費利浦·麥克莫蘭銅金 (FCX) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Freeport-McMoRan Conference Call.

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

Please go ahead, ma'am.

Thank you and good morning, everyone.

Welcome to the Freeport-McMoRan Third Quarter 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, and anyone may listen to the call by accessing our website home page and clicking on the 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 this call include forward-looking statements and actual results may differ materially.

I'd like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in our 2018 Form 10-K.

On the call today are Richard Adkerson; Red Conger; Mark Johnson, who is dialing in from Indonesia; and Mike Kendrick, and Mike runs our molybdenum business.

I'll start by briefly summarizing the financial results and then turn the call over to Richard, who will be referring to our prepared slide presentations.

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

Today, FCX reported net losses attributable to common stock of $131 million or $0.09 per share in the third quarter of 2019.

After adjusting for net charges of $123 million or $0.08 per share, the adjusted net loss attributable to common stock in the third quarter totaled $8 million or $0.01 per share.

Details of the nonrecurring items are located on Page VII of our press release.

Adjusted earnings before interest, taxes, depreciation and amortization for the third quarter totaled $564 million.

We've got a reconciliation of our EBITDA available on Page 28 of our slide deck.

Third quarter 2019 copper sales of 795 million pounds were about 4% below the July 2019 estimate of 830 million pounds of copper primarily because of lower production from Cerro Verde and also the timing of shipments at quarter end.

This was partly offset by higher production in sales from North America.

In the third quarter of 2019, our gold sales of 243,000 ounces were about 6% higher than the July 2019 estimate of 230,000 ounces.

The copper and gold production exceeded sales by 69 million pounds and 90,000 ounces in the third quarter.

These volumes were in inventory at September 30 and expected to be sold in the fourth quarter.

Our average realized copper price was $2.62 per pound.

That was below the year ago average of $2.80 per pound.

In the third quarter, average -- 2019 average realized gold price of $14.87 per ounce was above the year ago quarterly average of $11.91 per ounce.

Our net unit cash cost on a consolidated basis, net of byproduct credits, averaged $1.59 per pound of copper in the third quarter.

That was slightly improved from the July 2019 estimate of $1.63 per pound.

As anticipated, our average unit net cash cost were higher in the third quarter of 2019 compared to the year ago average of $0.93 per pound that reflect lower sales volume as PT-FI transitions money from the open pit to underground.

We expect that our net unit cash costs will trend lower as this ramp-up is completed.

In the third quarter of 2019, we generated $224 million in operating cash flows, and that was net of $146 million in working capital uses.

Capital expenditures totaled $666 million in the quarter, which included investments in our underground projects and the new mine in Arizona that will be commissioned next year.

We ended the quarter with consolidated cash of $2.2 billion and consolidated debt of $9.9 billion at no borrowings and $3.5 billion available under our revolving credit facility.

I'd now like to turn the call over to Richard who will be referring to our slide materials that you've been provided with.

Good morning, everyone.

Thanks for participating in today's call.

I want to share with you the enthusiasm that I personally feel about all we're accomplishing at the current time.

2 weeks ago, I made a trip to Indonesia and went to the job site to visit operations there.

It was my first trip to the job site in 3 years as we've been focused on our work with the government.

And I was truly impressed by the progress we're making underground and the morale and attitude of our team.

I traveled to Jakarta and while in Indonesia, met with the senior ministers that we've been dealing with, with the CEO of our partner, Inalum, and spent an hour with President Joko Widodo to fully review our operations.

And I was gratified by the warmness of the conversations that we have and how positive everyone is about the arrangement we struck last December and how it's working today and that was good.

But I really want to talk to you about what's going on at Grasberg.

This is one of 3 major initiatives of our company right now that we're really focused on.

The Grasberg underground ramp-up is the most important of those and one that's really key to our future.

The ramp-up is advancing on schedule.

My own personal confidence in achieving success with this transition was enhanced.

This will achieve low cost, long life production from underground ore bodies and it will be a source of significant cash flows for the next 20 years plus.

The significant mine development and infrastructure development is really impressive, as I said.

Much of this is already completed.

And I met in detail with our team and observed their strength and the technical competencies, the experience and motivation to execute the plan, and you will see that we have had very positive initial results as we're reporting today in the third quarter and the year-to-date.

All of this gives us strong confidence on our -- accomplishing our ramp-up schedule.

The designs of the 2 mineral zones, the Grasberg Block Cave and the Deep MLZ, set the world-class standards.

We're applying our company's experience over the past 35 years in block caving in the underground and using new technology to enhance the infrastructure techniques, undercut blasting and cave management, and I'll talk some more about that later.

The second of our 3 initiatives is the commissioning of the Lone Star project in Arizona.

The current project to develop and mine oxide ores is within our budget and on schedule.

First, copper production is expected next year.

The development is 2/3 complete and there are expansion opportunities that we've already identified in the oxide ore.

The current project envisions using available capacity at the nearby Safford mine.

But beneath the oxide ore is a resource that is growing as we do exploration drilling and has the likelihood of being a major Keystone asset for our company in the future.

The third initiative is something that's really exciting, and congratulate Red and his team for what they're doing in this innovation [driving] productivity improvements.

This is a program in which we are using technology tools, machine learning or artificial intelligence and a coordinated operating structure that's bringing together different capabilities within our company and applying it to basic operations to create value.

We tested this at our Bagdad mine in Arizona and had remarkable success.

And what was so encouraging for me is the enthusiastic way that our team has embraced this technology, which is kind of a quantum jump from the basic work of mining to using new technology techniques to improve efficiency.

What's allowing us to do is to increase production, decrease costs without making major capital investments.

We are now expanding this to Morenci and our other mines in the Americas, and we have not yet incorporated these in our numbers.

We'll do that next year.

But we have set an aspirational goal of adding 200 million pounds of copper from these initiatives with very little capital investment, and that would be a major accomplishment for us.

Slide 4 addresses our strategy.

And I want to emphasize that our strategy at this point in time is well defined and focused.

It is focused on growing our sales profile, being efficient, driving cost down and improving cash flow generation.

And we're going to do this with the 3 initiatives that I spoke of earlier driven principally by the Grasberg underground conversion.

Success in these would result in a 30% increase in copper, 70% increase in gold, approximately 25% reduction in unit cost and 100% [are doubling] of our cash flow generation.

This is all within our grasp.

It's up to us to execute, but that's what our strategy is.

And during this period of time that's built around the Grasberg transition, we are not looking to make major new capital investments, although we have great opportunities for the future.

We're not pursuing M&A transactions but building this because this will have such a major impact on our company.

Much of the capital needed to achieve the results have -- has already been spent.

These are long-lived assets, and it gives us a strong base for cash flows for the future.

I personally believe there's a potential [where] higher than current prices exist within the time frame of this transition.

