費利浦·麥克莫蘭銅金 (FCX) 0 Q0 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Freeport-McMoRan Copper & Gold third-quarter earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct an interactive question-and-answer session.

(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, good morning.

Welcome to the Freeport-McMoRan Copper & Gold third-quarter 2012 earnings conference call.

Our results were released earlier this morning, and a copy of the press release is 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 webcast link for the conference call.

We also have several slides to supplement our comments this morning, and will be referring to the slides during the call.

They are also available on our webcast link at FCX.com.

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 today, we'd like to remind everyone that our press releases and certain of our comments on this call will include forward-looking statements.

We'd like to refer everyone to the cautionary language included in our press release and presentation materials, and to the risk factors described in our SEC filings.

On the call today is our Chairman, Jim Bob Moffett, President and Chief Executive Officer, Richard Adkerson, Red Conger is here, as well as Mark Johnson.

I'll briefly summarize the financial results, and then turn the call over to Richard, who will be going through the slide materials that we've prepared.

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

Today, FCX reported third-quarter 2012 net income attributable to common stock of $824 million, that was $0.86 per share, compared with $1.1 billion or $1.10 per share for the third quarter of 2011.

Our third-quarter 2012 net income included credits for adjustments to Cerro Verde deferred income taxes, and to FCX's environmental obligations and related litigation reserves.

Those two items totaled $168 million to net income, or $0.18 per share.

We had net charges in the year-ago period for non-recurring items totaling $73 million or $0.07 per share.

We also increased sales during the quarter to inter-company smelters.

We defer recognizing profits on these sales until the final sales occur to third parties.

Changes in these deferrals, attributable to the variability in inter-company volumes resulted in reductions to our net income during the third quarter of 2012.

That amounted to $34 million or $0.04 per share in the third quarter of 2012.

Our volumes for copper, our consolidated copper sales of 922 million pounds, those were higher than our July 2012 estimate of 885 million pounds.

We had higher production from North America and Africa, and we also had advanced timing of sales in South America.

The third-quarter consolidated gold sales of 202,000 ounces were lower than our previous estimate of 225,000 ounces, reflecting changes to the mine plan at the Grasberg mine in Indonesia, which delayed access to higher grade material and a slower than expected ramp-up at the underground DOZ mine during the quarter.

Third quarter, as anticipated, sales were lower than the year-ago level of 947 million pounds of copper and 409,000 ounces of gold, primarily reflecting lower ore grades in Indonesia, offset partly by increased sales in North America and Africa.

Our molybdenum sales during the third quarter of 21 million pounds were slightly above our prior estimate of 20 million pounds, and the third-quarter 2011 sales of 19 million pounds.

As we look to the year, we expect our copper sales to total 3.6 billion pounds for the year 2012, 1 million ounces of gold, and roughly 82 million pounds of molybdenum.

We expect that number to be growing as we look forward to 2013, going to 4.3 billion pounds of copper, 1.4 million ounces of gold, and 90 million pounds of molybdenum, and if we look beyond 2013, you'll see that we have a strong outlook for growing volumes.

Our realized copper price in the third quarter was $3.64 per pound.

That compared to $3.60 per pound in the third quarter of 2011.

Our gold price realizations averaged $1,728 per ounce in the third quarter of 2012 compared to $1,593 per ounce in the year-ago quarter.

Molybdenum prices were below the year-ago levels, averaging $13.62 per pound in the third quarter of 2012, compared to $16.34 in the year-ago period.

Our consolidated average unit net cash costs, net of byproduct credits of $1.62 per pound in the third quarter of 2012 were in line with our previous estimates, but higher than unit net cash costs of $0.80 per pound in the third quarter of 2011, primarily because of lower volumes in Indonesia.

As you'll see, and as Richard will be talking about, we expect our costs, unit net cash costs to improve as we access higher ore grades in the second half of 2013 in Indonesia and we get the benefit of additional growth outside of Indonesia.

Our operating cash flows during the quarter, which were net of $765 million in working capital uses, totaled $526 million, and capital expenditures for the quarter, which included spending on our major projects that are underway, totaled $971 million for the third quarter of 2012.

We ended in a strong financial position with consolidated cash of $3.7 billion, which exceeded our total debt of roughly $3.5 billion.

The common stock currently outstanding totals 949 million shares.

With that, I'll turn the call to Richard who will be referring to the slide presentation materials.

Thanks, Kathleen.

Good morning, everyone.

The third quarter of this year was a good quarter for our Company.

When we look at our global operations, as Kathleen mentioned, we are achieving higher production growth in North America and Africa.

We'll talk about that, with our future growth opportunities.

Our expansion at Tenke Fungurume in Africa is going very well.

On time, on budget, and it was a quarter in which we set a number of operating records for current operations.

Our situation at Grasberg continues to progress and improve, and I'll be talking about how to put this year in perspective for our longer-term operations, because it is an unusual year for Grasberg.

We are advancing our brownfield development projects.

That's a focus of our Company.

As I mentioned, the project at Tenke Fungurume is going well, and is virtually complete.

Engineering construction with the mill expansion and mine rate expansion at Morenci is progressing, and we're making positive permitting progress for our big project, for the Cerro Verde project.

We're on track for a strong outlook for growing production profile.

The financial highlights that Kathleen mentioned to you, reviewed with you, I think when you look at it overall, we see this quarter as one, basically where we achieved our outlook that we had planned to achieve during the quarter.

We had a situation at Grasberg where we did have to change our mine plan for the pit, and that resulted in us mining lower-grade material out of the pit.

That had an impact on gold.

And combined with the issue of ramping up DOZ has resulted in us having 10% lower gold sales for the third quarter than we had anticipated.

