Q1 2020 Earnings Call
[music].
On the growing recognition of cop koppers anti microbial properties.
Copper can play a significant role in preventing transmission viruses and bacteria.
This has been known for a long time or industry is supported research efforts.
And education efforts.
For the public to understand the benefits of copper and providing the spread of inspections.
In normal times.
The current Pembina gaming is bringing to life with copper can achieve and improving public health.
Studies have demonstrated that copper can distort viruses like coven 19.
Copper is used in health care equipment and facilities and in public places, where I'm the avidly grow significantly when the costs.
Copper, which has been a barrier in the past is measured by the enormous cost to society.
That is being brought on by this spending.
Report will be at the forefront of leading the world to understand the benefits of greater use of copper growth.
The learn more about this I'll refer you.
Because of copper development associations web sites.
And you can read articles about it almost every day and Chris.
On slide nine we talk about just how quickly the market conditions change.
Yes.
It seems like a lifetime.
When FCX reported this fourth quarter results go economy, we're showing clear signs of progress.
The phase one deal with China was encouraging.
After trade issues at burden copper prices for the previous 18 months.
Copper price was then $2.85 pound and our voice and seem poised to move higher.
Now we have copper prices today about 50 cents a pound lower than in late January.
In recent times, we've seen.
We have seen.
We have seen copper trade down to near $2 per pound.
Totally unexpected.
Same time gold prices have risen dramatically.
Gold is a benefit to operations in Indonesia.
All market saw in terminal.
Diesel fuel.
Roughly 8% of operating costs has declined roughly about 50%.
Dollar strengthened.
Of course, our U.S. dollar cost for expenditures incurred in local currencies.
Many other input cost of dropped.
The rapid change in markets.
Required us to move quickly and aggressively to adjust our plans.
Reports 2020 revenues were already abnormally low.
Because of the transition of Grasberg underground mine.
We completed mining the massive grasberg.
Hi volume open pit in December 2018.
Today.
Ccfive effectively managing the going on of ourselves challenge.
Ccfive progressing on schedule with the ramp up of its massive underground mines.
This has been the critical strategic initiative for our company.
For many years.
Continued progress with this ramp up.
Well placed freeport in a much stronger cash flow position.
Even if copper prices stay low in 2021 and beyond.
The goal benefit of graph first production is a major benefit as I said the goal component Grasberg production is a major benefit.
It's what.
Yeah. There was good copper grades make this one of the mining industries.
Most fabulous assets.
Well, it's going as having its day into southern copper days copper stay will come.
Slide 10, we talk about this transition.
At Grasberg moved to underground mining and with the current ramp up.
We've incorporated in our original plans our budget going into 2020.
Oh prior to the current pandemic.
Series, a proactive steps to protect our balance sheet liquidity.
Over the past four years, we cut what was then.
First lien debt levels.
In 2016 in half.
Your between 19, we extended our three and a half a billion dollar bank credit.
Really.
Currently undrawn.
For a new five year term extending the 2024.
Definitely and her team also worked with our banks to obtain amendments to our bank credit revolver and covenants.
To give us flexibility during the grasberg ramp up.
In recent months, we've had two bond offerings, raising a total of two and a half billion dollars in long term notes.
At attractive rates, which we used to refinance debt maturities.
Today, we have no significant near term.
Debt maturities.
Slide 11.
Now addresses the aggressive actions were now take.
Our team undertook a comprehensive an iterative iterative process.
In bombing Som site management across the company.
Great Konger and his team in the Americas.
Huh.
We're facing the challenge this time around not being supported by cash flows going out of in it coming out of Indonesia.
Cash we're in.
We are generating Indonesia is going into continuing to develop the underground.
So what they had to do for each operation.
Each individual mine was develop a plan.
The maximize near term cash flow at low prices.
While protecting long term bags.
All the savings reflected or do you plan to reporting day are supported by detailed analysis.
We left no stone unturned.
This was not a top down exercise the objective was set at the top.
But our operating teams develop these plans and now on them.
They are committed to executing them.
And our senior management team in our Ministry of organization, who will support.
Everybody's on board.
Our board of directors deferred common stock dividends in 2025 times with good.
The board would you do hidden actions on regular basis with a goal of restoring dividends when conditions improve.
The chart underwrite during the rights summarizes the combined impact of these actions.
Based on our January plan at $2.85 copper.
We would have ended the year with the consolidated cash position as a billion dollars.
Before returning to significant cash flow generation in 2021 with grassroots ramp up and beyond.
Despite this 50 cents a pound current reduction in copper prices.
Our revised plans at 230 copper.
Plans, we're announcing today.
Jack $1.7 billion in cash Procurian.
An increase in liquidity without raising new capital.
This is a major accomplishment.
Three four weeks ago.
We wouldn't anticipate.
We have stress test our plants at lower prices to ensure we have a plan to bridges through 2020, regardless of crisis.
Put us in a strong position as we enter 2021.
When we will be adding large scale low cost volumes for grasberg.
Significantly we preserve a plan to double EBITDA on 2021.
From this year's levels without higher copper prices.
Slide 12 inch.
Illustrates the impact of yes.
Excuse for these plans will set us up for significant improvements in 2021 apart from changes in functions copper prices.
Projecting a 26% in increasing copper sales.
Volumes and 2021.
75% increase in go volumes.
Yeah that takes into account approximately 400 million pounds of America's production.
That we all are ideally in this plan in our projections include that remaining island and 2021.
With with adjusted as conditions improve.
Our unit cost projected to decline.
2021, EBITDA with double.
2020 levels at 230 copper in 1600 dollar though.
Cash flow benefit from potential a high higher gold prices noted as well many expect.
As well as a potential for a return of copper prices too.
Levels, we saw earlier this year.
Looking at slide 13.
We've got we note that our management team has had extensive experience in managing tough market environments.
Leadership teams across the company are seasoned they've been effective in successful in past downturns.
