Q2 2022 Freeport-McMoRan Inc Earnings Call
Speaker 1: the conference call. In addition to analysts and investors, the financial press has been invited to listen to today's call and a replay of the webcast will be available on our website later today.
Speaker 1: Before we begin our comments, we'd like to remind everyone that today's press release and certain of our comments on this call include forward-looking statements and actual results made different materially. Like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in our SEC filings. And to the risk factors described in our SEC filings.
Speaker 1: On the call today with me Richard Atkison, our Chairman of the Board and Chief Executive Officer, Marie Robertson, our Chief Financial Officer, Mark Johnson, Chief Operating Officer of Indonesia, Josh Olmstead, Chief Operating Officer for the Americas, and
Speaker 1: Mike Hendrick who runs our Millibus in on business.
Speaker 1: Corey Stevens, who leads our centralized technical services, engineering and construction. Rick Coleman, who's leading a number of our projects, including the smelter project in Indonesia. And Steve Higgins, our chief administrative officer.
Speaker 1: the last several weeks triggering recessionary concerns. In addition, concerns about the impact of COVID shutdowns in China and a strong US dollar have weighed on copper, which is viewed as a close proxy for sentiment on the health of the global economy. The reality is that this has been a financially driven anticipatory move in copper prices. Physical markets remain healthy as evidenced by the global exchange inventories illustrated on this chart, which remain at historically low levels. Our customers report solid orders, and the industry continues to struggle to meet production targets. The current decline in price is below would McKenzie's estimate of 425 per pound necessary to incentivize new supply under an accelerated energy transition. It will also provide less cash flow to the industry's developed new supplies, making the projected deficits in copper more significant in the future. The long-term secular demand transfer copper demand associated with electrification, decarbonization, will be important demand drivers for copper. We see these trends being less economically sensitive than traditional uses of copper in the economy. We fully recognize the short-term uncertainties, but have conviction about long-term fundamentals for the copper markets. Richard mentioned the S&P Global Report. Many of you have seen it. It was published last week, prepared by analysts at S&P Global and led by Dan Yergan, a well-known analyst.
Speaker 1: and our team proved its agility each time.
Speaker 1: We're prepared to respond to a weakening market environment if necessary. We're in a much stronger position than in past downturns with a significantly improved balance sheet and our successful expansion of the low-cost production at Grasberg. Our team is resilient, experienced, professional and value-driven in our approach.
Speaker 1: We can't predict the extent or timeframe of the current situation.
Speaker 1: But as a responsible producer of scale and a strategy focused on copper with long-life reserves, the prospects are bright for portfolio to become more scarce and highly valued in the future.
Speaker 1: On slide seven we provide some additional details on our operating activities in the quarter.
Speaker 1: In the US, the Lone Star Mine continues to perform above design capacity.
Speaker 1: We're expanding further to take us to 300 million pounds for Anum by 2023 with an investment of approximately 250 million. As we celebrate the mining of Oxide Awards, this will expose a much larger.
Speaker 1: So I opportunity at this site.
Speaker 1: We're also advancing and we're very excited about our leach recovery initiatives and emergency and across the America's portfolio using data analytics and new technologies to enhance our leach production.
Speaker 1: This is a significant value enhancing opportunity for us, and we continue to gain momentum and expect to have success on this priority initiative.
Speaker 1: At our Baghdad mine in Northwest Arizona, we are advancing plans for the Baghdad 2X project double production. The
Speaker 1: Studies are advancing and we're planning to advance early initiatives in parallel with the studies. We're focusing on developing this opportunity as a future growth option.
Speaker 1: But we'll be flexible on timing subject to market conditions.
Speaker 1: In South America, the teams have done exceptional work, navigating the pandemic. We've had a great highlight, significant milestone for the CRR Verdi team during the quarter, setting a quarterly record for concentrating of averaging 427,000 tons of concentrating per day.
Speaker 1: At Sara Verde, we also had some recent positive results.
Speaker 1: on exploration which have the potential to expand reserves and increase grades at this large-scale operation.
Speaker 1: At Alabra, we have increased stacking rates and commencing leaching on a new leach pad. Other than the ranch, the
Speaker 1: We continue to evaluate alternatives for the long-term at Alabra, including options for new concentrator or an extension of existing operations subject to ongoing monitoring of the investment climate and chilly. The investment climate and chilly. The investment climate and chilly. The investment climate and chilly.
Speaker 1: At Grassberg, we sustained our large-scale metal production after reaching our target metal run rate in the fourth quarter of last year. Two pounds on weeps last year.
Speaker 1: The cost position at Graspers is exceptional and the team there is doing outstanding work in managing and sustaining the largest and most profitable underground operation in the world.
Speaker 1: During the quarter, we again achieved higher gold recoveries compared with forecast, which contributed to a favorable variance for the quarter. And we've now increased our outlook for four-year-goal production. from 2000.
Speaker 1: At PTFI, we are advancing Mill Projects to provide additional capacity in the second half of 2023. We are diversifying our power sources and advancing the long-term development for Coaching AliArts.
Speaker 1: The construction of the new smelter in Indonesia is advancing. We reached an important construction milestone during the quarter, which will enable us to begin to reduce export duties later this year.
Speaker 1: Starting to slide eight, we provide a three-year outlook for our volumes.
Speaker 1: which are largely in line with our prior forecast. We've made small changes to our 2022 copper volumes, totally in about 40 million pounds or about 1%. And we increased our forecast for gold, a gold volume in 2022 by about 5%.