This is gold that we'll make up as we go forward, and you'll see that in our forward-looking numbers.

Our cost situation is in line with what our expectations were.

We are incurring additional costs in North America as we ramp up, and South America, we're having some higher energy costs, but actually our unit cost on a consolidated basis for the third quarter was really exactly in line with the guidance that we had going into the quarter.

So overall, the quarter was an excellent quarter for us operationally.

Looking at our cost situation, our consolidated costs for the quarter, at $1.62, as I said, was in line with guidance.

It reflects the unusual situation at PTFI at Grasberg, where we had unit costs of $1.65 this year.

That's slightly higher -- that's a quarter slightly higher than last quarter.

But looking forward, we'll return to more normal levels.

The markets today are complicated globally, no question about it, with the focus in our markets being on China, because it does remain such an important demand driver for our business.

I just returned from London at LME week last week, and there's a lot of skepticism about Chinese growth rates at 7.5%, or slightly above that.

The Chinese government is taking steps to stabilize their economy, to provide incentives for consumers, and to invest in infrastructure.

Their inflation rates have been brought down, and in many ways, it appears that the situation is stable there.

The government appears committed to dealing with these issues, and certainly has the financial resources of doing it.

With respect to our business, we are continuing to see a positive situation in China with the rest of our customers, very strong competitive demand for our copper concentrates and our copper cathode.

In the US, US-copper demand is being helped significantly by the automobile industry, housing data has been more positive.

While growth in the US today is certainly lower than the business community expected a year ago, we're seeing some positive aspects to copper demand in the marketplace.

In the context, global inventories of copper remain low.

Inventories by our customers are low.

And the industry is supported by ongoing supply challenges of production from existing mines, as well as the challenges in developing the relatively scarce number of major new projects that the industry has available to it around the world.

A number of companies are announcing cutbacks in capital spending, and being more disciplined in where they invest capital, all of that would be supportive for the long-term copper markets, and we remain very positive about those markets going forward, based on the uses of copper in the global economy and the challenges from a supply standpoint.

Our Company's strategy is focused, as you see on slide 8, on the enormous reserve position we have at $2 copper plans, we have 120 billion pounds of proved and probable copper reserves, and in addition, we have incremental resources associated with our existing mines where we have identified 115 billion pounds of contained copper at $2.25 mine plans.

So it's an enormous resource base for us, and our focus and challenge is bringing those reserves and resources into development projects and into producing assets and we're making good progress along those lines.

Slide nine 9 shows the highly-attractive brownfield development projects.

Notably, they are brownfield projects which, while they have challenges are certainly less risky in many respects from an execution standpoint, from a permitting standpoint, community acceptance standpoint than greenfield projects.

In North America, we have the project we're currently engaged in at Morenci, and potential significant sulfide expansions at Morenci and other mines in North America.

The Cerro Verde project in Chile is progressing very well, and we have a significant potential opportunity at El Abra, where our exploration activities identified a large sulfide resource.

Beyond the current expansion project at Tenke Fungurume, we have other expansion opportunities with our oxide ore there, and our exploration and metallurgical work continues to give us optimism about potential future sulfide projects.

And Grasberg, we are progressing well with the development of our underground infrastructure to enable us to transition effectively from the open pit, which we still expect to be completed roughly in 2016, to continue Grasberg as a large scale, low cost, very competitive operation for many years to come.

The details of the Morenci project are on page 10.

They're basically as previously reported.

We're expanding the mill, increasing the mining rate, targeting incremental production of 225 million pounds per year.

We received our major permits.

We're progressing engineering and ordering items and we expect full rates in 2014.

Ongoing exploration gives us the opportunity which we're now studying for further future large-scale expansions.

And this is a 100 year-old mine.

As you can see on the chart on page 10, it has a tremendous amount of future associated with it.

We essentially have as much in reserves and mineralized material as the cumulative production has occurred since World War II.

This is far from a short-lived mine.

It's got great expansion opportunities, which will give us future volumes of significance.

Cerro Verde, very pleased with the way our team has approached this project, by working cooperatively with the local community.

Peru has been a difficult place to undertake mining projects because of community concerns about competition for water and other factors.

Our team there, Red and his team have found a way of working with the city of Arequiba to help them with infrastructure development, both in terms of developing clean water supplies and using their waste water system, we've made the community better, in conjunction with finding an access for the water resources for our big project there.

We have increased our capital cost estimate for the project from $4 billion to $4.4 billion, reflecting some incremental cost of investment at power facilities and in the water projects, which give us a greater degree of assurance in these critical areas as we go forward.

This will become the world's largest concentrator milling operation, and give us significant incremental production of 600 million pounds per year.

Reserve life is significant because of the resources.

We're working effectively with the government.

We have a new stability agreement, working on engineering, plan to begin construction next year and complete it in 2016.

And you can see on the charts what that will mean to our Company.

As I mentioned, the current project development, which was our first expansion project at Tenke Fungurume following the initial project is virtually complete.

We will be adding a second sulfuric asset plant in 2015, but this is expanding the mill which has been operating very well to 14,000 tons per day.

We'll increase our mining rate.

It's $850 million of capital to get 150 million pounds of copper per year and that project and operations in the Congo are going very well.

At Grasberg, we have been able to be very effective in continuing our underground development, to give us access to the future sources of throughput for our mill, after the completion of mining in the pit.

This work has gone very well.

It is a very significant project, with over $6 billion of development capital for the total operation, our share is just over $5 billion of that.

And this will be spread over a number of years because of the nature of underground development.

Our average capital cost is about $550 million a year, and you can see the timing of the chart, bringing in the development of the deep MLZ mine, followed by the Grasberg blockade, which we will begin to operate once the pit is completed.

