Freeport-McMoRan Inc. (NYSE:FCX) Morgan Stanley Virtual 9th Annual Laguna Conference September 15, 2021 12:45 PM ET

Company Participants

Kathleen Quirk - President and CFO

Conference Call Participants

Carlos De Alba - Morgan Stanley

Carlos De Alba

Hello. Good afternoon, everyone. Thank you for joining us in the 2021 Laguna Conference. My name is Carlos De Alba, I cover metals and mining here at Morgan Stanley. It's a pleasure for me to host today Kathleen Quirk, President as well as CFO of Freeport-McMoRan. Thank you very much, Kathleen, for being here again.

Kathleen Quirk

Thank you, Carlos. Glad to be here.

Carlos De Alba

Great. So before we begin, I need to read some disclosures as usual. For important disclosures, please see Morgan Stanley's website and research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative and he or she will happily address those.

Well Kathleen, welcome back to this conference. It is an honor to have you here. It's a little bit different to other conference maybe that you guys attend, because it is more of an industrial focus, but I guess this is a good opportunity for the company to reach out to a different set of investors.

So with that in mind, what I thought we were going to start the conversation with a little bit of an update or an overview on the growth profile of the company. It's something unique that you guys are delivering starting last year with the ramp-up in Indonesia that helps you with more volumes with lower costs. So I think that's something that sets the company apart. So you can give us a little bit of an update on Indonesia's production profile and how that is going on. You have the two projects there, Grasberg Block Cave as well as the DMLZ. So why don't we start with that if you don't mind?

Kathleen Quirk

Okay. Great. And thanks to all for having us at this conference, we always enjoy it. And we enjoy reaching out to different investor sets and hope to get back to Laguna at some point. It's always a great venue, but good to be here virtually with you. Things at Freeport are going very well. As you pointed out, we are in a growth mode. We have since last year we've been ramping up our underground mines at Grasberg in Indonesia, and we've also completed the new project, our latest new line in the U.S. called Lone Star, and that's gone extremely well.

We're ramping up Grasberg at the right time. This year, our volume growth is significant. We've got 20% capital volume growth over 2020. Gold volumes are up significantly as well. As we look into 2022, we're expecting 15% to 20% growth in copper volumes, 15% for copper, and 20% for gold.

So this is a ramp-up, it's much needed in a market that is - that needs copper. The ramp-up is going well. In the second quarter of this year, we averaged just under 80% of a target annual run rate that was on budget, on track. And by the end of this year, we expect to be at a 100% of our annual metal run rate at Grasberg. This is a major accomplishment.

I mean, when you think about what this team has done during a pandemic is extraordinary. It would be extraordinary. It needs time, but particularly given what we faced, the team has just done an outstanding job. We did have at - in Indonesia, we did have a resurgence of a pandemic to deal with in July and August and partially through September from a Delta variant.

And we had to go back to our strict protocols and lockdowns, travel restrictions that we had implemented successfully during the 2020 and had started to relax some. So we did go back to those. Fortunately, I think we've turned the corner again at Grasberg in terms of the caseload going down. We have very few serious cases at the moment, and I'm very encouraged by the vaccine program that we've rolled out there.

We've got over 80% of the workforce. We've got a total workforce of almost 30,000 people there, all working together in the same area. And we've got over 80% at least one shot, and we've got over 70% with both shots. So that was a real important thing for us is to get our people vaccinated there.

But technically, the ramp-up is going well. We're continuing day-by-day to increase our throughput rates. We put in a new crusher at our Grasberg Block Cave earlier this year, and that's allowed us to expand production. So everything is going well on track. And I can't say enough positive things about the team out there that's really been resilient and plugging along with this major accomplishment in the face of challenging times.

Carlos De Alba

Yes. Certainly very challenging times in the last 18 months. So congratulations on that progress. I do want to come back to Indonesia, but you mentioned Lone Star, what can you tell us there? And maybe you could also add to the back of it, the optionality in terms of growth that you have in the United States that you're given the current prices that we're seeing, not only you're going to generate very interesting profits there, but also you have a lot of NOLs that would result in minimum taxes on those profits in the U.S. So if you could talk about that I think that will be very useful for the audience as well?