Speaker 1: The execution of our long-term plans is on track. After delivering 19% increase in copper sales in 2021, we are projecting growth in volumes in 2022 and further growth in 2023. The execution of our long-term plans is on track.
Speaker 1: For 2022, we estimate 36% of our sales volumes will come from the U.S., 27% from South America, and 37% from Grasberg. For more information, visit www.grasberg.com
Speaker 1: Moving to our cost outlook on slide 9.
Speaker 1: As I mentioned, we're actively engaged in cost management and efficiency initiatives to mitigate the impact of the challenging cost environment. What do you do to create your e compan. the challenging cost environment.
Speaker 1: We've updated our plans to incorporate recent commodity pricing, exchange rates, and our latest operating plans.
Speaker 1: We're now estimating unit net cash costs for the year approximating
Speaker 1: $1.50 per pound for 2022. That compares with our prior estimate of $1.44 per pound.
Speaker 1: As you'll see from the reconciliation on slide 9, the majority of this increase reflects the decline in by-product credits associated with the reduction in assumed gold and molybdenum prices for the balance of the year.
Speaker 1: Our projected 3 cents per pound increase in site production and delivery costs.
Speaker 1: Reflex the assumption of higher energy prices in the second half compared with our prior forecast, our consumer will cost together with the impact of a change in the estimate for copper and the maturing leach pad at Elabra. And this was partly offset by the favorable impact we have on labor costs internationally associated with weakened exchange rates compared to the US dollar.
Speaker 1: Historically, copper prices have been correlated with a number of our input costs.
Speaker 1: Should recessionary pressures continue, historical correlations would indicate that we may begin to see a reversal of some of the cost experiences we've seen over the last two years. Moving to slide 10, as one of the world's leading copper producers, our earnings and cash flows have significant leverage to the price of copper, up and down.
Speaker 1: On slide 10, we show model results for our EBITDA and cash flow at various prices and have shown a broad range of prices this quarter, given the volatility ranging from $3 per pound of copper to $5 per pound of copper, which is close to where the prices were earlier in the year.
Speaker 1: We've updated our gold and molybdenum prices to reflect current prices. We've updated our gold and molybdenum prices
Speaker 1: As Richard talked about, the current price is not sustainable long term given the cost structure of the industry and the need for new supply development in the future.
Speaker 1: We show modeled results on this slide using the average of 2023 and 2024 with current volume and cost estimates and holding gold flat at $1,700 per ounce in molybdenum at $16 per pound.
Speaker 1: Our annual EBITDA under these scenarios would range from over $6 billion per annum at $3 copper to $15 billion per year at $5 copper, with operating cash flows ranging from $4.5 billion per year at $3 copper to over $11 billion per year at $5 copper.
Speaker 1: We show sensitivities on the right to various commodities and input costs. We can't predict prices and prepare to manage in a low price environment.
Speaker 1: Long-term fundamentals of our business indicate that low-coffer prices are not sustainable long-term, providing increased cash flow as market conditions improve.
Speaker 1: We show the consolidated capital expenditures on slide 11. These are largely unchanged from our prior gardens.
Speaker 1: We've reduced the 2022 capital forecast by 100 million, which is a timing variance with 2023.
Speaker 1: And as you've probably noted, we've been spending capital during 2022 at a slower pace than our original plans.
Speaker 1: And in the current week environment, we will review opportunities to defer spending as we've done in the past. We have flexibility with our plans and benefits from the fact that the major investments required for the grass-brow transition are largely behind us and we'll begin to decline as we go into 2023. And we'll begin to decline as we go into 2023.
Speaker 1: On slide 12, we show our future growth options embedded in our asset base. We have multiple options for brownfield low risk growth across our portfolio.
Speaker 1: We call we have 191 billion pounds of copper mineral resources in our portfolio in addition to our approved and probable reserves of 107 billion pounds of copper. We call we have 191 billion pounds of copper mineral resources in our portfolio of 107 billion pounds of copper.
Speaker 1: The Leaching Opportunity is a major value driver opportunity for us and is not included in our reserves and resources.
Speaker 1: Success in this area would enable us to create the equivalent of a new mine with extremely low capital intensity.
Speaker 1: low incremental operating cost.
Speaker 1: and importantly a low carbon footprint.
Speaker 1: We're continuing to apply covers to our leach stockpiles as the retention of heat is proven to enhance recoveries. We're using data analytics and evaluating various data that can further enhance recoveries. We're using data analytics and evaluating recovery. We're using data analytics and evaluating recovery. We're using data analytics and evaluating recovery. We're using data analytics and evaluating recovery.
Speaker 1: We're initially targeting the addition of 100 to 200 million pounds of new copper per annum within a relatively short time frame and believe we can build on this target with initial success. We're also targeting the addition of 100 to 200 million pounds of new copper per annum
Speaker 1: We currently estimate 38 billion pounds of copper in our stockpiles, which has already been mined, but not in our reserves or production plans. The stockpiles are gone by one of the most intense consequences of ever burning out a harrassingpayment but over a decade ago they're shipped. Obviously the air pollution was really leven??excited because of the outstanding carbon dioxide movement. option plans.
Speaker 1: A significant portion of this opportunity is at a flagship Marancy mine, the largest mine in North America.
Speaker 1: A cross-functional team of technical experts, metallurgists, mine planners, data scientists, geologists and business analysts are working together to take full advantage of this exciting opportunity.
