Q3 2022 Freeport-McMoRan Inc Earnings Call
And Mike Hendrix on who runs our molybdenum business. We also have Steve Higgins, our chief administrative officer.
Richard is going to make a few opening remarks, and then we'll turn to our presentation a slide materials and go through that and then open up the call for questions and so now like to turn the call over to Richard for his his opening comments.
Thank you Kathleen and we really appreciate each of you joining our call today.
I'm just going to make brief comments about how our company is positioned in the current market.
What we believe will be a very bright future for the copper business in the future as we go forward.
As we talked about on our last call is it remains a world of two cities the macroeconomic.
Sentiment continues to be weak.
And you all see that in your everyday lives.
On the other hand.
The fundamental physical copper market is strikingly tight globally right now.
The macroeconomic situation is driven by the strengthening U S dollar.
The fed in central banks tightening concerns about China dealing with Covid in it.
This property section and then the.
No serious problems in Europe coming out of the Ukraine situation and how that's affecting.
Energy prices and economic outlook.
Those things are realities, we have to face up with.
But we continue to work to position our company.
To deal with these situations we.
Now have a very strong financial situation that allows us to do that effectively and we are increasingly confident about the outlook of the position.
The copper markets, and where freeport's position to take advantage of that in our <unk>.
Confidence continues to grow global copper inventories remain at historical levels.
C production reports from producers.
Across the globe.
Reporting challenges and.
And meeting their production targets.
And the industry is facing increasingly challenges in developing new supplies.
In the current environment stretched supply chains production shortfalls are becoming commonplace.
And cost curves are rising.
We have three quarter realistic.
About the potential for a weak weaker global.
GDP, we prepared our business and taken steps and have plans for further steps to take.
Depending on the near term.
Steps is what occurs.
We have an old saying around Freeport, we don't wring, our hands would roll up our sleeves.
The positive thing is that new sources of copper demand are emerging now.
And there's widespread recognition that copper demand will be significantly benefited by the ongoing global electrification around the world investments to reduce carbon they are beginning to accelerate and this is going to.
Occur more rapidly in the future and it's going to be a big impact on copper demand.
To meet that demand the energy transition will require a massive amount of copper.
And other steps to deal with it.
Higher prices will be required to bring on new supplies.
How much higher prices than we have now.
Simply because the current price is not sufficient.
To an extent.
New supply development on the scale that will be required to meet this increasing demand.
I'm real proud of our Freeport's global team, we're focused on executing our plans effectively.
And focused on managing what we can't control and not getting distracted by things we cannot control.
I want to particularly highlight our grasberg team for the great results. They achieved this quarter.
And the ongoing success our team is achieving in ramping up the large scale low cost underground operations in Indonesia.
Just three years ago, we were completing mining the open pit.
This team has achieved despite the challenges of Covid. This is truly remarkable.
Was.
Pleased to visit our site in <unk> during this past quarter.
And had the pleasure along with our team of showcasing what we've accomplished.
During a visit by Indonesian President joke overdose, though.
He was the first president of Indonesia to visit our job sites and Suharto did in the early seventies when production there commenced.
And it was it was it was truly a pleasure to be able to show them.
What we've accomplished what we are accomplishing in the underground.
And to point out.
Workforce, there were 98% of our employees are papuans are our Indonesian and over 40% are papuans.
It's really noteworthy that it was there.
You expressed a lot of positive comments about it.
For me it was something that was really special since I've been going there for over three decades and to be able to review it with him as a follow up he ask.
He asked me to accompany his minister of investment.
On a roadshow type two or <unk>.
<unk> universities seven universities in Indonesia.
<unk>.
Oh the estimate there was 10000 students and faculty at these sessions as well as it was streamlined to me anymore that was a special time for me and for our company and it just.
Illustrates the much improved partnership we have now.
With the government of Indonesia, and the President his ministers.
I just wanted to close by saying that.
To reemphasize, how I believe we are well positioned at Freeport to be the global leader in the copper business, we have long lived reserves.
Large scale global operations, a stat traveling established track record.
Managing responsibly.
The development and operation.
Among the largest mines in the world We've got a great team that's been experienced in stuck together through.
All the things, we face and so on.
Very pleased about that.
Going to take steps to create value for this company overtime Youll hear today about the exciting work, we're doing with leaching technology that can add values.
Low cost carbon friendly way, we've got large scale brownfield development projects ahead of us.
And we're going to use technology to continue to use technology.
To help us operate efficiently and create value.
So with that I'm going to turn the call over to Kathleen.
We'll review.
The quarter and outlook and then I'll look forward to your questions.
Thank you Richard and I will start on slide three with a summary of the quarter's highlights.
A theme we achieved strong production in sales product sales performance in the quarter.
As Richard mentioned, we're continuing our focus on effective execution of our plans in a challenging environment.
Volumes for Papa were 3% higher than last year's third quarter.
4% higher than our guidance going into the quarter, although sales were above the year ago quarter by 19% and 20% above our July guidance.
No strong performance at glassman during the quarter.
From a cash cost standpoint, our consolidated average unit net cash cost well $1 75 in the quarter are they averaged $1 75, and that was about 5% above our estimates going into the quarter quarter.
Richard referenced cost pressures continue to be a significant issue for our operations and really across the global mining stream on the current market. Many of our input costs are above historical correlations to the copper price.
We can't predict how long this dislocation will occur but based on history, we typically see a high correlation of many of our input costs, but the price of copper as Richard mentioned, we're going to continue to focus on those areas of cost and efficiencies that we can control to help mitigate these cost increases.
Adjusted EBITDA in the quarter was a million and half dollars. This was net of $228 million reduction associated with copper sales that were provisionally priced at the end of June .
