Q1 2022 Freeport-McMoRan Inc Earnings Call
Available to answer questions.
The case for copper as a commodity is strong I've been saying this for 20 years, but it's never been better.
Demand is growing globally globally growth is no longer dependent solely on China with Covid recovery infrastructure spending.
The spread of electricity everywhere, it's generating significant growth in Europe business is strong in Asia, and U S and in Asia outside China the.
The coming demand for carbon reduction and its impact on copper demand is truly extraordinary and it's coming.
At the beginning but it's not here now.
Copper supply development for many reasons as challenging as I've said recently.
The supply challenge cant be solved simply by higher prices.
I find it notable that the price of copper today is $4.50.
World, where there are a whole series of economic headwinds.
Many of these are transitory.
Higher copper prices in the future are likely and I'm very comfortable with Freeport strategy of focusing focusing this business on copper.
Our strategy to achieve our mission of being foremost copper straightforward.
We will execute our operating plan safely and responsibly, we have an unmatched set of globally diverse copper producing assets.
We are taking advantage of emerging technology involving data analytics new work practices.
Increasingly important advancing and leaching technology work.
Where freeport as well positioned as a global leader in leaching.
We will be developing organic growth projects in a disciplined way over time from our large set of undeveloped resources.
We will execute our financial plan maintain our currently strong balance sheet, while returning significant cash to shareholders.
Other opportunities for Freeport may arise, we are positioned to take advantage if they do but our strategy is focused internally.
Here's a few points I suggest you note in kathleen's presentation.
Look at our strong execution of our plans in the first quarter.
Look at our success in meeting the challenges of higher input costs.
Both through effective cost management and the benefit of past strategic decision.
For example, the long term development of Grasberg mine and its high copper and gold grades higher gold grades are higher gold prices are helping to offset input cost increases.
Note our positive situation in Indonesia.
With our partner shareholder mind that the with the government of Indonesia local communities and workforce, we worked hard to achieve this.
Our environmental performance and a very challenging location is exemplary in Indonesia.
Financial results are spectacular.
Flexing the good work of our <unk>.
And literally three decades of efforts and investments to getting where we are today.
We're progressing with the development of a new large scale smelter in Indonesia.
Our recent international bond financing at <unk> was a major milestone for our company.
Our team achieved investment grade ratings and with strong market reception for this $3 billion financing.
Looking back years ago, I would have envisioned our ability to do this.
Two thirds of our copper produced in the Americas, where our team is operating effectively and where we have significant growth for the future.
And finally I want to briefly note steps, we have taken this past year to.
To build a high quality sustainable board of directors and the sustainable management team for the future.
These are commitments I personally made myself a year ago, whereby Caine chairman.
We've added six new directors in the year.
You will be able to see the details on this in our proxy which will soon be available.
Four of these six or <unk>.
Individuals with significant international large company CEO experience.
To have significant business and financial expertise.
Together with a four continuing independent directors we.
Now have a high quality board one that Freeport has long deserved.
Building. This board is the highlight of my personal finance professional career.
At the same time, we've made important changes to our management team Kathy.
Kathleen mentioned that Murray has recently joined us as our CFO .
At a young age she has a distinguished career in international mining.
We've made a number of transitions of important positions with internal promotions and added significant capabilities with external hires particularly in the ESP area. We now have a younger more diverse management team at Freeport. They are great people, who embrace a special culture, we have with the Freeport global.
Family.
I am personally excited about continuing as a member of this team.
To be in good health and energy I am confident knowing that Freeport now has a board and management team that is capable of achieving our mission in executing our strategy beyond my tenure with that Kathleen I'll turn it over to you.
Thank you Richard and I'll start on slide three which launched when we had a really good first quarter.
Three summarizes the highlights we achieved meaningful growth in volumes and margins, which translated into strong cash flows and significant cash returns to shareholders.
Copper and gold sales were 24% higher for copper.
Year ago quarter, and 59% higher than a year ago quarter, our copper sales were 6% above our guidance going into the year.
We benefited from strong U S demand in the quarter, which allowed us to reduce inventory.
<unk> sales were also above our plan whole percent after reaching the targeted metal on rates in late 2021, Plattsburgh is operating well and sustain a high volume low cost operation.
Our average unit cash costs for the quarter of $1 33 per pound came in under our guidance in the first quarter and below the year ago quarterly average.
This is particularly impressive given the cost pressures affecting all of us and allowed us to generate strong margins with average copper realizations of <unk> 66 per pound during the quarter.
Notably <unk> costs were a net credit of six six per pound in the quarter Richard referenced this earlier, but this means that the gold revenues.
More than offset all of our cash production costs at the site.
We generated adjusted EBITDA of $3 4 billion in the quarter and adjusted net income excluding nonrecurring charges of $1 6 billion or $1 seven per share for the first quarter.
We generate very strong operating cash flows totaling $1 7 billion.
This was net of about $800 million in working capital uses primarily reflecting the timing of our cash taxes are cash flow significantly exceeded our capital expanding and that allowed us to return substantial cash to shareholders, while maintaining a strong balance sheet.
We continued our share purchase program during the quarter funded nearly 600 million of share purchases.
Starting the program in November of last year, we have purchased 27 million shares at an average cost approximating $42 per share.
We have $1 1 billion into the program out of a total of 3 billion.
Our total share purchases and common stock dividends, which doubled from last year's rate approach $800 million in the first quarter.
Balance sheet remains strong net debt was $1 3 billion at the end of the quarter about half of this relates to financing and the Indonesian smelter project, which is advancing.