Speaker 1: Review the ongoing oxide expansion at Lone Star, which is progressing on schedule. Longer term, we have the massive Lone Star sulfide opportunity, a 50 billion pound copper resource in our established mining area in Eastern Arizona. This project is right in our wheelhouse and is a valuable development option for the future. And it's a valuable development option for the future.
Speaker 1: In the medium term, we're planning to double the size of Baghdad. We have a very large reserve position at this site.
Speaker 1: We expect to complete the feasibility study for this project in the first half of next year and would be positioned to start construction activities as market conditions warrant.
Speaker 1: The Alabra Project has a resource approaching 30 billion pounds of copper and we've done a lot of work in identifying an operation that could produce over 700 million pounds of copper per year.
Speaker 1: In parallel with our evaluation of a major expansion, we're also considering investments in water, which would extend the life of the existing operation while maintaining the longer-term growth option.
Speaker 1: We continue to closely monitor developments in Chile and are deferring decisions for the time being.
Speaker 1: In Indonesia, Coaching Lear Project is a natural extension of our operations there and will allow us to continue large scale low costs mining there for decades to come.
Speaker 1: The learnings and shared infrastructure from our successful development of grassberg underground and the deep NLC.
Speaker 1: really enhance the value of this project at Huchimly R.
Speaker 1: We benefit from having a large pipeline of options and have flexibility on the timing of development of our projects, particularly the extensive options we have for development of new supply in the U.S., where we own most of our land and sea.
Speaker 1: We believe the world is going to need our projects in the future. We have a long track record of success in qualifying and developing projects in an efficient and responsible manner, enhanced by our industry-leading technical capabilities, established licenses to operate, and our strong franchises in the areas of focus. I want to turn to our balance sheet on slide 13, which are financial policies centered around a strong balance sheet.
Speaker 1: The actions we've taken in the past have placed us in an exceptionally strong position, particularly in the context of current market weakness.
Speaker 1: We don't have a need to raise new capital for the foreseeable future.
Speaker 1: During the quarter, we took a number of steps which further de-risked our balance sheet. We raised long-term financing for the smelter. We repaid our term loans at PTFI and Serverty and expanded our bank credit facilities for these subsidiaries. And we opportunistically purchased over 750 and senior notes at attractive prices. Weona, co-founder of the
Speaker 1: As we talked about, our net debt, including $11 billion in total debt and $9.5 billion of cash.
Speaker 1: net debt including the smelter net debt was a billion dollars and below our targeted net debt of three to four billion providing cushion in a weak market environment.
Speaker 1: We have an attractive debt maturity profile, as you'll see, with easily manageable maturities. We have an attractive debt profile. We have an attractive debt profile. We have an attractive debt profile. We have an attractive debt profile.
Speaker 1: We can continue to be optimistic on value opportunities to repurchase debt in the open market.
Speaker 1: miinyesuke.com
Speaker 1: We show a scorecard of our shareholder returns which have increased with our strong financial performance in recent quarters.
Speaker 1: We were active in the market in a second quarter, and into July , and have allocated approximately 50% of excess cash flows to shareholder returns since the third quarter of last year. And that consisted of 1.8 billion in share repurchases and common stock of over six hundred, this common stock dividends, and so do we know over 650 million during this period. So do we know over 650 million during this period?
Speaker 1: Our board authorized a $2 billion increase in our share purchase program to restore $3 billion in availability under the program. We'll continue to prioritize our balance sheet as the cornerstone of our financial policy, and that'll allow us to operate well in varying market conditions and drive long-term returns for sheer holders.
Speaker 1: The discretionary purchases of our shares will be dependent on market conditions and cash flow generation in the future, and our board will continue to review our financial policy on a regular basis.
Speaker 1: And summary, we're all focused on long-term value.
Speaker 1: and executing our plans responsibly, safely, and efficiency, inefficiently.
Speaker 1: Despite the recent market conditions, we're optimistic about the value of our assets.
Speaker 1: the strength of our global team, the fundamentals of the copper business, and the future prospects for the markets we serve. We appreciate your attention and we look forward to your questions. Operator will now open the call for Q&A.
Speaker 2: Ladies and gentlemen, we will now begin the question and answer session. 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 queue, please press star one again. If you are using a speaker phone, please pick up your handset before pressing the numbers. We ask that you limit your questions to one. If you have additional questions, please return to the queue. One moment please for our first question.
Speaker 2: The first question comes down to the line of Emily Chang with Goldman Sachs. Please go ahead.
Speaker 3: Good morning, Richard and Kathleen, and thank you for the update this morning. My first question is just around the 3Q Copper Shipment Guidance. It looks like that's a little bit lower on a sequential basis than 2Q before it moves back up again, but could you perhaps point to what region may be driving that, and is that timing of shipments or perhaps something to do with the mine plans of the 3Q?
Speaker 1: Emily, it's primarily timing. We did sell more in the second quarter. We produced more, but we also had some timing variances in the second quarter where we sold more in the US than we expected. In Indonesia, we also brought down our concentrate inventory. So it's mainly a timing. We're pretty much at run rates currently. We're pretty much at run rates currently.
Speaker 4: Great, thank you.
Speaker 5: And anyway, we do have challenges with timing in the need you from time to time. We pull and we're crystal clear.
Speaker 5: with the shallow water port that we have there. Rough seas can just delay loading, and we of course record sales.
Speaker 5: at the time of loading. And so that's just something we've had to deal with over the years.
Speaker 3: Understood, that's very clear. Thank you.
Speaker 2: Your next question will come from the line of Chris LeFemina with Jeffries. Please go ahead.
