費利浦·麥克莫蘭銅金 (FCX) 2019 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, everyone.

Welcome to the Freeport-McMoran Second Quarter 2019 Earnings Conference Call.

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

Our conference call today is being broadcast live on the Internet.

Anyone may listen to the call by accessing our website home page and clicking on the Webcast link for the conference call.

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

Before we begin our comments, we'd like to remind everyone that today's press release and certain of our comments on the call include forward-looking statements, and actual results may differ materially.

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

On the call today with me are Richard Adkerson, our CEO; Red Conger, who runs our business in the Americas; Mark Johnson, who oversees our Indonesian operations; and Mike Kendrick, who oversees our molybdenum business.

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

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

We'd like to note that the results we're reporting today for our second quarter are slightly better than the financial estimates reported in our July 1 update.

Today, FCX reported net losses attributable to common stock of $72 million or $0.05 per share in the second quarter.

After adjusting for net charges of $14 million or $0.01 per share, our adjusted net loss attributable to common stock totaled $58 million or $0.04 per share.

Our adjusted earnings before interest, taxes, depreciation and amortization for the second quarter totaled $465 million, and a reconciliation of our EBITDA calculation is available on Page 29 of our slide deck.

Our second quarter 2019 copper sales of 807 million pounds were in line with our April 2019 estimate of 800 million pounds with higher copper volumes in North America and South America, offsetting lower copper volumes from PT Freeport Indonesia.

Mine-sequencing changes in the Grasberg open pit resulted in lower second quarter 2019 gold sales of 189,000 ounces.

That compared with the April 2019 estimate of 265,000 ounces.

This is a timing variance, and we are affirming our 2019 sales estimates for both copper and gold of 3.3 billion pounds of copper and 800 million ounces -- 800,000 ounces of gold for the year.

Our second quarter 2019 average realized price for copper was $2.75 per pound.

That was about 11% below the last year second quarter average of $3.08 per pound.

And gold prices were slightly above last year's second quarter.

They averaged $1,351 per ounce in the second quarter of 2019 versus $1,274 in the year ago period.

Our unit net cash costs were $1.92 per pound in the second quarter of 2019.

Our unit net cash costs for the year are in line with our previous estimates of $1.75 average for the full year.

We generated operating cash flows of $554 million in the second quarter, and our capital expenditures totaled $629 million.

We ended the quarter with consolidated cash of $2.6 billion, and our consolidated debt totaled $9.9 billion.

We had no borrowings and $3.5 billion available under our revolving credit facility at the end of June.

At the end of June, FCX declared a quarterly cash dividend of $0.05 per share on its common stock, and that dividend will be paid on August 1.

I'd now like to turn the call over to Richard, who will be referring to a slide presentation on our website.

Thanks, Kathleen, and good morning.

We're enthusiastic today -- to report today with all the good things that are going on here at Freeport.

Starting with Slide 3. In the Americas, our Freeport team delivered on expectations.

Way to go, Red.

Production exceeding forecast, principally our mines in the U.S. Costs were in line, safety performance was good, and we're committed to achieving safe production as our highest priority.

Our Freeport team is highly energized by new tools we have developed to increase productivity.

The combination of data, artificial intelligence analysis and enhanced collaboration between our operators, IT team and business analysts is creating these new tools.

We have achieved early wins that give us momentum to implement these tools on a larger scale.

The Lone Star project in Eastern Arizona is advancing on budget and on schedule.

We are past the halfway mark and on track for first production by the end of the year.

The initial project we had 200 million pounds of copper, and we're assessing low-cost capital incremental expansions to build scale for what could well become a significant asset for us in the U.S. longer term.

As reported, we modified our plans for final operations in the Grasberg open pit by adding a new area of mining that is enabling us to extend open-pit mining beyond our previous expectations.

These modifications delayed access to some higher-grade material which we now plan to recover in the near term.

Our current forecast has us mining in the open pit through September, but we are likely to have the opportunity to extend open-pit mining further, subject to how the open pit interacts with the underground development.

Recall that our past plans envisioned completion of open-pit mining in 2018, so everything we're doing this year is, in essence, [linear] for us.

We are prioritizing safety as we proceed with mining and with the ramp-up of the long-term underground mining which is our future.

The Grasberg is a remarkable ore body.

We have now initiated block caving to allow the Grasberg to continue as a major contributor in the years to come.

In the second quarter, we achieved a number of important milestones in the development of our underground mines.

After years of investing in underground infrastructure, we have now begun to ramp up production.

We exceeded expectations on key performance metrics in the second quarter.

We're building momentum to meet our targets, which would result in high volumes with low cost and substantial free cash flows for the coming 20-plus years.

We're affirming our annual sales guidance for 2019 and beyond.

Our global Freeport team is laser-focused on execution.

We are very disciplined in our cost management, capital allocation by following a clearly defined strategy.

With continued successful execution, we're confident that our strategy will deliver large and meaningful value to shareholders.

Slide 4 presents the key metrics to bridge 2019 to 2021 and illustrates the benefits achievable over the next 18 months.

Through execution of the ramp-up at Grasberg, completion of Lone Star project, stable performance and our operations in the Americas, we expect to increase copper sales volumes by approximately 30% and almost double gold volumes.

This will result in an approximate 25% reduction in net unit costs, with all things being equal, and double our EBITDA and cash flows at current commodity prices.

I personally believe the potential for higher commodity prices exist.

