Freeport-McMoRan Inc. (NYSE:FCX) Bank of America 2022 Global Metals, Mining and Steel Conference Call May 17, 2022 9:30 AM ET

Company Participants

Kathleen Quirk - President

Conference Call Participants

Lawson Winder - Bank of America
Daniel Lungo - Bank of America
Peter Schmitz - Anglo American

Lawson Winder

Good morning, and hello, everyone. For those of you just joining us, welcome to BofA's 39th Annual Global Metals Mining and Steel Conference. I'm Lawson Winder, BofA's North American metals and mining analyst.

And it is my distinct pleasure to welcome here today from Freeport-McMoRan, Kathleen Quirk. Kathleen, welcome to Miami.

Kathleen Quirk

Thanks, Lawson.

Lawson Winder

So Kathleen, where I'd like to get started is on the copper price. And so I hear a lot of views that there's a lot of new supply coming on in the second half and into 2023, demand is looking like it's starting to slow and there's an expectation that there could be a material dip in the copper price in the second half of this year. I'd like to get your thoughts on that.

Kathleen Quirk

Well, I think we need to take into account -- you've heard some of the presentations this morning about how long it takes to bring on new copper supplies. And there are a couple of projects, less than a handful of projects that are expected to come online later this year and into 2023 that were started many, many years ago. So once we get through these initial projects, there really isn't much in the pipeline. And at the same time, we are entering a period of time where there is, as many are expecting, a multiyear period of demand growth. And that's coming from a renewed focus on infrastructure development, on technology applications and, of course, the decarbonization. And the decarbonization really is broad-based. You know all the statistics about intensity of use for copper in decarbonization, things like electric vehicles, renewable power, particularly solar, wind that's much, much more significant in terms of copper utilization than traditional historical methods.

So we can't predict the short-term. There's a lot of macro factors going on right now that everyone is focused on strong dollar, COVID shutdowns in China. But underlying this is a real structural deficit situation looming in copper. And it's a result of both demand factors and supply factors.

I think we've heard time and time again how difficult it is to bring on new supplies. And you hear about all the well-capitalized companies that want to get bigger in copper. And that's not something new. That's been the case for over a decade now. And you can see that there's been very limited ability to develop new supply. So we really see copper being an attractive metal fundamentally, structurally. We believe the secular trends that are going on right now with respect to demand, intensity of use of copper really primarily driven by decarbonization are going to become clearer and clearer to the market as we go forward.

If there's a decline in copper prices, my belief is that it will be short-lived because we really do have big deficits on the horizon. And markets tightened out and there's relatively low levels of inventory today.

Lawson Winder

We struggle with that, too. We wonder if the market will just look through any sort of downturn in oversupply...

Kathleen Quirk

I think there is going to have to be higher prices to incentivize new supply. The mine supply is a challenge to bring on. I think some of the presenters this morning talked about recycling call on scrap. There'll have to be prices to incentivize bringing on different sources of supply in the future. And we're doing our part. We're the largest publicly traded producer of copper. We're maximizing production. We just brought on significant production in Indonesia with the successful transition to underground. But it's a challenge. These projects are very challenging. It's not getting any easier. Supply chains are stressed -- stretched. So it's -- it will be an interesting dynamic as we go forward.

Lawson Winder

Indeed, I'd like to maybe turn it to Freeport. Freeport has gone through a tremendous amount of change over the past decade. Maybe just for me and the audience, I'd like to get your view on kind of where you see Freeport today, but more importantly, like how do you see Freeport evolving over the next decade?

Kathleen Quirk

We're in an exceptional position. As you mentioned, we did go through some challenging times, focused on our balance sheet. We're now essentially debt-free, net debt-free, generating very strong cash flows. We've executed very, very well. Just -- I mentioned the Grasberg underground transition. This is probably one of the most complicated mines in the world. And now we've transitioned it to a very modern, large-scale, low-cost underground block cave mine that will go decades into the future, very low cost. Our net cash cost in the first quarter from Grasberg was net credit of $0.06 a pound, meaning that our gold revenues offset all of our operating costs.

So we've been through some ups and downs, but now we've got a clear strategy, very focused on copper. It's really where our strengths are and that's the strengths we'll play to as we go forward. We have a very large reserve base spanning over 25 years. We've got twice the resources undeveloped as we have proved and probable reserves and it's all extensions of our existing operations.

We have very strong franchises in the places where we operate. We have a very strong franchise in the U.S. We've been very successful in the U.S. in managing all of our commitments to communities and managing environmental aspects of the business. We have a long track record. We were successful in bringing on a new mine in the U.S. in 2020. Many companies have struggled in getting community support for new mines. And Freeport really does have a franchise that we cherish and it gives us the ability to think about developing more in the U.S. as we go forward.