Speaker 6: Thanks operator, Hi Richard and Kathleen, thank you for taking my question.
Speaker 6: You mentioned historically, you mentioned your ability to kind of manage through the downturn deferring spending is one option. Historically Freeport in declining price environments has taken high cost capacity offline and we've had a lot of cost inflation in mining. The cost curve appears to be steepening pretty dramatically. I'm wondering.
Speaker 6: How much further the price would have to fall before you would consider taking some capacity offline? That's my first question.
Speaker 1: I think Chris, what we're really looking at is the physical markets. And right now, the physical markets are tight. As Richard talked about earlier, inventories are low. We certainly do not want to produce at a loss at any of our operations. And we'd prefer to keep our reserves in the ground for better markets in the future.
Speaker 1: But right now, the situation is so dynamic, it appears that physical markets continue to be robust. We're going to be watching it and it will be a combination of factors including what input costs do as well. But we go through mind by mind and look at overall production costs, capital costs, the overall cash flows.
Speaker 1: and we'll make adjustments as needed and maybe, you know, first adjustments need to defer some capital projects.
Speaker 1: which do have an impact on copper volumes longer term, but we're going to be looking at all these things and closely monitoring the conditions. As I mentioned, we operate everything, so we control all these decisions and we can look very quickly across the portfolio and where things stand. So we're prepared to make adjustments. I don't want to give a projection as to what number, but we have reduced copper production.
Speaker 1: in the past, particularly when demand has fallen.
Speaker 6: And you talked about the market being physically tight. You can see that in the inventory data. It's a little bit perplexing though because the Chinese macro got so bad in the second quarter due to the lockdowns.
Speaker 6: and presumably Chinese demand materially weakened, underlying demand, most of materially weakened there. There's been year of a year in a second quarter fairly substantial supply growth when the two biggest minds in the world, including your own, had pretty big production growth year of a year. A lot of companies are lowering their production guidance, but second quarter looks like a quarter where you had an increase in supply and potentially a collapse in Chinese demand, yet inventories didn't really change. So I'm just trying to reconcile what might have happened. Do you think the Chinese may be buying copper or not?
Speaker 6: for strategic reserves or is there something else going on in the market that would explain why it's staying relatively tight despite the biggest end market potentially seemingly imploding in the last quarter?
Speaker 5: So Chris, I'm preparing for this call.
Speaker 5: I have made a concerted effort.
Speaker 5: with my contacts in the industry. We're very knowledgeable of the business on the ground in China to answer your direct question there. Because that was for flexing out. I inquired broadly about where there are inventories in China that were not visible, what was going on with Chinese commodity trading companies, and the work came back, you know, not life, not life.
Speaker 5: Inventories were not building. It wasn't unusual trading. You're right, it's a couple of arm-on and the other big man.
Speaker 5: increased but there was also supply disruptions in Latin America during the quarter and it appears that that
Speaker 5: In effect, balanced some of the Chinese demand issuance book.
Speaker 5: We don't see our customers.
Speaker 5: in China, and we have a diverse
Speaker 5: Customer base, provides an Asia weed.
Speaker 5: by design, don't.
Speaker 5: sell all of our copper into China but...
Speaker 5: into Japan and
South Korea and Taiwan and in the
And we don't see any impact on demand. So I understand your question, and I just want to share with you what I've been able to find from it, but we're just not seeing it in our business. In our business. In our business.
Thank you.
Western world has been strong as well, Chris, so that's been different than in past years.
Even in Europe , our business there is strong.
And I know the uncertainty space in Europe with this energy situation. So I'm not diminishing any of that. It's just our business is strong, as many customers over there are avoiding Russian copper. And so it is unusual as I talked about. It is a disconnect. It's a serious disconnect right now between the physical marketplace that we're seeing and what's going on with copper prices.
All right, all right, thank you for that.
Your next question will come from the line of David Gagliana with BMO capital markets. Please go ahead.
uh... thanks for taking my questions Chris uh... just hit the uh... the one i was really trying to i wanted to ask about which is the the cadence and i feel it back historically
you know, oh, 809, I believe, if memory serves me correctly, copper prices, you know, went to like a buck 51 Freeport acted and then, you know, 2015 2016 again off the top of my head, I think copper prices were kind of in the
So we're two to two fifty range so you know given cost pressures I've seen everywhere is it reasonable? It's sort of a two fifty to three dollar per pound range or reasonable zone to start thinking about one we'll see.
you know, more action at existing assets.
Well, in response to your question earlier on we had about that.
proceed
I think everyone understands that with freeport we have a broad range of operations with different cost structures.
I mean that was really the whole basis for putting together Grassburg with the Phelps-Dyde assets.
It allows us to manage those assets more efficiently when you've got a
SF light, grass burn to support it.
When times get tough historically, what we've done is they will use grass birds to all by corporate GNA and our death financing cost.
And then we challenge each one of our minds.
to operate as a minimum cash flow rate even.
And we review this mind by mind and every mind makes that decision.
our decisions to support achieving that objective.
But then within
The larger mind.
And I'll just use Merence as an example, the largest mining north America.
There are layers of operations within
So it's not just a question of focusing on.
individual minds.
But what goes on in layers within the existing minds we're able to take steps when necessary. And we're able to take steps when necessary.
to adjust operations.
You
to reflect the current economics.
It's a balancing act because decisions you make to do that have consequences that go on for years in the future.
but
We managed, as Kathleen said, a couple of times now.
We manage all these operations ourselves.
