Freeport-McMoRan Inc. (FCX) Q1 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Copper & Gold First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct the question-and-answer session. (Operator Instructions) I would now like to turn the conference over to Ms. Kathleen Quirk, Executive Vice President and Chief Financial Officer. Please go ahead, ma’am.

Thank you. Good morning, everyone and welcome to the Freeport-McMoRan Copper & Gold first quarter 2013 earnings conference call. Our results were released earlier this morning and a copy of the press is available on our website at fcx.com. Our conference call today is being broadcast live on the Internet and anyone may listen to the call by accessing our website homepage and clicking on the webcast link for the conference call. As usual, we have several slides to supplement our comments this morning and we’ll be referring to the slides during the call. They are also accessible using the webcast link on fcx.com. In addition to analysts and investors, the financial press has been invited to listen to today’s call. And a replay of the webcast will be available on our website later today. Before we begin our comments, we’d like to remind everyone that today’s press release and certain of our comments on this call include forward-looking statements. We’d like to refer everyone to the cautionary language included in our press release and presentation materials and to the Risk Factors described in our SEC filings. On the call today are Jim Bob Moffett, our Chairman of the Board; Richard Adkerson, our Chief Executive Officer; Red Conger is also with us today and Dave Thornton is here as well. I’ll start by briefly summarizing our financial results and then turn the call over to Richard, who will be reviewing our recent performance and outlook and covering the information in our slide material. As usual, after our prepared remarks, we’ll open up the call for question. Today, FCX reported first quarter 2013 net income attributable to common stock of $648 million or $0.68 per share, which compared with $764 million or $0.80 per share for first quarter of 2012. Our…

As we look at the environment today, we walked away from the meetings in Chile with a lot of confidence in the long-term copper markets based on the fundamentals of the world’s requirements for copper longer term and continuing challenges of maintaining supplies from existing mines and also of developing new sources of supply. So it’s – we continue to run our business with a lot of confidence about a positive longer term copper markets. But it’s in times like these when we made these phasing weak markets that the real strength of our company I think comes to the forefront. With our long life reserves, our geographical diversity, our ability to produce large volumes profitably at low-cost and generate cash flows, we’re financially strong and we’ll talk more about this. This is the way we run our business from everything from environmental responsibility to safety issues. We’ve got a great team and a great set of assets that allow us to operate profitably during weak market conditions and then be there with those assets to make a lot of money as markets improve and we have confidence that they will. As we look at the environment today, we walked away from the meetings in Chile with a lot of confidence in the long-term copper markets based on the fundamentals of the world’s requirements for copper longer term and continuing challenges of maintaining supplies from existing mines and also of developing new sources of supply. So it’s – we continue to run our business with a lot of confidence about a positive longer term copper markets. But it’s in times like these when we made these phasing weak markets that the real strength of our company I think comes to the forefront. With our long life reserves, our geographical diversity,…

(Operator Instructions) The first question comes from the line of Sal Tharani with Goldman Sachs.

Good morning, Sal.

Sal?

One moment please. And Sal, your line is now open. Sal Tharani – Goldman Sachs & Co.: Thank you. Good morning, guys.

Good morning.

Good morning Sal. Sal Tharani – Goldman Sachs & Co.:

Well, Sal, we’ve been working hard to advance our discussions with the government to deal with its review of our Contract of Work and to get the process of – the extension of our contract formally approved by the government. As you know, our contract provides us rights to extend the contract on its existing terms beyond its original term ending in 2021 to 2041. We believe it would be best for all of us, the government of Indonesia, the province, the workforce, and everyone to get these issues resolved as quickly as possible, and we have been working towards that end with that goal. The government officials have expressed a similar goal and we've had productive discussions, but the process has not been organized in a way that has led to a conclusion yet. We are continuing the discussions. I will tell you we've made progress in finding some mutual acceptable ground on a number of the issues and you’re right, the election is for the President, it is scheduled for next year. At this point, Indonesia is an established country with a democratically elected government. And so there is expected to be a continuity in the way the company operates and deals with investors like ourselves. So we’re going to continue to work to get this done as quickly as possible and recognizing the challenges of getting decisions made as we get closer to the election. Sal Tharani – Goldman Sachs & Co.: And how about the labor side, have you started working…