Yeah prices is different but in each of our past experiences Freeport has come out stronger.
We have a management structure and a team that is collaborative experienced incisive.
Never cut corners on important issues involving worker safety, our environmental obligations.
We keep a long term focus on our license to operate around the world that we worked so hard to earn.
We adjust to market conditions quickly develop contingency plan for further actions is required to.
Do this on the site by site basis.
Plan safeguard protect long term bags.
This is a real hallmark of this Freeport organization.
I'll turn it on the slide or actions, we took in 2008.
It was not price.
2014, and reach critically low levels.
2015 in 2016.
When our across the company was heavily burdened by debt from our discontinued oil and gas business.
No were share prices were for FCX during each of these crisis and the improvement within two years that follow.
We're all committed to successfully executing these plans.
All intensely focused on restoring bag in our shares.
Now I want to provide you a brief update of our operations and projects.
Slide 14.
Yes, it Sarah bird.
As reported previously.
The Peruvian government declared a national emergency, which was just extended to maintain.
This government older effects, Cerro Verde and other mines in Peru.
Our Cerro Verde team is doing great work in managing smaller scale operations during this period.
While we protect the health of much reduced workforce.
And as we work with the government <unk>.
To explain our health protocols, so that we can position Cerro Verde for re store to normal operations.
They have already been operating in excess of design capacity for several quarters.
Cheap the mill throughput up over 400000 metric tons per day.
Leading up to March 16th.
We're currently operating about a third of this level.
Our plants are developing on ramping up Cerro Verde late in the second quarter, returning to our production levels in the second half.
Returning for Cerro Verde to normal production.
He is important to the government, Peru and community there keep up.
There are already has been a large contributor to the national local economy, one of the largest employers in the region.
Slide 15.
Covers our new mine that we're developing in.
Eastern Arizona adjacent to our Safford.
Mine.
A very.
Very close to currency.
Lone Star.
We're nearing completion of this new mine and we will commence production in coming months.
The project is 90% complete capital was largely behind us.
We are advancing on schedule with pre stripping, which we expect to complete the third quarter.
We have started to ramp up placement of or own newly constructed leach pad at the nearby Safford operation.
Well I checked this forecast at 200 million pounds of copper per year. Initially this opportunities decreased production overtime with low capital intensity.
While we have great expansion opportunities at Lone Star.
We are deferring those until market conditions War.
We remain excited about the long term opportunities Lone star.
We believe it will be a significant featured cornerstone asset for Freeport in United States.
The Grasberg very pleased report.
That our Grasberg underground ramp up is proceeding on schedule.
Great cave propagation for the rest for blockade and the deep in L.C.
Mine are continuing to go well.
We have achieved important milestones to establish laws large scale production from these high grade low cholesterol advice.
Then consistently meeting or exceeding key performance indicators.
I congratulate Mark Johnson dinner PDF team for its noteworthy performance in advancing this massive undertaking such an effective manner.
During the first quarter production from the Grasberg blockade and deep MLC together.
Averaged over 37000 tonnes per day.
Slightly in excess of our forecasted beginning of year in over 44% higher than prior quarter rates.
By the ended the first quarter, we reduce medical BYOD rate of over 40000 metric tons per day.
Rates will be increasing continually to go forward.
We've added almost 15 you draw those are the two mines during the quarter compared with 34 in the fourth quarter.
We now have 250 open draw bells.
Which are the rock funnels that allows gay scale in ore production.
These are high grade.
Large copper and gold ore bodies.
It's noteworthy that the first quarter mill way.
Throughput.
Was only about a half of last year's first quarter.
Yeah, Pts last quarterly metal production was similar to last years first quarter.
This demonstrates that these underground ore bodies can't produce scale because of their grades.
The full rate production leachable ore bodies is projected to average over 1.3 billion pounds of copper.
1.3 million ounces of gold per year.
In the earlier years will have higher grades.
That will yield higher metal production.
Average net unit costs are expected to average less than 20 says pound in the first five years at full production rates.
When he says that's notable in rare for large scale operations in global copper industry.
Our P.D.F. our team.
Deserves complements for their extraordinary performance.
Managing the health situation.
While continuing educate on this major project.
We have a workforce about 30000 people.
Large portion of that work in the Holland's.
Where they live in dormancy eating less halls.
Our team is supported by a world class medical providers.
They've been proactive with a series of actions.
To help us prevent any major operators this remote location.
Our testing a screening activities.
And one of the most remote places in the world.
Or much more dance that much of what we're seeing today in communities in the United States.
Our Pts five development operating team is supported.
By FCX is global World Class Technical organization.
If I hear that age is beneath sitting now.
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Its owners.
That was put in place in late 2018, where now we haven't 51% shareholder that to state owned company named mind I'd.
And now we have a much more positive relationship with the government of Indonesia.
After our December 2018, you Piquet.
Got it.
Unlike years past now all stakeholder interest in our business in nature online.
Slide 17 talks about the smelter that we committed to construct as part of the UK.
We're facing delays with this project.
It's located.
Our from our operations in Pablo in a densely populated area of eastern job.
We have notified the government of delays because of worker restrictions and supply chain issues.
And we were in discussions to extend the December 2023 project deadline.
We also reviewing with the government other issues related to the smelter that might be munificent mutually beneficial.
The PBF on government.
We do not expect to incurred capital expenditures of significance in 2020 older smelter.
As a result in the delays that we're experiencing.
Slide 18.
Well said copper markets.
Copper prices have dropped from.
Weaker demand from the declining GDP of course.
On the other half supplies of koppers have been impacted by the pandemic.
Copper mines and development projects are being curtailed or canceled.
Scrap market, which provides a large part would find copies top of copper to the market is currently being weak.
We're encouraged by data now coming out of China, indicating an emerging recovery.
There is strong likelihood around the world that ongoing stimulus actions will have.
Commies recover.
Despite the long truck the near term uncertainties.