With a growing production profile at time when copper markets could well be rising, our shareholders would have exposure to a positive long-term future in copper.

Much of the capital investment needed to achieve this result has been spent.

Ours are long-lived assets give us a strong base for solid cash flows for the future.

Moving to Slide 5. The Grasberg mineral district is one of the premier assets in the history of the global mining industry.

To date, production from the Grasberg open pit and surrounding ore bodies has totaled 36 billion pounds of copper and 54 million ounces of gold.

This is notable since the district is one of the most recent major ore bodies to be developed in our industry and still has a long life ahead as a significant producer.

Our reserves are reported only through 2041, which is the date of our current mining rights, but currently identified resources are massive.

Significant production is highly likely to extend beyond 2041.

We are now completing mining from the surface of the Grasberg as it has now become more economic to extract the Grasberg ore underground using block caving mining.

In block caving, the ore collapses under gravity, and there is no stripping or mine waste to deal with.

Cave propagation in the Grasberg Block Cave is positive now, providing us increased confidence in successfully ramping up production.

The rock type in the Grasberg Block Cave is very conducive to caving with no need for any preconditioning.

We are now undercutting, drilling and blasting in the Deep MLZ mine in conjunction with preconditioning rocking that mine using hydraulic fracturing to manage rock stresses in this ore body.

Our company is a leader in block cave mining with decades of experience in operating block cave mines in the U.S., but also dating back to the early 1980s in Indonesia.

With block caving, there is substantial upfront investment, and we've been making these investments since 2003.

2/3 of the underground development meters of these mines have already been achieved.

We invested in underground infrastructure and a state-of-the-art autonomous underground real system to deliver ore.

Most of the capital cost to develop Grasberg Block Cave and Deep MLZ are now behind us.

The high level of upfront investment for block cave mines is offset by high-production volumes and low-operating cost for an extended period of time.

Block cave mining has a long life, which will benefit us as we go forward.

On Slide 6, we show the designs -- well, the designs of our Grasberg Block Cave and Deep MLZ mines are based on world-class standards.

We used our experience at the world-class DOZ mine and previous underground operations to enhance and improve infrastructure construction, mining equipment facilities, autonomous loaders, remote-controlled equipment, ground support techniques, undercut blasting and cave management.

The Grasberg Block Cave will be our largest contributor to copper and gold production following the ramp-up period.

Reserves total at that mine about 1 billion tons of ore and high grades of copper and gold.

GBC will have a very large footprint, spanning over 80 acres when it reaches full rate and extended to 180 acres over the life of the mine.

The size of this ore body, the sheer size of it, will give us the ability to produce simultaneously from 5 production blocks, giving us scale, flexibility and assurance of continuous production.

In substance, we have multiple mines in the GBC sharing the same infrastructure.

We know the rock types from our mining the same ore in the open pit for 30 years now and through drilling the underground ore body.

We're assessing the ore about 300 meters below the surface which was created by the open pit.

As we continue undercutting and adding drawpoints, cave expansion is expected to accelerate to ramp up to 130,000 tons per day in 2023.

At the Deep MLZ mine, we commenced undercutting in the second quarter following our work to precondition the rock.

Ongoing hydraulic fracturing operations with continued undercutting and drawbell openings in the 2 active production blocks in this mine are expected to enable us to achieve the ramp-up schedule shown on Slide 6. We have a large inventory of drawbell openings at the Deep MLZ mine to support our ramp-up schedule.

At full rate, the production of these 2 ore bodies is projected to average 1.3 billion pounds of copper and 1.3 million ounces of gold per year.

Higher ore grades from these deposits will enhance production into early years.

Average net unit costs are expected to average $0.30 a pound in the first 5 years at full rates at current cost, and this is notable and rare for large-scale operations in the underground in the copper industry.

Slide 7 presents key performance indicators we are monitoring internally.

We've included for your information a glossary of terms to assist you in reviewing this following the slides.

We are now meeting or exceeding established milestones.

Going forward, there will be pluses and minus.

That's simply the nature of planning, but we have confidence in our comprehensive plan based on our knowledge of these ore bodies and experience with underground ramp-ups.

We are now over the hump on the multiyear development meters needed to meet the ore bodies.

The key for the future is to continue our undercutting to expand the mines, to open up new drawbells to accumulate the ore.

We will be accelerating drawbell construction as the caves expand.

Looking at Slide 8. The Lone Star project near our Safford mine -- adjacent to our Safford mine in the Eastern Arizona is progressing, is on schedule and on budget.

The initial project is economically attractive and low risk in an established mining area with access to nearby infrastructure and experienced workforce.

First production is expected at the end of next year.

Initially, we are targeting 200 million pounds per year of copper production and expect to have opportunities to increase this target by debottlenecking with low-cost investments.

We are increasingly excited about the longer-term potential for this asset.

The drilling results continue to be positive.

The grades are higher than any of our existing mines in the U.S., and the risks are lower than in many other jurisdictions.

We own 100% of this resource.

And in the U.S., we now have a very highly favorable income tax regime.

And for our company, we face no income taxes for many years in the future in the United States.

As we bring the oxides into production, and as a result, strip the deposit, there's a significant large and growing sulfide resource beneath the oxides which will become economically compelling.

We're not only generating returns from the oxide reserves.

But by mining, we are also enhancing opportunities to add a new large-scale cornerstone asset to operations in North America.

Now I want to move to Slide 9. We are undertaking a really exciting initiative that our team is very enthusiastic about to use the power of expanding computing capability, to compile and analyze data in our day-to-day decision-making for our operations.