So if you look at a growing production profile at a time when copper markets may be improving, Freeport would have a very bright future in the near term.

Slide 5 shows -- I'll talk about the Grasberg.

Now we're at the final stages of mining the Grasberg open pit.

I'll tell you, it was almost a spiritual experience for me to be there and to see the picture that you're seeing on the left.

I was there more than 30 years ago and took my own picture with a Polaroid camera of the Grasberg exploration shack where the second exploratory drill hole was -- had just been drilled.

There was no mine or anything there.

Then to be on the edge of this pit and see what this picture shows.

Here we are after mining over 5 billion tons of material produced at the district, 33 billion pounds of copper and 53 million ounces of gold with roughly $100 billion of gross revenues and 80% of that's from the pit, and then seeing this pit going 3 kilometers across, 1.75 kilometers deep, as I said, thinking about all of our history was something.

But that's history.

Interesting for me, a great story, but the future is in the underground, and that is equally exciting.

This is where our future production is coming from.

Our company is an industry leader in block cave mining with decades of experience, as I mentioned earlier.

The Grasberg block cave represents about 50% of our underground reserves.

It's the same ore body that we've been mining from the surface for the past almost 30 years.

In block caving, the ore that's there, rather than being stripped in mine from the surface, collapses into caves under gravity, so there is no stripping or mine waste.

We will only have to mine about 1/3 of the material that we've historically mined and produce more copper than we have in these -- all these years from the surface.

Mining 1 point -- 1 billion tons of ore will be done without incurring the cost of mining 5.2 billion tons of ore and waste.

The gross revenues from our reserves at the 2 mineralization areas that we'll be mining at $3 copper and $1,500 gold will approximate $150 billion over the long run and approximately 50% more than what we've already earned from the pit over the past 30 years.

We only [port] reserves through 2041 because that's when our rights extend to -- under arrangement with the government.

But resources indicate production will go well beyond 2041.

We -- this is -- developing these underground resources is not a new project.

We have been undertaking underground investments since 2003.

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

We've invested in underground infrastructure, these enormous access [to outlets], ventilations, large-scale crushers, personnel transport and a state-of-the-art autonomous underground rail system.

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

We -- on Slide 6, we list our key performance indicators.

I will refer you first to the chart at the bottom right, the ore extraction.

And you can see that we averaged over 21,000 tons a day from the GBC and Deep MLZ combined in the third quarter, and this exceeded our forecast.

The Grasberg Block Cave has met and in many cases exceeded expectations, and the cave propagation and its mine advancements is going very well.

The deep MLZ is where 2 years ago, we again experienced the seismicity issues because of the competency of the rock.

And we have developed systems to monitor that, micro systems that are placed throughout the ore body and have developed procedures to help us understand where these events may be happening.

Earlier in the third quarter, we used this system to temporarily suspend some advancement of drawbells and caving in one of the production blocks.

But using the hydraulic fracking approach that's working successfully for us now, we achieved the desired shape of the cave and we resumed undercutting in September.

Now going forward, in mining always, but in underground mining, there'll be pluses and minus is simply the nature of mining and of planning.

But we are now confident that based on our results today, that we have met the challenges of this rock situation, the Deep MLZ.

We spent a lot of time with our team talking about the hydraulic fracking operations at the Deep MLZ.

I observed the operations and equipment that was being used, and I was extremely pleased with the results.

At our wrap-up meeting, I asked our team, could I say that we can now state that we've effectively managed seismicity going forward, and there was a resounding yes to that question.

So this has been an exciting development for us.

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

It has reserves of over 1 billion pounds of high-grade copper and gold -- 1 billion tons.

The Grasberg Block Cave will have a very large footprint, 80 acres at full rate and 180 acres over the life of the mine.

The size of the ore body and the different headings that we will have will give us the ability to produce simultaneously from 5 production blocks, giving us scale, flexibility and assurance of continuous and predictable production.

It's important to note that when we talk about this underground operation, and we talk about these 2 mineralization zones, the Grasberg Block Cave and Deep MLZ, we actually have multiple mines within these zones, and these mines share the same infrastructure.

Our teams know the rock types.

We're mining the same ore in the open pit for 30 years, mining the ore mineralization that's in the Deep MLZ for 25 years and we've done extensive drilling into underground to understand ground conditions.

We are assessing ore at the Deep MLZ only 300 meters below the surface of the open pit -- of Grasberg.

As we continue undercutting and adding draw points, our expected expansion is estimated to accelerate to ramp up to 130,000 tons per day in 2023.

As I mentioned at Deep MLZ, the ongoing hydraulic fracturing operations with continued undercutting and drawbell openings in 2 active production blocks are expected to enable us to achieve our ramp-up schedule for that mineralized area.

We have a large inventory of drawbells already in place in Deep MLZ to support this ramp-up.

At full rates, the production from 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 in the early years.

Average net unit costs are expected to average at current cost levels, $0.30 a pound in the first 5 years of full rates.

This is notable and rare for large-scale operations in this industry, and we have the opportunity to deal with cost effectively through technology innovations in the underground as we go forward.

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

We expect to accelerate drawbell construction in 2020 as the cave expands.

We are comfortable we are mitigating the inherent risk in underground mining.

Turning to Slide 7 in Lone Star.

Lone Star is located adjacent to our existing Safford mine, which began production at the time of the Phelps Dodge deal around 2007 and is -- and the ore there is being depleted, although there's future potential sulfide development and depth there.

But we have available facilities that are allowing us to have a low-risk development with good financial returns at the adjacent Lone Star wholly owned ore body, only 8 miles away from Safford.

It's also only 18 miles away across the mountains from Morenci.

This is an $850 million initial project, 2/3 complete, estimated annual production of 200 million pounds and we'll be producing copper next year.

It's oxide ore with low capital intensity under -- with opportunities with low capital -- expansion opportunities with low capital [intended to --] available to us in the oxide.

And then our drilling at depth is really exciting because of the sulfide resource that continues to expand and will be a big part of Freeport's future.

Then to go back to this productivity project that we have been pursuing aggressively in recent months.

This is on Slide 8. It's a development project without significant capital.

The results of this, as we've seen at our Bagdad mine, increases production, improves its efficiency simply by doing things better.

And we do things better by measuring activities, by analyzing them quickly using artificial intelligence type methods, which involves involvement with broad areas of our team, getting data back and changing operations really efficiently.

It's working well and it unlocks bottlenecks throughout the operations.

We literally identify through data the best operations can do and instantaneously know when we're not achieving that and make adjustments to get back to the best it can do.

And I can't tell you how excited our team is about it and what it's like for me to watch that enthusiasm and how it's spreading through our organization.

Copper markets today are clearly affected by the trade war economic situations.

But in my view, they're simply not sustainable.

And the reason I say that is that even with the economic effects we're seeing, the demand for copper remains relatively strong throughout the world, in China and the U.S. and elsewhere.