Kathleen Quirk

Yes. Well, the Lone Star project as I mentioned, we completed that during the pandemic as well, and these are projects that have long lead times and so we were well into it. What we were able to complete it within our budget and on time last year. And this is a project in your community where we've operated or sometime it's not common to see a new mine developed in the U.S.

And Freeport with our franchise and our footprint and trust that we have earned in the communities, we were able to bring this project online. It's relatively small in the context of the overall company right now, but it has the opportunity and the potential to be a new cornerstone asset for us over time. It's right near Morenci. This is my background, where my virtual background is our big Morenci mine, which has been in operation for decades and will be in operations for decades to come.

Morenci is the largest mine in North America of all the copper mines in North America, so the largest. Lone Star has the potential over time to be potentially as large as Morenci. We're starting now with mining the oxide surface of the deposit. And that is going well. We were able to take advantage of existing infrastructure in the area from a mine called Safford that have processing facilities and capacity there.

So we were able to do this in a capital efficient manner. But we have opportunities to incrementally expand. And that's what we're doing. The project was originally developed and designed for 200 million pounds per year. Our objective now is to get that up to roughly 285 million pounds a year. We can do that by filling up the existing processing facility, a tank house, making some minor additional investments in equipment to increase our mining rates.

And so what we're doing there is really exciting, because as we're mining the oxides and generating profits from the oxide material, we're exposing the deeper mineralization that will be available over time to expand. And then we call it the sulfide mineralization to potentially develop a major concentrating complex at this site. So very, very attractive initial investment started out relatively small, but we'll build on that and we'll have the chance to incrementally expand and then potentially consider a major expansion down the road.

As you mentioned, we've got other opportunities in the U.S. We are working to qualify a project, add an existing mine what we have really is Brownfield projects, lower risks and then going into a totally new location that our community support by doing a Brownfield expansion. But we're looking to potentially double our production from Bagdad mine, which is located in Northwest Arizona.

And so we're working on the engineering and design associated with that project, working through the considerations when need in terms of where we'll put tailings and the water requirements that we'll have.

So we're working through those things, but expect that we'll be in a position next year, maybe to start going forward. Now it's a multi-year project, but it's one that we think because of the long reserve right there. We've got over 80 year reserves life currently. We're looking to bring some of that value forward. So that's exciting at Bagdad.

Elsewhere in the U.S., we've got a really exciting, I know you'll probably ask me about this, but a really exciting opportunity to get more out of what we have. We've been working over the last few years on automation, artificial intelligence, the way trying to work our assets harder, improves productivity, improve automation. We're digitizing pretty much everything that we can in the workplace. So we're doing a lot to try to get more out of what we already have.

And in that regard, we have a real opportunity to get additional work coverage from material that has already been mined. And we've got substantial stockpiles of material across the world, but mainly in the U.S.

If you look at our last presentation, we identified 38 billion pounds copper - contain copper. That's not in our reserves. This is material that's already been mined, and we don't expect to recover because when you late, you only recover a certain percentage of the metal. And so we're looking at technologies both internally and externally to try to increase the amount of recovering we can get from that material. And think about this Carlos, this is material that's already been mined.

So the carbon footprint of it is low. You're not having to go put new trucks or new shells, or use a lot of energy to bring this to production. It's really trying to make R&D, so there's still risks with it, but it's trying to get more out of what we already have incremental value. And we believe that is the place where we can go and create value for our shareholders as opposed to trying to do a lot of Greenfield exploration mine. So this is really - our focus is getting more out of what we have gained additional value to track the value in the markets we believe we're going to need.

Carlos De Alba

That's very interesting. Thank you for that summary. I want to ask a question that I just got from the audience, and I'm going to put it in the context of another question that I have for you, Kathleen. So they are asking that since you operate in multiple jurisdiction, can you try to put some ranking around where do you think the lowest and the highest political regulatory risk to operate globally are? And I would like to bridge this question from the audience with something that I wanted to ask you about why would be - how do you see the pecking order or all - of all these options for growth that you just sort of alluded to a minute ago?

Kathleen Quirk

Yes. Well, it's great question. And we do have insights because we operate in multiple jurisdictions and have opportunities really across the globe within our portfolio. And in our business, as you know this, we have to take a long-term view. And we have to make sure when we go into a project that it has the opportunity to meet the needs of society, right? We need to make sure that communities benefit from these operations.

