed to maximize project-type debt financing probably or financing through PT-FI to minimize upfront capital for it.

Then, we have the potential of bringing other partners into this.

We're having discussions with PT Amman, which acquired the Batu Hijau mine from Newmont.

They faced a smelter commitment, and we're having ongoing discussions with them about participating with us.

And that has a potential of reducing -- increase the size of the smelter but decrease the capital requirements of our company.

Going back to the earlier conversation about tax effects, big picture, currently, the government gets about 50% of the economics of the projects through taxes and royalties.

They now have 50% of the equity.

So 75% of all this is the government now.

I mean, our 25% interest is potentially what we had under the Rio Tinto deal and so forth.

So all these numbers you need to take into account that the effect of the smelter will be reduced by tax consequences and by the government's participation in it.

So we will -- we've spent a couple hundred million dollars today in planning, we're working with contractors.

And with completion of the deal, we'll move forward with construction contract plans and so forth.

And we'll be able then to lay out a cash flow profile for what would be required, how it will be financed and what capital commitments will be for us.

Okay.

And completed within 5 years or begun within 5 years?

That's my -- well, just one clarification.

Completed within 5 years.

We will commence -- I mean, we're doing planning now, but we'll commence the project immediately on issuance of the new license and completion of all these other transactions as part of the package.

I will now turn the call back over to management for any closing remarks.

All right.

Thanks, everyone.

Appreciate your interest.

If you have follow-up questions, get in touch with David Joint, and we'll be moving onward and upward.

Ladies and gentlemen, that concludes our call for today.

Thank you for joining.

You may now disconnect.