I'm trying to.
Based on our business on our if anybody else's ability predict these near term.
Situations the long term copper outlook for copper remain calm and positive and in some ways being supported by the supply curtailments, we're now seeing.
Copper strong supported by fundamentals.
As an essential role in the overall global economy.
The major element in efforts to reduce carbon.
In the in the World.
And the World is increasingly turning returning turning to electronics.
ER in so many respects.
Stented from.
Then it from a electric vehicles charging stations, but also.
Fiveg another technical factors, you're going to require more electronics electronics in the world.
Supplies a proper continued to be.
It would be limited.
No one can predict what confidence when economies recover.
Copper is a highly attractive commodity loses its is positioned to move substantially higher as economic conditions improve.
Report will be a major beneficiary of this movement.
I've included slide 19, as that info graphics developed by the copper or development associations with that's all it does a great.
Job of illustrating broad ranges of uses of copper in the economy.
I just referred to you and.
And that you could ask you to take a look at it a when you have a moment to consider.
Slide 21, we present, our reserve and resource position.
We have long lives and valuable resources that will be available for all granted gross development for decades to come.
Yes, we've elected to curtail the current market will be more valuable in future.
As economic conditions improve.
Before turning to Kathleen who will review financial outlook more detail I want to close with a follow.
Freeport is foremost in copper.
Looking beyond the current.
Trouble conditions.
Copper is widely considered the best position major commodity far supply from a supply demand standpoint.
Reports portfolio copper assets are large and high quality.
And establish industry leader, we operate the mines that we have interest in which are among the largest in the world.
In the operating over assets.
It provides us valuable synergies and flexibility across the portfolio.
Deal with times like these and to take advantages of the brighter days to cone.
Our assets are lot lot durable with embedded option for reserve and resource growth.
Strong franchises in the United States, South American Indonesia.
Near term.
Report is it in advanced stage for a major increase in margin and cash flows beginning in 2021.
Apart from copper price movements and extend in for 20 years and further.
We have industry, leading technical capabilities.
Through strong.
Track record of execution over many years.
We burned the trust and respect of our partners our customers our suppliers financial markets.
Most importantly, our workers.
Communities in those countries, where we operate.
Our block caving experience is when most extensive and long standing in the history the gold mining industry.
We've been.
Operating block caves in Indonesia since the early 19 eighties, and we have an important well listen a block cave operation in Colorado.
This is a critically important factor as we transition transition grasberg.
So the largest bought saving operation in the world.
Our experience and Battle tested management team has demonstrated capabilities to perform in good times in bad.
We are confident viability.
Quote prove our metal as we've done in the past.
Slide 22, and want to close by talking about our people.
Again, I want to recognize the strength and resiliency of the entire Freeport family.
Mm.
To inspire me every day.
I'm proud to be part of his team.
We're all motivated and committed to persevere.
Achieved success for all our stakeholders.
Definitely let you take though.
Okay. Thank you Richard I'll turn to slide 24, and run through some of the details of our operating plans in financial outlook before we begin the Q any session.
On 24, we present, a summary of our.
Revised operating plans plan, it's Richard was saying earlier as we developed a new plans we focused on.
We do see an operating cost and capital expenditures, while maintaining safety reliability and the integrity of as a long range plans in the Americas, we reduce mining rates across the board by about 20% in total.
What instead it had the impact of reducing all elements of our operating cost.
And the capital they hire mining rates would require.
Ah we note that this material is still there and available to us in the future as market conditions warrant.
And our molybdenum mine and in Colorado, The climax mine, we're going to reduce the mining rate there by about 50% to better match supply.
And and the supply and current market conditions.
In the Americas, we reduce capital by 500 million.
And that included the capital associated with our innovation initiatives that we previously estimated at 150 million of capital in 2020.
I would add a production.
Yes, we know for it we have suspended that project, but we're still using the data analytics tools and agile laying 14 to drive cost performance and other things like recoveries and initiatives that do not require significant capital.
We believe these tools will be very useful to us as we drive efficiency.
We'll use them rather than driving higher production levels will use them to manage costs and improve our recoveries in in our Americas mines in Indonesia, I mine plans are basically the same as our prior plans.
We incorporated.
Updated market rates for energy and the favorable impact sent the stronger dollar on our.
Foreign denominated labor cost.
We also tightened up about to reduce spending on a number there isn't throughout the operation.
I've combine these savings reduce costs in Indonesia by about 10% for 2020.
We also benefited from a higher gold price, which have prior plan was based on 1500 dollar cold and we've adjusted this plan to 1600, a dollar gold and and as you know gold is currently over 1700 per ounce today.
Capital spending in Indonesia was reduced by over 200 million in 2020.
About half of this is the timing of installation of plan mail upgrades, which we deferred buying here as a result of them pandemic in current constraints on international contractors.
We've also reduced spending forecast associated went to promote proposed smelter in Indonesia, and Richard referred to earlier as a result as project delays and meet current discussions with the Indonesian government.
I'm looking at slide 25 in and this is also in our press release.
It's a financial summary of the revised plan for 2020 compared to the January plan that we prepared in conjunction with our earnings call in late January.
Because of the sequencing of our mine plans during <unk> joined here, we expected the first quarter to be the weakest every year.
We also expect it in under the current plan for capital expenditures to exceed our operating cash flows in the second quarter.
But you as you can see here I'm on the slide we expect our operating cash flows for the full nine month period in in the balance of this year to exceed capital expenditures by 400 million.
And let's say, that's a 200 million dollar improvement in cash flows for the full year compared to our previous plan. Despite a 50 cent decline in assumed average copper prices.
In addition to the cost and capital reductions I plan.
Reflects a number of cash flow benefits associated with reductions in materials and supplies inventories and acceleration of tax refunds in a series of other items to improve our cash flow importantly, we boosted liquidity during the year compared to our prior plans and our net debt.
It's a lower.