The next slide on Grasberg, we gave a lot of thought as to how to put this year in perspective.

It was an unusual year following the labor situation that we faced in the second half of 2011, and continuing this year.

And we have had a year of unusually-low metal production compared with history.

Besides the issues associated with the labor disruptions earlier in year, we continue to deal with labor issues, but we're making progress with that.

We're preparing for our future CLA negotiations, as well as dealing with a number of issues of concern to the employees.

But it has been, in conjunction with that, a year in which our mine plan was one in which we were going to have lower grades in any event.

We had to change those mine plans.

As a result, we were only mining this year in the upper reaches of the Grasberg pit.

During the labor disruptions, we ended up with a situation at the DOZ mine, where we had to do panel repairs.

Those have taken more time than we expected.

We're currently operating the mine which has a design capacity of roughly 80,000 tons per day, the current rate is 50,000 tons.

We're not as far along as we expected.

That was high-grade material that would have gone into our mill, so that's affected the volumes of copper and gold that we had available to us.

But we are on track of getting this back to full production levels, which will occur gradually, and reach full levels by the second half of next year.

If you look at the charts at the bottom of the page, you can see the impact of that.

For copper this year, we're roughly at 50% the average that we would have for the last 10 years, and what we expect for the remaining years in the life of the pit.

This is the aggregate Grasberg production, and there's a footnote there that shows our share of that, net of the Rio Tinto interest.

Particularly for gold, you can see this is a year where we have really less than 1 million ounces of gold production, where our normal production is over 2 million ounces.

And as a result, because a lot of our costs there are fixed, our unit cost at Grasberg are abnormally large for 2012.

We expect to be at $1.34.

For the last five years has averaged $0.13, in 2013 and 2014 we expect that to drop to $0.20, and then be a net credit for the years 2013 through 2016.

You can see that, and I'm going to refer just quickly back to some of the supplementary slides that we have.

Slides leading up to slide 36 show where mining has occurred on a quarter-by-quarter basis in the Grasberg open pit.

But if you turn to slide 36, you can see, and this is a familiar slide for those of you who follow us, how the grades are distributed in the Grasberg pit.

This is one of the mining industry's great ore bodies and it's characterized by very high grades of both copper and gold at the core of the pit.

As we have developed this pit over time, we've had to have sequencing in which we mine the upper reaches to execute our long-term mine plan for our stability, and that has resulted over time in years where we have higher ore production.

2012, we're in the final stages of designing the ultimate pit limits and executing that, and you can where we were mining in the third quarter at the upper reaches with relatively low grades.

As we go forward into 2013, we will be mining at lower reaches of the pit, and that will give us access to higher-grade material and you'll see that reflected in our numbers.

2014 going to slide 38, we get closer in.

Then beyond 2014, we'll essentially see significant drops in our stripping requirements.

We will be getting down to the final stages of mining the very high grades at the bottom of the pit in 2014, 2015 and 2016.

This 2013, as you can imagine by looking at this, will be a year and we'll talk more about this as we give our outlook for the year in our fourth-quarter earning release, will be a year in which we will be back end loaded.

We'll be progressively getting to higher grades as we go through the year.

Now, we continue to work with the government of Indonesia on our process to get the extension of our contract of work beyond its primary term.

The contract has a primary term that goes to 2021, and by its terms, we have the rights to two 10-year extensions.

We're also talking to the government about their review of our contract and other companies' contracts in light of their new mining law.

We made a lot of progress during this quarter in these discussions.

We are engaged in the process that the government has established to talk with us and we feel very encouraged by the progress we make this quarter and we're looking forward to completing this process as it works its way through the Indonesian government situation.

On slide 15, let's turn to the Americas, where we've got just a really positive story with the current Morenci expansion, the restart of our Chino mine in New Mexico and the Cerro Verde expansion.

We see, within a relatively short period of time of increasing our production to 3.5 billion pounds a year, which is roughly what our total Company will produce this year.

This has been the great story of the Phelps-Dodge transaction was this highly profitable, expandable resource that we were pleased to bring into our Company as a result of that transaction.

Beyond that, we're working on the incremental resources to deal with sulfide opportunities in the US and as you can see, this is a significant opportunity together with the sulfide resource we had at El Abra, and those will be projects that we'll continue to review and find ways of executing in years to come.

Slide 16 shows what we've done with Tenke, began production in 2009.

We've been able to optimize that first project, the mill performed in excess of our expectations.

Now, we're in our first expansion.

There's likely another optimization expansion with oxide materials, which would give us significant additional volumes, and as I mentioned, our exploration drilling and metallurgical work gives us a really positive outlook about the future opportunities with what appears to be very large mixed ore and sulfide ore opportunity there.

Pulling this all together, we've got opportunities to have five mines with a capacity for over 1 billion pounds of copper per year, very few mines in the world can reach that level but with Grasberg being the cornerstone asset, Morenci, expansion at Tenke Fungurume, Cerro Verde and the opportunity at El Abra, we could well have five mines in that list of global world-class mines.

Turning to our molybdenum business.

We completed the construction of the restart of Climax in mid-2012.

We began ramp-up in March.

We're continuing this process and managing the ramp-up, subject to market conditions, prices for moly have weakened during the year.

We feel good about the long-term markets, and we have positioned ourselves to take advantage of it with the combination of our byproduct production, our Henderson mine and now Climax will allow us to produce on a profitable basis in varying conditions in the industry, and to have significant production and expansion opportunities as we look forward to more positive markets in the longer run.

We're spending significantly on exploration, $255 million this year, focused on our brownfield expansion opportunities in terms of both adding reserves and resources, moving resources into reserves and reserves into development projects.