The labor side, okay, excuse me. The labor side is – the union is now getting organized under Indonesian law. There has to be new CLA agreement, labor agreement every two years. And our current contract expires this fall. The formal process of discussions begins May 1 and the initial process is one of exchanging information and having interaction with the union leadership. And so the union and ourselves are getting prepared for that. Union leaders, community leaders and others are all visioning a goal of awarding a strike this year and that’s certainly our objective and we will begin that process formally on May 1. Sal Tharani – Goldman Sachs & Co.: Thank you very much.

You next question comes from the line of Paretosh Misra with Morgan Stanley. Paretosh Misra – Morgan Stanley & Co. LLC: Hi, guys. Two questions; one, as you look ahead the under pending merger, do you think – are there any non-core assets in your current portfolio that you perhaps would be open to divest?

Well, we over time always review assets, see what make sense and what doesn’t make sense. At this point, we have not made any decisions to sell the assets. We like the mix that’s there. And so there is nothing that’s been decided yet, the target in any particular sales, but we will be working with our management team and our Board to assess what would make the best structure going forward. Paretosh Misra – Morgan Stanley & Co. LLC: Got it. And then second and last, on Cerro Verde, could you talk a bit more about your capital spending plans? In other words, what are the major spending years, 2014 or ’15?

Yeah.

Paretosh Misra – Morgan Stanley & Co. LLC: Got it. Thank you very much.

Next question come from the line of Oscar Cabrera with Bank of America Merrill Lynch. Oscar Cabrera – Bank of America Merrill Lynch: Hi, thank you, operator. Good morning, everyone.

Good morning, Oscar. Oscar Cabrera – Bank of America Merrill Lynch: Richard, just wanted to, first, verify the numbers that you provided for the throughput in Grasberg. You said 2015 for the DMLZ (inaudible) Grasberg. What were those numbers again please?

Yeah, in rough terms, it would be a ramp up of DOZ extension and the Deep MLZ, that would end up achieving 80,000 tons per day. Now that’s really the current capacity of the DOZ mine. But we are moving to a resource that’s deeper and adjacent to the DOZ mine and fortunately the initial production from there comes from a section that has very good grades. And so that will help us during the period that we’re transitioning from the open-pit to the Grasberg Block Cave, which lies underneath the open-pit. We currently expect to complete mining in the open-pit, but at the end of 2016 approximately and then over the next four years or so we would ramp that up to 160,000 tons per day and that actually comes from two headings in the Block Cave. In some ways, it will be like having three mines that are currently comparable to what we're doing in the DOZ. Oscar Cabrera – Bank of America Merrill Lynch: And also basically, the plan hasn’t changed. Thank you for that. And then getting back to the issues that the Government and DRC put forward requirements that they have, could you just walk us through what they're asking? My understanding is that they want higher value added in the products leaving the country. You guys are producing copper cathode. But you don’t think that the hydroxide that you’re producing in cobalt, that presumably is going to be exported to your new operations, will be affected by these changes. Can you just walk us through…

Okay Oscar, one issue that the DRC looks at and this was also an issue in Indonesia, which led to the 2009 mining well. For certain types of minerals and in the DRC applies to some copper, people are exporting ores. They are just mining the ores and sending it to other countries for smelters and sometimes to the small smelters in the DRC. A lot of the ores will go in to Zambia and in Indonesia, you saw nickel and tin ores going to Japan and the countries say we want to see processing facilities in our country. Now in the DRC, we produce copper cathodes through our FXCW process and that’s a finished product. We produce this intermediate product which is a processed product, cobalt hydroxide and with our move into the processing facilities in Finland, we now have as a partner in that the Gécamines state – mining company, and so we are very comfortable that we’re not the target of these types of restrictions because of what we're doing there. Oscar Cabrera – Bank of America Merrill Lynch: Okay, understood. Thanks a lot for the clarification.