At 375 per pound, which remains subject to final settlement and the decline in copper prices during the quarter resulted in a negative adjustment.
A reconciliation of the EBITDA calculations on page 31 and decide that.
Adjusted net income for the quarter was 375 million that excludes <unk>.
Nonrecurring gains that are detailed on.
Running and on page seven of our earnings release.
75 million or <unk> 26 per share in the third quarter of adjusted net income.
Our operating cash flows of roughly $800 million in the quarter approximated our capital expenditures our capital spending during the quarter.
<unk> 400 million for major projects, principally associated with our Grasberg underground projects.
200, <unk> two advanced construction on the Indonesian smelter.
During the quarter, we continued opportunistic purchases of our public debt securities in the open market. So.
So far in 2022, we have purchased approximately $1 1 billion of our no.
Notes at a discount to par.
Including $400 million and principal amount in the third quarter the.
Market conditions in recent months have provided a great opportunity for us.
Reduce our absolute debt levels at attractive prices and these purchases generate approximately $50 million per annum and interest cost savings.
We continue to maintain a strong balance sheet, we've got a large cash balance and significant liquidity.
We ended the quarter with $1 3 billion and net debt, excluding the $800 million and net debt associated with the Indonesian smelter, that's well below our targeted net debt range of $3 billion to $4 billion.
The authorization under our share purchase program remains at $3 2 billion.
Since reaching a net debt target in the range of $3 4 billion in the middle of last year, we've used over 50% of our free cash flow for shareholder returns that totaled $2, seven dalian and share purchases and dividends.
Over that period.
We did not purchase shares since mid July and that reflects our priorities on our balance sheet and our policy of using excess cash flow for shareholder returns and the timing of our future purchases will be dependent on our cash flows and overall market conditions.
I want to point out that we recently published our updated annual climate report that's available on our website.
Report includes an update on our progress to improve our energy efficiency and energy integrate lower carbon alternatives until our operations and we're making great strides in that area.
As Richard talked about and.
And we talked about on our July call. We commented on the magnitude of the sharp decline in copper prices that we experienced in recent months.
We benefit from having the balance sheet, the asset quality and experience to successfully.
An uncertain market environment.
Despite the recent weakness we remain constant in our strategy centered on being foremost in copper we're positive about the strong future fundamentals for copper.
And the strength of our assets and team to increase value for stakeholders.
America Slide four which is a graph of the year to date copper prices.
We discussed on our last earnings call.
Is that the price may have appeared to be anticipatory and financially driven by global macroeconomic conditions.
This backdrop continues to be challenged by rising interest rates attained inflation concerns about Chinese economic growth and pressures in Europe associated with energy and geopolitical turmoil. We also indicated on our last call that markets remain strong physical markets remained strong for Papa.
Our customers are reporting solid orders physical market was tight as evidenced by low levels of inventories.
Situation is much the same today copper demand remains healthy the industry continues to struggle to meet production targets and inventories remain low by historical levels.
And as you look forward.
We see copper demand that will benefit from a substantial requirements for metals required for electrification and the energy transition.
This new demand is emerging emerging and it's driven by secular trends rather than economic cycles.
History does not have a current pipeline to meet this demand and the recent weakness in copper prices will only make this development more difficult.
Richard talked about we're realistic about the current macro conditions, creating uncertainties, but we do have strong conviction about the long term fundamentals for the copper markets and we expect to start seeing as we go through this period of increased demand from de carbonization locked.
Supply demand gaps emerging in the copper market.
On slide five we'll turn to operations and you'll see we present here a.
Summary of our sales by region for the third quarter.
And I'll just go through them.
Around the globe, how our teams are doing and starting with the U S. Our teams are focused on meeting our production targets safely and efficiently and overcoming challenges with limitations on event on available.
Labor.
We are ramping up the Safford Safford mine, we're ramping up our mining rates and.
In the U N in the U S and we are aggressively pursuing leach production and continuing to study the possible expansion of our Bagdad mine in northwest Arizona.
Moving to South America, our team at Cerro Verde in Peru continues to execute very effectively and produce at an average of over 400000 tonnes of ore per day through the concentrator during the quarter.
We faced some challenges during the quarter with byproduct molybdenum production and that impacted net unit cash costs. The team is doing great work to overcome this challenge as we as we look forward into the fourth quarter and beyond.
We're particularly proud of exceptional work Cerro Verde dogs in the community.
It's a sustainable model for the operations.
At El Abra, we're continuing to optimize the existing operation, while we considered a larger expansion options in the future.
Richard talked about Grasberg, we benefited from continued outstanding execution of the plans that allowed us to exceed our third quarter sales guidance with strong production results in the quarter.
Higher than forecast grades and an exceptional loading and shipping performance.
The team loaded and shipped all of its third quarter production and available kind of concentrate inventory during the period.
We're also continuing to advance several projects at the site related to them.
Our work to add an e-mail circuit.
Working on power infrastructure.
We're continuing to advance the development of teaching Liard, and we're progressing with construction of a new smelter in eastern Java with a targeted completion of that project in 2024.
We show you at cost at the bottom of the slide on a consolidated basis as I mentioned and costs in the third quarter or about 5% above our guidance that mainly on a consolidated basis was associated with higher maintenance and the increased cost of supplies.
Taking it down by region.
The U S was challenged with higher maintenance supplies and labor.
South America, the variance to our expectations related to lower molybdenum byproduct credits and Grasberg was in line with our prior estimate.
But they were offsetting variances higher maintenance costs and supply costs were offset by stronger gold byproduct credits in the quarter.
We've adjusted our annual cost guidance for 2022.