Richard mentioned, we've we've gone through a process of stress testing. These plans at various prices and believe we have a plan that will break is 320 20 and put us in a strong position as we enter 2021 with the addition of large scale ocas volumes from Grasberg.
Turning to slide 26, we show our sales outlook for 2020 to 2022.
As you'll note in this slide the <unk> sales volumes or about 400 million pounds per annum lower than our previous estimates.
This reflects the curtailments that we're making in the Americas, a reducing our our mining rates and also includes a small change in 2022 associated with them deferral into upgrade of the mail project, which has a.
Well I don't Pat on our mine plan for I put a ramp up does that deep M.L.C.
You see the gold sales are similar to our prior levels. There's a small a change in 2022 related to the timing of the mail upgrade.
Oh molybdenum sales are down about 10% time I prior estimates and that reflects a change at the climax mine and also the reduction in byproduct Molly resulting from mine plan changes in our Americas copper mines.
I'm on slide 27, we present, a summary by region of our unit net cash cost.
We are separated the first quarter from the rest of the year. So you can see the impacts interactions.
Net unit cash costs on a consolidated basis in the first quarter or dollar 90 per pound.
This was better than our plan, which forgetting about just over $2 in the first quarter and I first quarter was expected and late in the original plan to be I've are highest in the here.
But as you'll see what we've done with our cost structure in a in a balance of a year is driving a significant decline in net unit cash costs and should it does the compared with the first quarter.
Cash costs in the nine month average would be $1.44 per pound that is 46 cents, a pound or 24%, 24% below the first quarter average.
We expect to average for the either $1.55 taken into account the first quarter results.
And moved to a unit cost level of about $1.20 per pound.
In 2021.
We show at the bottom of the page. The makeup of our cost by region you can see energy on at least a pie charts.
Which includes diesel and electrical power.
And that represents a combined the diesel and and other sources of energy, 17% of our consolidated cost.
Diesel represents about 8%.
And our diesel prices have declined more than 50% since the start of 2020.
Moving to slide 28, and you've seen I'm asked present, EBITDA and operating cash flow and this format.
Over many quarters, but it's designed to show at various prices, what our EBITDA on cash flow generating capacity is using the average volumes and cost for 2021 and 2022.
We hold gold flat in this scenario at its $1600 per ounce and molybdenum at $9 per pound and there the copper prices for 2021, and 2022 between 250 and and $3 and you can see here, we would generate a 250 copper over $5 billion.
In EBITDA and over $3 billion of operating cash flow and is prices.
Move we could generate over $7 billion at $3 copper [noise].
And over four and a half billion at downs that was operating cash flows.
Ah we present sensitivities.
On the right side of it the chart. So you can make your own adjustments is to different copper market, our gold market outlooks.
We expect as it's Richard was was talking about to.
Manage our situation from a financial standpoint in 2020 before getting into 2021 will generate expect to generate very significant increases in cash margins and cash flow.
We've cut spending I'm now on slide 29. So these cash flows that we generate will be available to fund capex and also have excess cash flows for.
Other initiatives, including debt reductions and and other initiatives that we have we cut capex from 2.8 billion to 2 billion and we show the details of where that came from.
For 2021, I would currently estimating $2.3 billion in capital expenditures.
That's about 100 million lower than our prior estimate.
The focus of our plans to date and revised plans to date has been mainly on capital expenditures in 2020, we're continuing to review 2021, and we are reviewing those for potential additional reductions depending on market conditions, which we'll be evaluating in the coming.
Yes.
I plans appropriately cut spending in capital and again <unk> preserving the strong outlook that we have over the next several years.
Rob just close on our financial policy that we covered throughout the call. We remain focused on safeguarding our people and our business and maintaining strong liquidity and balance sheet strength as we manage uncertainty during the pandemic and the economics associated economic impacts.
On a current market conditions and priorities I board does not expect to declare dividends and 2020.
This will be evaluated on a regular basis and as we said successfully execute our plans and answer 2021, we expect to be in a much stronger position with the increased cash flow enhanced flexibility to consider shareholder returns.
Thanks for your attention today, and operator, we'd now like to open the call for questions.
Ladies and gentlemen, we will now begin to question and answer recession. If you wish to ask a question press star one on your Touchtone phone. If your question has been answered or you wish to remove yourself from the Q.
Police press the pound key.
Yes, if you are using a speakerphone. Please pick up your hands had before pressing the numbers. Please ask one question. If you wish to ask additional questions. Please return to the Q.
One moment. Please my first question.
Our first question comes on the line of Alex hacking, what the CD [noise].
Good morning, a richer than Kathleen and hope you guys, there are staying safe and doing well.
Let me ask a couple of questions on on Grasberg. If that's okay. The first question would be how are their supply chains are holding up there.
Able to get access to you know the consumables and other things that you need or are you having to run down stockpiles.
And then I guess secondly on Grasberg.
I'm now congratulations on all the stuff that you're taking there to keep everyone safe.
But they didn't a worst case scenario, where you know there is a significant outbreak.
What is the contingency plan I mean, it's obviously very difficult to kind of safely whole underground mining there. So maybe you could discuss a little bit what what the contingency would be in a in a worst case scenario. Thank you very much.
Okay. Thank you for your question.
ER Mark Johnson would you comment Mark is actually in popular now it but that Grasberg can you comment on the supply chain issues in how we're dealing with it.
Yeah today, we haven't had any problems or nothing's been interrupted.
Were you know, we always have to maintain a the supply up into highlands.
But no issues on obviously, we have a large community up here. That's that's one of our concerns or but no no problem like some other places in the states.
We haven't had around on any of our grocery stores or medical supplies almost key things plus all the things that we're doing for production.
And for our development, we haven't any had any issues.
On the <unk>.
Contingency plans you know one of the things that we've looked at in a worst case scenarios. You mentioned is high the mines that we'd be.