As Richard said as we look forward, we're enthusiastic about the embedded opportunities.
Asset can bring to supply the world's rising demand for copper with several projects. We are progressing with near term medium term and longer term horizons.
We're continuing to dedicate significant resources to our sustainability objectives and now leads the industry with nine of our operating sites certified under the copper Mark.
We have a strong foundation for success, we are executing our strategy very effectively and we will continue to focus on delivering on our plans.
Slide four is just a summary of the recent reports that we filed our annual report to shareholders and guests today following our 2021 sustainability report.
The theme for our recent annual report is titled Electrifying, the future and it highlights our assets in the prominent role that Freeport has.
Supplying modern uses for copper.
We also published our sustainability report this marks our 20 <unk> year of reporting on our sustainability programs.
As a leader in the industry. We also want to lead in our reporting and transparency in this important area, who really help youll have the opportunity to review the report in detail. It's available on our website. We're proud of the work we're doing it's embedded in all of our business plans and supports our responsible production practices.
On slide five.
We had a neat deal earlier this month, we celebrated PT Freeport, Indonesia, 55th anniversary.
We are operating at the same side for more than five decades, and we've developed one of the industry's most prominent operations, providing tens of thousands of jobs and meaningful economic impact to the Indonesian government in province of Papua.
It had mentioned we've invested heavily over the years.
Create a modern world class operation, there that will benefit all stakeholders for decades to come we lead the industry and technology supporting a large scale block cave mining.
Richard Richard mentioned with our new partnership with the government established in 2018 and are committed and focused team. We're enthusiastic about the future for this exceptional mine and Gulfstream.
Turning to markets Richard covered this in his comments.
View, the fundamental outlook of the type of business its very positive.
<unk> role in the global economy, a renewed focus on infrastructure connectivity and copper is essential role in meeting global decarbonization targets.
Demand trends are broad based and global in nature, we see this continuing and accelerating with the increased intensity of use for copper associated with modern applications.
Many are predicting when the early stages of a multi year period of rising demand over the last decade, most of the growth in demand has come from China.
Richard mentioned were announcing a major expansion of growth and demand for copper for infrastructure spending and de carbonization from western World economies.
The scarcity of new mine supply development is growing at a time when demand is rising.
The project pipeline of actionable development opportunities is significantly lower than it has been historically.
Beyond the projects, which are being completed now there is a real absence of new supply development necessary to meet estimated demand increases.
Current physical markets are tight as evidenced by the low level of inventories on global changes.
Slide change continues to be stretched.
While we will see macro factors, such as China's economy, geopolitical considerations and actions by the fed impacting sentiment the low level of inventories and supply them in and supply limitations that's it.
SAP for a scenario of higher prices in the future.
We're in a great position at Freeport as a responsible producer of scale in our strategy as Richard outlined focused on copper long live reserves and future growth options.
<unk>, so bright for our portfolio become more scarce and highly valued in the future.
I'll comment a little bit about some details of our first quarter operations.
Moving to slide seven.
In the U S. The Lone Star mine continues to perform well above design capacity.
You remember we commissioned the mine in late 2020, and produced 265 million pounds of copper in 2021, a 30% increase from the original design.
We're expanding further to take us to 300 million pounds per annum by 2023 with an investment of roughly $250 million as we accelerate the mining of asset oxide ores at Lone Star. This will expose our much larger sulfide opportunity for us in the future.
At <unk>, our largest mine.
In the in the North American portfolio, we completed the restart of a mill in March we've been ramping up for several months and are now running at capacity.
With the rise in Covid cases early in the quarter, our mining rates were constrained, resulting in the reduction in annual production compared with our private our prior expectations. We are back on track, we expect morency to produce 7% more copper in 2022 compared with last year Richard mention.
We're also advancing our leach recovery initiatives were focused at morency, using data analytics and new technologies to enhance our leach production.
This is a significant value enhancing opportunity for Freeport and we will be reporting progress on this initiative as we go through the year.
At Bagdad, we are advancing our plans for what we're calling the Baghdad <unk> project to double production at this mine in northwest Arizona.
We're advancing studies and planning to commence early work principally for mine equipment and additional stripping in parallel with the studies.
Turning to South America. The teams have done exceptional work navigating the pandemic.
When things started to improve in late 'twenty. One we have a spike in cases in January and February in Peru that did have an impact on our mining rates in the first quarter by about 10%.
Situation improved significantly in March we expect to reach our targeted mill rates of 400000 tonnes per day and the balance of the year.
A lower mining rate in the first quarter is expected to have a small impact on our 2022 production at Cerro Verde compared with our prior plans, but we still see 8% growth in Cerro Verde production in 2022 compared with 2021.
We continue to target a full restoration at Cerro Verde, this year and be on our way to that two 1 billion pounds per annum from this large scale operation.
Our library accessible successful in Chile, and increasing stacking rate of material on its leach pad, we expect a 30% increase in 2022 production at El Abra and to sustain a level of 200 250 million pounds per annum for the next several years as we assess opportunities for feed.
<unk> growth.
At Grasberg, we sustained our large scale metal production after reaching our targeted metal run rate in the fourth quarter of last year.
We achieved higher gold recoveries compared with our plan, which contributed to a favorable variance for the quarter.
Our 2022 volumes are consistent with our private prior forecast will go out for glass Berg.
We incorporated some relatively small adjustments for changes in mine sequencing and Grasberg block cave and deep MLC, but the five year metal forecast is generally consistent with our prior expectation.