To average $1 55 per pound that compares with our previous estimate of $1 50 per pound and we've got a reconciliation provided in our reference materials on slide 22.
On slide six we wanted.
I wanted to highlight the the progress at Grasberg that Richard referred to.
Since reaching the targeted run rate in the second half of last year.
The team at Glastonbury that she has done a great job demonstrating sustained large scale production for several quarters now.
We benefit from our industry, leading expertise in block caving.
We're effectively managing the largest underground mining complex in the world. This is a major accomplishment not only for our company, but in the history of the global mining industry.
Resource at this site, where we've been operating for over five decades is significant.
And with the success of this project we're engaged in discussions regarding an extension of our operating rights beyond our current 2041 timeframe.
Richard talked about earlier, we've got some pictures from the visit on the slide we were honored in late August to House, Indonesia as President at the Grasberg site.
He toward decided extensively he decided to form a surface mine had an in depth tour the underground.
And actively engaged with our team and he expressed great pride of what has been achieved technically and for the people of Papua and the country. It was it was really a happy time special time for our entire team.
Worked so hard over the years to make this project such a success.
Another exciting area that we wanted to talk more about today on slide seven.
Is our leach in innovation initiatives.
This is really focused in the Americas, and our drive toward capturing higher recoveries from Leach stockpiles is gaining a lot of momentum.
The economics of this opportunity are extremely attractive very low capital intensity low incremental operating costs low carbon footprint.
The lowest cost copper units in our Americas portfolio.
And carbon.
Carbon intensity is low because the mining costs have already been incurred.
And so essentially what we're doing here is extracting more copper from what historically would be considered waste.
We're using new data analytics capabilities and those are providing valuable information to.
Titus and prioritize our work on the highest value.
We're continuing efforts to retain heat and the stockpile, where we're moving forward to apply covers two our leach stockpiles because the retention of heat are within the stockpiles is proving to enhance recoveries.
So applying solution.
Two new areas that we're not pursuing historically and we continue to test various additives second further enhance recoveries.
Progress to date and an early results are leading us to a target run rate of 200 million pounds by the end of next year in that.
Is that the top end of what we were a prior thinking was 100 to 200 million pounds.
Success at this level would give us a roadmap to scale a larger and that's what we're focused on.
And we're really taking advantage of the long history, we have in leaching significant stockpile material the availability of new technologies that weren't available in the past.
And we're in a really strong position to lead the innovation in theory.
We're managing this project and this initiative as we would a major project and when we think about it is it's similar to a it has a similar production.
What we would look at at a project within the U S to add concentrated but we don't have the capital associated with it and the operating costs are very low.
We're allocating a meaningful amount of significant.
Expertise and technical resources and are aggressively pursuing this opportunity.
I'm going to move to slide eight which provides a three year outlook for our sales volumes.
As you'll see the 2022 volumes.
Similar for copper for $4 2 billion pounds of copper for 2022.
Sales or about 5% higher than our prior estimate for the year.
And that reflects that.
Glamour.
The sales mix for 2022 is roughly 35% coming from the U S, 28% from South America, and 37% from glass fared.
You'll note that our 2023 copper sales guidance has been adjusted their lower by about 150 million pounds from our prior estimate that's roughly 3%.
Half of this is a timing matter and does not represent a production shortfall.
And this goes to a.
A change in the commercial agreement.
<unk> of our of our arrangement with PT smelting the existing smelter in Indonesia, which we own a 40% interest in currently that commercial arrangement is converting in 2023 two.
I'm, a purchase and sale agreement to a tolling agreement and so P. T F. EIS production, a portion will be deferred and sitting in inventory until final sale, but it does not represent a production shortfall and in fact P. T O <unk> production is going very well in line with expectations.
The balance of this change is associated with updated mine plans and the Americas.
That includes the impact of anticipated lower grades than we were previously forecasting for 2023 at Cerro Verde the rest of the.
Guidance is it's pretty similar to what we were when we were guiding to last quarter.
And we're going to move to cash flows on slide nine and you've seen these charts before.
As a leading producer of copper our earnings and cash flows have significant leverage to the price of copper.
And we show modeled results for our EBITDA and cash flow at various.
Prices and with the current cost structure of the business, which is we've talked about has has increased in recent quarters.
We've shown a broad range of prices ranging from $3 per pound to $5 per pound.
And just recall.
Everyone in the first half of this year prices averaged nearly $4 50, a pound and we're approaching a $5 a pound later in the year.
We don't believe our.
Current copper prices sustainable long term given the cost structure of the industry the need for new supply development in the future.
Modeled results using the average of 23 and 24 with the current volume and cost estimates holding goes flat at 1700 per ounce and molybdenum flat at $18 per pound.
Our annual EBITDA would range from roughly 6 billion per year at $3 copper to over $14 billion per year at $5 copper and our operating cash flows.
Net of all of our taxes.
Would range from 4 billion per year at $3 copper to $11 billion at $5 copper. So a lot of leverage to the price of copper we show sensitivities to the various commodities on the right.
It's Richard talked about where we're prepared to manage in a low price environment, while retaining optionality for what we believe will be a much more positive situation as we go forward.
And we've got this long life asset base.
At will prove to be valuable given the compelling fundamental outlook.
I'm looking at our capital expenditures on slide 10.
You can see that we've reduced the 2022 capital forecast by $400 million.
<unk> gone from $3 1 billion in our prior forecast to $2 seven in the current forecast.
About half of that has has shifted into 2023.
As we've talked about all year, we've been spending capital at a at a slower pace than our original plans. This has.
Something to do with with with the just the.
Supply chain and.