Kathleen reviewed our 2012 outlook and the details on that are presented on slide 20.

Consistent with what our guidance was last quarter, our unit cost for the year is now expected to be $1.50.

I'll talk about Grasberg's impact on that, if copper averages $3.70 in the fourth quarter, we would expect to have operating cash flows of $4 billion, net of $1.4 billion of working capital uses and tax payments.

We would expect those sorts of things to reverse in future years and our capital expenditures, primarily based on timing changes, are now expected to be $3.6 billion this year, versus the previous $4 billion.

Like all companies in our industry, we are focused on being disciplined with both capital spending and operating cost spending, and along with our primary focus on safety.

That's the first thing we talk about at every one of our meetings.

Near-term sales profile is presented on slide 21.

You can see the expected significant increases in 2013 and 2014 as Grasberg returns to more normal levels.

Our Candelaria mine has been producing at lower levels because of mine sequencing, grade issues, that's expected to come back, as well as our expansion projects kicking in over time.

So we're looking forward to future volume growth.

The goal slide you can see at the upper right shows the condition I mentioned earlier, of this being an abnormally low year for Grasberg.

Quarterly sales, we were, on average, for totals had higher volumes the third quarter than our guidance had been.

This was a bit lower at Grasberg because the factors I mentioned earlier, offset by positive performance through the rest of our Company, in the Americas and Africa.

This resulted in some transfer of volumes from the fourth quarter to third quarter.

That's something we'll try to do every quarter, if you know our history.

We try to move that forward.

Slide 23 shows our unit cost.

As I said, our costs are really coming in pretty much as expected.

We are incurring additional cost as we ramp up in America, for example, in Morenci.

We're doing additional stripping to prepare ourselves for the expansion there, but when we look at net unit cost of $1.50, that's in line with what our expectations have been.

In terms of viewing those unit costs, again, we'd like to point out the abnormal year at Grasberg.

Page 24 shows the $1.50, how it reconciles with our experience in 2011, and then the impact of the higher expected future volumes near term at Grasberg, bringing our cost level down to more normal levels for our Company.

Slide 25 shows the model that we present every quarter of operating cash flows for our business.

We've added a little bit to this to show the impact of expansions on that, focusing on the $3.50 price level for copper.

At that level, with our current operations, based on our next two years of operations, we would have $9 billion of EBITDA and $6.5 billion of operating cash flows.

With the increased volumes looking at the following two years of 2015, 2016, we'd see a roughly 50% increase at $3.50 copper, in terms of our EBITDA numbers and operating cash flows, so these expansion opportunities that we have are really very significant for us.

Our sensitivities, so that you can adjust this for your -- for other views about prices and input costs, are presented on page 26.

Obviously, the important one is copper.

$0.10 of copper results in $275 million of annual operating cash flows for us.

Capital expenditures reflects, on page 27, reflects our new estimates, reducing this year's projected spending from $4 billion to $3.6 billion, with roughly the same levels for next year.

We're really focused on expansion.

We're limiting our efforts and putting our focus on our best project.

We're obviously being very prudent about capital spending.

The brownfield expansion that we're pursuing have really good economics, even at lower prices than currently, and so our big focus is being disciplined and focusing on execution of these projects to get them done in effective way.

Our financial policy continues to be directed towards maintaining a strong balance sheet, as an investment grade rated Company, strong liquidity position, having that focus on these attractive growth projects in a disciplined way.

We pay an attractive current dividend and our Board continues to review financial policies as we go forward.

So as I said, we're pleased.

We had a good quarter.

We'd be looking forward to responding to your questions.

Jim Bob is here, along with Red Conger, Mark Johnson and Kathleen and I, we'll be happy to hear what your questions are.

(Operator Instructions)

Our first question comes from the line of Sal Tharani with Goldman Sachs.

Richard, I just wanted to get some more color on the Indonesia.

There are quite a bit of news from there.

Latest one was the royalty question also.

I was wondering -- obviously you are also spending quite a bit of money over there over the next few years, before going underground.

Was wondering if your conversation for expansion beyond 2021 incorporates all these issues and expansion and so forth, or are these being talked separately, and these are separate issues?

It all comes together, Sal.

I mean, the government is very positive about our investing now for volumes to produce beyond 2021.

Consistently the discussions have been directed towards our continuing to operate.

We have reserves now to 2041, and so we were having a lot of support for what we're doing.

It's meaningful to the country.

We have a workforce of over 20,000 people there.

We pay -- taxes are the biggest component of our compensation we pay to the government.

But we pay well over $2 billion a year on average for taxes, royalties and dividend, and that's meaningful to the country.

The issues have been built around this new mining law that was adopted, that does not technically apply to us, and the aspirations of the people of Indonesia regarding mineral resources, and so we're engaged in productive discussions to find a way forward that is responsive to those aspirations and protects the interest of our shareholders.

But built into this would be a positive response to your question, in that it would give us surety of our situation going forward beyond 2021, and the ability to take advantage of our current reserves and resources.

Richard, there was some rumors about floating Indonesia assets separately, so that to avoid any of the government regulations.

Is that on the table also?

Well, it's not to avoid government regulations.

I mean, we're subject to our contract of work which sets the basic parameters of how we operate and what our rights and obligations are, and that contract itself has a status of law.

For some time now, we've seen benefits to having PTFI listed on the Indonesian exchange.

The government is very positive about that.

We believe it would present the Company in a positive way within the country in terms of the way reports are [dissimilated] and so forth, and so we are pursuing discussions about that, and believe that it would be a very positive step for us and the government would view it as positive as well.

Thank you very much.

Let me just add that would be a small percentage of PTFI.

PTFI is a large asset and so we're talking about a small percentage listing of that, which would be a large transaction for the Indonesian exchange.