We're advancing mill projects to provide additional capacity targeted for the second half of next year, we are diversifying our power sources in Indonesia, and we're advancing our long term development for Cuccinelli R. A.
The team there is doing outstanding work in managing and sustaining the largest and most profitable underground operation in the world.
On the next slide Richard touched upon the Leach opportunities we have at Freeport and this was a major initiative ongoing that we have to extract more value from our historical Leach stockpiles.
This can unlock significant value for us by increasing production from material already mined and placed on to stockpiles.
In the context of an industry, where new projects can take 10 years to develop this is a significant opportunity for us to bring the equivalent of a new mine on screen and a fraction of the time it takes to develop with a fraction of the carbon footprint very little increments mental capital and operating cost.
So tremendous value opportunity for us and we're pursuing it with urgency.
During the first quarter, we commenced a process.
To insulate our leach stockpiles to return retain heat heat is proven to improve leach recoveries and work to date has indicated the potential to incrementally add to our production in the near term.
We're also enhancing our processes with the use of data analytics. This tool is providing new insights and opportunities.
We're working on internal technologies for additives as well as with third parties, who have proprietary technologies.
We're optimistic that these collective initiatives have the opportunity to add an incremental 100 to 200 million pounds of copper across our Americas portfolio in the near term.
<unk> success will enable us to optimize and expand this potential moving forward as youll see in the charts. We currently estimate 38 billion pounds of copper in our stockpiles, which already has been mined but this is not included in our reserves or production plans.
A significant portion of this opportunity is that our flagship morency mine.
And our cross functional team of technical experts metallurgical mine planners data scientists.
Just in business analyst all working together to take full advantage of this great opportunity for us.
The Leach opportunity is just one facet of our growth and Richard touched upon.
We will be focusing on as we go forward.
We have multiple options looking at slide nine multiple options for brownfield low risk growth across the portfolio.
We have over 190 billion pounds of copper mineral resources in our portfolio. In addition to the proven and probable reserves of over 100 billion pounds of copper.
<unk> talked about the leach opportunity and the ongoing oxide expansion at Lone Star. These are near term opportunities to add incremental production and a 12 to 18 month timeframe in the medium term, we're highly optimistic that will double the size of Baghdad, and the 2026 timeframe.
We expect to complete the feasibility study.
Study in the first half of next year and be in a position to commence construction activities.
Longer term, we have the massive lone star sulfide opportunity of 50 billion pound.
Copper resource and our established mining area in eastern Arizona.
A lot of our project in Chile has a resource approaching 30 billion pounds. We've done a lot of work in identifying and operation that could produce over 700 million pounds of copper per annum.
Lastly, monitoring the developments in Chile, and we will defer our decision for the time being pending the results of the ongoing constitutional work that's being done in the country.
At <unk> and the Grasberg district.
It's a natural extension of our operations. This will allow us to continue our large scale operation.
In Papua for decades to come.
We believe the world will need our projects in the future we have a long track record of success in qualifying and developing projects.
Efficient and responsible manner and this is enhanced by our industry leading technical capabilities.
Our established license to operate and our strong franchises in our areas of focus.
Looking at our sales profile on slide 10.
This is the annual sales for the next few years that we update each quarter. The outlook for volumes is largely in line with our prior forecast and the execution of our plans is on track.
We have insignificant changes to our prior guidance for copper sales for 2022, and 2023 and the 1% range that principally reflects the COVID-19 downtime experienced in the Americas earlier, this year and some timing changes at Grasberg between 2023 and 2025.
After delivering a 19% increase in copper sales in 2021.
Jackie and a 12% increase in 2022, reflecting higher production across the portfolio and further growth in 2023.
We estimate about 36% of our sales for this year will come from our U S mines, 27% from South America, and 37% from Indonesia.
On slide 11, there's been a lot of discussion about cost pressures in our industry.
Cost pressures that we're facing the entire industry is facing this year are well documented energy and other commodity related inputs, such as sulfuric acid explosives grinding media and other consumables have increase.
We will continue to work to manage and mitigate these impacts to the extent possible. We also benefit from the fact that our byproduct credits, particularly for Golar to provide mitigation.
We show a reconciliation of our prior unit net cash for 2022 estimates.
Based on our January estimates compare.
Here too our current estimates we've updated all of our plans to incorporate recent commodity price and pricing and our latest operating plans, you'll see here that half of the unit cost increase is offset by stronger gold prices and production.
<unk> cash costs are up about nine cents per pound of copper.
Or an approximate 7% increase.
These numbers were built off of copper price assumption that was 25 cents per pound above the prior plan, but.
But we're looking today at $4 70 <unk> copper.
Current market with a cash cost of $1 44 estimated for this year, which will generate very strong margins for us.
We show on the next slide Slide 12, the significant cash flow generation at various prices. This is a great strength of Freeport, a big exposure to top of markets and the large scale nature of our existing capacity.
We're in an enviable enviable position with a significant new production that we brought online in recent quarters and we show on on this slide slide 12.
Significance of cash flow generation, using our volume and cost estimates and prices ranging from $4 to $5 copper.
Are these are modeled results using the average of 2023 and 2024 with current volume and cost estimates and our annual EBITDA at these prices from four to $5 per pound prices or closer to $5. Today then for.
Would average over $11 billion at $4 copper to nearly $16 billion per annum at $5 copper and operating cash flows very strong ranging from over $8 billion to approach $12 billion at $5 copper.