Red is leading this effort in conjunction with Bert Odinet, our Chief Innovation Officer, and a team of other leaders from throughout our organization.

Real benefits have been achieved in the initial stages of this initiative, and momentum is accelerating.

We are leveraging data analysis with collaboration across functions, arming our operators with tools and empowering them to make decisions quickly based on real-time data.

Results are measured in real time to determine how they impact productivity.

We initiated this process at our Bagdad mine in Arizona as a test case, and the results are telling the story.

Since late last year, our mill throughput is up over 10%.

Recoveries are up a percentage point, approaching 90%, and unit costs are down 10% to 15%.

Safety and retention is better, and all this was placed in service in a very short period of time.

A key to expanding on this success, and this is a fundamental strength of Freeport, is that we manage all of our operations in our global portfolio of mining assets.

We can readily and efficiently coordinate and implement processes across all of Freeport's global mining assets.

Everyone has access to data and the results of the analysis.

We have now begun to implement these tools and management approaches across the portfolio.

We have set an aspirational goal of adding 200 million pounds of copper in our Americas operations, reducing our cost with minimal capital involved.

This, in effect, is creating a new concentrator for us.

This would add substantial value.

Typically, a project to develop new capacity for 200 million pounds of copper might cost on the order of $1 billion to -- $1.5 billion to $2 billion.

We believe we can achieve this simply by increasing productivity without incurring any significant capital.

Our unit costs would decrease, which is key to unlocking value in our U.S. assets.

A very exciting initiative, our operating teams are rallying around it.

Their enthusiasm is high and contagious, which is -- with our senior operating team last week and preparing for our earnings release, and we'll keep you updated as we expand this throughout our Americas operations.

Slide 10 addresses copper market.

As you know, the uncertainties resulting from the trade dispute between the U.S. and China have been impacting copper prices for a year now.

These uncertainties are affecting the confidence level of some of our customers, and to a limited degree, short-term demand.

However, the global copper market remains balanced.

Fundamentally strong inventories continue to be low in relation to historic norms.

Supply development in our industry continues to be supportive of copper prices.

Industry disruptions this year are at a higher rate than last year.

Mine supply this year is expected to decline despite some new production coming on-stream.

We continue to see long-term support for copper prices from the issues and developing new supplies.

High-quality ore bodies are increasingly scarce.

Resource nationalism continues to be an issue around the globe.

Current producing mines are aging.

Grades are falling.

As economic uncertainties diminish and global economic growth improves, copper will be an important component of that growth.

We remain very positive about the outlook for copper long term, underpinned by limited supplies, coupled with important and growing role that copper plays in the global economy.

Before turning the call over to Kathleen, who will cover the financial outlook, I'd like to close with Slide 11 by just reiterating the inherent value FCX has in this asset.

Copper as a commodity is one of the best position from a fundamental standpoint.

New discoveries in this industry are extremely rare, and development opportunities are limited.

Any development requires multiple use to execute with substantial and unavoidable risk.

All of the above is becoming more evident over time, and all of this makes the existing long-lived mines, such as the mines we own at Freeport, more valuable.

The current cost, as I mentioned earlier, to develop new capacity approximates $8 to $10 a pound.

Applying this measure to our existing, developed, producing capacity on a copper-equivalent basis translates into a theoretical replacement cost value of $36 billion to $45 billion.

In reality, it would be very difficult to replace these assets at any cost.

This replacement cost value significantly exceeds our current enterprise value with no value assigned to our large, undeveloped resource position, which I believe will ultimately prove to be highly valuable for our company.

We will continue to execute our plan, build our cash flows, deliver value from a portfolio for the benefit of shareholders.

I'm personally looking forward to being part of the Freeport team as all of this unfolds.

Kathleen?

Thanks, Richard.

I'm going to go over the financial outlook, starting on Slide 13, and we show here the sales outlook for 2019 to 2021 and is broadly consistent with our previous guidance.

You'll see our copper sales growing by approximately 200 million pounds in 2020 and 900 million pounds in 2021 compared to 2019.

This includes the scheduled ramp-up of production at Grasberg and the commissioning of our Lone Star mine in late 2020.

In 2021, we expect just over 2/3 of the copper production will be produced from the Americas and the balance from Indonesia.

This outlook does not include the opportunities being pursued with technology and innovation that Richard discussed earlier.

And as discussed, we're targeting an aspirational goal of adding 200 million pounds of copper through these initiatives.

We're also ramping up gold production during this period with high grades available to us in Indonesia.

And as many of you know, Grasberg is one of the largest gold mines, in addition to being a significant copper producer.

Our molybdenum sales are flat over the period, but we have the ability to increase production rates from our primary molybdenum mines if market conditions warrant.

Moving to Slide 14.

We have modeled our EBITDA and cash flows at various prices to provide you with a range of the cash earnings and cash-flow-generating capacity of the company.

You'll also get a feel for the leverage we have to improving market condition.

At $2.75 per pound of copper, around the current price, we are in the $2.8 billion range for EBITDA for 2019.

This is a trough year for us.

And as you see from the modeled results, we would generate approximately $4.4 billion to $6 billion in EBITDA in 2020 at this range of prices, and that would grow to $7.4 billion to $9.5 billion in EBITDA for the average of 2021 and 2022.

This is more than a double of cash flow, and most of the capital required to be able to achieve this is behind us.

Now it's up to us to execute.