We need to make sure that the workforce is there. We need to make sure there's a regulatory environment and rule of law that we can rely on, now recognizing that regulations change over time, and we need to anticipate that, but we need to have robust enough economics to be able to address those risks.

And we have to take a long-term view. And so where we are attracted is not only just the regulatory and political risk, but also the resource. You've got to start with a resource that is long-term. If you try to make your return in a very short period of time, you could get something wrong, you could get the commodity price wrong, you could get the political situation wrong.

Really what we're trying to do as a company in the industry is create value for all of our stakeholders producing a product responsibly that the world needs. And so when we go to write projects around the world, there are many criteria that we take into account, but the first criteria is really the resource, and is the resource a long-term resource that -- because the capital investments upfront are very, very large, something that you can develop over time and create economic velocity for the community and returns to shareholders over a long period of time. And so that's really what we're looking for.

We're looking really for places that we already are where we have experience, where we have community support, where we have the workforce. And we have those opportunities really within our portfolio. There are going to be times like there are today where there's heightened risk in certain places where we operate like in South America. And that you can't just completely stop making investments. You have to keep the options open and keep things going to be able to have the opportunity when the time is right.

In Indonesia, Freeport made a lot of investments during times when there was significant risks. We felt confident given we knew that what we were doing was the right thing that the country needed our project and we needed to cooperate with the country. So we worked out a deal that was a win-win for both parties. And that's the kind of spirit that it really we have to do to go into these things.

Now, having said all that we would love to find additional growth opportunities in the U.S. We have a footprint in the U.S. We have customer relationships. We're the largest supplier of copper to the U.S. market. With all the infrastructure demands in the U.S., more copper is going to be required, more copper is going to be required for the de-carbonization initiatives really globally, but also in the U.S. And so, we have an opportunity as Freeport, where we have existing franchises, we have the trust to build increments to our existing mining operations.

And so, that's really what our first priority is, is to continue this development and growth in the U.S., but we've also got bolt-on opportunities in Indonesia. In [Indiscernible], our deposit is an attractive deposit. We've gained a lot of experience in block caving. That's a natural progression for us. We have this wonderful opportunity in Chile with our El Abra project. The sulfide opportunity there is very attractive. That's project is going to be developed at some point. We may not pull the trigger right now, but it will be part of the mix. We'll keep it warm. We'll have that optionality in our portfolio, but none of these things happen overnight. These projects they're taking longer. The regulatory requirements are longer. We've got our management team and management teams across the industry are focused on carbon reduction. And we're very serious about that.

That's not going to result in growth necessarily. We've got to focus on getting more out of what we have and doing that in a very carbon efficient way. So it's a challenging time to develop new sources of growth. We had Freeport fortunate that we have projects that were already in the pipeline, but in terms of new projects, they're going to take upscale, they're going to take some time to get those up and running.

Carlos De Alba

Yes. Your comments - you're basically right in line with what the Robert Freedman was telling us earlier in the week and we had a team in the conference and he was also pointed to exactly the same challenges to keep production, to keep more corporate coming out of the ground that the world requires more than never perhaps and now and in the coming years. And maybe just a little before there on what you were discussing is there any update or any comments that you can share on the situation in Chile and in Peru, how that is evolving with the potential royalty in Chile with the new administration in Peru? What can you share with investors?

Kathleen Quirk

Well, it's something that all of us are watching very closely. The good thing in Chile is the industry is at the table. Copper is such an important component of Chile's economy. And Chile is important to the overall world of copper. It's roughly 25% of copper is produced there. And so, we both have an interest, both the industry and the government having an interest in making sure we have a balance. And we're both at the table, we're both listening and we're confident that over time this will work out. We don't know exactly what the end result will look like, but it's got to be something that works for the industry and works for the government, works for society. Copper industry there in Chile is a major employer, a great provider of social and community benefits, the wages that are paid to workers are very, very high and attractive.