Your next question will come from the line of Brian Yu with Citi.

Great.

Thank you.

And good morning, Richard, Kathleen.

With regards to Grasberg, I know you've taken the copper shipment estimates down the next few years.

When I was looking at the reference slides, I couldn't see any real appreciable difference in the mining plan at a high level.

I was wondering if you could go into that in a little bit more detail.

And then similarly, with the DOZ and the delay in the ramp there, I think you mentioned some labor, ongoing labor issues and panels.

Was there just more extensive damage with some of those panels, and that's what's delaying the ramp?

Thanks.

I'm going to let Mark answer the second part of the question first.

Mark, why don't you answer that?

Yes.

On the panel repair, first of all, typically in the DOZ, we've experienced over time about 5% to 10% of our draw points are down for some type of repair.

During this period of time right now, we're up close to a third of our active draw points are in a repair process.

These draw points, a lot of them are the older draw points to begin with.

Some of them were built in the weaker area of the mine, the more friable ground, so that's played a role.

The impact of the labor disputes, the pipeline situation that we had last year, also added to our concerns there on the panels.

And these repairs, a lot of times the panel is in a state where it takes a very intensive repair, a lot of steel sets, a lot of concrete, and really we don't, until we get into those panels and start repairing them, sometimes we're not completely aware of what might be done, needs to be done.

So we're in a process.

It takes very experienced miners.

It takes a very methodical process to get them repaired.

We feel good about our process in getting these opened back up.

We're working through that.

We have five panels right now that are undergoing repair.

We get one of those panels back in the fourth quarter of this year, and then over the course of 2013, we'll be bringing these on sequentially.

Okay.

And then with respect to the mine plan question, Brian, basically we're looking at a period for open pit mining now that will go from now through 2016.

And our total copper and gold during that period of time is essentially the same as our previous plans, because of the factor that Mark mentioned, and because of some of the delays that were caused with mining rates during the labor situation last year.

There's been some shifting of that from our previous plans back, but it's really minor.

And now, as we return to normal operations, we will be factoring back as to how we can advance volumes forward again.

So it's not, in the bigger picture of things, it's not major changes from what we were previously talking about.

Okay.

Thank you.

Your next question will come from the line of Michael Gambardella with JPMorgan.

I have a question going back to slide number 9, with the brownfield projects.

Everyone in the world is taking on especially greenfield, but also brownfield projects having costs increase.

The Cerro Verde portion is obviously about two-thirds of the component here for the total Company going forward, and it's still three, four years out.

How much confidence do you have in that number of $4.4 billion?

You recently upgraded it, but just how much is locked in and how much variation possibly could we see in the CapEx program?

I'll let Red Conger respond, Mike.

Thanks.

Mike, we now have an estimate based on 30% of the engineering being completed, so that gives us a good, solid basis for that new forecast.

As Richard mentioned, a lot of the change has been on things outside of what I would call the outer limits of a normal project -- power, water, those kinds of things that are unique in this case.

The mill and processing facility itself, we understand well and have the tailing down.

We have good estimates on all of them.

As Richard said, we're all focused on doing it well, doing it right, and we'll keep you posted on that.

But right now, it's a very good estimate.

And Mike, I just want to make a point again, that this is different than even a lot of other brownfield projects.

This is a footprint of where we've been operating.

As you may remember, the last major expansion was completed in 2006, right before our transaction.

A lot of this is not exactly replicating but very similar in nature to what we've done before.

The big issues as is the case in Northern Chile and Southern Peru is water and power and those are the things where we have seen some escalation on, but some of our investment has done is to give us a surety on these things so that, in a world where both water and power are going to be increasingly problematic, we're investing to see that we've got safety in our project.

But in terms of the mill processing facilities and so forth, these are essentially things we've done before.

Okay.

Thanks, Richard and Red.

Your next question will come from the line of Tony Rizzuto with Dahlman Rose.

I just want to follow up a little bit on, to make sure I understand correctly, when you guys talk about the panels, am I thinking about -- correctly thinking about mine roof bolt systems?

Are they similar?

The panels are essentially our access to -- it's the drift where we access the draw points.

We have various levels of ground support, some areas in the very good ground we just put shotcrete, very light roof bolt support.

And these areas as we repair them, it's very extensive.

It's steel sets, essentially re-concreted in.

We re-support the ground, essentially in a very engineered and structured way.

So it does involve roof bolts.

There's a variety of roof support, ground support, throughout the DOZ relative to the ground conditions in this specific area.

Okay, Mark.

And so I guess the situation I think that Richard alluded to, could you elaborate a little bit more about the specific situation, was it something that was labor-related that did occur during the quarter?

One of the -- with blockading, one of the things is that once you start mining the area, it's not a mining method that's easily shut off and restarted.

As I mentioned, some of these draw points that we're repairing may have needed repair regardless of the labor situation and the pipeline situation that we dealt with last year, but both of those issues exacerbated the potential for damage.

And like I said, it's difficult in a blockade.

Once you start pulling an area to keep the stresses off of the panels, to keep the ground support intact, you want to keep pulling each area in a very engineered and controlled fashion.

We had disruptions last year during all of that -- all of the issues that we dealt with, and it's certain played certainly played a role in the situation we're dealing with today.

it wasn't something that occurred this quarter.

During the labor issues which began mid-September, really, last year, we were taking steps to try to mitigate this problem, which we knew was there.

Then some of those disruptions continued, as you recall, into early 2012.

So this was developing, and we had plans to -- as to how we would deal with it, and as we physically get into dealing with it, it's taking us a bit longer than we thought it would, when we gave our earlier guidance.

So it's more that situation than some new problem that developed this quarter.