And over the next 3 to 4 quarters, we'll continue to de-risk the plan as we hit the milestones set out.

The story is the same for operating cash flows at the bottom of the page here on Slide 14.

That's net of our cash taxes and interest costs.

Our operating cash flows grow from roughly $2 billion in 2019 to over $3 billion in 2020, which is sufficient to fund our capital expenditures and our dividends.

And we expect the average of 2021 and 2022 at these copper prices from $3 to $3.50 to range from over $5 billion, approaching $7 billion at $3.50 copper.

And we expect capital expenditures to decline beyond 2020 which will supercharge our free cash flow.

On Slide 15, we show our projected capital expenditures for 2019 and 2020.

This includes sustaining capital of roughly $1 billion per annum and the projects we have underway that are allowing us to grow our cash flows so significantly.

We're continuing to manage capital very carefully.

You'll note that capital costs are up slightly from our April estimates.

The primary driver for this is that we're ahead of schedule on the Grasberg Block Cave and Deep MLZ work.

Our 5-year average spend for the underground development is consistent with our previous guidance, but we've been a little bit more productive in 2019, and so we've adjusted the timing of our spend.

These amounts do not include the new smelter in Indonesia in which FCX will share 49% of the economics.

We expect to debt finance the smelter at the PT-FI level and are having some good discussions with a group of banks to put a facility in place to fund these costs.

Moving to Slide 16.

We show our financial position and liquidity.

We're in a strong financial position.

Our balance sheet is in good shape.

If you look at our leverage relative to the expected EBITDA generation, our current net debt is around 2x 2020 EBITDA and about 1x 2021 using $2.75 copper.

We also have a strong liquidity position with $2.6 billion in cash on hand and undrawn $3.5 billion facility.

In closing, going to Slide 17, we are gaining real momentum in achieving our objectives, clearly focused on executing our plans in an effective way and have a line of sight for meaningful increase in our revenues, earnings and cash flows.

Thanks for your attention.

And operator, we'll now open up the call for your questions.

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

A few questions from me, quite quick ones.

On the smelter, when can we expect any updates on the timing of that?

Second question, just around thinking about the open pit underground transition, can you just give an update on mill stockpiles and also any port inventory that you have just on the differences between sales and production?

And then the last one, just the timing of the Slide 9, that 200-million-pound opportunity you've talked about, if you could talk about that a bit further.

Thanks, Chris.

On the smelter, we started early works in ground improvement.

We've got a site located in Gresik near the existing smelter in Indonesia, and we're doing some front-end engineering work, so we'll have better estimates at the end of the year in terms of capital cost.

As I mentioned, we're having good discussions with lenders about financing the smelter and expect -- we're not expecting significant cost of the smelter in 2019.

It will start ramping up some in 2020, but the bulk of the spend will be later in 2021 and '22, but we expect to have a debt financing in place that will allow us to fund those costs and essentially amortize them over a long period of time.

Our commitment with the government was to do it within 5 years of December 2018.

So that's the time schedule is -- that we're working on is to have the project running by the end of 2023.

Your question about production and sales, we generally sell what we produce.

Sometimes we'll have shipping delays that extend over a period of time -- short period of time, but we don't have significant port inventories.

We've wound those down, and we don't have significant stockpiles at this point, so we are basically in normal operations.

Slide 9, Richard, do you want to comment?

He asked about the timing of the 200 million pounds of...

So we expect to ramp up beginning the end of next year and by mid-2020 to be at that full production level.

But as we speak and in our recent meetings, we're seeing opportunities to be able to expand that with incremental oxide production with reasonable amounts of capital to go along with it.

Right now, we're being able to use available facilities at the Safford mine for processing, which that mine is ramping down as expected.

But the opportunities for future growth in oxides is there.

And of course, there's a -- we've spoken about the very large longer-term sulfide resource that's available to us.

That's with respect to Lone Star, Chris.

I think you were also asking about the innovation project which we're moving very aggressively on.

We've achieved the results at Bagdad.

We've got more to come at Bagdad, and then -- the aspirational target that we set of 200 million pounds, this is something we want to do quickly.

We're working on blueprints and designs, and we don't have -- we haven't put it into our guidance, so we don't have a projection.

But we have optimism that we'll be able to convert that aspirational goal into results.

Yes.

And we have a full-blown team on the ground at Morenci right now, putting now one in place and getting ready to go to the next one after that.

Right.

We see a very great opportunity for this, and this -- what this does is -- and we didn't know exactly how it would work.

When we went to Bagdad, that really worked quickly, and now it looks to be sustainable.

And so by increasing mill throughput, then you have to adjust your mine plans to feed that capacity.

And that, in effect, shorten your reserve life, and we got enormous reserve life.

So all that's so economically positive for us.

And I can't tell you the way our team has responded to it to see our long-term mining executives being excited about.

Data analytics, it's quite an exciting thing to see.

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

Just a couple of questions from me.

On the undercutting, on the drawbell development, everything was great.

What exactly there is allowed to faster pace versus your plan?

And do you think you were very conservative at the outset?

And then second, continuing, can you give an example of the concrete kind of process change that the data analytics at Bagdad have led to and what's really driven these op improvements you've shown?

Okay.

So we -- Mark, why don't you comment on this because...

Yes.

On the -- as far as the undercutting and drawbelling, I don't think we were conservative in the GBC.

We have some upside.

We try to use a central estimate when we put our forecast together.

We look at opportunities to be slightly better and where the risk would be, but the challenges would be on the downside.