Copper inventories are low.

The future is bright because of the fundamental uses and the growing uses for copper and alternative energy generation and the future for electric vehicles and just the general use of electronics throughout the world.

When you hear a mining company talking about measuring things electronically, think about how other businesses are affected by that.

So structurally, the copper market remains very supported.

It's essential to the global economy and then it's significantly supported by the scarcity of supply.

When Mackenzie says it takes $3.30 to incentivize significant copper production, economic activity is going to affect demand in the near term, but we remain very positive about the outlook for copper and are prepared to deal with whatever price we have to do in the short term but believe this is -- that we're in a great industry with great assets.

So I'll close before turning over to Kathleen.

But just by looking at the reason that as I start out saying I'm so enthusiastic about our company.

We've got a strategy that our Board, our management team has bought into, on our shoulders to execute that.

To do that, we have a portfolio of high-quality assets, look at our track record and our commitment to communities, environmental responsibility, our technical capabilities that we've proven with our development project and the way we operate.

We're the leader in our industry in terms of size, scale and durability.

We operate all the mines that we have interest in, so we're able to share supply chains, technology, people, resources.

We're going to have very significant -- growing production and cash flow profile within our sight to doubling of our cash flow generation.

Copper is -- fundamentally are positive and increasingly so.

And then we have this innovation driving value creation that's going to spread throughout our organization.

So beyond financial results, which are affected by this transition issue that we have, this has been a great quarter for Freeport.

Kathleen?

Thank you, Richard.

I'm going to start on Slide 12, where we summarize the production and sales data for the third quarter by region.

And starting at the top, North America did better than our forecast and was up about 12% compared with last year's third quarter.

We're seeing improved production performance from our leach stockpiles at Morenci following initiatives that we've put in place to reduce the particle size of the material placed on leach pads, and we've also had some favorable changes in the chemistry of the ore.

At Bagdad, as Richard was talking about, we're seeing -- we're continuing to see real benefits from the innovation and debottlenecking initiatives.

And Bagdad has become a real model for this initiative as we drive it across the portfolio.

In South America, Cerro Verde as well as other mines in the region were impacted by restricted access to transportation outlets.

And that was associated with protests regarding the nonaffiliated third-party development project.

Our team at Cerro Verde did an outstanding job in managing the situation safely and efficiently in the circumstances.

But production was below the year-ago level and about 10% below our forecast.

Because of lower mining rates and changes in mine sequencing, we processed a greater portion of stockpile ore, which impacted grades and recoveries.

The lower mining rate in the third quarter will also impact the fourth quarter metal production, but this is being offset by better performance in the U.S. than our prior forecast.

We want to note that despite the disruptions, the Cerro Verde concentrator averaged over 380,000 tons per day during the third quarter.

That's above nameplate capacity of 360,000 tons per day.

And the team is optimistic that the AI and innovation initiative will drive further increases in the future.

For Indonesia, our sales in the third quarter were generally in line with our guidance.

We did a little better on gold and have increased our estimates slightly for the year.

We're continuing to mine a small amount of high-grade material from the surface.

Our current forecast assumes we'll continue this through November.

But we also ended September with a higher level of concentrate inventory, and we'll be working this down in the fourth quarter.

We show a table at the bottom of Slide 12, which presents our consolidated production for the quarter, and that exceeded our sales by 69 million pounds of copper and 90,000 ounces.

And this relates to timing of shipments of concentrate from Cerro Verde and also from Indonesia where we built some inventory in the quarter.

This is simply a timing matter, and we expect to sell this inventory in the fourth quarter and get back to normal levels of inventory by year-end.

On Slide 13, we're summarizing our consolidated sales outlook for the periods 2019 through 2021.

These projections are in line and broadly consistent with our previous estimates.

Our copper sales are expected to grow by roughly 200 million pounds in 2020 and 900 million pounds in 2021 compared to 2019.

This includes a scheduled ramp-up of production that Richard referred to earlier at Grasberg and the commissioning of our Lone Star mine next year.

In 2021, about 2/3 of this 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 we're targeting the potential to add 200 million pounds of copper per annum through these initiatives.

We also expect our gold volumes to rise over this period with high grades available to us in Indonesia.

And recall, the district has high grades of both copper and gold in the same ore, which makes Grasberg a low-cost, valuable operation.

Molybdenum sales are generally flat over this period.

But we have significant optionality in our portfolio and can adjust production rates from our primary mines if market conditions warrant.

I refer you to Page 14, where we've modeled our EBITDA and cash flows at various prices to give you a range of the cash earnings and cash flow generating capacity of the company.

You will note the significant and positive leverage we have to improving market conditions on this slide.

At $2.60 copper for 2019, we are in the $2.4 billion range for EBITDA for reference.

This is a trough year for us.

And as you'll see from the modeled result, we would generate approximately $3.5 billion to over $5 billion in EBITDA in 2020 at prices ranging from $2.75 to $3.25.

And this grows to $6.5 billion to $8.5 billion in EBITDA for 2021 and 2022 average.

So you see that our EBITDA is moving from $3.5 billion to $5 billion next year to $6.5 billion to $8.5 billion depending on prices.

These added volumes that we're bringing in are expected to come at a low incremental cost, and that provides us with solid margin expansion even at low prices.

And as we've been emphasizing, it's about execution.

And over the next few quarters, achieving our key milestones will continue to derisk the plan.

The story is the same for operating cash flows, where we're expanding operating cash flow over the next few years, and that's net of our cash taxes and interest costs presented on the slide.

Our cash flows grow from less than $2 billion this year in 2019 and would range from $2.5 billion to $3.7 billion in 2020 as we continue to transition.

Of the average of 2021 and 2022, looking at $3 copper, it would range from over $5 billion to $6 billion at $3.25 copper for the average of 2021 and 2022.

We show our capital expenditures in -- on Slide 15, and these are broadly in line with our prior guidance.

That includes sustaining capital of roughly $1 billion per year.

And then we've got the projects underway, including the underground at Grasberg and Lone Star that average about $1.6 billion per year in 2019 and 2020.

As Richard mentioned, we're continuing to manage capital carefully and thoughtfully.

The investments we're making now are at an advanced stage and will strengthen our margins at low prices, enhance our long-term asset base and provide leverage to improve markets over time.

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

As indicated in the press release, we're completing engineering studies and we also have -- we're expecting to have the engineering estimates and project schedules in the first part of next year.

We've been working with a group of banks on debt financing for the smelter.

We expect to debt finance the capital cost of smelter at the PT Freeport Indonesia level, and that is expected to be nonrecourse to FCX.

The -- we're advancing the discussions with the banks and hope to have a facility in place to fund the cash outlays for the smelter.

Currently, we do not expect that dividends out of PT-FI will be burdened by smelter development capital as a result during the construction period and particularly during the period prior to 2023 when FCX receives 81% of the dividends from PT-FI.