Labor and other things that have that have that deferred the projects, but we're continuing to prioritize the critical projects.
We're gonna contain Apple.
<unk> opportunities as we look at our capital spending plans in the context of the market environment due to first spending where it when it makes sense.
We have a lot of flexibility with our plans and we benefit from the fact that the major investments required for the grasberg transition largely behind us.
These amounts exclude capital for the Indonesian smelter project that project is being funded with cash.
From a bond offering that we raised earlier in the year Theres. Some details on this project and its progress in the reference materials on slides 27, and 28 mm construction is moving forward, we're working to complete the project as early as we can.
Currently expected to complete it in 2024 and to date, we've invested about $800 million in in this project.
We will talk for a minute about the the financial policy.
And and our and our strong balance sheet.
Going to the balance sheet, it's really the cornerstone of our financial policy and the steps we've taken in the past.
This isn't an exceptionally strong position.
Particularly in the context of the current market weakness, we don't have a need to raise new capital for the foreseeable future.
Essentially all of our debt is fixed rate.
We continued as I mention our opportunistic purchases of debt and during the quarter and in it.
We purchased over $1 billion in senior notes at attractive prices.
The slide here shows our net debt at $2 1 billion at the end of the third quarter.
That includes 800 million for the smelter so when we look at.
Our net debt compared to our target, it's $1 3 billion.
This is below our net debt target of $3 billion to $4 billion. So that gives us some cushion.
We've also got a very much cash balance.
Of $8 6 billion and that's that's.
That continues to provide significant liquidity for us and you'll see here, we have a very attractive debt maturity profile, we've got easily manageable maturities, we've taken steps to improve.
Improve our financial flexibility, we did some transactions to increase P. T. F. EIS revolver. We did the same thing at Cerro Verde and just this week, we completed the extension.
Our corporate revolver.
Which was.
Previously our plan to mature in 'twenty, four and we've extended that to 2027.
And closing.
We're showing a scorecard on slide 12 of the shareholder returns, which have been substantial since reaching our net debt targets last year.
As a reminder, the financial policy provides for the distribution of 50% of our free cash flow.
And shareholder returns with a net debt target in the range of three to 4 billion, excluding the smelter debt.
We pay a base dividend in a variable dividend totaling <unk> 60 per share and 30 cents per share that is variable was used $1 8 billion of our $5 billion in share purchase authorization a variable dividend is continuing through 2022 and our board will.
We have the opportunity to review future dividends depending on performance.
As I mentioned, we've returned $2 7 billion to shareholders. This represents over 50% of our free cash flow over this period, and we're well below our net debt targets.
As I mentioned, we did not purchase shares since July 22, and that reflects just the priorities on the balance sheet the impact of the sharp decline in copper prices on our cash flows.
We're going to continue to prioritize our balance sheet.
We believe that maintaining the balance sheet strength and various various market condition is really important and our ability as we look forward to drive long term returns for our shareholders.
We're focused on long term value focused on execution doing this responsibly safely efficiently.
In the near term with respect to growth projects, we're going to continue to define our future options.
But expect to defer new major investment decisions.
In the current market environment, we're convinced the world's going to need our projects in the future.
Prices will need to move higher to incentivize the new project development.
But you talked about the pipeline of options. We have we've got a lot of flexibility in terms of the timing of development of these these options, particularly the expansive options we have for development of new supply in the U S.
In closing we are optimistic about the value of our assets.
Grant of our team and fundamentals of the type of business and the future prospects for the markets we serve.
I'll stop there and we'll operator will open up the call for questions. Thanks, everyone for your attention and we look forward to your questions.
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 youre using a speakerphone. Please pick up your handset before pressing the numbers, we ask that you limit your questions to one if you have additional.
Please return to the Q1 moment please for our first question.
Our first question will come from the line of Emily Chang with Goldman Sachs. Please go ahead.
Good morning, Richard and Kathleen and thanks for taking the time. This morning and my question is just around the leaching technology and understandably, it's a low capex a opportunity that to continue to bring them.
Spring production growth. So I wanted to understand the guidance that you have of 200 million pounds per annum by year end 2023, that's the run rate that you targeted could you perhaps share what volumes you are seeing from leaching activities today, and how should we be thinking about that ramp profile to get there. Thank you.
Thanks, Emily we have experienced some positive and that's what's given us more confidence to get to this run rate we have experienced some some improved recoveries.
Particularly at at Morency, where that's been the start of this focus was that at morency that has offset.
The improvements that we've had in and Leach production. During 2022 has offset some shortfalls. We had in 2022 associated with lower placements as we struggled through them you know the labor situation with with mining.
With with mining rates, but.
In terms of the the actual benefits to date, we are starting to see those.
So you're talking about you know by the end of next year.
Getting to 50 million pounds per quarter on a on a run rate basis.
We're already probably a third of the way there.
In terms of what we're seeing now, but what we've got to do is is not only see the improvements in recovery, but get the material placed and that's been the challenge in 2022 is getting additional material place to meet our base production, but.
The reach initiative has helped us offset some of the shortfalls in other areas.
Great. Thanks, Kathleen if I could squeeze one more just on the Baghdad expansion. It sounds like that's been at least pushed into 2024.
Well, we were completing the feasibility study we expect to complete the feasibility study in the first half of next year and so we will have the opportunity at that point.
You look at the situation look at the availability of labor.
Look at the inflationary environment that we're in in terms of executing a project in U S.
In any environment.
And look at the overall market conditions. So what we're doing now is really getting to a point, where we can make a decision.
And have the project feasibility ready to go so that we will have optionality of when to start it but I think it's fair to say, if if we wouldn't pull the trigger today to start.
We need to see some some improvements in and just the overall.