And we run our business in the Americans.
our business in the Americas essentially as a single business unit.
So we all get together, we find out what's working, what's not, what can be done, what is, and we balance the longer term consequences with the need to meet current realities. And with the need to meet current realities.
And it is, as I said, we have the same basic team we've had that we've done this before. So we don't have to adapt to what the YouTube community is for that we've had earlier on the web, and that's why we're able to return to theblipad. And then all of a sudden, you know, before that, even on Instagram...
We have a game plan for us doing it.
Now, our operators are ahead of us on occasions. Everybody knows what to do. Everybody is.
Head of us and occasions, everybody knows what to do. Everybody is...
pitching in and acting as a team to deal with our corporate objectives.
So...
it's not an easy question to say is there a price where this happens with this mine because it's an interactive process it cuts across
all of our minds in the Americas.
Of course, an Indian EU will produce as aggressively as we can safely.
and consistently with our long-term plans.
In.
It's so great now to be a grant up to the extent we are still that a couple steps to do.
But just two years ago it was really scary when we were having volumes down there and the world was facing COVID.
And we're so much better positioned now.
You raised this in your comments and we look at a lot of the publications that show where cost support is for copper. Those estimates are dated.
There's been a lot of changes in input costs that the historical cost of poor for copper has been increased significantly. So 325 copper is not the same as it was two years ago. And so that's a factor as well. But reading T. Lee's about how long this will last, we can move quickly.
This has happened suddenly and we're starting a process to look at what we can do, particularly on the capital spend. That's the quickest way to increase cash flow.
Okay, that's helpful. Thank you. And then just a quick follow up, obviously the authorization increased the buyback to from three to five billion at a time when copper is dropping. You know, it's copper kind of holds where it is. We don't see a lot of free cash flow, which by the way is no different from a company that reported last night that also raised their buyback. My question is just really, can you just speak to the thought process on the approach to the buyback, you know, moving forward considering?
And so we worked on it for months and finally came up with a policy that was announced about how we were allocating available cash flows, what was our debt targets, how we were allocating cash flows between shareable returns and investments.
It's always a challenge in the investment side of it because it takes so long to do it. So anyway, that's just part of the function. But we felt that...
And we discussed this with our board. We felt that it would.
best to give the marketplace.
A direction since we executed so much of our existing authorization, that we would have the availability.
to act for share of buybacks when it was warranted by the marketplace.
and
I want to be careful to say this because I'm not predicting anything. I mean clearly I
My long career has taught me not to be confident in myself or others.
in predicting these short-term movements.
but
David, there is a scenario here with the market being so tight.
And if things turn out not to be as dire as most expect now...
There could be a dramatic recovery.
and copper prices, and that would translate to recovering people with share parts.
And we want people to understand what we'd be prepared to do.
If the circumstances change dramatically where they are now.
That one goes for most to predict.
We're still gonna run the business.
with the primary goal.
protecting our assets and protecting our future.
because we believe the future, we're confident the future of this company is so bright. The future of this company is so bright.
past actions by the company that they didn't put it all at times we're not going to do that this time.
We're going to have just one about it, but we want it. Good morning.
market to know that we have this authorization available to us for us to execute when it makes sense.
Yeah.
Yeah, I think another factor out there is as you look at
The copper price needed to support new mine development.
and compare that to where our shares trading and what's implied in our shares.
You know, it's attractive, you know, versus new supply development. And on the flip side, we are looking at this staring, the situation in the face where new supply development is required. So...
There's a bunch of disconnects in the market right now and we wanted to signal positive we're going to use excess cash flows to buy stock back.
We've, you know, the lower copper prices gives us less cash flows to use, but
We're going to continue to look at our plans and see how we might modify that with this disconnect in where our share price is trading and what's needed long term to develop new share price.
I mean maybe it's right because most fans must say this, but our management.
and our board.
I truly believe that the fundamental value of Freeport is substantially higher than what it starts trading now.
Your next question will come from the line of Lawson Winder with Bank of America Securities.
Hello, Richard and Kathleen. Good morning. Thank you very much for the update. Again, today it is very nice to hear from you. I'd always hope you both are well. I just wanted to kind of dig down on your comments regarding the increase in the cash cost guidance to Kathleen. You mentioned it was a majority of the forces driving that were actually just a reduction in the byproduct price assumption. I was getting to that too, though. I was getting to a very small majority. So almost close to $50.40. Really happened to have us.
specific number in terms of how that broke down between inflation and the change in the price assumption and then maybe if you could just speak to some of the key I guess unexpected inflationary items that you saw in the quarter. Sure. Yeah, sure on slide nine we show a roll forward and you can see there where we've gone from 144 to 150 in the byproduct credit because we're using lower gold prices and Miley from what we use in our
in our prior forecast is down by five cents.
So, you know, we have a six-cent increase and five cents of that is reduced by product credit. police
The site production, the top line number, the site production delivery being up three cents.
The major factors there that impact are impacting our cost guidance is energy. We used just for reference in our last forecast, we used 350 per gallon for diesel prices, just for one reference in our outlook, which was around the price of the time. The price in the second quarter ends up being above $4.
for Gowon and that's the client sum watch of 3.370. So we're using current, or at least prices as of last week for oil prices, for diesel prices, roughly 370 a pound, or Gowon in our outlook. Whole prices are also up for my prior forecast.
purchase power costs are up slightly. We had some offsets in currencies, the stronger dollar results in lower operating costs in our international locations. So we've reflected that. We've had some contractual consumable price increases which are rolling in, which we've brought into the forecast.