Turning to Slide 16.

We show the debt maturity profile for our senior notes, which total $9 billion over this period of time.

During the third quarter, we issued $1.2 billion in new 8- and 10-year notes, and those are shown in yellow on the graph.

And we used the proceeds to redeem debt with near-term maturities and we also redeemed a higher coupon note.

We were able to extend our average maturity by 1 year.

You can see here on the table where our weighted average maturity is roughly 10 years now.

And we reduced our average coupon during this process.

Our balance sheet is in good shape, and we don't have significant maturities until 2022 and have a strong liquidity position.

In closing, on Slide 17, you see our road map to our growth and cash flows to drive shareholder value.

Each of these initiatives is advancing well.

The momentum that we have in each of these projects is real.

And we're very focused as a management team on executing these plans effectively and have a clear path in front of us to substantial growth in revenues, margins and free cash flow.

Thanks for your attention, and Regina will now open the call up for your questions.

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

The first one just relates to the grade reconciliation.

Just wondering if you could just talk firstly on the gold for the full year.

You've increased that.

Is that just a timing issue?

Or are you getting better reconciliation?

And then for the underground, you've talked a lot about the development.

But how is the grade, how are the grades reconciling in copper and gold on the underground development?

With respect to the first question, the increase in gold for 2019 principally relates to the open pit ore.

We've extended the mining of open pit through November.

And we're doing this on a limited basis, but it does have high grades.

And so it does impact us.

There's a potential that we could extend the pit longer, but our real focus is on getting the underground ramp-up, which is going well, and we have not had any issues with respect to grades.

We've got good grades, higher than reserve grade coming from Deep MLZ in the early years, and that's part of what drives the metal production.

But -- and Mark's on the line.

Mark, I don't know if you have anything to add about the grades.

But we believe we're in good shape in -- on that front.

Yes.

For all of the new major underground mines, Big Gossan, GBC and Deep MLZ, the grades that we've gotten are very much consistent with the reserves, and GBC and Deep MLZ were just really starting to touch the bottom of the columns.

And sampling through some of the drawbell purity and some of the initial primary fragmentation is a bit challenging.

We get a lot of big material.

But everything we've seen so far is consistent with what we'd expect.

The ore bodies are very well drilled.

Like Richard had mentioned earlier, these are not new ore bodies or extension of ore bodies that we've been mining for years.

So we haven't seen any issues there.

And for those of you who follow the Grasberg open pit for years, you'll remember that we always had this high-grade core of gold.

That's the way the mine was designed to access that.

And that's why we're doing this surgical mining.

When I was there, there's only 2 shovels working at the bottom of this pit.

We've mined out the haul roads, so that -- single-lane haul roads going down and coming up.

But the reasons for doing that and trying to extend this is the ore we're getting is such high-grade gold.

I mean, it's extraordinary grades.

And so that's the whole reason for continuing to do it.

We'll do it as long as we can until the development of the Grasberg Block Cave pit eventually will geotechnically require us to get out.

And we've got procedures to get out very quickly and we're monitoring it with due diligence.

But as long as we can get down to that high-grade goal, we're going to do it.

And that's what you're seeing, Chris.

Okay.

Second question, just on Slide 17, when you're stepping through the future of the company, I just wondered if you could comment.

Once you get through the ramp-up period of Grasberg and then have more decisions about future projects versus potential capital returns, can you just rank those?

Are you trying to do both?

Is there one over the other?

I just wondered if you could talk through what the priorities are for the medium-term investor?

I can't wait until we face that.

So here's what I think will unfold, and it's going to depend on what the economics of the world are and so forth.

But we'll be generating cash and we'll use that cash to manage our debt level and our balance sheet initially and return -- our balance sheet, we're comfortable with it.

It's not a question of having to do things, but it will be sort of the situation we were in years past, where we'll be increasing returns to shareholders.

Shareholders will have been patient.

They deserve to be rewarded for that.

And so we will be focused on shareholder returns, that we've had a traditional emphasis on dividends, but we'll be looking at the share price and deciding about share buybacks and dividends.

We will also be looking, if markets warrant, disciplined investments in some of these undeveloped resources of Freeport, which I think is a great asset for our company.

But in any event, if we pursue those and it will be disciplined, those in our industry are investments that are undertaken over time -- it's not onetime investments.

Well, we have lots of people we'd like to be partners with us, and we'll make assessments about that.

So my own view of how -- the way this one will unfold is success with the transition in these initiatives that we have, confident of that.

I believe copper markets will be better because I don't think today's price is sustainable.

And I think the world is geared for a brighter future, and that will mean a lot of cash.

We'll use some of that probably to pay down some debt, shareholder returns and longer-term investments.

Okay.

The last one for me, maybe for Kathleen.

Just on the timing of the sales versus the production, do you expect most of that to be caught up in 4Q?

Or you still have an imbalance that will head into 2020?

So i.e., can we expect a really big catch-up in this quarter?

Yes.

We are expecting that our inventories will be at normal levels.

We do usually have some inventories at site.

But generally, our production matches our sales.

And in the fourth quarter, we expect to sell more than our production and get inventories back to normal.

You always have, from time to time, some shipping, weather type things.

But we're not expecting anything under the -- out of the ordinary and expect most of that to be -- and it's reflected in our guidance, most of that to be sold in the fourth quarter.

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

Richard and Kathleen, I just have one question.

You mentioned in the slides, there have been some seismic activity at DMLZ that it slowed some of the undercutting rates and so on.

And obviously, underground mining is not necessarily as linear as open pit mining, and there are issues that crop up from time to time.

So I guess my question is, are you comfortable that there's enough production blocks or draw points, effectively sort of latency and optionality in -- that's been engineered into the DMLZ so that if these -- as these geotechnical issues crop up over time, that you won't have significant impacts on production.

Yes.

So I've spent a lot of time talking with Mark and the team about this and asking that very question.

And the more I get into it -- and I try to emphasize the point that this is multiple mines that we're developing in these mineralization areas with multiple headings.

And I was making the comparison with open pit where, when we first started open pit, we had a lot of access available because this pit was in high-grade ore.

But as we went further down in the pit, the pit widened and we had less options for dealing with changes in open pit mining.

And so in comparison, where we are with the underground, and Mark, you jump in on this, but I'll give you my interpretation of meeting with you and your team.

With these different mine headings that we have is really going to give us a comfort that if we do have and it's not necessarily mining and do seismic events, but you can have wet muck and other things that you encounter.

We're dealing with that with remote mining activities and so forth.

But because of these number of accesses that we have, we're going to be able to have confidence in being able to operate regularly and to deal with relatively predictable production now.

You make a point, there's risk in underground.

That's true.

But I want to make the point that we're not just talking about a single underground mine like we have with our smaller Big Gossan mine where an event could affect that.

It's not material to overall operations, although it's a great profit generator.