We do have a lot of meters of development.

And then the undercutting right now, all of that drifting is well in advance of where the undercutting is taking place.

So a lot of the undercut meters are essentially just the drilling and blasting the final stage of that, and -- so we're going to continue to use the central estimate way of forecasting.

And this year, we're looking at having marginal upside on both the Deep MLZ and GBC in that regard.

On the Deep MLZ, obviously this year, a lot of it was driven by our ramp-up of the hydrofracking.

In the second quarter, we commissioned our third hydrofracking pump, and that went well.

So we're continuing to see the cave respond to that preconditioning.

And that will be something that we continue to press forward on, and it was a learning curve for us.

I'm proud to say that the group out there took that technology and ramped it up very quickly, and it's part of our day-to-day operations now in the Deep MLZ.

Yes.

And a point I'd like to make is this is not a new plan.

I mean we've had a plan that we started on 15 years ago that envisioned during this time frame.

In fact, it was envisioning starting in 2016.

But because of issues at the surface in the pit, it was delayed.

So we've had this consistent plan.

The guys have done a great job of being focused on it despite everything else that was going on at job site in Indonesia, and that plan just keeps getting modified and improved as we go through time.

So it was not like this is a new plan that's been developed but consistent execution of a long-term plan.

And now that we had talked about this AI initiative, but for years now, we've been using measurement devices on equipment to get information to supervisors who then take it and feed it back to operators in the field.

What this does is take that fundamental process but gathers the data, processes it immediately, compares it to what would be optimal conditions and where it's falling short and getting that data instantaneously in the hands of our team to make those adjustments in real time and continuously.

Red?

Yes.

So it's a combination of many things using this model, but it's a great way to bring our people together around facts and data versus opinion.

So it allows us to challenge paradigms, any rules of thumb or conservatism that we might have had in managing the processes before.

Now we're doing it by fact and quick turnaround of information as Richard mentioned.

And it's truly a way to have your best day every day that you can take the conditions that are presented to you today and perform absolutely at the top opportunity available to us and seize that every day.

It also has our people working together much differently and collaboratively than they have in the past.

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

I just have actually 2 questions.

One is a quick one on Grasberg, and the second is on the data analytics and technology innovation.

So first on Grasberg.

I'm just curious as to why your full year by-product credit estimate is unchanged despite the fact that your gold price that you're using in the by-product has gone from $1,300 to $1,400 an ounce, and your production of gold is unchanged for the year.

Is there a small rounding difference in the gold sales number for the year?

Or I would have expected the unit cost number to be quite a bit low actually, being that you're using higher gold price.

So just wondering why the Indonesian costs are not lower despite a higher gold price.

That's the first question.

Maybe we can start with that.

Okay.

The gold credit will be a function of what the gold revenues are in relation to the copper volumes, and there was a slight change in copper volumes for the year.

It wasn't a big number, but we increased copper by -- from $6.25 to $6.30.

So that -- it wasn't a huge difference.

It was a $0.02 variance between the 2 numbers, but it's a relation of what the gold volumes are in relation to copper.

I just wanted to make sure there wasn't anything going on with price realizations there, so that's helpful.

Secondly, on the data analytics and technology innovation, we're starting to hear from other copper mining companies as well about their expected ability to begin to ramp up production from debottlenecking and using technology and innovation.

And historically, we've -- with the copper as industry where you have kind of a national decline rate in production, which is obvious pretty bullish for pricing.

Are there any reasons why we should believe that your ability to debottleneck effectively using technology is unique to Freeport?

Or should we begin to worry about the ability of the industry to kind of deliver organic growth from very low capital cost projects using technology and innovation?

I think the real distinguishing feature for our company is this idea that we manage all of our operations as, in effect, one business and is not where you have joint venture operations or a minority interest in other operations.

So it allows us to do things and share it from mine to mine to mine.

Technology is going to drive things as we go forward.

We're working with our suppliers in applying technology to underground mining, which, in reality, probably is a more fertile area for application of this than open-pit mining because of the more factoring nature of that business.

So it will be a factor in the industry going forward.

Other factors, in my view, are going to be more important in terms of looking at ultimate supply/demand impacts for the industry, and that is this whole issue of global growth and the things that overhang the market from the demand side and just the issues of these things might help offset falling grades.

But grades are falling.

And you see in project after project the challenges that are faced in terms of developing supplies, whether those relate to processing issues, ground support issues, government issues with resource nationalism.

So it will be a factor.

We're certainly going to take advantage of it to the maximum extent we can.

I don't believe, big picture, that this is going to be a game changer in terms of the fundamentals of supply and demand for copper.

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

Just a couple of quick questions.

I was wondering if you can comment on the increase in site production and delivery costs in South America going to $1.92 a pound from $1.73.

Understand there was an issue with production, i.e.

grades, but is there anything else like pushbacks or higher throughput that you're putting to Cerro Verde that are affecting cost?

No.

Oscar, it was primarily at Cerro Verde.

We had some different ore types of that we mined in the second quarter, and so we had some issues to work through there.

That's the main driver was the ore types in the second quarter at Cerro Verde.

Red, do you want to...

As we got to the bottom of the Santa Rosa pit, we had some slope issues that kept us from extracting the high-grade pushback down there, Oscar, to finish that off.

So we're trying to stabilize that and get back in there and get that ore, but it's not lost.

We were -- it was just a timing change of the mine plan.

Yes.

It's a temporary change.

Yes.