We had also a, and this is more of an accounting deal, but we also had as we are transitioning at Alabra from a former leach pad to a new leach pad, we had some changes in estimates.
in our estimates of what coppers remaining in that leach pad. And so what that does is basically if we reduce the amount of copper available in leach pad and increases our cost for the remaining pounds. So that is not a cash item. It's essentially we've already spent the cash, but it'll roll through our unit net cash cost, and that was a factor as well. So, but the headlines.
Energy materials and supplies, this deal at a lobby, which is more noise offset by a stronger dollar and profit sharing and other costs that are driven by copper prices. So, net of all that, we were three cents on site production and delivery, and our export duties and royalties went down by two. So, the biggest factor you can look at this in sales and sales by product credits, is that we...
portion of consolidated numbers.
That's the huge benefit.
Maybe as a follow-up, I find it remarkable that you did not mention labour among all of that. Are you just not seeing signs of any meaningful labour inflation? And I guess you're obviously confident that you don't expect to see any going forward?
But we had already updated in our second quarter, in the second quarter and our first quarter results in April , we had already updated our labor costs for inflation. We've also, in contract labor that we're using, our labor costs actually, in this forecast, are a little lower because of this currency factor that I mentioned, and then that doesn't affect our U.S. operations. In beta, and beta, and beta, are providing a weird recovery for the necessary lowest cost foundation,
You know, when you look at South America and where the Peruvian and Chilean currencies have moved relative to the dollar, that helps because our costs are in those countries for labor are principally denominated in the local currency.
Thank you very much for the best of audio.
That's well, thank you. We'll get a shout out to R&M.
Supply chain team that's just done a remarkable job working with our suppliers in a difficult environment. make crowded
You know, not only from a
So I'll stand point but from up.
Delivery standpoint and...
They've just done a great job in working directly hand in hand with our operations to do what we can to offset these challenges that are broadly across all businesses.
Your next question will come from the line of Carlos de Alba with Morgan's family. Please go ahead.
Yeah, good morning. Richard, good morning. Thank you very much. A couple of questions if I may. First one, it seems that the leaching technology. It seems that the leaching technology.
could be a very attractive return on investment for you. So I wonder if you can give us maybe a little bit more color as to what is the current status there, what are some of the work that is still pending to do. And if you have any sense of a potential time in for that investment to materialize. And then the other is, I'm clear a lot of volatility, as you mentioned, and a couple of prices have suffered, but since you are quite constructive on the market, you might be an opportunity. To start with Facebook, Facebook has described the audacity of doing some research ??ai, and the projects that you are actually trying to ensure that it has found that Biden can be experienced as a Okay.
best project in the portfolio and is...
something that's a catalyst for us to really add value to our business. You know as you mentioned low capital intensity, very low operating costs and particularly in this current environment. We are highly motivated. We've got teams we're running it like a project. We've got teams highly focused on this. It's our number one priority. It's got you know an element of research and development associated with it so it's not just
execution. You know, it's got some science associated with it, but we are advancing our understanding of the science.
Our company and its predecessors have been really leaders in this area and we've got a team of people who have a lot of experience in the science of this as well as some new approaches that are going to allow us to be successful here. Corey Stevens is on the line who is leading this effort and with Josh and the whole America's team.
Corey, I don't know if you want to make any comments in addition to what we said earlier. But Corey's phone rings quite a bit because we do see this as being a real value opportunity for us to create value for our business and shareholders. But Corey, is there anything you want to add that wasn't covered?
No, thanks, Kathleen. Yeah, so, you know, reaching really does offer a number of compelling advantages on a number of fronts.
The analytics capabilities is really unlocking a more granular look at all the different aspects that we see.
in terms of recovery and it's enabling us to decouple static recipes that we had in the past to more dynamic recipes that maximize value as we go forward.
But that's just one bucket and it's very organic. We're at morency is a lot of a center of our attention right now.
We're executing to the moderate volumes that we've put into this year's forecast, building confidence into a sustainable, what that looks like going forward and then have a number of activities. And then have a number of activities.
going to add even more with a very large backlog of a number of alternatives that we're pursuing.
Thanks, Corey. Thanks, Corey.
additives which we're exploring as well as heat which we're applying covers across all of our stockpiles and we're well on our way to doing that and as we retain heat in the stockpile the data shows that recoveries are greater so it's a multifaceted approach to it. We're focused initially at Morenci. Chino is the second largest one in the US and we're
moving with data analytics there. We're trying out some additives at Ciarrita. We've got some third party activity going on at our Baghdad mine in Arizona. So we're trying a bunch of alternatives to enhance our understanding and we're gaining confidence that we'll be able to have some we've set this target of 100 to 200 million pounds over 12 to 18 months time frame.
And we're increasing our ability to our confidence and our ability to get to that. Once we get to that, that'll open up some iterations that will allow us to expand it from there. But we've got to get the first success. And we've had some early successes. It's just we've got to get to scale on it. So stay tuned.
We're going to the second question on Sara Verde.
Let me just add, you know.
The real focus is what Kathleen and Corey talked about, you know, is taking advantage of our existing leech operations. But with success, the future beyond that is really, really exciting about what we might do in terms of......and through ain't none, but is exactly to what we and Tommy czego did to traction. do in terms of...
is what Kathleen and Corey talked about, you know, is taking advantage of our existing leech operations, but with success, the future beyond that is really exciting about what we might do in terms of...
you know, mining sulfide ores and processing them with this technology or looking at historical lead stacks.