They'll ability of labor.
To see some improvements in just the tightness, that's going on in supply chains, and and you know the top execution environment for construction projects.
And and just the overall copper market, but these are options that we have and so we don't have any kind of timeline.
To start it we Wanna started when it makes sense when the market needs. It and so we have that flexibility within the portfolio to do that but we're continuing the feasibility studies. So that we can be in that position next year.
Great. Thank you.
Your next question will come from the line of Christmas season that with Jefferies. Please go ahead.
Alright, Thanks, Operator, Hi, Kathleen Hi, Richard Thank you for taking my question.
So.
My question relates to <unk>.
Some of the operational and financial flexibility that you have so if you think back to early 2016 you had.
$20 billion of debt very little cash or to issue equity sold assets.
Not in a great position at that time to weather the storm of difficult markets, whereas today you have low net debt you have high cash your net debt is well below your target range and you have multiple levers that you can pull in the event that macro conditions. We can further so obviously, the first lever, which looks like you're pulling your readiness kind of suspending the buyback until things improve.
But you still have a couple of billion dollars.
Kind of leeway on the balance sheet before you get into your net debt target range. So, let's assume that commodity markets get worse kind of stress testing the business.
Youre burning cash for the next kind of 12 months based on your current operational spending plans when you get into that targeted net debt range. What are the levers that you can pull nextera, they're kind of capex reductions that you can make.
Their mindset Youll take offline the cost inflation is kind of a prominent industry in copper price isn't really doing much. So eventually I would assume that some of these mines become lossmaking. So what are the levers that you can pull over time in the event that market conditions weaken further.
We have 12 months leeway.
Before you need to consider that but.
Where do you look next to kind of protect the balance sheet in the business.
Yeah.
Richard I'll I'll take that.
Hum.
Or you'd like to go first.
No no go ahead yeah.
Yeah.
Chris as you know historically, what we've done and you know we've got a really.
Really experienced team at this.
Normally what we've done is.
And looked at each mine.
Individually and looked at opportunities to them.
To reduce costs.
Mine's cash flow positive during weak environments and.
What's different right now and I don't you know if we do get into a recession I think that we're still going to start to see some of these historical correlations.
Come more in line, but right now we've got the copper prices have declined significantly but input costs have not at this point.
I think that if we do get into a really tough situation across situation may may get some some relief, but in any case, what we do as we go through each mine.
Look at the operating plans determine how we can optimize those operating plans what it tends to mean is that.
We.
Tend to look at where can we cut back on the mining rate to them to get to a better cash flow situations. We did that in 2020, we've certainly done it weighed on nine we did it in 15 and 16, we've done it multiple times.
So we do if we get into the situation where it is we've got big surpluses building on top of the world doesn't need on copper.
We certainly have the playbook on how to address that.
The difference now is that you know the world does seem to need our cockpits of the inventories are are very tight.
We've been recovering from the 2020.
Down downturn, where we when we took down a lot of production took down a lot of.
Mining rates and we're ramping back up and it takes a long time to get that flywheel going so I I don't think we're gonna be very rash to cut mine rates and do we need to do.
Unless it's a very difficult situation now what's different now than it was in 2020.
Westberg is doing so well and the match of having having our Grasberg mine is is it really does provide a very strong results you know low on our lowest cost mines in the world and so that having that mine up and running and doing so well is.
It is a benefit we've also got a very different balance sheet than we've had historically, but we're gonna be smart about how we look at this you know we're not going to.
<unk> produced at a loss you know that if the world needs our copper it needs that we need to we need to have a margin. So.
We're going to do what we need to do the levers that we have to pull are the same levers that we've had in the past big reductions in Capex, probably the first thing and then we'll start looking mine by mine on how to change the operating plans.
But the difference again I just want to emphasize.
You know you look at the forecast for this de carbonization.
And the world appears to need more copper rather than less and that type of demand.
Yes.
Who are these economic movement, so well we are agile and nimble, we'll do we have to do but I think it is different now than it has been in the past.
No question about that I mean, 2016 was a crisis for our company, we're not anywhere near prices now and since then.
We've had two major.
Scott bullish, let's Derisk our business significantly one was the $2 18 agreement that we reached.
With the government.
Two.
Stabilize the situation situation, we had in years.
About the structure of our taxes royalties and operating rates.
And now we've had.
Four years of operating under that.
Yeah.
And it's going very well as you can see by the presence of visits et cetera.
And then as Kathleen mentioned de risking grasberg.
Ramping up the underground and being effective in sustaining rates there we go.
To be able to do that.
<unk> to operate effectively we've got this coaching their ore body that we're developing.
I had one too to give us stability.
So.
We went back to the strategy that we've always had grasberg generates cash and many of them.
Any environment.
You can find our G&A.
Okay.
And then we challenge each of our other mines too.
Manage their business to break even at least at least breakeven on a cash basis.
Thank you.
Your next question will come from the line of Alex hacking with Citi. Please go ahead.
Yeah, Thanks, Richard and Kathleen just a quick clarification on the leaching. If you are successful in getting to that 200 million pound rate by the end of next year.
Should we be then thinking about that adding onto the existing $4 2 billion pound guidance for 2024. Thank you.
Yeah.
Yeah, we'll give you we'll give you.
Definitely I mean, the possibilities here are really exciting and we don't want to get way out ahead of ourselves because it's still in the development mode.
But with a sizeable leaching operations, we have already in place throughout our company.
The ability to use this technology to add volumes.
He's really.
It is really exciting and could be meaningful.
And then beyond that we have historically said Lee.
Sex.
You can see we're using this technology to replace concentrated investments with some of our sulfide ore bodies. So it's.