There's no fundamental change in the cost structure there, and we expected to have stability there, but the issue is quarter-to-quarter.

But we expect long-term stability in our cost structure at Cerro Verde.

Does it mean your throughput is well above the 360,000 tons per annum, so we can expect like increased production over the next 12, 18 months then?

Yes.

I mean we're having to -- the mill is performing so well.

I mean this is the industry's largest mill and that we're having to feed that mill and find ways of adjusting our mine plans to move production forward.

And all that's very positive from a value-creation standpoint.

Yes.

So that it was higher throughput, but lower grade.

And Mark Johnson just reminded me we're recovering at El Abra from the flooding incident that happened in the first quarter, so there's a delta at El Abra on pounds as well.

And El Abra was ground zero for the floods in Northern Chile and Peru, and our team there has done a great job, not only recovering for our operations, but helping nearby communities deal with their problem.

Yes.

No.

Noted.

No.

That's -- regarding about that.

And then lastly, your comments on the debottlenecking of Lone Star's leach development, what sort of delta could we be looking at here?

Is it 20-25, 40 million pounds per year?

It's too early to do that right now, and we're focused on the initial project.

It's just -- as we did and as we're reviewing with our team, guys were brainstorming and saying, "Okay.

We have this opportunity, this opportunity." The next stage will be to evaluate how those new opportunities match up with capital requirements for processing and so forth, so we're going to be alert to it, studying it.

But here and throughout our operations, we got 2 years of real discipline.

We've got a plan.

We're going to execute this plan.

We're not going to get off course by pursuing opportunities too aggressively right now.

We're going to study things and make sure we get the benefits of this transition period behind us, and then the world's going to open up to Freeport in a remarkable way.

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

Just curious on the smelter as well at Grasberg.

Do you anticipate that 100% of the $3 billion CapEx will be debt financed?

And then secondarily, will you not have to add the CapEx or consolidate that in terms of the smelter CapEx to your consolidated financial CapEx?

Or will that be...

Yes.

We'll have -- the -- we consolidate PT Freeport Indonesia, and the -- so the capital expenditures incurred by PT-FI are consolidated in FCX's results, so they will be part of our consolidated results.

But the economics, and we have a shareholders' agreement between FCX and our partner there, Inalum, a state-owned company, where smelter costs are shared according to the ownership of 49% to FCX.

So we'll consolidate it, but the economics and cash flows associated with it will be borne 49% by FCX.

And we do anticipate being able to finance substantially all, if not all of the smelter.

PT-FI doesn't have any debt, and so it's in a good position, and we've had some positive feedback from lenders about financing for PT Freeport Indonesia for this project.

In the past, we've looked at alternative structures.

In other words, we've looked at potential opportunities to create partnership and create an entity that might or might not be consolidated.

So we've left ourselves this option.

It now appears that the best course of action, considering all factors, would be to debt finance it through PT-FI.

But other alternatives may emerge as the reality of this thing occurring gets accepted in the marketplace.

Okay.

So should we anticipate that at some point in the future, you'll, say, update your 2020 CapEx guidance of $2.6 billion to include the smelter?

Yes.

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

Following up on the Indonesian comments.

Richard, just wanted to -- maybe you can share how the joint venture from a personal, corporate business level, government level has done over the past, I guess for almost 6 months now but more than 6 months, and relative to your expectations on how you've been able to manage the successful transition that we're looking at for the second half of the year.

I'm pleased to say it could not have gone better.

It was -- as we talked about extensively, to understate it, leading up to December and getting that step taken to resolve all of the issues between us and the government.

The partnership with Inalum is going very well.

They have -- we've established the corporate structure where we have a shared Board of commissioners, shared Board of Directors.

We have an Operating Committee that FCX controls that runs this -- the operations at site, but Inalum participates in it on a partnership basis.

We have a total alignment of financial interest.

Inalum financed the acquisition of Rio Tinto's interest in the joint venture through an international bond offering that we have facilitate.

They need the cash flows to fund that.

It's not government guarantee.

We're swapping ideas.

They've got people working in our organization.

We had representatives of Inalum at our FCX managers' meeting last week.

We're participating in their Inalum functions.

It's gone well.

During that 6-month period, Indonesia has had presidential elections which kind of dominated public focus there.

President Joko Widodo was -- has now been officially cleared as having a new term.

There's considerations, we understand, going on about the structure of government going forward, but we couldn't be more pleased.

The personal relationships are very positive.

We've had the Inalum people visit us here in Phoenix to see our operations and meet our global teams.

So it's -- couldn't be more pleased with the way things are going, and I anticipate this is going to be very successful going forward.

As I said, we finally are in a position where our interests are totally aligned with the government of Indonesia through this partner.

That sounds encouraging.

Maybe just one follow-up.

In the past, I've observed how the ground -- business on the ground is relative to some of your -- the markets for copper.

And there's been a lot of negative data points, especially in North America, relative to the economy.

Are you seeing any issues relative to demand and the ability to get your copper and others?

And is the market maybe kind of softened a little bit given some of the macro data we've seen?

It was incredibly tight throughout 2018 and going into 2019.

We were literally -- we supply 1/3 or more of the downstream copper in the U.S. from our mines in the U.S. We virtually do not import, export any copper in the U.S., and we were having to buy limited amounts of copper from traders to meet the demands of our customers.

So there are some pockets of softening, which are evident in the general economy.

But overall, the markets remain tight.

Many of our customers are very positive going forward.