It's really exciting. Our whole team is really pumped up about it.
Very, very, very good to see.
Our project is called Leach to the Last Drop.
And just to circle back on Sara Verde, you know, we monitor the share price there, the public share price there. The public float is a historical carry forward that has been in place for a very long time. But we do monitor the trading conditions, opportunities, if they arise and being able to repurchase. It's a different scenario than in the U.S. where we can have active.
share purchase programs, but we are in tune with the market there and with certain of the investors and we'll look at that on an opportunistic basis as we compare uses of cash flow with other priorities at the corporate level.
All right, thank you very much. Appreciate the color.
Your next question will come from the line of Michael Dutus with the RP. Please go ahead.
Your next question will come from the line of Michael Dudas with VRP. Please go ahead. Yes, good morning everybody.
Good morning, Michael.
All right, so Richard we've had this this location over the last six seven weeks which is perplexed a lot of folks
And on top of the S&P report, you're going to report the came that you've cited as promised couple weeks ago.
Do historically these types of corrections are uncertainty in the market? or uncertainty in the market?
Will it lead to exponential delays in decision making and getting some of the supply to the marketplace? Is there going to be just…
Or is this like, well, we know that longer term topics could be great, so we're going to go through with these.
discussions. Obviously you're looking at it in one very measured way, but historically as the industry we're going to see further pressure on inventories and deficits because this type of you know nervousness could lead to further delays in the need investment for the product.
Yeah, unquestionably. I mean, you just think about the...
The impact on corporate strategy, the amount of financing that's available for smaller projects.
This is just another element of this series of barriers to supply development that the industry had already faced.
and unquestionably, I mean, it was pointed out earlier in the discussion that if our company like ours
It was pointed out earlier in the discussion that if our company like ours is
We got this really great project.
and truly...
That's being delayed by.
The policy political situation there and uncertainties about taxation When you balance that out with the company like ours and potentially being able to buy your chopstop back so cheaply That's that's going to have that's going to have an impact
political situation there and the uncertainties about taxation. But when you balance that out with a company like ours and potentially being able to buy your stock back so cheaply, that's going to have an impact.
The investment in this industry is just so long term.
investment in this industry is just so long term, it is so long term even for.
you know, a project as straightforward as
doubling our concentrator at Baghdad, that's a multi-year effort to go through the permitting, the planning process, the procurement process. So it's the long-term nature of this business.
Head spinning move and prices like this is going to have an impact on
on those investment decisions. I don't know of any company that's just going to close their eyes and say you know that the market's so good in the future. We're just going to ignore this. You can't ignore it. I mean, it's been such a dramatic decline and there's still such uncertainties. So what's going to happen?
that all of that is going to lay.
all of that is going to delay.
production investments and And there was just such a limited number of investments available out there. Anyway, it's just building forces
Coming huge deficit in the copper markets.
Thank you, Richard. Your next question will come from the line of Tim Nataners with Wolf Research. Please go ahead.
I am, thank you. I guess I'm just trying to kind of square that what we've been discussing in terms of report slide 12 in terms of all those projects. What does it take that you need to see to from the Chilean politics to get more confident in El Abra? And what does it take in terms of copper prices just generally to proceed or many of these still very attractive at recent prices? Thanks very much.
So Tim, thanks for your question, it's job.
you know in looking at our situation there's a lot of balancing of competing economics for these projects that come
The uncertainty at Alahbraf where we have a 50%
51% interest in we operated because the elbows are partner.
Uh.
Just means that that is a burden on that project. Where is?
at Investments in the US.
Where I mean, mentioned we.
on substantially all of our land and fees, so there's no royalties where we have a favorable income tax situation that's partially due to the tax legislation that's in place now and partially due to a tax situation that's in place now.
That operating loss care forward we have from going against investment.
and all the issues around community support or what you have to.
which you have to provide in international operations affects that balance that we have.
international operations affects that balance that we have. Yeah, yeah, no.
Future years different because it's just a clear cut fitting into our long-term plan for managing the available award.
Dressburg, and by the way, I might mention it, and when you had your report today, I questioned about extending this.
4041 deadline there. We're in early discussions. I think we have the pathway forward.
But we have a proceed with that and that...
Something that would benefit all stakeholders and also open that whole area for further exploration which is
been limited because of the 2041 deadline under our existing operating rights. So it's not an easy question to say in them, but it's a balancing off on all these things. But it's a balancing off on all these things.
of the 2041 deadline under our existing operating rights. So it's not an easy question to say, but it's a balancing off on all these things. And the other regards, though, are Swinburne, you know.
Right now, you know, the lead focus is not there. It's going to be affected by economics timing of bagdad, maybe. The Loanstar project, the near-term expansions are going well. We may have some more opportunities there that so far is longer term. The new lovers and one that's really challenged. The Loanstar project is going to be a great opportunity for us to be able to make a great effort to get the best of the team. The Loanstar project is going to be a great opportunity for us to be able to make a great effort to get the best of the team.
Beyond that we have fotherther opportunities in the U's at burrency and and and that our otherwise but.
What I really like about our company is we have this huge pipeline of
I really like about our companies, we have
The nearest thermal take time, whether the leaching wants to come quicker, but beyond that, we have such great resources that are available to us beyond reserves. No time, those are coming to reserves, and so this company is sustainable for our bail-on-bearded time.