Also on the chart, we've got sensitivities to various commodities, we can't predict prices, but the long term fundamentals of our business indicate the prospects for higher copper prices as.
And as we go forward you can note that each 25 cents per pound change in copper equates to over $1 billion in annual EBITDA.
Generate significant free cash flow, we expect this to continue with cash flows significantly above our capital spending and Youll see the capital spending on slide 13. Our these are largely unchanged from our prior guidance.
We're forecasting some offsetting timing differences between 2022 and 2023 and have also included some early equipment purchases for our Bagdad expansion project in 2023, as well as ramping up the <unk> project.
Both of these projects are designated as discretionary projects for purposes of our available cash returns framework, we've got a tracking of the discretionary category included for your reference in the appendix.
Roughly 25% of our capital spend over the next two years is associated with value enhancing projects. These projects all have solid financial returns and operational benefits.
And we will use a portion of the 50% of free cash flow, we are earmarking for organic investments toward these discretionary projects.
I'll also note and you'll see this in the in the slide we've got a large decrease in spend on the Grasberg block cave and deep M. L Z.
From 'twenty to 'twenty two to 'twenty, two 'twenty three totaling 500 million. So as those projects are being being fully developed will see our planned capital expenditures coming down.
The next slide we are.
<unk> will provide an update on our activities for the smelter.
We were engaged in detailed engineering and procurement and early construction activities are advancing with piling and concrete installation. We've got about 2000 workers now on site and that'll grow to over 10000 workers next year.
We've got some updated photos for your reference in the appendix.
And as we've been talking about for some time. This project is important for PT Freeport, Indonesia, and the Indonesian government. We are focused on completing the project as efficiently and timely as possible.
Richard mentioned the successful bond offering we did earlier this month.
Raised $3 billion to support the cost of the smelter.
Longterm financing average duration of of roughly 14 years and an average cost of a five 4%, whereas you mentioned the investor response, it was very positive and reflects.
The strength of of P. T O five underlying business.
The cost of this financing them.
Is largely offset by a phase out of the 5% export duty.
So the economic impact of of the smelter is is not material.
Turning to the balance sheet, it's a it's a core focus of ours and has been for the last several years.
Made meaningful progress in reducing our debt.
And our whole financial policy is centered around maintaining a strong balance sheet, we reduced our debt of just over the last 12 months by nearly $4 billion and our EBITDA continues to grow.
Free cash flow was significant as you've seen with growing volumes positive markets and low capital requirements.
We're in a fast a fantastic position to execute the strategy of maintaining a strong balance sheet.
That's been in a long term future and returning substantial cash to shareholders.
Our last slide that will cover is the summary of the financial policy I'm on Slide 16, we show a scorecard of our shareholder returns those have increased meaningfully with a theory of strong execution and balance sheet improvement we began implementing in the book.
Otherwise performance payout policy in November of last year.
The combination of our share purchase program with dividends are designed to distribute 50% of our cash flow after capital expenditures, excluding the smelter investments and discretionary projects.
Since November of 2021, when we began to implement the program. We've utilized about one third of the authorized $3 billion share purchase purchase program with purchased 27 million shares common stock and an average cost of.
Just under $42 per share. We also have a variable dividend component now common stock dividends for 2022. This is double the base dividend and the first payment at this higher rate was made in the first quarter of this year.
The board will have the opportunity to consider additional actions as we progress. The program further I mentioned in the first quarter alone returns to shareholders totaled nearly $800 million.
With the continuation of favorable market conditions and solid execution of our plans. We expect shareholder can Trump returns to continue to be strong.
As Richard mentioned, we have exceptional opportunities in our business.
As a team we are meeting the challenges and embracing the opportunities.
Our future is very bright and we at Freeport are electrifying the future and we're going to do this responsibly reliable reliably and relentlessly.
So that's a summary of our of our quarter and outlook and now we'd like to take your questions.
Thank you, ladies and gentlemen, who will now begin the question and answer session.
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Your first question comes from the line of Chris <unk> with Jefferies. Your line is now open.
Hey, Thank you for taking my question, Hi, Kathleen Hi, Richard.
Josh.
Question about Katherine you mentioned, the sensitivities and every 25 cents per pound change in copper is about $1 billion in annualized EBITDA.
And then on the slide where you show the new 2022 cost guidance I think it's a nine cents per pound increase in guidance and you said that.
There was a 25 cents per pound increase in your price assumption when you drive that guidance. So the question is if we if we think about changes in the copper price should we assume that a 25% increase in the price.
Fully translated into the $1 billion of EBITDA do we need to adjust that for some sort of cost increase as well and if we do it how much of a cost increase should we expect to reach 25 cents in other words does that nine cents per pound increase in cross.
Associated with the 25% increase in price kind of the way, we should think about cost and prices moving together.
I'm not sure if that question makes sense, but I'm just trying understand the sensitivity to prices and costs that we understand the question. The sensitivities that we show are you know just in terms of the copper price without having you know changes in input prices.
Think right now what we're what we're seeing is increases that are unusual correlations that are unusual energy prices have risen.
And some of these other commodities like sulfuric acid, and and and and explosives and things like that.
Reflecting kind of a geopolitical situation I don't think the long term trends. If you look at the correlation between copper prices and some of these inputs inputs are as dramatic as what we're seeing this year.
Time will tell and we'll see but we don't expect to see these kinds of.
Nine cent increases for 25 cent move in copper prices it'll depend on obviously the fundamentals of each commodity.
Now some of the commodities are.
Moving.
I'm in a direction differently on a short term basis because of what we're seeing in the Russia, Ukraine situation.