But with all these, the large scale of the ore bodies, the access to those ore bodies at multiple points will give us the chance to avoid having the kind of risk that you would have if it was a single mine.

And Alex, just to clarify, the slowing of the undercutting in one of the production blocks at Deep MLZ during the quarter was not -- was designed to achieve a desired cave shape.

We're managing the seismicity issues.

It wasn't related to that.

It was simply to get the cave shape in a manner that we thought was the right shape, and Mark can comment further on that.

I just wanted to clarify that it wasn't a seismicity-driven issue.

No.

What was encouraging about this situation is that our team was able to detect a buildup of stored energy before we had any significant seismic event.

They were able to determine what was -- what the cause of that was.

We had a relatively flat cave angle.

We focused on the mucking in this -- in the cave front area.

And within a month, we had the cave shape back where we'd like it.

And then we were able to see that some of these indicators were back in line, and we had a process where we got back to the undercutting.

So that, to me, was all very encouraging.

It was a very proactive way of looking at the data and adjusting the mining.

Another -- just to comment on your concern about the underground mining, what we do in the underground mine plans that we have now.

We use a central estimate where there's upside to the estimate.

We also look at the downside events that could cause that.

But what we try to do is to develop an estimate for our forecast that has 5% to 10% upside.

And some of the advantages we're going to see in the underground, for instance, in the GBC, where we have the manless automated train system, is that we feel there may be some upside to our ability to maximize the use of our ore flow system that we haven't been able to do in the previous systems that were based on manned truck systems.

This system will be able to run through shift changes.

It will be much more of a continuous operation and also our mills will see a very consistent ore blend day-to-day.

That's not necessarily been the case in the Grasberg Block Cave.

We can compare the Grasberg pit.

We can get into a very high-grade phase, and then we can get into low-grade phase and all those swings cause minor disruptions in the processing.

I believe once we get into a very steady state on the ore types and the feed grades, that there will be further enhancements to our ability to more efficiently process the material.

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

I also wanted to, and I know this has come up a few times, but I also wanted to follow-up on the DMLZ, and specifically, what I looked at was the number of drawbells by year-end 2019 and then also year-end 2020.

Any long-term conclusions that can be drawn from this slight reduction?

Just would appreciate that clarification.

Mark, you want to take that?

Yes.

We had about 3 less draw bells than we planned for the quarter, which is around 3% of our total draw bells.

We don't see that as significant.

It didn't impact our ramp up.

The amount of material that we pull from each draw point in the Deep MLZ is very conservative.

When we had 80 draw bells in the DOZ, for instance, we were producing 30,000 tons a day.

So we've been able to pull more per draw points.

We continue to see that, that's an upside to where we are right now in our production ramp-up.

We have not yet pulled any of the material that has been affected by the hydrofracking.

That's just slightly above where we're pulling.

So we're optimistic that hydrofracking will also affect the fragmentation as it starts to make its way to the draw point.

So it didn't have any impact.

It's a relatively minor change.

We feel that our production schedules, our tons per draw points are very much in line, in fact, well below what we experienced in the DOZ.

That's very helpful.

I appreciate that.

And then two quick follow-up questions.

The first, the 200 million pounds of kind of efficiency-related output potential.

When could that be coming through?

I would appreciate a sense for the timing on that.

And then, secondly, you have a large portfolio of undeveloped assets.

Could you speak to the extent those might be candidates for monetization, Timok, for example, or Kisanfu, would appreciate your thoughts.

We're targeting rolling out new plans in the first half of next year.

With all of our teams are going through now, new mine plans to incorporate, the debottlenecking and the findings that we're experiencing through this program that Richard was talking about.

And so our expectation is that beginning next year, we'll incorporate those plans and hope to have it in the first part of the year.

In terms of the noncore asset sales, we'll continue to test the market and have dialogue where we can add some cash proceeds to our company at a time during this transition.

We have a couple of assets that aren't producing cash flows that we may sell, and that's just something we'll consider as we look at what the alternatives are.

But that is something that we're -- that we do have.

It's not in our plan.

We do have a plan, an announced agreement to sell our refining part of the Cobalt refining business in cocoa, and we expect that transaction to close in the fourth quarter.

And I'll just say we have substantial interest in the Serbian and the DRC asset people, and we're just assessing -- we understand the values.

And if we can get to those values, we're likely to proceed with those.

But there is interest in them.

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

I have two different questions.

First relating to Grasberg and second relating to the Americas.

Actually, I'll start with North America.

So I think one thing that maybe gets a little bit lost in the mix was Freeport because we're also focused on Indonesia is your very consistent and predictable operational track record in the Americas.

In fact, especially in North America.

And third quarter was no exception.

Obviously, you had very strong production there.

I guess the question around that is unit cost in North America.

I mean, obviously, you're not paying taxes.

So that's very helpful.

But unit costs despite strong production in the quarter creeped a little bit higher versus second quarter.

How should we think about the cost progression in both North America and South America over a multi-year horizon?

I mean, obviously, you have the innovation plans, which could lead to some cost reductions.

But is the cost creep really just a function of grades?

I mean it's -- or is there something else going on that you could -- that can make a material change lower over time?

That's the first question.

That's one of the real benefits of this program that Red is leading is, over time, we've done a lot with low-grade assets to maintain a competitive cost structure.

And these are new tools that are going to allow us to improve productivity and that will drop the unit cost.

But one thing just to point out, we did have an increase year-over-year with North America.

The biggest driver of that was at Morenci, where the cash costs were higher year-over-year from an accounting standpoint.

But when you look at the underlying cash, the amount of cash we spent to produce those pounds at Morenci in the quarter, it was actually the same as the last year.

But we had costs with the stockpiles that were inventoried on our balance sheet.

And because we drew, and I mentioned we're getting better recoveries out of the leach pads, we actually had some of those costs that were in inventory on our balance sheet come through the income statement, and that's included in our, we call it, cash costs, but that's using the income statement.

So really, from a cash standpoint, the way we also manage it is to exclude those prior period costs.

And when you look at it, the net cash costs were similar to the year-ago period.

So -- but the real benefit, as we're all talking, is to drive those costs lower through productivity.

And not only do you have a lower unit cost, but that expands the reserve position because these North American assets are limited by economics.

We use, 2 50 to do our reserves.

But if we can bring down the cash cost, that's more reserves that could be brought in to the portfolio.

So our focus is to keep stable and drive down the cost in the Americas.

Yes.

And let me add one other effect that's been kind of part of our situation the last couple of years.

When we were so focused on debt reduction 3 years ago in 2016, and that was a time when copper prices were very low, we deferred some things.

And we've had to catch up with mine rates, and that's added some volume-type cost to our business, which mostly is behind us now.

I think one of the points we're making is we're not seeing significant increases in input cost, energy cost or what they are, but our energy sources are diversified.