Thanks, Oscar.

Your next question comes from the line of Brian Yu of Citigroup. Brian H. Yu – Citigroup Global Markets Inc.:

Yeah, if you look across all of our metrics when we talk about productivity increase, you can see a higher mine rate in open pit. You can see a higher mine rate in the DOZ underground mine, higher mill rate, higher concentrate production, all those things are heading in the right direction. In the DOZ mine, we are getting to 60,000 to 70,000 tons a day, our capacity is roughly 80,000. So everyday, there’s issues that our guys are dealing with, but there is nothing that’s changing our outlook for continued progress and that’s what you’re seeing in our numbers. Brian H. Yu – Citigroup Global Markets Inc.: Okay, great. My second question is, on the site production and delivery costs, guidance is still the same at $1.89. but there’s some material movements across the regions, so for example, South America, site production and delivery costs are coming down quite a bit, while Africa is moving up. I was wondering if you can comment what’s happening maybe in those two that seem to have more material changes in the cost outlook.

Brian, this is Kathleen. You’re right. On a consolidated basis, $1.89 is similar to as what we had previously on a consolidated basis. but there was some movement between the various regions in Africa. Our unit costs are, we’re estimating to be higher for the year. and that’s primarily a function of sulphuric acid costs; purchased sulphuric acid costs are higher than what we had previously modeled. As you are aware, we’re putting a sulphuric acid plant in 2015 that will enable us to reduce our acid cost. So we are modeling higher purchased asset cost than what we had previously. In South America, the decrease is related to some energy contracts principally where we’ve had modeled some higher energy costs in our plan and have achieved some better results. So that’s a factor in South America. we had some slight increases in North America and Indonesia that offset. But net of all those things, the consolidated numbers, $1.89 is the same. And then really when you cut through with the big change was the gold byproduct credit at Grasberg where we were previously expecting something close to $1.95 of byproduct credits and now we’re down to $1.66, which works out to $0.10 on a consolidated basis. Brian H. Yu – Citigroup Global Markets Inc.: Okay, thank you.

I just want to say, two weeks ago as we do before, at the end of every quarter, Red had all of the senior operating guys here for a meeting in the Americas, and I really want to compliment Red and his team for this focus they have on really looking at cost. I mean it’s one which is, it’s a real challenge and you see that throughout the industry, particularly at mines age and our mines in the Americas for the large part of our older mines. and so that means issues keep coming up. And this mining is a tough, tough business as we can see by the problems that Bingham Canyon is facing right now. But we’ve got a culture here. Markets are markets and at the end of the day, it drives a lot of our profitability. But we’re a commodities company. And so the culture that we have of really looking for cost in these older mines where it’s not like the Grasberg and if you can just break through these high grades is really something that’s built into everything we do. and Red and his guys did just a great job with it. Brian H. Yu – Citigroup Global Markets Inc.: Maybe, Richard, a quick follow-up on that, on the cost side, it seems like we are finding that on mining, maybe less CapEx does seem to decline. At the same time, you’ve just got secular increases in the industry, because of grades and depleting mines. but more on, and maybe the EPCM equipment, are you seeing any kind of cost release coming through as more and more of mining companies start to maybe rationalize projects?

Next one.

Your next question comes from the line of John Tumazos with John Tumazos Very Independent Research. John Tumazos – John Tumazos Very Independent Research, LLC: Congratulations on the rise in the natural gas price. With the rise in the gas price, do you think more U.S. energy acquisitions are still possible? I read the energy stocks fell with other commodity stocks even though gas is higher first question. Second question, would you hedge copper prices? Third question, how far out in the CapEx planning horizon, do you have flexibility to reduce CapEx of copper prices where it keeps falling? Would you look at 2016, 2017 projects as opposed to 2014 spending?