Understand.

Understand.

Thank you very much.

It's very helpful.

Your next question will come from the line of Paretosh Misra with Morgan Stanley.

The first question is about your Africa operations.

And I see that a second sulfuric acid plant that you mentioned is expected to be completed in 2015.

Could you give us any sense as to what capacity this can support?

I should know that right off the top of my head.

I don't.

We'll be back to you on that.

But it's a similar size plant to what we built at our Safford operation, when we expanded that.

So we'll have an answer to you before the call is over.

It's like 600,000 tons a year.

The reason why we have the plan is as we go forward, we've got -- and this is part of our long-term plans.

We've got ore that has higher acid consumption and so as part of the long-range planning, we have timed in the addition of an acid plant.

We also supplement from time to time purchases of acid, but it's more cost effective for us to actually buy the sulfur and logistically better for us to buy the sulfur and convert it to acid.

Got it.

Fair enough.

And then maybe if I could ask a second, probably, question for Mark.

Any specific reason why gold recovery was down in third quarter at Grasberg?

Yes.

As we work through this lower-grade material in the pit, we also experience lower gold recovery.

It's expected.

It wasn't a surprise to us.

Actually, we were about 2% better than what we had modeled as far as mill recovery for gold.

One of the characteristics of the Grasberg that works out mostly in our favor is that when we're in the very high grade areas we get the highest grade copper recovery, the highest gold recovery, and the best [con] grades and it was just part of the process of working through this lower grade phase that Richard described earlier.

Understood.

Thanks, guys.

Higher grades make better miners.

Your next question will come from the line of Oscar Cabrera with Bank of America.

So are you saying better lucky than good, Richard?

I don't think so, but it's great to be lucky and good.

Jim Bob's on the line, but one of the first things he told me is, luck is when preparation meets opportunity.

I was wondering about the stripping agreement with Rio Tinto.

As one of the previous callers mentioned, the production specifically for gold is very back-end loaded in the years that you show here, 2015, 2016, so can you remind me what the stripping agreement for levels for copper and gold for Grasberg are, please?

Yes.

It varies year by year, Oscar, so it's not something you can just say simply.

It's disclosed in our 10-Ks, but metal strip is the schedule that -- the way we call it, was established back in 1994 when we negotiated the deal with Rio Tinto.

What we did then is we took the reserves that were in place at that point, and the productive capacity that was in place at that point, and agreed with them on how that would be produced year by year.

And then to the extent that actual production in any given year exceeds the metal strip, then that's shared 60/40.

So Freeport gets all of the metal strip, plus 60% of the excess, and so it varies year-by-year, extending to 2021.

We have made a couple of adjustments for force majeure type items and so forth.

We have those details in our documents and Kathleen has got --

Just on average, Oscar, if you look at the 2013 to 2016 aggregate Grasberg production of 1.4, our share of that would be roughly 1.3.

At gold at of 2.1, our share would be roughly 1.9.

As Richard said, it varies year-to-year but they get 40% of the increment above what the strip is and in years when we're below the strip, like this year, we make that up first.

But on average, we would be getting 1.3 out of the 1.4 and 1.9 out of the 2.1 during this period of time.

Thanks, Kathleen.

That was very helpful.

That was the next question.

Maybe I get to ask another one.

On 2012, your overall CapEx went down from $4 billion to $3.6 billion.

Can you talk about the difference, where was that change?

Because 2013, the CapEx stayed more or less the same, $4.6 billion now versus $4.5 billion in the previous outlook.

Yes, it's mainly a timing thing, Oscar, as we looked at where we were and looked at the outlook for the year.

Mostly on projects, moved into 2013 and some of the 2013 moved into 2014.

So it's across the board of timing.

We put together these forecasts based on the best estimates, but sometimes these actual spends lag a quarter or two, and that ends up deferring money into next year, and then we've got some that's deferred into 2014.

So we are spending about $1.5 billion in sustaining capital and then the balance is in our projects.

Okay.

Great.

Thank you very much.

Oscar, going into the fourth quarter we'll be doing our Company-wide planning for our business and so we'll be able to give you, at our next update, the results of our detailed planning exercise.

Appreciate it, Richard.

Thanks very much.

Your next question will come from the line of Jorge Beristain with Deutsche Bank.

Richard, I guess my question is just in Indonesia, you've deferred, if I understood that correctly, going underground by one year, just because of the delays partly on the labor issues.

Could you talk a little bit about 2017, what the unit cost would look like out at Grasberg compared to your 2015 guidance, which is your last data point there?

And also talk about production that would be both in total and attributable to you?

Yes, Jorge, we really haven't deferred the transition to underground.

We've been talking about 2016 for a number of years now.

There has been no deferral for it.

As a practical matter, as we get closer to that period of time, there will be some decisions made about what we actually do, so that's still before us.

But our guidance right now is the same that it's been for years now.

There is a lot of moving parts to the second question.

As we finish mining in the pit, and transition to the Grasberg blockade, which is directly under the pit, that will have a ramp-up period, and one of our strategic challenges that we had for years was how to deal with the drop-off of production in the pit and then the ramp-up of the underground.

We've had some success in dealing with that, and one of the big successes has been the additional reserves we've discovered in the DOZ - MLZ complex, which we've advanced the development of, so that's going to come on-stream before 2016, and offset the ramp-up, to a degree, of the Grasberg underground.

We've got stockpiling plans.

We developed the Big Gossan mine, and so there will still be some ramp-up effects, but it's not nearly as severe as our long-term plans once indicated.

Now, looking beyond the open pit area to the underground, Kathleen, you have some information on the unit costs?

Okay.