Strong position in South America. We have a very large operation in Peru, a relatively small operation in Chile currently but a lot of potential there. We've got a big development project that is under consideration in Chile. And then, of course, Indonesia. And Freeport has proven, we just celebrated our 55^th-year anniversary in operating that same site in the Eastern most province of Indonesia and the province of Papua where we have a very long track record of responsible production, large-scale production. And we've just completed this transition. We completed a new agreement with the government three years ago and that's going very well. So we're really set up as we look forward.

M&A was discussed in the last presentation. We don't need M&A to execute our strategy. We've got organic opportunities within the portfolio, extensions of existing operations. We've got large-scale production currently which is generating very strong margins. We believe execution of the strategy will provide exceptional returns to our shareholders. Of course, we always monitor opportunities in the market, but we don't rely on acquisitions to execute the strategy.

One of the things that Freeport really is good at is focus. We can do projects anywhere in the world. We successfully did a project in 2008 time frame going to 2010 with the development in the Democratic Republic of Congo, a very complicated situation there and Freeport executed that very well. Of course, we've executed in Indonesia over many, many years. So that's really the strengths that we play to, is the ability to explore, develop, to manage costs and that's real important in the current environment. And to manage the business for the benefit of all stakeholders.

And I can't underestimate the value that relationships with the communities have to our business. And it's real important to us. We focus on it every day. Mike talked about day in, day out work. It's something we focus on relentlessly in terms of listening to communities and making sure that what we're doing is benefiting not only shareholders but stakeholders and society. And we really feel like we have the ability to do that within our footprint.

Lawson Winder

Okay. You touched on a lot of things there I'd like to jump off on. Maybe first, you spoke about growing in the U.S. and it kind of begs an interesting question which is does the United States need to build more smelting capacity, particularly in light of your expectations? But also in light of supply chain risks and the risk of relying on foreign supply? So how would you assess the probability that new smelting capacity gets added in the U.S.?

Kathleen Quirk

It's a real interesting question. Those of you who have been around a long time can remember that there were smelters in the U.S. back in the 1990s that were actually -- copper smelters that were actually closed and dismantled. And now we're in a situation where there is more concentrate production in the U.S. than there is smelting capacity. So there's some product that gets exported.

As we look forward, what many of the projects in the U.S. will be concentrate producers which does call the question of needing more smelter capacity. So we're looking at can we expand a little bit on the increment. We also have some technology, concentrate leach technology that we've been successful in using and certain of our U.S. operations that allows us to not build a smelter and actually process concentrate in a leach vessel. So things like that we're looking at. But yes, probably the U.S. will need more smelting capacity, as hard as that is to understand why we dismantled smelters and then we need them again. But there is -- the projects in front of us are more likely concentrate producers as leach production has declined.

But there is a resurgence of optimism around leach production now. And we and others in the industry are investing in new technologies to enhance leach recoveries. And this is a real significant opportunity, value opportunity for Freeport. It kind of ticks all the boxes, low capital intensity, low-carbon footprint, low incremental costs, ability to potentially bring on production more quickly than a new mine and you don't need a smelter.

So we are engaged in this opportunity to use data analytics, a combination of data analytics with different types of new additives, technologies that can be added to our existing leach stockpiles to get more from what we already have. And that would expand reserves, bring on low-cost production.

This is principally in the U.S. We do have some in South America as well, but that's a real opportunity for us and one that I think Freeport will be successful in as we look forward two years from now. I think we'll be in a position to bring on some implements. It's not going to result in deficits going away in the market. But anything on the margin that we can do to bring on new supplies is -- we're incentivized to do that. We're focused on that now.

Lawson Winder

I didn't realize that the novel leach technology could potentially be ready for a game time in two years.

Kathleen Quirk

I think we're making progress on the margin. We're starting to see some results come through. It's not going to be a game changer in a two-year time frame. But I think our objective is to get another 100 million to 200 million pounds per annum of new production from these initiatives in that sort of time frame. And it still has risks to it. It's still very much R&D, but we are seeing some early wins that's given us some confidence in being able to get some incremental production in that sort of time frame.

And then we'll iterate on that. We'll iterate on it and build upon that. And we've got 38 billion pounds of copper sitting in leach pads that we never expect to recover. And so to the extent we can get 10% of that, 15%, 20% of that, that's a lot of value.

Lawson Winder

Yes, it's incredible. Now that we're on the topic of the leach technology, I wanted to ask about the competing technology. So obviously, there's Jetty which you and several of your competitors are invested in and who will be hosting a panel later today with Jason. Stick around for that. There are other technologies though as well. And I'd be curious to get your thoughts on how that competitive dynamic is helping or hindering the process? And is Jetty the technology or could it be a mix of technologies?