Okay. well, John… John Tumazos – John Tumazos Very Independent Research, LLC: Forgive me for being interested.

I don’t even know how to respond to that. You have good questions, we’re all interested. John, we like the position that we have in the natural gas industry that will come to us with the Plains and McMoRan acquisition. Plains had a position, a significant position in the Haynesville Shale play, which because of its cost structure is a play that’s uneconomic at lower prices, but becomes very attractive as prices rise. and so that is a good position I have. And then with McMoRan, it has a very positive attributes in terms of its access to very large potential production reservoirs that will unfold over time. and we think the timing of the way that the McMoRan story will come into play, plus having the position in the Haynesville gives us a very attractive position in the natural gas business and the ore business. So initially, we’re going to be focused on executing our financial plan of integrating the companies of managing our debt level to get it down as we go forward. Our management team and our board will have the opportunity to look for investments over a broader set of assets and look to where we can get the best returns. So we’re certainly, as we do in the mining business, we’ll be alert to all potential opportunities. With respect to hedging copper, we fundamentally believe that we can manage price risk through the way we manage our portfolio of assets, the way we’ve structured it, the way that we have the ability to deal with capital expenditures like you talked about shows the ability to defer capital. If we have to, we could do that again. We also have the ability to manage our margins and our costs by the way we run certain of our operations. You may recall that at Morenci in third-quarter of 2008, we had unit operating costs that were nearly $2. Within four, five months we had reduced it to $1.20. Now that reflected the lower input cost, which if the copper price does ramp down, input costs are going to be ramping down because of the way that the correlation between the economics between copper prices and input costs. But we basically have a philosophy of managing price risk in the mining business through operating hedges as opposed to financial hedges. And with CapEx, you’re right. If we have to, we have the ability to defer CapEx going forward. The good thing about our opportunities is that we really have the rights to do that. We’re not compelled by contracts with the government and so forth or other outside parties that force us to spend money at particular points in time. So that gives the flexibility on how to manage cost. John Tumazos – John Tumazos Very Independent Research, LLC: Thank you.

Thanks, John.

Your next question comes from the line of Tony Rizzuto with Cowen Securities Anthony Rizzuto – Cowen Securities: Hi, everyone. I’ve got a couple of questions here. The first one is, how should we think about the Cerro Verde output before the mill expansion comes online in 2016? I know the grades were lower in 2012 and output was down year-on-year. But should we be building in further grade declines as we model the next couple of years?

Well, Kathleen is taking a look through her book here to answer your question specifically. I will say that that’s all built into our numbers that we give you. I mean, as we give you volumes going out for the next three years, that factors in what we expect to produce at Cerro Verde.

Yeah, Tony, it’s Kathleen. We’re showing slightly lower production in 2014 compared with 2013 at Cerro Verde. And then it starts to increase in late 2015 when we get the concentrator in place. So we would have had and I think we have a slide that shows that. We would have had declines at Cerro Verde if we weren’t doing this expansion. We’re still bringing on incremental volumes. But we were facing declines in grades if we didn’t and loss of the oxide deposit as we go forward. So that’s all reflected in our numbers that we’ve given you the outlook on. Anthony Rizzuto – Cowen Securities: Thanks, Kathleen. Is that decline would be of a similar magnitude to the decline we saw in 2012 or less than that as you’re modeling right now?

We’re modeling about 10% lower in ‘14. Anthony Rizzuto – Cowen Securities: Okay, okay. And then just a follow-up on DRC and appreciate all the commentary there. And I was wondering, I know you’ve also got a labor expiry there as well. is there any potential here that the government may look to try to tie-in something along these lines with the cobalt hydroxide along with labor negotiations there, is that a risk do you think?