The things that are keeping copper prices lower, keeping some of our input cost low.

So what you're seeing is some of these accounting type issues that Kathleen referred to, some degree of catch-up in employment, mine rates and so forth.

But the fundamental cost structure of our business is not changing.

We had the unusual -- you mentioned North America, South America this year had the unusual situation of having these disruptions of protest not related to Cerro Verde, but related to other mines.

But roads were blocked.

We couldn't get equipment in.

We had some delays in shipments.

We had to take some steps to counter these disruptions that cost some money, and that's just part of the things that happened.

The good news is the community continues to support our operations.

So that's going to be normal variations.

But every quarter, right before this earnings call, we sit down and go through input cost with our supply team for all of our operations.

And I'm struck by just how well we're managing that suppliers are being very responsive to us.

Caterpillar is a big supplier of ours, and we work well with them to reduce costs.

So all of this is -- I guess, the point I want to make is there's not fundamental changes in the cost structure that are driving it.

And then quickly on Grasberg.

There's a lot of focus amongst mining investors and our investors in general about ESG issues.

Can you just kind of discuss the changes in the environmental impact at Grasberg as you move into the underground?

We are moving less material, obviously, making less waste.

How do we think about the environmental impact from the operations going forward?

I should have mentioned this, and I'm so glad you asked this question.

Besides my being thrilled with what I saw with what we're doing with our underground transition, I spent a day taking helicopter tour over our tailings deposition area.

And then we got in buses and trucks and actually went down on the ground.

There's 2 aspects to what you just said about waste management.

One is the waste material we've mined from the pit and placed around the mine.

I went to this area called the [Lanigan], which is one of our major waste dumps, where we've literally spent over The years $0.75 billion managing waste at that site.

And again, I was there when it started.

And to see how effective that is in terracing this way, in mixing the waste rock with limestone to control the acid runoff, I mean, it's remarkable the numbers, how they've decreased.

Then you get down the tailings area, and this is a point I'm making with the government, I made with the President.

This tailing system that we settled on in the mid 1990s was very controversial at the time.

Because we use the natural river to transport tailings and it was contained within a dike, a levy system within this designated deposition area.

Today, in that deposition area, we have a demonstration project of where we're actually growing crops, raising fish, raising cattle, and that's good.

But what's more remarkable to me is throughout this deposition area, when the tailings river moves away from an area, it drives up, a natural slime develops, natural grasses and trees are growing.

And so in the tailings area, you can see over a majority of the area, natural revegetation occurring without any assistance from us.

And our team estimates that at the conclusion of the mining decades from now, this whole area will return to a natural state and we'll only have to do any kind of remediation for about 20% of the area.

It's a visual verification of the decision that we and the government made 20 years ago, and that is that this was not only a cost-efficient way, but the proper way of disposing of these tailings so that they can be restored.

It was impossible to store tailings in the mountains because of the severity of the terrain, the wetness of the climate.

And although it's not a higher quake area, the possibility of earthquakes.

And so we chose this system.

And now 20 years later, with all that's going on, we can look back on it and say, this is working as designed and it was the right system.

We're not defensive about it and the government is now agreeing with us.

That's great.

And then you talk about ESG.

We learned early on at Grasberg, for us to be successful, we had to work with the local people to be successful because of sensitivities between the province and the central government.

Now under President Joko Widodo, there's more sensitivity about the central government improving the situation in Papua.

And more of our taxes and royalties that we pay to the central government are coming back to Papua.

There will always be an issue with social situation there.

But we're working hand-in-hand now.

Now that our interest with the government are aligned, we're working hand-in-hand on improving the lives of local community.

Freeport can't succeed unless the populace succeed.

We can't succeed unless Indonesia succeeds.

The government now has a 70% ownership interest in the economics of this project.

We have the same 30% we had going into all these negotiations.

But we are working cooperatively on security issues, community issues.

It's an ongoing effort, but we're all working together now.

And I met with local leaders when I was there and made the same commitment to them to keep working.

Nearly 40% of our workforce today are Papuans, whereas in 1996, it was just a handful.

And one of the most exciting things, I have this picture of Kathleen standing with a group of women underground miners at the surface, operating remote-controlled mining equipment underground at from the surface.

And to see Papuan women who came from the backgrounds that they came to, operating the largest underground mining operations ever in the history of this industry and not having to have big, strong mid in harm's way underground, but using equipment that looks like Gameboy, chairs and things and all the smiles and things and seeing that, it's really gratifying to see.

Your next question comes from the line of Matthew Murphy with Barclays.

I had a few on just small changes on guidance on Grasberg.

One being the CapEx.

There's mention in the release about the 4-year period, 2019 through 2022, where it looks like CapEx hiked a little bit.

And then on Slide 15 of the presentation, it doesn't look like Grasberg CapEx is up.

So should we assume that 2021 and 2022 CapEx has gone up a bit?

And if so, what's driving that?

When we did the average in last quarter, it rounded.

I mean, this is a rounding thing, it rounded to 9 20 something and now it's 9 50 at round.

So it's not -- it looks like a difference, but it's not a difference like what you would expect.

But we did have some increases in 2021 and 2022 that were modest related to some mill improvements that we're putting in.

We had some revised engineering estimates on a new SAG that was included in some other minor changes, but there weren't -- the changes weren't significant.

Okay.

And then just on 2021 gold.

Guidance came down a little bit.

I get it's a small change, but I think you guys started the year at 1.6 and it's now 1.45.

I'm just wondering what -- do we expect to see that in 2022 and it's just a timing thing?

Or is it ore body understanding or what?

Let me just say, these are Kathleen's questions and she's going to answer them.

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

We update our plans every quarter.

When we step back and we meet, and we come up with our best estimates.

So there are going to be changes of this nature, plus and minus, there are every quarter.

But rather than like, in my experience, watching other companies, they give kind of constant guidance through a quarter and then they'll have this big announcement at their plan and how these things come through.

So things you're seeing of this nature just reflect a bunch of hard work that goes in.

And as you get closer to things, you get more specific planning done and the numbers change a bit.

But -- go ahead, Kathleen.

Yes.

And now just, as Richard said, we do update the mine plans every quarter.

And we had a 25 million -- 25,000 ounce change in gold in 2021, which could be grades or modest, small changes, and that rounded the number differently.

So as Richard said, we just -- we keep this updated and we don't want to have any big surprises.

So we keep it updated each quarter.

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

Just a follow-up on unit costs.

Obviously, they bounce around quite a bit at Grasberg depending on the volume.

But if we looked at site delivery costs at Grasberg on a dollar basis, it seems to me that they've been trending up this year, averaging about $500 million a quarter or about $2 billion per annum.

Is that a good guide for a run rate moving forward?

Because that's certainly up from what we've seen in the last couple of years that were more like $1.7 billion to $1.8 billion on for site delivery costs.