It's really something we're not we're using.
A number of different approaches.
Some proprietary something in partnership with others.
And we'll give you report every quarter on how we are progressing with it and how we see it affecting us.
Okay. Thanks, and then we've got we've got about a third of that included in our numbers, Alex and and and so there there is certainly upside.
And you know our team we want to get to this initial target, but everyone believes that with success. There we can scale. It further so.
You know for US this is.
In the near term. This is this is this is an area where.
Low cost units to our to our Americas business and particularly in the U S.
Okay. Thanks, that's clear that one third of its already in the guidance and then just on the cost side.
Your tone sounds like Youre, not really seeing any cost alleviation. Yet you know we have seen you know FX sort of moving in the right direction for you maybe energy headline energy prices come off a little bit freight come off a little bit.
How are you thinking about the cost environment as you head into 2023, Thank you very much.
Well, we were a challenge.
Yeah, we were encouraged in the third quarter.
Paul well, yeah pretty close in line with what with what we had forecast going into the quarter.
And in the corner.
Hum.
Uh huh.
With the exception of coal we've had you know very very hot rolled prices in Indonesia, which which continue to remain at.
Way above historical historical levels.
So some of the headline commodity prices have come come come down we're encouraged by that.
An area that we are seeing increases as we come through is is is more non commodity.
Non direct commodity more indirect.
Where we're seeing now.
The parts and equipment and other supplies that we purchase.
Come in it and it cost.
Of course, you know with with recession.
Potential you know that'll give us some leverage to push back on some of these things, but but so that's the headline numbers, we have seen some relief in.
But there are some other underlying areas, where we're continuing to see.
Price increases being passed through to us that we're continuing to it.
Because to manage as best we can.
You're right about the currencies you know.
That that benefits us in.
South America, Indonesia, and you know going into.
The quarter in terms of our guidance you can see you know Cerro Verde wasn't that much different than our guidance. The main thing that Cerro Verde was I was with the Mali issue that we had but in the U S. We don't get the benefit.
The of the currencies so.
As we look into 2023.
At least right now for a forecast purposes.
We're projecting.
What it is now so hopefully if if if if you know the.
The markets are to you know turn weekend, we'll have some some better or their labor costs down, but right now for forecasting purposes. We've we've essentially included what we you know what the current market environment is.
Okay. Thank you best of luck with everything.
Yes.
Your next question will come from the line of Matthew Murphy with Barclays. Please go ahead.
Hi.
I'm wondering if you have any thoughts you can offer on.
On what might lay ahead on the legislative agenda in the U S for the mining sector.
Lots of talk on critical minerals, and just a few murmurs on permitting changes or debate around the mining.
So I'm just wondering if theres any sort of big opportunities.
Or threats out there.
Hi.
Yeah.
Yeah.
Well I mean, it's going to continue to be a matter of discussion but practicality.
Affecting our business.
Or that.
Hmm.
Just a couple of facts I think most of you know this but we own virtually all of the.
My hands and see what we have mining operations.
So we don't really pay royalties in the U S.
Uh huh.
You know there is a there was some impact.
<unk> deduction acts in terms of the.
Alternative minimum tax and we're still sorting through those.
But.
Well there is a sort of a favorable federal tax rate we have.
Net operating loss carryforwards from oil and gas deal.
We have oh.
Today, we have great relationships.
With the state switch.
The principal regulatory authority over our.
Business and.
Great community support where we operate including the.
The native American groups, who are.
I want us to invest in hiring new people and working together.
So.
There'll be a lot of lip service doing is we're not counting on any.
Okay.
Government based type incentives for us in the future.
Hum.
We hope people get more reasonable.
Yeah.
Progressing permitting processes.
Investing in having resources available to deal with things effectively.
Hmm.
Yeah.
We continue to deal with the fact that politics or shorter run in our business yes.
And we'll just have to see.
Okay. Thanks Richard.
Your next question will come from the line of poorest baccarat with Scotiabank. Please go ahead.
Hi, good morning, and thanks for taking my question.
Obviously, we're hearing a lot out there about slowing demand, particularly in regions like Europe are you seeing any evidence of that from your customers or any customers scaling back orders at all.
No.
In fact in Europe .
You saw some of the recent articles zone premiums that are being suggested at very high levels.
You know the inventories are low.
There is.
There is.
The production out of Russia is a complicated issue it's not a it.
It's something at the margin for Freeport produces more copper than Russia does.
But.
But that's a factor but.
Hum.
<unk> strong.
Right.
It's just striking to see that the price of copper dropped 70 from a quarter a year ago and yet.
Day to day business that we have this is one where customers are.
Or really fighting to get product.
We had something I don't think it's ever happened.
Kathleen and her Mark Johnson is on the call.
But we actually emptied all of our concentrate barns at Grasberg I mean.
Were empty.
Generally we have.
Operational issues with the shallow seas there.
Adding production now so its just striking.
Negative.
The financial markets are.
About this industry and yet the physical market is so tight.
It's.
It's something that we haven't seen the reality isn't Kathleen you mentioned that.
This historical correlation between our input cost in copper prices.
It right now I think it will come back in.
Yes.
Into a more traditional relationship in the future, but it's not now.
But.
We just don't see any.
We certainly have no problem.
Southern copper in fact, we are we have problems meeting demand for.
Sometimes it's the rod market in the U S is disrupted and so theres a shortage of copper rod in U S.
So it's.
Thank you Richard relation right now.
That's great to hear thank you Richard.
Yes.
I don't I don't have any basis for predicting what's going to happen in the near term.
But you know as this market turns its going to turn.
To turn up.
So with a vengeance.