Kathleen Quirk

I think at this point in time, it's too soon to say whether one technology will prevail or whether there will be multiple. And right now, we're pursuing our internal technologies. We're pursuing partnership with Jetty. We've got other third parties we're working with. The size of the prize for this is so significant to a company like Freeport that we've got multiple avenues, multiple paths that we're pursuing to really -- and it could be that we end up with multiple. It depends on the asset, the type of ores that we're processing. One could be better suited for one type of ore and another could be better suited for a different type of ore. So there's a lot of work being done in this area, a lot of momentum.

And as our industries can do spirit where necessity is the mother of invention, we say, where innovation, we had a breakthrough of leach technology decades ago. That's now depleting and we need to kind of reinvent the leach technology. And that's what we're doing, is bringing modern approaches to an old technology. And we believe there's value enhancements that will come from that.

Lawson Winder

So in the spirit of this conference, I would like to offer the opportunity for the audience to participate. If there are any questions from the audience, please raise your hand. Perhaps while we're waiting for that, is there a question? Perfect. Please go ahead.

Daniel Lungo

Dan Lungo, BofA. I'm just wondering on the balance sheet. You've done a ton of work, obviously, you have almost no net debt. But what's the plan from here now that you've kind of capped out on where you can go from a rating agency's perspective, especially at S&P due to the high concentration of Indonesia exposure. So just any color around how you're thinking about ratings and the balance sheet moving forward would be helpful.

Kathleen Quirk

We've made tremendous progress with the balance sheet where we've got a policy of -- a clear-cut policy of our leverage where it's well below 1x EBITDA. Our balance sheet is -- credit statistics are investment grade by 2 of the agencies and we're going to continue to work with S&P with regard to their rating. But we're -- at this point in time, balance sheet is not top of mind. Our top of mind is really executing the operational plans, executing the financial policy which provides that half of our free cash flow will be returned to shareholders with the balance used for additional balance sheet enhancements or investments in our long-term future.

And so it's a balanced approach that really protects the balance sheet. I think all of us in the industry have learned that the one thing that can differentiate a company during ups and downs in the market is the balance sheet and we're going to continue to protect the balance sheet. It will give us opportunities to have consistent investments over a period of time, drive higher shareholder returns. And it's proven in our industry that a strong balance sheet really, really supports higher shareholder returns over time.

So really no -- the balance sheet, the hard work and the heavy lifting on our balance sheet has been done. As we look forward, we're looking for how we grow value in the business and also continue to return substantial cash to shareholders. So that's really our focus right now and it's not on deleveraging.

Lawson Winder

Jack, gentlemen, there was another question? Yes, please go ahead.

Peter Schmitz

Peter Schmitz, Anglo American. Thank you very much and very interesting to hear about some of your new technologies that are coming through as well and very important for the industry as a whole. Do you see this as something which you would see diffusing through the industry over time? And would you play into that?

Kathleen Quirk

I think it will but there's a limitation on it. I think our company, given our historical operations, the amount of historic leach stockpiles that we have within our company is probably greater than many others. But I do see in our industry, while we're all competitors, there are a lot of technologies that are shared across the industry. All of us, for instance, are focused on decarbonization, reducing our Scope 1 and 2 emissions and sharing technologies across the industry with respect to working with partners, with respect to trucks and really trying to reduce our carbon footprint.

The block caving technology that we're using, for instance, in Indonesia, there's a lot of collaboration in the industry, a small group of companies that are involved in block caving but collaboration there. And I think the leaching thing will end up being the same is that once the code is cracked in terms of how to do it better, while everyone might have their own separate recipe, I do believe that others around the industry will pick it up over time and use this latest technology. But I think in terms of size and scale, Freeport stands to have the biggest exposure to this -- to these new technologies.

Lawson Winder

I think that might be it for the questions from the audience. We have 1 minute left. There's one question I think everybody -- a lot would like me to ask which is I often get asked about the reduction in the economic interest in Grasberg at the beginning of 2023. What would you say to investors that are worried about that?

Kathleen Quirk

So he's asking about our partnership in Indonesia where, currently this year, we get 81% -- we own 49% of the shares but there's a disproportionate sharing where, currently, we get about 81% of the cash flow and that will decline to 49% next year. That really has been a legacy part of this operation since the 1990s. The government stepped into Rio Tinto's shoes. And so Rio Tinto made investments over time so that they would earn 40% after 2021. And that got extended to 2022. So really, it's just been a feature of the development of this asset, the partnership arrangements that were put in place. We're buying back stock now. So we'll just continue to do that with cash flow and increase our ownership as we go forward through reinvestment in our stock.

Lawson Winder

Excellent. We have reached the end of the time. Kathleen, thank you very much.

Kathleen Quirk

Thanks very much.

Lawson Winder

Thank you all for being here.

Question-and-Answer Session