Need to have some consideration the big Austin, we could shut off in turn on if we needed to its don't mind.
But we've got a we worked with our consultants and we understand what sort of minimum draw rates, we would need in our blockades keep them going or we could drop our personnel you know dramatically and Oh to just do that minimum draw you know for instance in the DPM LG right now we run.
Loaders.
But the same and the in the GBC, that's our core production.
Core production is that a relatively small amount of people and equipment a lot of our effort is in the continued expansion in the construction.
To to achieve those Oh out years that we've got so it's an ongoing process. Our contingency plan in the worst case scenario would be too to minimize those activities and focus on the production activities.
Thanks, a lot more.
Your next question is from the line up the DVD Gagliano with BMO capital markets.
Hi, Thanks for taking my questions and congrats on the yeah. The comprehensive update the click actions the cost improvements a cash savings I mean I highlighted today clearly you've been through this you know before.
My question is regarding the out years I'm it looks to me.
On my side like the 2021.
In 2022 reductions in copper volumes are mainly tied.
To the AI initiative Capex kind of at least for North America.
My question just to verify did the 21 and 2022 copper line target to Sue.
And that the North American operations are back up and running at normal rates or does it assume they continue to operate the roughly 20% lower rate and under what a underlying market conditions you plan to ramp those operations backup to normal again.
The Davis Kathleen our mining rates that we have a put in here that you're 20% reduction in 2020 continues into part of of of 2021.
We have some mines that are starting to ramp up but we still have idled production during that period of time. So when we were pursuing previous in our previous plans. The initiatives. We we were calling Americas concentrate or where are we were increasing both mining rates at.
And milling rates I'm, we're not doing that at this point. So we could if market conditions were to improve dramatically and we'd have to be don't take a long hard look at that because as you know this is not a light switch that can go on and off but we could start bringing back.
Production and and over time and increase our our mining and milling rates again.
So this assumes that we remain in a curtailed mode and most of the and it really all the operations through the first part of next year.
And then some of the operations are increasing mining rates and and others arent. So what's it's a mixed bag, but we could.
There's nothing about our prior plans that that would stop us from from increasing production. It may delay that because of the mining rate change. This year. It may delay the timing to get to those volumes, but as we talk about there. The volumes are still there and could be could be added over time, if if market conditions.
Laurent.
Okay, and just as a other related follow up just if you can you give us a sense as to.
When you say if market conditions warrant is or is there you know what's the.
The market condition that would warrant a full well I prior plant a prior plan and began the year was based on up the context of a copper market you know to 75 to $3.
And you know, it's Richard was saying that the.
Things the ground work was in place for potentially higher prices as we go forward.
So you know I think you know you'd have to see prices move back to those levels and have more you know economic certainty around the economy.
We're gonna be very disciplined about you know executing these plans really focused on cost.
Oh really focused on on capital in the near term to make sure that we can preserve our financial position.
During 2020, and and and then as we get into 2021, we can start looking beyond that what the market conditions are and whether we restore former mining operations at that point.
Okay. That's helpful. Thank you.
And in they are realistically.
This situation is not likely to turn on.
One point.
Yeah.
Different countries, you're going to be a different situations and and things will occur step by step.
And there will be uncertainties, along the way.
So it'll be fair to say that given our overriding objective.
Oh protecting the long term values of our assets.
We will be very measured how long how we respond.
Got it helpful. Thanks very much.
Your next question from a line of Chris Terry with Deutsche Bank.
[noise], hi, bluegrass, but doing okay.
The or just sort of follow on to David's question. Just analysis slide 26, just on the production I understand North American I think that was probably reasonably well flag that there might be a Johnson said it in terms of South America. Appreciate everybodys offline currently but the 20.
21, 2022 impact of both South America can you talk through that I know you have a little bit of late shame on on sort of it I use that the carryover effect is less mining into 2021 or is that what exactly is happening. There just trying to think about how you could maybe increased.
If it again, maybe back to copper conditions or just trying to understand the mechanics of 2021 in particular.
Well. We've also we've also reduced production at El Abra.
We deferred a significant capital item, there and so we're reducing our our mining rate and a lot broaden that's also that's also contributing to the at a lower production and in in South America.
But we do show under our plans, we do show Cerro Verde, a production increasing in in 2021.
From its 2020 levels, but our El Abra mine is is is is about flat like you know like it wasn't in 2020 when you compare it. So that's it that's a significant reduction from our prior plans.
Okay. Okay. Thanks, that's helpful. Just one more for money. That's just wanted to follow up on the on the comments on the smelter. So the concept is still the kind of three and a half billion level, but you just push back 2020, but you still working out exactly you know negotiations on that he's looking at the wrong way.
Think about it thanks.
[noise], Richard you want to take that one.
Well I would let me ask you repeat the question. Unfortunately I had a.
Little static in my line here.
Oh sure no I just wanted to just be little bit more detail on a smelter in terms of the cone said so I think what you sign is it's still kind of the three in Australia and you just got to push out 2020 and year end approaches to bring negotiating it I just wanted to understand that that was correct.
Right.
So I wouldn't characterize it is a renegotiation.
We.
Reluctantly.
Decided that we would have to commit to build the smelter in order to get a resolution of the longstanding.
You should use we'd had with the government, Indonesia about extending our operating rights.
And that was one key concession that we made.
Along with facilitating.
The government through a state owned company acquiring 51% or the shares that.
As you know was chief principally by Rio Tinto.
Oh deciding to sell their joint venture interest to the government.
Bush in return, we got clear cut operating rights.
Fixed this school in financial terms to 2041.
And established a positive new working relationship with the government.
So we've made their commitment to the government and we're.
Executing on that commitment.
The facts or are we can't.
Proceed as we had planned.
Because of the worker restrictions that gresik smelter, the located and supply chain issues with contractors and alike.
In the meantime, the government in Indonesia, like governments around the world or struggling.
With state revenues because of lower economic activity and investments.