Just in terms of the volumes that Richard was talking about, as we look at the ramp-up period going from 2016 into 2025, we're expecting, on average, aggregate copper price, I mean copper volumes to be around 1.4, a little over 1.4 and gold to be 1.8, which would -- our share of that would be roughly 1.1 and 1.4 for copper and gold.

And then longer term we're expecting average in the whole underground era having aggregate production of 1.6 and 1.4.

As we look at costs underground, as we've talked about on previous calls, we don't have the stripping to do.

It's essentially all coming out as ore.

And so we're able to -- and these are large scale operations, and so we're able to have a very efficient cost structure.

We are actually projecting costs in the underground era that will look very much like the type of costs, on a net unit cost basis, of what we've enjoyed during the open pit era and would be significantly less than $0.40 per pound at current gold prices.

So we're going to have a period of time in the 2016, 2017, and 2018 as we're ramping up, as the open pit depletes, and we're not quite up to the 240 rates in underground, we'll have some lower throughput, but as Richard said, we've got high grade material coming from deep MLZ and so that transition in terms of metal production is better than what you'll see through the mill.

But as we look forward, these underground projects are very, very attractive.

The economics are some of the best in the Company and we had a record during the third quarter in terms of development progress, and we're very optimistic about being able to establish a very large scale, low-cost underground operation.

The other side of that time frame is we should have some excellent years leading up to the depletion of the pit, because we'll have very high grades of both copper and particularly gold.

We'll have low stripping.

We'll be retiring equipment and so forth.

So should be some very, very attractive times before the pit is depleted.

As Kathleen said, as we start up the deep MLZ and the Grasberg blockade, we start those off in the highest grade portion of the ore body.

As tons ramp, as we're ramping tons up, we're experiencing some of the better grades available to us in both those deposits.

Got it.

Thank you.

Sorry, if I could just follow-up as well maybe with Richard, just on your balance sheet, you're again posting a net cash positive result.

Historically you've tended to do a little bit of a top-up extraordinary dividend in the fourth quarter.

Could you just talk about what your relative preference would be for returning cash to shareholders, given that you did not pay an extraordinary last December, or declare one?

Would you favor now just increasing your base dividend as a way to return cash to shareholders, or would you see still falling back on that kind of fourth quarter top-up as a way to kind of flare excess cash off?

Well, that's issues that our Board talks about and they'll be looking at those things.

In the very near term, our CapEx are going to basically be absorbing all of our cash flow generation at these prices, because of our cash CapEx situation.

But as I said, financial policy is something the Board looks at and they will be viewing investment opportunities in relation to available cash, and deciding how to manage it.

We have a long tradition of returning cash to shareholders, as you noted.

Great.

Thank you.

Your next question will come from the line of Richard Garchitorena with Credit Suisse.

Just to follow up on that question, given the sensitivity that your cash flows and EBITDA have to the expansions, and the 50% increase that you highlighted as of 2015, 2016.

How should we think about that, and how do you think the Board will view that going forward, just given the strong generation of cash flows at higher volumes, over the next three or four years.

Well, we smile when we think about it, so it's going to give the Board a lot of opportunities in deciding this balancing of investment opportunities, returns of cash to shareholders.

So as a practical world, these are based on models.

We live in a complicated world today, and so we're going to be focused on achieving these projects which give us the opportunity to generate these volumes, and then the market price of copper and gold, molybdenum and cobalt, will determine exactly what those cash flows are.

So we've got time now, as we work through this in executing our plan, and the Board's going to have a lot of options to it in deciding what to do going forward.

Okay.

Great.

And just one follow-up.

On Tenke, obviously the sulfuric acid plant will be completed in 2015.

When should we expect to hear an announcement on the next phase?

Would it be when this current phase is complete, and you're going through the plans for next year and the year after?

We will give you a quarterly update of where we stand with our thinking on Tenke.

The first thing now that we virtually completed this project is what's it actually going to do?

Are we going to be able to optimize it as we did the initial project?

Our original design capacity for our mill there was 8,000 tons per day.

It operated at 12,000 tons, which was a huge upside for us.

So we were able to buy some additional mining equipment that allowed us to expand processing equipment.

So now, I just got to tell you how proud I am of our team over there, and operating in a challenging environment, as I am with the Americas, which we've done great, and Indonesia, our team has met the challenges there in an effective way.

But the first step will be to see exactly how this system operates and the way you design systems, your hope is, our experience has been is that you do better than design, and that's what we're going to see where that happens, and then we'll go from there.

Sounds good.

In the meantime we're going to be continuing to do a lot of drilling and to do a lot of metallurgical work on how long run to deal with this big sulfide mixed ore opportunity that we have, and I would say our work over the past year, 18 months has been very encouraging about that.

Just to come back to the Tenke and the acid plant that Paretosh asked about, the plant that we are planning to come in the 2015 time frame, would have a capacity of about 1,400 tons per day.

The existing plant there has 800 tons per day.

But the new plant would be similar, similar size to our Safford acid plant that we put in recent years, which has a similar capacity.

Great.

Thank you.

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

Congratulations on all the good hard work.

I know all these projects can take a little time.

I wanted to direct a question to Red about the Cerro Verde economics, and I understand that 360,000 tons a day would be the biggest one in the world, but the grades at Cerro Verde aren't as good as the grades at Grasberg, or Escondido or Chuqui when the big mill was built there or even Northern Dynasty that Pebble in Alaska that proposes a big mill.

Why does Cerro Verde justify all your hard work and the shareholders' precious capital, if you could explain it a little more fully.

On the surface, from a distance, a cynic might say it's a marginal mine where the costs are going to rise, and if you don't triple it, you'll shut it down?

You need economies of scale to justify keeping it open because of the low grades and mining inflation.