No, I don’t see that as a risk at all. We have great relationships with the workforce. We haven’t had any sort of really significant issues. When they have issues that are important to us, we respond to them. And the government has been very supportive. That’s a country where people really appreciate jobs and the government appreciates employment. So we haven’t seen any attempts to try to tie-in labor relations with government policy issues. And in fact, Tony, I’m just real pleased with the way we’ve conducted business there. The provincial government, the central government are all very supportive. now having said that, the government is constantly trying to extract money form us in terms of the way they interpret our contract and regulations and that’s an ongoing issue. But that’s just a function of the status of the government. But our relationships with the leadership, its province and the central government have really improved dramatically over the past couple of years. Anthony Rizzuto – Cowen Securities: That’s great insight, Richard. I appreciate that, and that’s Kathleen too.

Thanks, Tony.

Your next question comes from the line of Brian MacArthur with UBS. Brian T. MacArthur – UBS Securities Canada, Inc.: Hi, good morning. Just following a little bit up on what Tony was talking about. Can I ask the same question on El Abra because first quarter looked really good, you did 90 million pounds, but my understanding was as we transferred over, which is going down to a run rate at 300 million pounds over the next few years. So is it possible just to get the sort of profile on that too?

Yeah, El Abra, we are expecting in the 350 million pound range for this year and it’s similar next year. 2012 we had sales of 340 million pound, so we are kind of in that range up over the next few years. Brian T. MacArthur – UBS Securities Canada, Inc.: And will that be like sustainable long-term i.e. higher than original, I thought originally when we converted all over sort of more replacing at 300 you used to talk about. Will it be higher than that on a sustainable basis going forward now do you think?

We're going to try and hit as much as we can, I mean, that's just the way we are and I think that's what we're reflecting in achieving these higher rates going forward. I think looking beyond that, we ought to just think about it in terms of replacing that 300 million pound level and we'll give you the outlook. Red, do you have any comment on that?

No, that's the level that we're at those. Those grades are consistent pretty much for the Sulfolix project.

Yeah. Brian T. MacArthur – UBS Securities Canada, Inc.: Okay, great. Thank you very much.

Thank you, Brian.

Your final question comes from the line of Garrett Nelson with BB&T Capital Markets. Garrett S. Nelson – BB&T Capital Markets: Thanks. Most of my questions have been answered, but I did want to ask about the dividend policy. Can you definitively say that under no circumstance would you cut the $1.25 dividend? And that even if copper and other commodity prices were to decline materially, you'll extend your debt pay down timeline and/or defer CapEx before you'll trim the dividend. I'm noticing that the stock is yielding about 4.5% right now, which is a tight yield and sometime, which I think is compelling to a lot of current and perspective investors.

Garrett, we’ve been working around these commodity business for a very long time and so to say never is not something that I will think about. Never is just too strong a word. Now having said that, we are confident about our ability to maintain that dividend. We recognize that it is attractive to investors. When our board made the decision to set it at that level, it was set at a level that was looked at in contemplation of lower commodity prices than the $4 – where it was when we set it and lower prices than where we are today. So we have a commitment to it. I don't think any natural resource company can say definitively that you never do it, because we can all look back in history and see where companies have all had to make adjustments for a difficult scenario. But we do have a confidence in the commitment to it. Garrett S. Nelson – BB&T Capital Markets: Sure, I mean it seems like the dividend is well covered even at much lower commodity prices.

And that’s the way we looked at it when we set it at that level. Garrett S. Nelson – BB&T Capital Markets: Okay. Thanks very much.

Okay, Garrett. Thanks.

Thank you. I’d now like to turn the call back over to management for any closing remarks.

All right. Well listen, we appreciate everybody’s attention. we look forward to executing our business as we go forward and dealing with these markets, however they might turn out. Always with a really optimistic positive view of our business in the longer-term. So thank you for your participation.

Ladies and gentlemen, that concludes our call for today. Thank you for your participation. You may now disconnect.