Others are concerned about the trade issue and the ultimate impact on the global economy.

But inventories, you see the public report it, they are what they are, and they're low by historical standards.

So we continue to be at that crossroads.

And the crossroads are is this trade issue going to result in broader economic impacts in China and the global economy?

Or is this thing going to get resolved in a way that avoids those?

Within China itself, the government is working very actively to offset areas of softness in their economy by stimulating investment, investing in infrastructure, pushing this Belt and Road Initiative to use excess capacity, and they're having some success doing that.

But it's a question mark that we or nobody has the answers to at this point.

There's certainly no falling-off-the-cliff situation with our customers.

It's -- but as I said, there is concern, and we're at a crossroads.

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

Just 2 for me.

So I know on the guidance that you gave for later this month, there's some comment about potential upside to your forecast.

So I see that you didn't revise them, and I'm just wondering at what point do you feel like you have conviction to comment further on your run rate or your ability to recoup additional volumes from the open-pit mine extension?

All right.

So this is a very unusual mining for us.

We are almost surgically looking at what remains in the open pit to see what we can capture, and so it's not like having a typical mine plan where you have mining areas designated and a specific plan to do.

We're literally mining access roads that go down there.

We're narrowing access roads from what to what, Mark?

From 14 meters to 15 meters.

And all of that's just taking advantage because, obviously, anything we can get from the pit is accelerating it.

That ore would ultimately be mined in the block cave but for several years out, so it's real value added but difficult to say where we're going to be able to get this ore.

And at the same time, we are monitoring very carefully the interaction of the beginning of mining from the Grasberg Block Cave and the safety of the pit itself.

And we've got a whole team with state-of-the-art measuring devices.

And if there's ever any question about safety, we're just going to stop because the real value strategy for us is to develop these underground mines.

And so this -- a year ago, we didn't plan to have any mining in 2019 from the pit, and we started finding ways of doing it.

Right now, we've added in a quarter, and we'll see -- I think it's likely it will go beyond that, could go into 2020 now, but it's uncertain.

We don't -- but I want to make the point.

This is not like our traditional mine plans in the pit or for the underground.

It's surgically finding areas that we can safely mine and taking advantage.

Okay.

Helpful.

And then I just wanted to follow up on something you commented on a couple months ago regarding plans for the dividend, and I caught with interest Kathleen's excitement over cash flows as CapEx rolls off.

But I just want to confirm, you're still waiting to get more certainty around the mine plan and timing before thinking about any changes to your payout strategy?

That's correct.

As I said, we're going to stick with a very straightforward focused strategy.

It was 2 years.

Now it's 18 months as we ramp up.

And after we ramp up and get the benefit of these cash flows, my expectation is the dividend is going to grow.

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

I wanted to ask about the export quotas and mentioned a few times in the release, and I wondered if you can provide some background.

Is that still related to the mining law and the smelter requirement?

And ultimately, I assume this is a formality to get amended but would appreciate your thoughts on kind of the background of the quota and kind of where it goes from here and any limitations it may cause.

Yes.

It is an administrative formality now.

I mean we -- the Energy and Mines Ministry has regulations and procedures to follow, and we have to adjust our plans as we adjust the mine plans for this limited open-pit mining we're doing now.

And so we have to follow those plans, and the quotas get approved.

And that's all it is to it.

Got it.

Got it.

And what exactly caused the need for a change in the quota given that guidance is...

The way the process works is that we file for the quota in like October of 2018, and they base it off of what your plan was then.

Subsequent to that time, PT Smelting had some additional downtime, and we ended up having more concentrate production in 2019 than what was in that forecast.

So the process now is we have to resubmit that plan, which we've done, and so we'll -- and it's not a big driver of our second half sales.

It's important.

We want to get it.

We want to have some options if we do have the ability to extend in the open pit, but we've given them an updated forecast, and we expect in the third quarter to get approval for additional quantities of export.

That's very helpful.

And then another question on the Grasberg Block Cave.

You comment in the release about increased confidence in growing production rates over time.

How would you translate this increased confidence in numbers?

Is it kind of a narrow range of potential outcomes around your guidance?

Or how would you explain to us where could we see that increased confidence?

Well, let's see.

We're saying today -- we went into the years, and we had a 2-year period.

We now got 6 months into that period, and things are meeting milestones, going along plan.

So as that occurs, our confidence is reaffirmed, let me just say.

We had confidence in our plan going into it, but I think I used the term earlier, show me.

Now we've shown for 6 months that we're on target, meeting targets, exceeding targets.

So as time goes by and we get to this ramp-up, Mark and I had a conversation last week, I said, "Mark, when we get this Grasberg Block Cave fully developed, how comfortable are we going to be in meeting quarterly targets?" He said, "Well, Richard, we're going to have multiple drawpoints with ore available if there is some mechanical issue and when we can move to another, so -- and production blocks and so forth." So I made a comment earlier it's like having multiple mines with one set of common infrastructure.

So there will always be issues in mining, but we got so much backup, so many alternatives that we're confident that we're going to be able to meet our targets.

Mark, do you want to talk about cave propagation?

Yes.

It's -- obviously, there's a lot of moving parts in a block cave.

We've built crushing and conveying systems.

We've built the rail system.

All of those -- all the commissioning of that went very well.

So that -- as those developed and as we got the commissioning behind us, that led to this increased confidence.

The cave propagation, we've got, as you can see in some of the slides, we've got 2 separate areas that we're developing and undercutting right now.