And thank you for that and just a follow up to that and going back to the China cycle, obviously, many years ago, but.
It was the cost inflation that you saw then very different from what you're seeing today in other words do you think the war is having a disproportionate impact on cost inflation today or are we just seeing generally typical cost inflation that we get them bull market in commodities.
Well if you go back.
<unk>.
Talk about.
Three years of copper demand.
Correlated to industrial production before China emerged in RA.
Roughly 2003, China here.
We're in a new era of copper prices.
There's been various.
Factors back back when copper was cyclical.
Driven by industrial production in the developed World There was a correlation between prices.
Then when China emerged.
And copper prices.
From a dip below $74 in a short period of time when nobody was expecting.
There wasn't a correlation with prices today.
Is affected by the dislocations caused by them.
Yeah.
Russia and the situation in Ukraine, particularly.
Oil and gas prices.
And you'll just have to reach your own.
Judgment of how sustainable that is or how much is the impact of the current situation.
Other commodities.
Okay.
It's having an impact on copper prices, but.
Russia was a relatively small producer of copper globally three 4%.
And regionally affected markets and the market is so tight it has an impact but other commodities.
Being more effective than.
Copper and as I said many of these things I believe are transitory.
So.
We're taking steps, where we can to control prices.
Copper prices are rising faster than costs for us so our profitability is growing.
We are encouraged about that continuing into the future.
Yes, that's great. Thank you very much.
We would you know our diesel costs.
That we went into the year with our plan of roughly $2 50, a gallon.
We've increased that in this most recent guidance by about 40%.
And normally we would not see that kind of.
You know the dislocation.
And when we look at the long term trends of diesel prices and copper prices, we normally wouldn't see that so same.
Same holds for some of the fertilizers and.
Ammonium nitrate the product we use for explosives has gone up a lot as sulfuric acid has as well and we believe a lot of those are are up you know just generally because of commodity prices, but the Ukraine, Russia situation is exacerbated some some of that so we don't see it as a long term.
As a long term.
Costs in our structure at those levels.
Thanks.
Okay.
Your next question comes from the line of Emily Chang with Goldman Sachs. Your line is now open.
Good morning, Richard and Kathleen and thanks for the update.
Next question.
My first question is a little bigger picture in nature and related to how youre thinking about growth, perhaps how have increasing steel costs raw materials consumables and labor change the business case, if at all when you think about sanctioning brownfield and Greenfield production long time.
Emily those really arent driving factors on our investment decisions.
The resources that we have.
Or just economically not that sensitive to even these kind of price increases.
So.
Our our timing issue.
The.
Brownfield development projects.
The engineering.
Permitting community relations and things like that these are things that affect supply development across the industry and it's a double edged sword of coverage.
A major factor of Warcraft for prices are so strong.
So we will factor in the higher prices, but.
To take a project.
The.
Investment decision is not going to be driven by those factors, but by others for <unk>.
Example, in Chile, where.
Why do you make an investment decision on El Abra, which is a great project.
But there's a lot of uncertainties about the government policy towards mining in Chile, and so that's what where we're monitoring before we make.
Proceed with an investment decision there.
And Emily that you know the.
The leaching opportunity that we have we.
We don't have exposure to steel and structural costs for that for that opportunity and that's why we're we're really pushing that with a sense of urgency because that really is you know.
Very low capital intensity and operating cost intensity that'll translate being a right to our bottom line. If we can we can crack that code. So it's the equivalent of bringing on new mine, a new mine without having all the capital costs. So that that is that would be a really really strong thing for us as a company.
If we can we can continue to advance the leaching.
And our position how well positioned Freeport is.
Take advantage of that those advancements.
We're the largest leaching operation in the World, which is the largest single mind from leaching and it's been part of our.
Company's experience for for decades, So we're really excited about it.
Great that makes a lot of sense and just real quick if I can follow up on labor markets.
And I appreciate any color that you have on the labor cost component than some of that might be higher profit sharing but anything that you can share on the workforce outlook on labor availability would be helpful. I'll leave it at that thank you.
Well thanks Emily.
Kathleen follow up but we do have a special situation with our large workforce in Peru.
Where.
Your government laws and regulations. There is a mandated profit sharing plan and so as profit goes up their workers automatically benefit and higher wages as part of that process.
But.
Jeff why don't you follow up generally on labor cost yeah.
The main thing that we're that we're experiencing Emily in terms of labor is is it's really focused more in the U S. The main issue.
We know, it's a very competitive job environment as you say.
Tim.
We've got you know significant job openings in our in our U S operations.
We've been supplementing our workforce with with with outside contractors.
To help us with with projects and capacity assurance and and so really you're seeing you know more and more utilization of contractors right now, but we have made some progress in hiring in the first quarter.
You know we've been.
And I've had a number of openings for several months and we're starting to make progress in the first quarter and in getting in getting these positions filled so but I'd say, it's more a matter of a.
Tightness in terms of availability of people as opposed to you know really big increases in wage rates and we have increased our wage rates and we've provided some supplements and and and incentives for people, but the.
The main thing has been you know we've had to use higher higher priced contractors them until we get you know all these positions filled.
We arent seeing the same kind of issues in Indonesia, and Richard mentioned, the Peru impacts with.
With with profit sharing and we just signed a new contract labor agreements, both in Indonesia and in Peru.
And the labor situation there as it is much easier than it is in the U S.
Understood. Thank you.
Your next question comes from the line of Auris woke Codell from Scotia Bank. Your line is now open.