We'll let Red respond to it and Red, just let me make an introductory comment.

When we look at our reserves and resources and what we believe is a very positive long range you view for copper markets, we want to position our Company to take advantage of that.

And to do that, we need to make long-term investment decisions that allows you to have the ability to deliver copper into the marketplace.

And the two-edged sword for the industry is that you just can't increase capacity in a short period of time, as you mentioned, John, and thank you for your comment.

And so we want to position ourselves and that's what we're looking for with our capacity expansions, is to position ourselves to deliver large volumes of copper into what we believe a long-term positive marketplace and to manage that, to manage that, we look at our assets on a portfolio basis.

We wish every mine could be a Grasberg, but it can't.

And the world is increasingly having to look to Cerro Verde-type deposits for supplies of copper, and with greenfield projects, with a Cerro Verde-type grade, you've got a big challenge in trying to do it.

So we're seeing the investment of this as giving us the opportunity to have the chance to move forward this significant resource, have it available to the marketplace.

If we have times as we faced in 2008 and 2009, of where the world turns against us, we have our business organized that we can adjust to that.

So it's that balance of, position yourself to take advantage of what we believe is a long-term positive market for copper, and then manage yourself to deal with the short-term risks that are clearly evident in the world today.

But the decisions are made on a portfolio basis, and not just on a mine-by-mine basis.

Red?

John, just on a technical basis you're absolutely right about the comparative ore grade.

What we have going for us at Cerro Verde is a low stripping ratio compared to a lot of other high-grade mines we see around the world.

And we have hydropower available to us in that part of the world, which is part of our new plan, we've got additional hydropower contracted for the mine going forward.

So those are the two big offsetting items that are favorable for us.

Red, what do you project the rates of return to be at $3, $3.50 copper, for this $4.4 billion?

We'll let our Chief Financial Officer answer that question.

If we look at the break-even of the project in terms of getting a 10% after-tax return, the price of copper is about $2.80, $2.85, and then of course as you move up to higher copper prices, at $4 copper you're approaching 20% returns, after-tax returns.

So as we look at the projects that we have currently, our Tenke project, which is nearly completed, is the most attractive on just a breakeven copper price and then Morenci would be in between Tenke and Cerro Verde.

Thank you.

I just want to say that sometimes we might listen to these conference calls and not appreciate the hard work you do.

I had an investment in another Company where the other shareholders got impatient and changed the Board and one of the guys went in and shut the headquarters and fired most of the people.

Now the directors are running it free, trying to do all that detail work and they made me Chairman and I'm suffering for all my years of wise-ass remarks.

So Red, I just want you to know, I appreciate it, but I'm involved in a Company where the shareholders went in and fired everybody because the CapEx was too high.

And now I'm suffering.

All right, John, good luck to all of us.

Thanks.

Your next question will come from the line of Carly Mattson with Goldman Sachs.

Could you talk to, just more broadly, the M&A environment and has recent commodity price volatility changed the landscape at all?

Then just kind of a follow-on question to that, if valuations do become more attratcive, how would Freeport weigh closely acquisitions over organic growth opportunities the Company is currently pursuing?

Carly, I missed the first part of your question.

Could you repeat that?

As far as the M&A environment and valuations, has recent commodity price volatility changed the landscape at all regarding valuations?

Well, the answer is yes, you can just look at share price performance over recent years.

It's not just changing valuations, but also the uncertainties in today's world, I think has an impact on a Company's willingness to invest in projects and pursue opportunities for M&A.

As a Company, we're constantly looking for opportunities.

We have internal discussions.

We have others proposing ideas, we talk about it with our Board.

So we always have our eyes open for opportunities.

The base case for our Company is one that's focused on organic growth and that opportunity became much more significant for us than we anticipated after we completed the Phelps Dodge deal.

We looked at the economics of that deal on the basis of our positive view about copper markets and their production profile.

We've done a lot of work since then, and have added 45 billion to 50 billion pounds of copper reserves.

That's given us a lot of internal growth opportunities.

Lots of times in the M&A world you can't predict opportunities that are going to come to you.

We certainly didn't predict the timing or the opportunity for us to acquire Phelps Dodge, but the stars and moon, the stars aligned for us, financing markets aligned for us, and we were able to do it.

We're always alert to opportunities.

We have our base case for our Company that's very attractive, and it's one that we're aggressively pursuing.

Great.

Thank you.

Your final question will come from the line of Wayne Atwell with Global Hunter Securities.

There's been some labor issues in Africa.

Can you talk to us about the tone of the labor relationship between you and the union where you currently operate?

Yes.

It's a very difficult situation in South Africa.

Other countries have had things.

Our situation in the DRC with our labor group has been very positive.

We just signed an agreement there.

That country is one in which has a very difficult financial situation, 65 million people with $12 billion to $14 billion of GNP.

It's $200 a person.

In the United States it's almost $50,000 a person.

So in the community, and with workers, people are very appreciative of what we're doing there.

We've made the largest investment so far in the history of the country.

We're giving employment right now with construction workers, we have about 9,000 people working there.

The vast majority of those are Congolese.

We're doing community development, government officials from the President, to the Mines Minister, to the Governor of Katanga are all very positive about what we're doing.

We're being sensitive to workers there, paying them well, providing benefits, and so far we've had very good relations with them.

This whole issue globally, though, with work forces, is a challenge for the industry, and one that's caused production disruptions, which has led to the copper market implications and that's not likely to go away.

Thank you very much.

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

Well, thanks to everyone for their attention.

We're pleased to have this chance to review our business with you and look forward to other progress as we execute our plans.

Thanks.

Ladies and gentlemen, that concludes our call for today.

Thank you for your participation.

You may now disconnect.