So we are engaging with the government is too whether it is you.
New circumstance.
Might provide a way that would be mutually advantageous.
The government ore mined idea its repeat cdfive.
To reconsider what we're doing just smelter.
But.
Throughout all this we or.
Being a clear cut.
That we made this commitment to the government.
And unless the government.
Agrees to some changes.
Which are the current circumstances might lead them to consider.
We are proceeding with fulfilling our commitment to build smelter.
Okay. That's great. Thanks, that's it for me. Thanks, Thanks, Richard Thanks, Good luck.
Thanks, Chris.
Your next question, we spend a line of Carlos de Alba with Morgan Stanley.
Thank you a very very good Marina hopefully everything we do want even fine. So my question Lisa first on working capital.
Company generated cash flow from working capital reduction or lower levels of working capital in Q1, how do you see that going forward. During the remind you don't do you and second question. If I may is regarding the positive surprise for the second quarter in a row in terms of gold production shipments out of Indonesia.
Hi can you maybe provided to be more color as to why didn't going on there and any dairy.
Something that maybe you have a room to continued surprise to the outside thank you.
Okay with respect to working capital question, we are projecting a large working capital source in in 2020, as we mentioned that is one of our initiatives here too.
To to the lease cash from the balance sheet through through the materials and as we as we its we curtailed mining operations will have the ability to.
Use existing inventories as opposed to having to buy in new consumables to a certain degree. So we'll have a reduction in materials and supplies were also.
Bringing forward some tax refunds that were projected over the next several years and we're bringing those forward into into 2020.
And their number of other cash flow initiatives that we have developed over the last several weeks in context of our in the context of our revised plans and so we are we are showing a large m. source of working capital but throughout the year.
Okay. Thank you for me. So these will continue in a in Q2 Q3, yeah, but on the younger we saw a already to London.
Right yes.
We just added that.
Again comping many people Kathleen her teams done a great job.
With financing.
These higgins who heads up our.
Administrative team is doing an excellent job in managing.
Worker issues and and.
HR and other matters.
Any huge who heads up our global supply chain.
Doing a fabulous job in.
We have tremendously positive relationships with our suppliers.
We are often one of their largest customers in many cases the largest customer.
And so as we face this problem, we sit down with our suppliers.
And we were able to find ways to.
Reduce cost deal with payment terms and alike.
Same way with our customers you know, we all understand each other's problems we work together many years.
This you're seeing as result of all those long term relationships, but also how diligent our whole team is is being.
And finding ways I said, we left no stone unturned in finding ways to generate cash and we're going to continue to do that.
Oh, no on ongoing basis.
Into in terms of the question on the.
On the on a gold no we did experience some some higher grades.
And.
In in of gold and that you know that all we still I'm forgetting that are grades are consistent with what our plans and you'll have pluses and minuses with with with how the the grades are measuring against the plan. So we did have some higher grades and Mark I don't know if you want to comment.
Okay, any further about about gold grades and and and recoveries as we go forward.
Yeah, I was going to ask that Kathleen before mark to Mark Mark.
I've been noting just how strong our recoveries European and recoveries have been above plan in many respects. So maybe you could talk about that.
Yeah in the first quarter, what we the significant difference that we saw in grades in both copper and gold was in the deep M.L.C., we were essentially on or just above target as far as the times.
But for both the copper and gold grades we were about a 18% above plan.
What's driving that is a really where we're mining the deep in housing for the cave management, we've talked about the seismicity.
And so we're very cognizant of how we pull the cave.
And it's our intent is to drive it in a very even fashion.
And we've got a great system now where we can track every single bucket and we know exactly where each of each bucket immaterial came from just happened in the first quarter to to manage the cave.
On a daily basis.
The grades came out so.
I I Kathleen said it it was an advancement, it's not a change in our model or we just happen to be able to Paul.
By following the cave plan, we ended up with with a better grades and those grades are quite good or on both or the copper grade for deep demos. He was at 1.9% copper and 1.9 Gram per tonne goal and the plan for both of those were right in the 1.6 range. So that was a way.
From surprise, our recoveries have been quite good as Richard said, we've been a particularly on copper we were over 92% copper recovery. Obviously these are experiences ban over the life of mining the grasberg and or the ore bodies fear that the better the grade the better the recoveries.
And that's been tracking well or as we mine. These very high grade the grass at south deep and know the integrated the ER maybe see your are also very respectable.
And a very high grade deposit it it's a big Austin, So we track well on that and then we'd been right in the 80% recovery range for the goal, which is which is very close to our expectations.
Thank you thank you Mark.
Your next question based on the line of Christmas even out with Jefferies.
Hey, Richard in Kathleen Thank you for taking my question.
Good to see the improvements in your balance sheet and liquidity over the last few years very different from what you looked like in 2015.
And also good to see the operational flexibility looks like you are actually generating positive free cash flow at current spot prices, which is encouraging [noise].
My question relates to have with some of the operational changes that you're making today might affect.
The long term performance it Erastus every call back in 2008.
Some mining companies revise their mine plans they reduced their capex in response to low prices, which helped in the short term, but those changes led to an extended period of higher costs and higher sustaining capex and I'm wondering if that's something that is likely to happen at Freeport or is it just that you were taking these short term measures without necessarily.
<unk> jeopardizing the longer term structural integrity of your assets.
Well thanks, Chris.
[noise] toward jeopardizing.
It's not one that would be apply would apply here.
But.
The effects of not spending some of this money now.
Will carry over to future production levels.
Because.
Certain of the capital costs that were deferring, we'll have to be recovered.
In the future and it will push out some production.
But this this will not.
In any.
Significant way.
Jeopardize the value resources because of resources are still there, but it could you will result in some delays.
Oh.
Yeah.
That production occurs.
You see that at Grasberg, where we are delaying spending on.
Incremental crushing capacity at the mill when the time be and that will have an impact what we'll do.