I'm, not predicting that and I'm, just saying yes.
Your next question will come from the line of Carlos de Alba with Morgan Stanley . Please go ahead.
Yes, good morning, Richard and Kathleen.
Thank you for taking my question.
I would like to if you could possibly difficult.
Thanks, Richard what is what is the outlook for cash taxes in the quarter.
It seemed that that was a.
It's still an important drag off of cash.
The guidance for the fourth quarter and for the income tax rate, but any comments on the on the cash front.
It would be would be really useful.
And yeah.
Let's just go ahead and answer that you know we we.
We have an issue.
Uh huh.
Taxes, we pay.
Based on our foreign operations.
Particularly like in Indonesia taxes, we pay in any given years based on the taxes, we pay in the preceding year.
So when you have a situation like.
Like we've had this year, where the preceding year was.
A lot stronger financially.
Paying higher cash taxes this year.
Next year.
It could well diverse.
But you know our past situations.
Stabilized you know, we're watching carefully what's going on.
In Chile, but that's more of an impact on our future development foreheads, but.
But we have stable.
Stabilized taxes in Indonesia, and there's no question about it.
Continuation of that.
It just didnt doing financial analysis, you've got to take into account this timing difference.
When taxes are incurred or when they are actually paid.
Uh huh.
You know if you want details on their call David joint and he can he.
We can help more people.
Walk through those.
Perfect and if I may squeeze just one more.
Terms of the.
The negotiations that you have started with Indonesian government to potentially extend the current agreement beyond 2000 2041 I.
Presuming Sterling, it's still early on but any color that you can provide there how those are going and win them.
It would be the earliest that you could get a resolution on that.
Yeah.
So we've had.
Early discussions.
<unk>.
My sense is there's a recognition that it's in.
All parties.
Mutual interest to find a resolution for this.
Make no sense for any stakeholder.
For us to run this operation.
With a drop dead date of 2041.
Theres resources already identified beyond that.
And for a number of years because of the.
All the protracted discussions we had about our contract of work in the U K we.
We really haven't done.
Delineation drilling to really understand what happens to these ore bodies at depth.
And so.
Yeah.
Discussions are early on there were some complications.
We and the government will have to deal with with existing regulations and so forth.
So it's not something we can say that there is.
Anything other than early.
Conversations but.
I've been pleased with the.
It's one of those conversations.
Now, we're starting to hard work I'm, saying.
How do you how do you get this done in a mutually acceptable way.
Cause I think one of the things that that that's a real positive.
We talked about the 2018 agreement.
But the fact now that the government through mind I'd be owns 51% of PT Fi.
As increase the yeah the knowledge of.
This ore body and.
The recognition that it takes a very long time too.
Two to identify and develop new sources of production.
And so there's better recognition that.
We need to know soon or earlier than five years before the exploration.
To be able to maximize the values and so I think that's a real positive that recognition that the long term nature of this business and how it will benefit from.
Having additional exploration development.
Over the next 10 years and instead of waiting until the in until it's too late.
That's that's that's a that's a real positive of the 2018 agreement and alignment that you have with the government.
Alright, great. Thank you very much Richard.
Yeah.
That's a good board Kathleen.
Our next question will come from the line of Michael Dudas with vertical Research partners. Please go ahead.
Hey, good morning, Kathleen and Richard.
Michael.
Hey, good morning.
So looking back towards say, maybe pre endemic levels.
And if you were in analyzing and doing a feasibility study that youre doing for Baghdad or any other type of project what do you estimate the.
Increase in absolute dollar capital cost would be for a certain running the mill or whatever type of project you'd have.
And what do you think those operating costs would flow through higher and the other aspect is as you analyze risked read adjusted return return expectations.
Expectations.
Have you changed and given where interest rate levels are and some of the political aspects.
Whether it's U S or in South America.
You know just.
Michael These projects are so different you can't fit them in.
And I know.
A lot of people who follow the industry at a high level, we're always trying to come up with some.
Things like incentive prices and other things that.
Yeah.
Every one of these projects is just so different.
And there are different factors.
We will factor in.
As we conduct this feasibility study at Bagdad.
And began to skirt and we continue discussions with our board.
We will factor in whatever their current price outlook is for capital and operating costs.
No.
We don't focus in on a particular copper price, but what does.
Scenario copper prices look like how does it fit into our overall portfolio.
One thing that's come out of this definitely made references to it a couple of times.
But one thing that's kind of it.
That's come out of the.
Pandemic.
Labor issues and that's.
As I talk with people the business round table business Council, it's it cuts across industries, but it certainly affects our industry.
And baghdad's very remote location.
And we've got it.
Make some investments to attract people to come there and.
And and develop.
Sustainable Labor force there, but it's true in our other offers not so much overseas.
But in the U S. It's a real issue and Thats a factor to consider.
In terms of committing capital.
We've got a whole long future potential.
Potential capital projects in the U S and there are a lot of.
And our view advantages.
For Freeport and having that.
There's.
You know I mentioned the royalty situation the great support we have support for them.
Travel groups.
In the long history that we've worked to investors so hard to have those relationships and so we just have to put to me and I guess my point is.
It's not something you can really generalize about it but you have to dig into each of these projects.
And thoroughly understand.
Of course other factors.
Figure into it. So you know we've got Baghdad, We got this lone Star project in the future that's great.
El Abra is going to be a great project eventually.
So.
I wish I could give you some some some simplified answers for that.
Uh huh.
There's clearly a mismatch Michael between.
Current cost of capital project, and where the current copper price is.
And that's what's guiding some of our thinking around.
Timing of Baghdad is.
It's not something we have to do now, let's wait for something to see how some of this unfolds and not try to force a project in the kind of environment, we're in where the availability of people and equipment.