I'm just curious if there's something going on this year with the transition that's driving that up and it'll come back down?

Or whether that's a good run rate from a dollar basis?

Yes.

No, actually, our cost at Grasberg, when you look at it on the basis that you're looking at, is lower this year, and that reflects the lower mill rates than what we've had in recent years.

But -- and then next year, we're not projecting any significant changes in the cost from this year.

As you'll recall, a lot of it is fixed and then we do have some variable costs associated with the mill rate.

But we've got basically a core team that manages the operation.

We don't have -- we're not having significant changes in the cost.

And actually, they're actually down from prior years.

So we've been -- one of the things Mark's teams leading out there during this period of time of transition is really trying to drive efficiencies.

Grasberg has always had high production.

And so costs have been less of a focus.

But his team out there is really focused on dropping aggregate costs and looking at costs and capital together.

So we will be happy.

Dave and I can call you and review exactly what your question was.

But we see that Grasberg costs have been trending lower this year versus previous year.

Okay.

I'm not sure I actually got, but...

Kathleen and I want to soapbox on that issue when we're out there.

But Orest, maybe you got some elements of cost that you're raising the question about rather than the total cost.

Okay.

Yes.

I just locate your total site delivery cost of $1.5 billion year-to-date versus $1.4 billion last year at Grasberg.

Yes.

We -- last year, total costs, cash production costs at PTFI was $1.9 billion and we're less than $1.8 billion in this year.

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

Well, the 40 million pound decline at Cerro Verde in the third quarter be caught up?

And would there be 40 million extra pounds delivered in the fourth quarter with the blockade of another party being over?

Or were there a few other operational items that might have gotten mixed in and contributed to the decline in addition?

And separately, could you give us a flavor of the day-to-day productivity and cost issues you manage.

My sense is that you're going to do your best to have a net profit for the year rather than a small loss.

And could you talk about whether it's day-to-day cost per ton, day-to-day recovery rates, travel expense, exploration expense, bypassing some low-grade areas, maintenance schedules, some stripping that you can postpone, the different things you're trying to do.

It's impressive if you can stay out of the red as the price falls.

So I'm going to ask Red to talk about situation in Cerro Verde.

I mean, practically, we try to operate all out, and that's our plan.

So there's not really the capability of makeup.

Although there was some inventory that's in our numbers that we'll make up.

But John, we certainly aim to maximize cash flows.

That's what we're doing.

But we are not driven.

I talked about the strategy of our company and the major initiatives that we're on.

And that's what we're focused on.

We're not -- we're trying to be efficient every day and cut out unnecessary cost.

But in terms of trying to do things that would otherwise be beneficial in deferring them just so we can affect near-term accounting profits is not what we're back us.

And the bigger picture, this thing is irrelevant to the future of our company.

Now I don't want you to think we're not being hard-nosed on expenses and efficiencies.

That, we are.

But to defer some maintenance that could have longer-term consequences just to achieve some near-term results, we're not going to do that.

The -- Red, why don't you talk about the Cerro Verde situation.

Yes, John.

Just quickly going from the issues that Kathleen discussed in the third quarter that we faced, there is going to be some carryover effect from that into the fourth quarter.

Our mining lines did not get advanced to the areas that we thought we would in the fourth quarter.

So we're going to have to use some additional low-grade stockpile material to offset that timing of ore.

That ore material is there.

It's not lost and will be mined next year.

So we've got a small effect in the fourth quarter from that.

But both production and sales for Cerro Verde are expected to be higher compared to the third quarter for the fourth quarter.

Yes.

I was just referring to our forecast.

Yes.

But compared -- as Red said, compared to the prior forecast, we did adjust some Cerro Verde for the current mining situation there.

But on a quarter-to-quarter basis sequentially, production and sales, we're expecting to be higher than the third quarter at Cerro Verde.

And along the lines of what you're talking about, John, one of the things we talked about with Mark and his team when he was out there is as we are ramping down mining from the open pit, there's going to be a lot of dismantlement of facilities, transfers of equipment.

We're transferring trucks from Indonesia to North America and to Cerro Verde.

And so we talked about having a focused team on how to as we're -- the focus of the overall organization is on this underground transition, to put together a team of how we can do things like that as efficiently and saving cost and doing some of the less significant, less visible items in an economical way.

But if you look back at our -- for example, our G&A costs, we've made substantial reduction of G&A costs in recent years.

In the order of a 30% plus, right, Kathleen?

And so we're continually going through our organization and challenging personnel costs, travel costs and the things of that nature.

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

Just one question for me that I didn't hear anyone ask and I really wanted to get your high-level thoughts on.

It seems like there's an uptick in disruptions in Chile lately.

And from maybe project-specific issues in Peru.

I just wanted to get your thoughts on, is this isolated incidents?

Is this something broader that we should be worried about?

Is country risk picking up in those Latin American regions?

So Peru has been a country of where there's been this dichotomy between the government through several presidential administrations since I've been involved there over the past 12 years, there's been consistent recognition by the government for the way for Peru to improve this encouraged mining investment.

And the central government has done that directly with us and other miners.

They've seen the historical success in Chile, and they made a lot of progress.

The challenge in Peru has been, and it's not new, but it's been all along, the conflict between local communities and nearby mine developments, often center around access to water, but also disruptions in communities and so forth.

And this has been a feature of business in Peru, which still -- and even though the country has made tremendous progress, still has a large income disparity within the country.

And so it's something that we recognize at Cerro Verde early on.

And I was just with the President of Peru at UN week, I've been with other presidents, and they all acknowledge that we've been a shining star success with community relations.

With -- in our region with the City of Arequipa, where we provided a freshwater system as a community support.

We developed this innovative use of a wastewater treatment center to get water for our expansion rather than building new dam, improved the river, improved the farmer situation.

But there's ongoing issues related to other mining projects in Peru and it's sort of this inherent conflict between communities and mines.

And that's been a feature and is likely to continue to be a feature going forward.

Although the current president, as I discussed with him, is very committed to encouraging mine development and wanting to do things to help it, but it's an ongoing social problem.

Chile is a country that, over the years, has had a stable situation.

There are labor issues that come about with labor negotiations that caused disruptions from time to time.

And there have been, in certain parts of the country, weather events and earthquake events.

But typically, the civil situation has been relatively stable.

On occasion, there gets to be a debate between the use of revenues generated by mining for our different purposes within government.

And that swung back and forth to a political view.

The current situation -- Red, why don't you talk about the reasons of what we're seeing.

Yes.

Part of the reason this is such a surprise to the world is that Chile has been a country steeped in rule of law.

Things work very well there and are very reliable.

And over time, there has been this concern about incoming quality and how people can better themselves, can they grow the economy fast enough to create jobs for all of the well educated people.

So just to a recent event of changing the prices of the metro fare by a relatively small amount had sparked this current unrest.