Hi, good morning.
Following up on the outlook for cost and specifically I was wondering if there is a big lag impact on seeing higher costs flow through and I don't know if that's from previous contracts that you may have for things for.
For some of the input costs like explosives.
Fuel and whether there is still I guess it was lagging impact that we should see if current cost stay where they are whether we could see a fairly significant rise in your cost base.
As weak.
As we approach closer to the end of this year.
That's really not a significant factor.
There may be.
Short term contract.
Renegotiated.
But of course the cost you see are essentially the current costs that we're experiencing now.
That's perfect. Thank you Ryan.
So the outlook that you have you now reflects our.
Current estimate each quarter, we update all of them all of our operating plans and cost inputs. So so what youre seeing in the in our latest outlook for the year is based on you know the market prices. When we prepared this forecast just recently.
Thanks Kathleen.
While there is uncertainty as my expectation is we're face we're facing kind of the height of dislocations.
From global supply change to other factors.
Covid shutdown in China situation in Ukraine. So.
Personal expectations as rather than seeing costs going up in the future, we'll see them come down.
Thank you Richard.
But time will tell.
Your next question comes from the line of Alex Hacking from Citi. Your line is now open.
Hey, Alex.
And next we're going to reopen your line. Your line is now open.
Sure.
Hi can you hear me.
We can okay, sorry, sorry, Richard I had a problem with my handset there.
So let me just play Devil's advocate on the growth side.
If you look at your production profile it does peak.
Peak in 2023.
Some declines in 'twenty four 'twenty five in Grasberg and elsewhere.
You know put back that leaching opportunities are these.
Are these more of keeping the production at the current.
Four and a half.
1 billion pound level or can they really kind of generate a growth CAGR.
And here I guess on setting aside the multibillion dollar.
So sulfide projects. Thanks.
Yeah.
In the near term, Alex you're right I mean in the near term.
What we've got is these leach opportunities and and you know like I said it takes seven to 10 years to build a new mine and so these leach opportunities really can fill in the near term.
Longer term, we're really looking at growth coming from is this.
There's big potential we have at.
At Lonestar.
And also our Libra you now that you know we had made a decision on a library, yet but that you.
That's 700 million pounds plus of Av.
New new production in the Lone Star sulfides would be a meaningful amount of increase as well but.
I mean, it's a feature of the copper market.
It's very very challenging to develop new supplies and it takes many years to do it.
We've had significant growth in 2021 and again in 2022, but you know it's not a it's not common in our industry to see that kind of growth in copper production and that's really what underpins the fundamental outlook for it.
And Alex just one thing I've been trying to get across to policymakers.
And others, who follow our industry just about how long term copper business is.
<unk> Kapadia in Cambridge energies.
Okay.
Zero down in <unk>.
Houston was the oil and gas companies and everybody was asking the oil and gas companies about.
The time for response to production and they were talking about it.
Executives with the energy companies were saying well, it's a long term business. It takes months to respond and I said, well copper takes years to respond.
So that's why I pointed out.
Okay.
And there was a lot of pressure on us too.
Yeah.
For periods of time to delay development at the Grasberg underground.
We were talking with the government, Indonesia about our contract rights, but had we done that we wouldn't have had this production available to us and so what we're looking at when we talk about growth.
Rose from a very long term basis.
<unk>.
It's one of the reasons why we have a favorable copper price and while I believe golf prices go higher.
We're seeing we're seeing companies across our energy industry being challenged with meeting their production targets, we've done that but all of that's going to be supportive of prices.
As I said I'm really struck by having.
Today's copper price and the kind of global market.
Headwinds that would normally lead to lower prices.
Great. Thanks, Richard Thanks, Kathleen and.
<unk> being one of the few in the copper industry, that's actually hitting your production targets.
Thanks, Alex Thank you.
Your next question comes from the line of Lawson Winder from Bank of America Securities. Your line is now open.
Hello, Richard and Kathleen Good morning, Thank you very much for the update.
So I can maybe ask on capital allocation.
Excuse me M&A.
One of your partners.
Cerro Verde recently divested of its minority interests.
And then another gold mine in Peru.
Got me wondering.
With Shreveport.
Would you guys be open to increasing your interest in Cerro Verde, they should the opportunity emerge.
Particularly in light of the political situation there. Thank you.
Yes.
Good.
It's just such a great asset.
[laughter] funny historical story before the Phelps Dodge deal I called the Phelps Dodge CEO when he sold down originally interest in Cerro Verde.
At a time when they needed production and I said, what are you doing I wish they had kept a greater production we've got great partners.
But yes, it's such a great long term asset and those kinds of quality of assets are really really scares and our business.
And while that's a project that week.
We can enhance growth at the margin.
It is not a project, where theres going to be a step change change in volumes in the future.
We.
We got some leaching opportunities there we can be more efficient.
We can overcome some of the.
Issues at Covid is cautious but it's.
It's just a great long term asset with our positive view of the copper markets. We're glad we have it and we wish we own more.
Okay.
Fantastic.
I can maybe just sneak in.
A follow up question, if you don't mind.
But just in terms of the total capital return this quarter.
Appears to be in excess of 50%.
Available cash flow maybe.
Maybe I'm looking at available cash flow incorrectly, but I mean, if this is the case.
Okay.
You can expect to continue.
Forward or just something that we're sort of even out over time.
Yeah.
We're looking at it on an annual basis really and we had a big working capital.
The big working capital item in the first quarter.
And so we're not varying our of our returns on on working.