Tight so.
This is really a project of bringing copper forward. If if we don't produce it now will produce it later, but we wanted the capital part of this project. This is important because.
You don't Wanna be building a project in an inflationary environment. When you wait two years and it could be a different story, we can't lights, Richard was saying, we can't predict exact timing but.
We know we can be more efficient about doing a project in a in a different environment than where we sit today in the U S.
Yeah, you certainly highlighted the fact that the hurdle for the industry is much higher and certainly its going to exactly whatever supply demand gap do you anticipate going forward because of what you just enumerated. So I appreciate those thoughts thank you.
Well that is.
The real point I mean, this industry faced supply challenges.
Before this occurred.
<unk> environment, we have.
Those had to do.
When I look back.
On the almost 20 years now I've been CEO .
You know you have you have geology factors, where today's opportunities.
Supply expansion just are much less attractive than they were 20 years ago.
And then you've got the geopolitical factors that crop up in different places around the world.
And the fact that so many new deposits or underground et cetera, et cetera, but now this situation, we're going through right now with the uncertainties about the relationship.
Input cost.
And prices about the availability of material supply supply chain issues about labor issues, particularly in the U S.
All of those things are just adding.
To the supply.
Barriers for the industry.
And yet we have this new era of demand there.
Yes.
Coming to play.
Yeah.
Absent some just global calamity or whatever basis. It is.
I'm, just so increasingly confident about what the outlook for commodities.
Commodity is going to be and just how strongly our company is positioned to benefit from that outlook and that's what we want to preserve that's why we're gonna be conservative.
About spending capital about financial policy.
Anything you have.
See the damage that can be occurred if you don't approach it.
Come on commodity environment like we have are industry like we have.
Conservative solid way.
And so that's that's what you hear over and over as we talk about how we're dealing with the current environment and positioning ourselves for a positive future.
Thank you Richard Thank you Kathy.
Okay.
Our next question will come from the line of Martin Malloy with Johnson Rice. Please go ahead.
Good morning, Thank you for taking my question.
Assuming that the current copper price environment financing environment continues here.
From an industry standpoint, when do you think you'll start to impact.
In terms of deferment of projects et cetera.
Industry supply.
Well you know the current environment, adding to it.
But clearly the uncertainties that have emerged over the.
Past year, plus time in Latin America, you know, 40% of the world's copper coming from Chile and Peru.
And with what went on in their most recent presidential elections.
The uncertainties that came out from that things continue to change.
You know in Peru.
<unk>.
He has been in turmoil I mean, the number of ministers that have gone through this administration's just striking.
And then in Chile had the situation where.
There was a negative vote on their proposed constitutional amendment, which changed.
Target is there.
And.
You can see what's happening to greenfield projects being delayed in the United States, even though.
There seems to be lip service, saying, that's world needs copper, but that's not chase.
Changing so much for greenfield projects.
Here in.
Africa's Africa. So I mean, you know, it's just a world of where.
All of this all of this is happening we do have an industry, where there's two or three projects that had been in the works for.
Many years now they're going to come on stream shortly.
But when you get past those.
You just see everything has dried up and you don't see companies.
<unk>.
Talking about.
Having.
You'll hear more about what you're hearing from Freeport.
Being conservative at Bagdad, we'd be conservative the voucher.
Libra.
Conservative about our opportunities at Lone Star.
So.
And in the surpluses that were predicted two or three years ago.
Downgraded us as companies.
Downgrade their current production estimates.
It's going to happen.
Quickly you know in the next.
The next three years and it could be shorter.
Thank you.
Your next question would be some real similarities I see you soon.
Hope to see some real similarities to what we've seen in the crude oil business for years of Underinvestment and then all of a sudden something happens.
Now the World had a crisis for you.
You know in the oil industry.
Yeah.
Okay.
Our final question will come from the line of Brian Macarthur with Raymond James. Please go ahead.
Hi, Good morning, Brian Lee Good morning, Hey, Brian .
Most of my questions been answered, but can I just ask.
However had a very good quarter 60 million pound thats, probably the best in like years is that sustainable now or something.
Different happening that this quarter there.
No I mean, we've been flagging that we put a elaborate stacking rate during 2020 and have been ramping ramping back up to forget.
You get an increase and so we've been flagging, the and we're moving to a new leach pad. There. So so that's that's in line with what we've been well within guiding too.
So we're back we're now on that new steady run rate of 240 50 million pounds a year.
Right Yeah, you touch on an important point, you know and we certainly saw this with the crisis.
Crisis steps, we took years ago in 2016.
Hum.
Sort of towards the end of the question about what are you going to do it.
With some of these.
Lower grade deposits you know if.
If you make decisions about.
Mine rates.
They have long term consequences it takes.
It takes a while.
You've cut back stacking rates on some of these mines.
And.
You know that's that's that's.
<unk>.
That's not a production impact just for this year, but extends for years in the future. So as we can.
As we take steps to build it back up then that's going to be incremental over a period of time.
And so.
I, just keep harping that people who try.
Talking about our business, it's a long long term business.
And that just comes to play in.
Almost everything we do.
Great. Thank you.
I know, it's coming back up against what was a pretty big jump all of a sudden so I just was curious whether everything can be done there to go to that new rate. So thank you very much.
<unk>.
Okay.
Thanks, Brian and thanks, everybody, we really appreciate you being on the call and thank you.
Courage you to follow up if you have.
Further questions.
We look forward to reporting.
Reporting on our company and our industry in the future. So thanks for joining us.
Ladies and gentlemen that concludes our call for today. Thank you for your participation you may now disconnect.
[music].