His update you each quarter, we go through this and get better views of it but again, it's not a question of.
Destroying resources, but there will be some impact on future Terry.
Well, let me ask Red Red you have a you have a comment on this.
Yeah, Richard you're absolutely correct and just one specific example would be El Abra. The Kathleen mentioned earlier that we're slowing down the production rate there in order to push out capital expenditures in a new leach pad that's required for future production. So when things look out will.
Make that investment and be able to increase the volumes or if markets warrant.
[noise], that's probably had sorry I was just said Reds team is is very strong with with all of those operations that during this downturn.
We're not going to compromise safety, we're not going to be cannibalizing equipment.
I'm going to keep the equipment that we are using in good condition. Its just that we are not we were not using all of our equipment. So we are postponing what we need to do in terms of rebuilding and things to meet a.
Hi, or mining plan, but we're not doing things that that don't you know we aren't doing things that would destroy asset value in and read you know keeps pushing out to two the team. So I just wanted to add that.
[noise] as a follow up it will be I suppose interesting to see whether companies that don't have liquidity don't have positive cash flow and are taking actions to to kinda protect their balance sheet well have to do things that would lead to less production for an extended period of time in other words. My question really is really do you think this leads ultimately this downturn leads to.
To an extended period of less than expected global copper production as a result of initiatives that companies are taken today to protect themselves in which case, we could have higher prices it and I'm trying to would've had otherwise.
Oh no question about that.
I think the feature that was most supportive of copper prices.
Oh.
Yes, the supply situation copper.
Supply was gonna be tested in any event before all this happen.
And now with development projects being delayed.
Curtailments occurring would you be just spoke about has some impact.
And.
As you say minutes, we know what it's like to be a company.
Or where you don't have flexibility with liquidity, that's where we were 2016.
It was resolved so we can sell assets.
The on copper, but also some characteristics so.
This is just depending on.
To be early and to me this lasting there's going to be.
Hey, a long or one impact on copper supplies and that will ultimately be sporting good stores.
Thank you.
Your next question is from the line of Oscar Cabrera with <unk>.
Thank you operator, and good morning, everyone.
Richard just wanted to.
Sure no more.
Cost reduction you, Tim Guttman no by the way congratulations to the team when a quick turn around.
Something that's a blessing.
A few weeks, where whereas you know little that mining companies are not providing this level of detail so youre side in production and delivery costs.
With your original plan, what's about to go listen, we're saying Oh.
Oh I pounds. This was now reduced to $1.80 I was wondering if.
You can see why do with an estimated how.
How much lower can this go.
And.
Well, you know you've talked about this'll cosby's nowhere.
Well, that's getting help from.
Oh, Hey, depreciating it changes around the world.
I was wondering if you could provide in just a ballpark estimate oh, what percentage of that accounted for the reduction.
Oscar This is Kathleen so it was a combination of.
It was a combination of of many things, but in in the Americas, we removed production. So that flows through all the costs you know with all the.
All the of the mining and labor costs incident that that had an effect on.
On removing all of that the cost of production associated with those pounds. We also benefited from.
From lower lower energy costs, which which was about seven cents a pound compared to our prior forecast energy costs are.
Our our lower than when we prepared to this forecast servier down probably probably another.
Yeah 15, 20% from the time, we prepare this this forecast.
For you know from from a long time perspective, we're using of about a dollar per gallon F.D. So in these in these forecasts and and that that had about a seven cents impact on on the Americas cost.
Question in the U.S., our currencies you know what's that it's all the U.S. dollar business, but we really saw the benefit of the currency impact was was in Indonesia, and and as I mentioned.
That reduced our cost by by the absolute cost.
As it has the energy plus the.
Lets say the currency benefits by about 10% in Indonesia, and the big driver in Indonesia, Dallas is the volume Astec and that's really what's kind of drive on a cash cost lower but as you've seen we reduced our.
We were previously estimating over the next five years.
About 30 cents a pound for from for production costs net unit production costs in Indonesia, and we're now using a roughly 20 cents a pound for those costs and that reflects some savings in in the cost structure that weve.
Then driving over many months not not just because of that and the covidien and if they economic situation, but as we transitioned out of.
Aspac into the underground we've been Mark and his team has been leading to zero based budgeting process to bring to bring overall costs down and Indonesia.
Mm Hmm you never into 2020, if need be sockets Cosby reduce further.
Hi easier.
Are there other sources you could use like cutting more production to lower the door 80 that you're showing up.
I you know I think what we what we're doing really is looking at.
No what is cash flow positive and and so we look down at it.
Cutting production further.
Now at $2 copper that may not make sense, what will you know will elaborate on that some more as we go forward, but if you really look into our our second half second half cash cost at at $2 copper our Americas business is yeah.
Operating cash flow.
And so it can prices would have to decline you know substantially for us to.
Two to take it down further but you know you noted how quickly we moved here and we are you know we're continuing to to evaluate to be flexible to have a flexible operating structure, yeah, regardless of regardless of prices.
[noise], thanks, very much Kathleen and all the best.
Your next time I have missed on the line.
Your next question I thought a line of John Tumazos with the John Tumazos very independent research.
Thank you very much for taking my question and for your service as a company concerning the exciting anti microbial properties of copper.
[noise].
Proof for weaving into wins and masks and things I guess I would use wire rod and wire products consistent was infrastructure.
But for countertops tables chairs.
Restaurant public applications.
Oh, it would need sheet.
And there's very limited amount of foil where strip in electronics in a very limited architectural roofing applications.
Would you be willing to contribute capital.
For a sheet rolling mill or a JV with other copper producers are fabricators are apply for stimulus money, which the government might grant to to get to supply going it could be a multimillion time markets.
[noise], Johnny we've all parties.
I think I understand your question.
Oh, you want to doing a hot strip mill for copper sheet [laughter].
You know.
I think the more likely thing.
Way forward with that.
He is for.
Our company and hopefully.