Working capital change like that that's not expected to continue through the through the year. So really it's a we're looking at it as it is an annual and we're having to make some estimates and that kind of thing but.
Is it we're trying to have some consistency in it.
And in the share buyback program.
Yes.
Dan.
The facts are because of these.
Tom challenges in pursuing investments.
With strong copper prices cash is going to come in faster than it's going to go out.
So that's something our board will be considering going forward.
Okay. That's clear thanks, very much both of you.
The 50% was the guidance for.
For investors to understand what our thinking is but it's not any sort of.
Fixed in stone situation.
Yeah.
Okay. Your next question comes from the line of Abby Agarwal from Deutsche Bank. Your line is now open.
Thank you Marty if you send money Katherine Thanks, a lot good morning.
Yeah.
My first question is on <unk>.
The bedroom is seeing a significant upheaval right now across several mines.
Cerro Verde has has been immune thankfully over the last.
Microsoft.
Have you have you seen any signs of disturbance et cetera.
Given given what's happened more recently.
No not really we've worked really hard with the.
With the local community in Arequipa.
And we have establish a positive relationship.
We did some really important things in terms of community investment over the years, we built a freshwater system for the city and second largest city in Peru.
And then we developed a.
For a city that didn't have that was just dumping its wastewater into the.
Remember Julien.
<unk> developed a wastewater collection.
Processing facility and so the ecology of the river has really improved which has.
<unk> been very positive in many levels with agriculture interest and so forth. So.
We have done a lot we pay people well, we manage through COVID-19 effectively and it was challenging.
But fortunately, we have a really positive relationship.
With the local community and we work hard to preserve that.
Thanks, Jason.
If I could sneak in another one and this is a question on the new lease technologies, which you're in the gasoline business. You mentioned that it was it's very low capital intensity, which is great.
But.
The question I have is in your view how easy it is to implement it.
The other operations and owned by other mining companies and a bit of a long shot here, but how much do you think it could increase overall.
Overall production by.
Yes.
Well.
We are advancing and it's still early days, we're working with.
A group of different technologies.
Some of its proprietary some of it with outside contractors and some is in joint ventures with other companies.
Latin America so.
We're excited about it.
We are.
But what we.
Haven't yet been able to.
Forecast, what we believe will ultimately be a significant incremental production gasoline mentioned.
200 million pounds, a year is a target we will currently working for.
<unk>.
It's focused on our existing active lead stacks, but there's other opportunities as this works as we anticipate it would with some old historical inactive lease stacks.
Potentially be an alternative to investments.
The concentrator is to process sulfide ores. So it's.
I get pumped up when I talked with our technical team about it. They brief me on what's going on because of this.
Excitement there expressing.
But we will keep you informed keep the market informed as we as we're a.
Well to get.
More visibility about incremental production.
Got it thank you very much.
Your next question comes from the line of Carlos de Alba from Morgan Stanley . Your line is now open.
Yes. Thank you very much good morning, Richard and Kathleen So a question for me on Grasberg I know that the changes were in that significant but if you could give us a little more color on the on the sequencing changes that you guys are experiencing.
Now in Grasberg.
That'd be great.
So if you could comment if this mine.
Impact in any in any way your cost.
A little girl profile for the operation.
The company.
These are just normal.
Normal mine plan adjustments that come up as conditions change.
When you look at the numbers from Grasberg.
Looks like it's almost like an assembly line process.
We're constantly.
Dealing with changes.
Geology and other conditions.
But.
There is nothing unusual there and it's certainly nothing that.
It has a fundamental change in our low cost operations there Mark Johnson is on the line and he's.
Long time head of operations there at Grasberg in the.
Mark why don't you make a comment in response to this question.
Yes, Richard I think you addressed it pretty well.
Most specifically in 2023.
Lynn.
A bit of a swap in.
Metal production 'twenty three 'twenty four.
Due primarily to deep <unk>, where we continue to learn and apply.
Deposit specific cadence parameters.
And what we ended up doing.
Slowing down the cave advanced a little bit going to the west.
And that deferred a little bit of higher grade metal.
In 2023 into 2024 and 2025.
At the same time, where we were able to increase our milling rate.
And the additional tons.
Middle allows the mines to ramp up and so that more or less offset any of the change that we made a deep MLC.
Yes.
Alright excellent. Thank you very much and then just on Cerro Verde, if I may read you very quickly.
When do you expect that you might get back to the one 1 billion pound level of production.
We're getting close to that this year and next year, we expect to be and it changes modestly on the margin with grades, but we're getting close to two 2 billion pound Mark this year.
And we'll be there next year.
Alright excellent. Thank you very much good luck, we did them.
We did and you know in terms of the gold at Grasberg.
We did experience some higher recoveries in the first quarter of this year and we've increased our gold volumes slightly for the year for 2022, we haven't incorporated any any of these increases in the out years and so we do potentially have some some ben.
That's for gold and as we look forward that we haven't incorporated but we'll have to see how the experience goes as we go through this year.
Alright, that's encouraging thank you Catherine.
Next question comes from the line of Michael Dudas from vertical Research partners. Your line is now open.
Good morning, Mike.
Good morning, Katherine Richardson and welcomed Marie.
[laughter].
You guys get this fund going.
Yes.
And yes it has.
We intend to.
So anyway so.
So Richard I was.
As you mentioned in your prepared remarks.
Market price for copper is not listening.
Investment demand or the supply response.
As expected all the cycles.
And you talked about some of the issues but.
No.
Given that it's not just top it with other metals given expectations on EV and net zero.