The material is very amenable to the caving process.

It's -- we've tried to identify and explain the difference between it and Deep MLZ.

So what we're seeing now in both of those areas are good.

We're able to go in and pull the cave, and it fills up the air gap.

And we're getting our processes in place when we do need a secondary blast.

And all of those things are coming together.

We're really transitioning from a development project to an operating project.

And as we increase that confidence and the group is kind of taking on a new role, all of that's coming into place very well.

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

If I can ask 2 questions.

Could you give us an update on capacity for the Cerro Verde mill?

You had another strong quarter.

I think the original capacity was 360,000 tons, maybe that varies with ore hardness.

Secondly, congratulations on the block cave development.

July 16, the good people at Rio Tinto announced some delays in their block cave.

Could you elaborate on the better ground conditions you have at the Grasberg Block Cave that your transition is going so much better?

Okay.

Red, do you want to comment on Cerro Verde's mill?

Yes.

John, we've continued to have good performance there.

We're at about 400,000 right now.

And with this other analytics work that we've been talking about, artificial intelligence, et cetera, we have even a higher target than that, that we're aiming for with this project.

So that continues to go well, and we're very upbeat about that.

Are those metric tons?

Yes.

And, John, we -- as you can appreciate, we're not going to comment on Oyu Tolgoi situation.

But in our situation, we know this ground, this ore body at the Grasberg Block Cave, which is the biggest contributor to our future.

It's the same ore that we've been mining for 30 years, and we've drilled, I don't know, thousands of drill holes in it.

So -- and we've done all metallurgical tests.

And so we just -- we're demonstrating that we know the rock, and it's -- as we keep saying, it's amenable for block cave mining in a very positive way.

The separate ore system, which literally started with the Ertsberg mine in the early 1970s and then is extended underground beginning into early 1980s through -- this is the fourth level of the same system that we keep going down.

Again, we know the fundamental physical characteristics of the rock.

What we encountered there, because as we've gotten deeper in that ore body below the surface, was this need to precondition the rock, but it is something that is consistent with what we've done in the past.

Our challenges will be to manage wet muck which we've what had in the IOZ, DOZ mines going forward and which we can manage by -- we'll have course material available to mix with the ore so that we can manage that going forward.

But we just don't have the same circumstances of unstable ground that others might face and commonly in the industry.

Our final question will come from the line of a Brian MacArthur with Raymond James.

My question relates to post 2020.

You've been putting in $750 million to $1 billion to develop Grasberg, as you said, since about 2003 to get everything ready.

You talked about it dropping off past 2021.

I'm just trying to get a magnitude or dropoff on that ongoing.

Would we go down $500 million?

Because you're still going to have to open up some of the other cave areas as we develop it longer term.

Is it reasonable to assume that, that ongoing capital drops by $500 million, in that ballpark?

Well, our current plans show that capital drops off pretty sizably beyond 2020.

We are going to be looking at the development of Kucing Liar.

That's not in our current 5-year plan.

We want to get Grasberg Block Cave and Deep MLZ optimized and up and running and spend the capital needed to do that before going in and attacking other projects.

The KL deposit is not a big value driver for us, so we're not overly anxious.

But we're -- so we're going to be cautious over the next several years in how much capital we allocate, and we're currently showing capital falling off on the order of what you're saying, Brian.

Which, sorry, great, have led to me the second question...

Excluding the smelter.

But putting all that aside, we see capital fall off.

Right.

Which kind of led me to the other question.

So when do you actually -- I mean you have lots of flexibility in the GBC once it's up and running.

When do you actually have to start looking at KL if you want to do that?

Yes.

This is Mark Johnson.

We're looking at the potential of starting development in that in 2021.

As Kathleen mentioned, we are looking at different plans.

We do have some flexibility when that starts up, as Kathleen mentioned.

It's not the largest -- the recoveries, particularly in gold right now, are challenged.

We're doing some work on metallurgical studies to see if there may be a sweeter -- a better sweet spot of the ore body to enhance the value.

Some of those studies also may reduce some of the mill capital associated with the KL.

It's a work in progress, and it lends itself.

It also ties into the common infrastructure that we built for the GBC and the Big Gossan.

So it -- we're poised to start that development.

We know we're going to start.

We know what we need to do longer term, and we're just trying to refine the timing of that and the actual footprint of the ore body.

And again, just to look at the options, to have a case where we expose less capital and look at the trade-offs of that because some parts of the ore body may require more -- a lot more capital.

And so we're looking at trade-offs of not mining part of the pyrite, for instance, and that has some pretty big implications on capital.

So that will be -- studies that are in front of us, they'll be value-add studies.

But as Richard said, we're really focused on executing this first phase, optimizing the first phase and then looking at where we go from there.

But we don't have -- currently, we don't have in our 5-year outlook capital for Kucing Liar.

Or any metal.

Or -- yes, or any production.

And it's fair to say at current copper prices, we'd be unlikely to do this project in the future.

I mean -- because it's got to bear the burden of in-country processing, which is -- so anyway, it's a future opportunity, and it does meet reserve standards at today's value.

But we and I believe others in the industry are going to be fundamentally careful about investments, pending the way the copper markets develop.

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

Thank you all for participating in our call.

We look forward to reporting, as I said, as the story -- the Freeport story unfolds.

And if you have any follow-up questions, please contact David Joint.

Thank you.

Thanks, everyone.

Ladies and gentlemen, that concludes our call for today.

Thank you for joining.

You may now disconnect.