I feel confident other companies will join us.
It is to provide the.
Technical basis for these things and then to work with <unk>.
And your venture capital firms and so forth to develop these new industries, a we tried to this in the past and we ran into.
ER barriers because of the cost of refitting and so forth.
Oh no.
The World has changed and people are saying this thing.
One of articles is coming out.
Telling the truth about copper so we think that will create a market and we will be working with the industry as a company to help promote this going forward.
Oh, I think has said that there would be some likelihood for government support Oh from your own type companies.
Going forward.
Our primary focus is going to continue to be in developing an operating here Oh, but we will we've already begun.
Talking and developing a team to see how we might go lead this movement to doing something that Oh.
Pausing for proper mortgage of course, but more importantly would be pause before the world because the these fees.
Impacts.
Self protection are real and we just see how much they are needed in today's world and.
Even before that the number of infections that people get going to hospitals for surgeries and things like knee replacements or that the that occur because of infectious hospitals is staggering. So this is just bring to life.
Oh, Oh contribution to coffers of metal can make to the world and.
We are going to be up leader demonstrate.
Thank you.
Your next question, it's on the line if the Lucas pipes with B. Riley FBR.
Hey, good morning, everyone. It yeah, congratulations on a very precious response to this especially I wonder if he's very difficult circumstances.
I wanted to follow up to Chris' question earlier on.
Tradeoffs between states cuts it and future production stairway to maybe quantify a little bit more detail what what's the impact your production looks like what do you ever because oh it starting around 2023.
Well, it's just too early to do that I mean.
We're in if we're in a period of uncertainty right now.
Our focus has been at home regime.
From the loss of cash flows from the lower copper price.
To ensure that we could reach our company to the higher volumes from Grasberg.
And so that's what we're doing with his plan.
We focused on executing this plan.
Or any of us to sit here today.
And be able to predict where the world's going to be.
Oh.
Any.
Period of time, even in the short run there, Steve Peacher, uncertainties and beyond that there are as well. So we're just not in a position right now to say, what we're going to do but but I think what you can get comfort is that we have the flexibility of the dressings or whatever it was a for old.
As we have a track record of doing that you can look and see what we did.
Beginning in 2010 2011, when we did in 2016 17 and see how we did it and that's what we're going to keep working on so this isn't unfolding story a work in process, but as a company we have a lot of flexibility and dealing with whatever comes down the road positive or negative.
And right now our plans show pretty flat going out to that point does yeah 20, <unk> any over the next five years bought for Americas, but that's where she said it's gonna be dynamic as we assess situation going forward.
Yeah, I understand I appreciate the color I'd again.
Really great job responding to this.
[laughter] on anticipate a ball environment here.
[laughter] second second question just in terms of <unk>.
Now, let's just cost position that the industry response, obviously, there's been a lot of supply be taken offline due to safety.
It's a precautions.
Do you anticipate first what's kind of what what does develop what's what's your relative cost position.
Today, and then do you anticipate a broader supply response from the copper mine are.
Due to decline prices.
Well we have.
My friends that range in cost structures.
From the lowest end of the ER.
So of the industry.
Two mines that are relatively high costs.
Because of the nature of the portfolio, we put together years ago, when we combined.
Grasberg with.
Well start to portfolio of assets.
And by having these assets together is what enables us.
To reduce.
Oh mines that are relatively low margin during good times and generate profits.
An extended resources.
Weve, having the ability.
Scaled back production.
When prices are low.
And that way.
You issue that Phelps Dodge phase years ago, and strategic benefit we achieved by putting the sets of assets together.
So we can calculate an average.
As a company and compare that average with other companies look when we manage the business.
The management is focused on.
Site by site.
So what you're seeing here today is a layering of actions.
To reduce our cost production.
Drive our costs down.
And even with them.
Areas of mines like Rensi.
There are.
Elements of production was saying that large minded get adjusted in others do not show.
No there's no.
The average is the average miscalculated, but the management.
He has managed site by site.
I think the other thing to add here is you know we benefit from having very long life reserves and.
When you're looking at you know aside from the Grasberg reinvestment.
Investment program, we're making right now.
You know once we get into two to production at Grasberg, you know Capex will decline and you'll be generating a lot of.
Out of five free cash flow, but also in the Americas, we have a very long life, a reserve base and additional resources. So.
When you look at the cat like cash cost plus the capex.
And you think about you know, we're not having to spend.
Spend a lot of Capex too.
Replace reserves, because we've got such a long reserve profile and we don't have the reinvestment risk that some other sure sure life mines might have so when we look at this and when we went through this plan.
With Red in the Americas team, we were really looking at what is the cash costs less stuff. That's the capital that comes with it.
Sometimes when you're trying to build production and grow you've got.
You know you've got a lot of capital that comes with that and so right now we're operating in a plan to.
I have is lower cash cost, but also what is the lowest cash cost plus capital expenditures that that makes sense for US right now and then that's what that's really a plan we're focused on.
Yeah, very very good job and keep up great work, that's that's like this.
All right. Thank you.
Thanks, so much I appreciate those comments.
Now, we'll turn the call over to management for any closing remarks.
Well, it's been a long call I appreciate your.
Attention.
I think the length of this call is warranted because of the uncertainties, we face and we wanted to make sure that we did our best to try to explain to you what we're doing with the company.
As you can tell we're.
We were more than pleased with where we are in a very difficult known certain situation or our garden is up we're not going to let down at all because none of us are quite sure what else we might have to deal with.
And so thanks for your like your attention. If you have follow up questions or comments a please get in touch with David Joy and a will respond to them.
Oh, well all of you stay healthy in your families and friends and do show as well its time.
To be reflective about.
What this situation is doing to so many people around the world and.
Our hearts improves go out to everyone. Thank you a lot.
Ladies that Cameron.
Ladies and gentlemen that concludes don't recall for today. Thank you for your participation you may now disconnect.
[noise].