Looming.
It appears that mining investment may be constrained across the board, which is going to keep pressure on pricing.
How that's too for the market to get more confidence on marketplaces is the prices.
Yeah.
Okay.
Yeah.
Well I mean.
Theres just things are just piling up that's adding to the supply constraints I mean.
So thats the story 20 years ago, when China emerge there was a general expectation that there would be a major supplier response.
As there are always had been in copper before that but then people started.
Looking hard and it's been going on for 20 years now you know copper has been at the top of the strategic objectives of the major mining companies ever since then.
The combination of geology.
The quality of deposits are much much lower than they were before they are much more challenging jurisdictions often there are the grades are lower.
Your underground.
So that's been a factor that's overwriting.
Everything and now you know with 40% of the copper coming from Julien Peru and.
And those companies countries going through political.
Discussions about the direction of how theyre going to be treating the industry that.
That's clearly a factor.
That's out there.
Uh huh.
And.
As things get delayed.
Because of the amount of time that requires to develop even even a straightforward project like this mill project. We have at Bagdad is about as simple.
Project is you could have with its taken several years.
To get engineers engineering and permit it's just a question of building a new mill.
Building some tailings facilities I mean, there is nothing really that complicated.
But when you start looking at projects that are really complicated that are really in <unk>.
In challenging jurisdictions.
Can see around the world communities opposing new developments.
While we benefit in the U S. Because ours are brownfield and we have good relationships with communities that we worked hard to keep people who are trying to build new mines in the U S are running into.
Really serious delays in sometimes brick walls about not being able to go forward. So these things are just peer meeting.
And.
Absence.
Really significant.
Global economic event.
I am just hard pressed to see where we're not hitting for an environment of where copper prices are going to be very high.
And there's going to be real challenges as people try to substitute get more scrap develop new projects all of those things have very or so.
As I said at the start I'm really confident about our strategy of being a copper company.
I think we're really well suited to benefit for our stakeholders.
Being good at execution as we've shown.
Being focused about doing things the right way by building relationships with mentioned Peru same.
The same way in the same way in Indonesia, we learned long ago.
And our experience in coming up with developing the Grasberg in Indonesia was you cannot turn a blind to the local people.
Have to give them jobs opportunities benefits.
And so we've learned those lessons and it's paying off for us and I think it will continue to pay off for us.
Excellent Richard Thank you.
Your last question comes from the line of Alex Barron Chu from Stifel. Your line is now open.
Alright, good morning, everybody.
I just wanted to just circle back on some of these.
Growth options here, particularly the loans.
Excuse me and El Abra sulfide.
I know these are long lead time projects, but is there any way you can kind of just lay out for us the timeline or schedule.
Another way is there any way you can kind of Cds coming into production.
Within a decade.
And then also you talked about 700 million pounds.
I know the oxides currently being mined.
Like a pre strip, but you think that would be.
We do have some overlap with the oxide leach and the sulfides or would you just basically transition to a sulfide operation.
Yes, well El Abra and Lone Star.
Are different.
And.
When we acquired Phelps Dodge 15 years ago.
Or was viewed as a.
Climbing short term asset.
And it was through our.
Exploratory drilling we discovered this large sulfide deposit it is very large, but it's at altitude and requires T cell desalinization.
Energy and so forth so.
It would be an expensive project, but certainly one would be economic with.
Today's current process and so it's just a question of seeing what truly does.
And then doing all the work we have to do to get ready for it.
The stripping side of things and I'll, let Josh say a couple of comments about it is really what's happening at lone star which is.
Adjacent to our historical.
Safford mine just across the mountain ridge from RNC.
And again places, where we have great community support to do what we're doing but there were expanding this oxide production and it is serving as a stripping towards the sulfide resource that we're continuing to evaluate it.
Sort through how to development.
<unk>.
10 years.
Josh why don't you make a couple of comments about it.
I'll comment on the portfolio there is just on the concurrent.
We could have concurrent leach for a period of time at the library alongside of US concentrating same as is lone star we have that in many of our operations, including Morency, where we have concurrent leach operations and concentrating operations and yes to answer your question.
And these projects could be within the decade.
But it takes you know it takes a very long time since we've all been talking about on this call.
Sorry to interrupt go ahead Josh.
No.
Everybody just a few.
I'll comment I think Kathryn touched on it I think we can get those projects should be able to be done within a decade, depending obviously on timing with respect to El Abra as far as loan started as you indicated in your question the oxide stripping the oxide mining is really functioning as a stripping for the sulfide one of the things that we continue to.
Discover as we do additional drilling at Lone Star is that ore body is what I would classify as well not the same as mine is going to be a district similar to timberlands in the sense that it'll be a combination of leaching and milling sulfides as it goes forward and get to put into place and so it would be a concurrent thing concur.
Operation and production of both it wouldn't be a pure oxide been transitioning to a pure sulfide, but rather an ongoing combination of the two which will allow us to really maximize the value of the resource.
And the pound on an annual basis.
Okay. That's great. Thank you.
Now, we will turn the call over to management for any closing remarks.
Alright, well thanks, everybody for your interest in Oh, I'll, just close and say I hope to see both.
Both lone Star and El Abra.
Projects you'd.
Kicked off so that'll.
And that will give you some time frame on it and.
We are really.
I'm really proud of our team.
I.
We really feel good about where we are and where we're going so thank you for your interest and we look forward to reporting our progress in future.
Ladies and gentlemen that concludes our conference call for today.
You for your participation you may now disconnect.
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