Without having to do anything else. Without having to do anything else.
do anything else without having to do anything else.
the decisions about timing and when to commit and so forth.
a lot of moving parts and that got even, it's just gotten more complicated by seeing this third percent drop of copper prices and not knowing what's going to happen in the next.
two to three years globally. So it has an impact on us and it will have an impact on other companies.
Thanks for that context. Thank you.
Your next question comes from the line of Abby Yargawal with Deutsche Bank. Please go ahead.
Thank you. Morning Richard and Kathleen. I just had a question on inflation. So in terms of inflation, where do you see the biggest upside risk into the year end and 2023? And you did talk about using spot gasoline prices and including labor in your forecast. But does the Q3 and the 2022 guide reflect the spot consumable prices you are seeing? That's my first question. The first answer is yes to that.
on the future. I learned long ago that's a dead man's game.
And so we just use current crisis and then look at scenarios of, I would say that so those of you who follow the company a long time, you heard me say.
about the correlation between our input costs and copy prices that's been there and that's
On one of the rationales we've always used for not hedging.
This current market has disrupted some of those.
long-standing traditional relationships, you know, energy's the most...
significant one and that's changing and every day you see that that changing so we're just having to
We're having to approach this with prudence, with an overall goal of protecting this great set of assets we have.
and protecting the future that I think is going to be so great for our company.
So we're going into that mode that we...
that we followed before.
of really aggressively managing our business there's a world around this changes.
And to your question about where we see the most risk or opportunity either way, I'd say energy is the one that's the most uncertain. And to your question about where we see the most risk or opportunity either way, I'd say energy is the one that's the most uncertain.
As Richard talked about the correlation, what we're spending on energy, if we did historical correlations going back over a long period of time, our energy costs correlated to a $3.25 copper price.
would be 40% lower or greater. And so, but yet people are talking about potentially energy prices spiking again because of what's going on in the world. If we really do get...
This recession really comes through, you know, maybe it's a scenario where historical correlations start to fold in more than they are today. But our current plans are not based on historical correlations they're based on.
on the current and the current market conditions.
But you know, and this is obviously already the biggest risk to our business right now.
is obvious to already the biggest risk. The biggest risk to our business right now is...
Is the future demand?
And I'm going to drop off a clip.
The cons of a global recession.
And that's what the market's pricing that in, in large part right now, because that's what
And that's what the market's pricing that in, large part right now, because that's what the expectation was. And that's what the market's pricing was.
It looks that Bank of America surveys they did
80% of the people were rejecting bad times, but we haven't had that yet.
But that's the risk to our business. If the dire expectations about recession occur, demand will fall off. We can adjust to it. We're not going to... You're not gonna be wired to do anything.
put our company at risk. And that's why we're going to be very prudent about the way we manage capital, manage operations, manage our financial policy.
Oh.
You know, I'm such a big believer in copper, I have this urge to be a lot more austere about it, history has taught me we need to be really prudent to protect ourselves in case things happen.
big believe in copper and have this urge to be a lot more asked to hear about it. The history is taught me and we need to be really prudent to protect ourselves in case things happen that....
or might put a put a suppress and we're not going to do that.
might put a put a sugary we're not going to do that. I'm going to do it.
Your next question will come from the line of John Tomazos with John Tomazos Therian Dependent Research LLC. Please go ahead.
Your next question will come from the line of John Tomazos with John Tomazos very independent research LLC. Please go ahead. I'm going to see very much. Thank you very much. Thank you very much.
Hey John such a strong position.
3, 4,
And given the two big capital projects, the smelter and cooking we air, basically non-disgressionary.
Oh.
that we really don't need to make too many changes to play off to always this winged cat backs around a lot.
And that there's less risk of a double mistake of making all these cuts and then the market recovering, you know, panics start and stop so fast, it's so hard for you to manage.
Do you think it's very likely we're steady state at three-port?
Well, let's see, you mentioned people, you know, we –
We may, we may.
substantial cuts and personnel just over two years ago with the COVID issue.
You know, we did that. We always treat people fairly. It was mostly between incentivized, but each time we met Mark and animation director Tom Thomson we were talking to in this
terminations and so forth and we were very effective with doing that.
By the way, we have carried over some
really efficient benefits and on G&A cost.
What we learned during that period of time.
learned during that period of time about
and working efficiently with our people. I encourage all of you to go back and look at the history of Freeport's GNA and just see what carcass we've made with it.
John , we're actively looking for technical people. I mean, we're not talking about cutting back technical people at all. I mean, we're not talking about cutting back technical people at all.
because this opportunity with reaching, with data analytics, which is used in reaching, but in the rest of our business, and my experience has shown you find your technical people you can.
they'll create value for it.
they'll create value for it. So steady state.
Maybe that's one way of saying it, you know, now that stuff.
You know, it was grass bird being worded with a ramp up. We're still working on a mill enhancement there, and we're powering to use. We're powering to use.
We're dealing with our power plant there.
dealing with our power plant there.
so
We have some other investments made, but we're at our run rate.
And clearly the expansions are being affected by a day's copy price. So.
Yeah, we're just focused on staying
in a strong financial position, keeping all of our options open.
financial position, keeping all of our options open, and being prepared to act when time makes sense.
We raise the capital we need for the smelter. That's an important part of our agreement with the Indonesian government and we raised.
the capital we need both in the bond and the bank markets earlier this year before things
Things got deteriorated and so we're in good shape. That's an execution project. It's a complicated execution project, but it's an execution project. The Cooch and Liar project is investments over a long period of time. We can have some pluses and minuses as we look out in the plan to tweak it, but it's a long-term investment. The places where we do have