President Piñera has pulled everybody together, gave a great talk last night to the country about how they recognize these issues and are going to redouble their efforts to address it.

So it sounds like they're resolving this current unrest and everybody that we've talked to this morning feels very positive about the efforts being made going forward.

But Timna, as I reflect on your question, let me step back and look at a global situation.

You're raising issues about country risk.

And I think, unquestionably, that's a feature in today's world in recent history.

And it's something that ultimately is very supportive of copper prices and supply development.

And you just go around the world and look at what situations have occurred.

The situation in Alaska with a new mine that's being proposed there, the situation in Mongolia, our situation in Indonesia.

We talked about Peru.

Chile has been really a stable situation.

Situation in Africa, where we were in 2008, our contract was challenged.

And now the new mining law is being revised.

But that's beyond the DRC and Zambia in other places.

Even here in Arizona, where we have just remarkably positive relationships with the government and communities where we operate, and that's taken years of work.

We have -- I tip my hat to Red and his team for the positive relationships we have with the Native American groups, where we need to have positive relationship for water access, but we're providing training and employment and opportunities for their people.

But their minds here in Arizona, they are very controversial right now.

The -- I will not going to say specific mines because I don't like to talk about other countries.

But you're fully aware of the challenges that people face.

And so mining is challenging because it has such a major impact on communities where mines are located.

There's issues about sustainability of mining, the resource curse question.

The issue of environmental impacts.

The competition for water.

It's just inherent.

We're working on those issues through ICMM.

But the reality is, is that's a major constraint on future mine development in an industry where the economic resource is scarce.

Copper is not like iron ore or coal.

It's not everywhere.

And the easy copper deposits have been found over the years, modern deposits at the surface are much lower grades.

Like our Cerro Verde mine that requires tremendous investments in infrastructure, mining, processing.

We have the largest mill facilities in the world of Cerro Verde.

Enormous tailing dams are required because you process so much material.

And increasingly, mines are underground, where costs are greater.

So all of that is reality.

Everybody is working to try to deal with it.

But it is ultimately a very positive impact for future copper prices.

Your next question comes from the line of Jatinder Goel with Exane BNP Paribas.

Just a couple of small questions.

I understand these are not material numbers.

But just curious on your treatment charges for Indonesia have gone up by $0.02 on 2019 guidance.

Is there a change in concentrate grade?

Or is there any interim revision in the terms?

Similar rise in royalty in export duties.

I understand gold price and volumes are higher.

But at the same time, copper price is lower.

Is it just a mix or something else is changing there as well?

Right.

It is the mix.

And we are exporting more than what we had in our previous plan.

But it's really just a mix issue and not something more than that.

Okay.

Very good.

We get -- we pay global TCs and RCs.

I mean it's market-based.

We're the world's largest marketer of copper concentrate.

And the concentrate price that we pay is the globally negotiated rates.

And we agree on a royalty screen with the government, and that's what we pay.

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

First of all, congratulations on the strong development of graders.

We look forward to see how that transition works out.

Just getting back to the South America and Cerro Verde.

Are you assuming that the blockades won't be there for your budgets in the fourth quarter and into next year? .

Repeat that after.

Are you saying, are the blockades -- they're down now, right, Red?

Yes.

And we're assuming that things run, that we ship is now.

Now some of the issues that led to the blockade are still unresolved.

And so if something else happens, it happens, but we don't predict that.

We -- our plans are based on having normal access to our port for delivering concentrate, normal access for bringing goods in to the operation and for our people to be able to come to work.

So...

And that's the case today.

And that is the case as we speak.

Okay.

Yes.

No, that was the question.

And then secondly...

And I will say this, I will say this, Oscar, not all of the disruptions that you read about affect us, okay?

This one did.

But there have been other disruptions for other mines that did not affect us.

But this one was particularly well organized and it was directed to disrupt us as a protest against other operations as well as the other operations.

Yes.

No, I think that is well understood by the market, which is during the unfortunate position of just having to use the same route to get your product back to market.

Then secondly, on Chile.

There was -- can you just please remind me 1 other large mining company cut back their -- the projection for copper production because of the drought that they're experiencing in the South.

But can you please remind me of your situation in as far as water and power in El Abra?

Yes.

So the water at El Abra comes from well fields up near the border with Bolivia.

So those well fields are well managed.

They're sustainable and no issues for us.

And this is a leach operation, not a mill.

When we're talking about a potential El Abra expansion, we would address water there with desalinization.

But the current operation doesn't require that.

And somebody asked earlier about future development projects.

El Abra is a very attractive project that where we're partners with CODELCO.

It would be a mill expansion.

It would require, as Kathleen said, desal, and it would be subject to Chilean taxes.

We have a number of projects in the U.S. that we're considering.

There's an expansion at our Bagdad mine in Arizona that is not as large-scale, but we own 100% of the mine.

We own the land and sea.

We have no income taxes to pay in the U.S. We have expansion opportunities at a number of our other U.S. mines, including Morenci.

We have potential expansion opportunity in Mexico.

So we have a number of alternatives.

What we're doing right now as we speak is we're doing studies of these.

We're advancing our understanding of the projects, the ore bodies.

We're challenging capital.

We're trying to come up to see which ones are most economic.

And we are ranking them so that when we do get to the promised land of strong cash flows and paying returns to shareholders, we'll be able to evaluate which of these to pursue on a disciplined basis.

But I failed to answer another question.

I just want to make this comment.

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

Richard, what do you or your team expect to see when you get to LME Week?

Man, I'll tell you, that's -- we're there next week, as you know, Mike, and every year, it's a good barometer of what's going on in the industry.

My guess is we'll hear a lot of complaining about U.S. government's trade policy.

We'll hear talk about China's efforts to bolster its economy through fiscal means and through economic stimulus and spending on infrastructure and belt and road initiatives.

I'm sure we'll hear a lot of talk about Timna's question about government relations and dealing with governments.

Our ICMM meeting will be focused on dealing with tailings down management, which is an issue.

We have long recognized as important for Freeport.

At the time of the Phelps Dodge deal, we put immense focus on it and we've invested a lot in it, continue to and are the situations that evolve around the world are matters everyone studying, working with others in the industry to review our practices.

But we're confident we're doing the right things and we'll always do the right thing.

So that's kind of an overview of what I expect.

As you know, Mike, it's a mood seems to come over LME and sometimes it's positive, sometimes, it's hopeful and sometimes it's negative, and it's not always predictable in advance.

Well, you'll be running into the Brexit issue over there.

So good luck when that happens.

Yes.

I don't even know what to say about that, so I won't say anything.

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

Well, thanks, everyone, for your participation, and we look forward to ongoing reporting of our progress.

If you have any follow-ups, feel free to call David Joint.

Thanks so much.

Bye-bye.

Ladies and gentlemen, that concludes our call for today.

Thank you all for joining.

You may now disconnect.