So it is a real contributor to society. Of course, we're producing a product that's needed for de-carbonization. So all that is good, but we need to listen times change in different countries from time to time. And as an industry, we want to listen and we want to make sure that we're responsive. We all can't do everything that everybody wants us to do, but we do want to listen and be constructive. In Chile - I mean, in Peru, we've had limited discussions to date on with the new administration. We're looking forward to having additional discussions here soon as we go forward where we operated Cerro Verde, we're a very sizeable contributor to Arequipa, which is the second largest city in Peru.

We have a stability agreement there, but we do pay taxes above what the current statutory rates are under that agreement. In addition to the taxes we pay, there is also a - as you probably know a substantial profit sharing component that a good piece of that goes to our workers. And some of that, if there is excess those due to taxes, but a big part of what we do there is around the community. And a mine cannot be successful without the community being successful. And over time we've had the great pleasure of working closely with the community where our mine is. In the last expansion, we were able to put in a clean water plan to deliver clean water to the City of Arequipa, which they didn't have enough before.

And so during the pandemic, we've really been able to reach out to the community and provide oxygen and other things that that the community really needs, equipment, et cetera. So it's a real partnership. And it's a give and take relationship. Again, we can't say enough that you have to take a long-term view and it has to be successful for all parties, and it's an evolution to get there. But I think we have the right framework, the right model that provides for substantial benefits to the country and at the same time provides a framework to generate a return on investment for our other stakeholders. So it's a balancing of stakeholders, but our industry is very, very accustomed to dealing with those kinds of challenges.

Carlos De Alba

Yes, certainly, you have had a lot of experience in dealing with all these topics. So in the time that we have left, there are two topics that I would like to address. One is the Indonesia smelter. Any updates there? What is the timeline looking like the latest discussions with the government? And a question - a specific question within this topic is does the precious metal refinery need to be completed in the same timeframe as the copper smelter? And then I'll come back to the last topic I wanted to discuss with you.

Kathleen Quirk

Just real quick, Carlos, on that. We did provide an update - in July, nothing really new from there. We are proceeding with the smelter at the site. We have government support for that site. And so, we're proceeding. The PMR as part of that project is well and we're working to complete it with the same timeline. The whole question of timeline has been interesting because unlike the Grasberg Block Cave and Deep MLZ. We were well advanced in construction and we were more in execution of ramp-up when the pandemic hit.

With the Smelter early stages, it involves a lot of international contractors to come in. And so we were not able to and have been not been able to make the same progress there that we made with the Grasberg ramp-up, but we're focused on it. We've talked to the government. Our objective is to get the Smelter and PMR done as quickly as we can, but it's going to take some time because we're in the early stages, we're just putting in preparing land, putting in pilings. We've got to go through all the - and complete all the engineering, et cetera, but we are trying to fast track it through the extent that we can and the government understands. Now this latest issue we've had with the Delta variant there didn't help matters, but we're all committed and focused to do it as quickly as we can.

Carlos De Alba

And the last topic I want to discuss is something that maybe is not as visible for people - may not be as visible for people, or when they think about Freeport and that is the moly exposure that you guys have. And moly prices, of course, have almost doubled in the last 12 months, right. So what is your latest thinking there? Is there anything that you could do to produce more? Is that something that is an option for you? Or you are just really more focused on taking advantage of this high price that reduces your cost, increases your cash regeneration?

Kathleen Quirk

Well, with - at Freeport, we do have a good bit of optionality with moly. Most of the production of moly comes from byproducts of mines, and we have a large portion, the majority of our production, vast majority comes from byproduct mines. Just like the issue we're seeing with copper supplies going forward that also will have an impact on scarcity of byproduct molybdenum production. But we at Freeport also have as you know primary molybdenum mines, which we can flex to a certain degree in response to market conditions. Molybdenum prices have risen significantly in recent months. We will look at the portfolio. Again, you've got to kind of take a little bit the longer-term view on it, but we'll look at the portfolio.

We have a lot of capacity in our primary mines, particularly at our Climax mine in Colorado, where we could increase some production and we're looking at that. We want to make sure that that the market really needs this excess production, but we have the flexibility and optionality within the portfolio to increase moly production from these primary mines over time without major new investments. It's going to require some investment, but not like building a new mine and we can do it relatively quick.

Carlos De Alba

All right, fantastic. Let me squeeze one more maybe in a minute or so.

Kathleen Quirk

Yes.

Carlos De Alba

With a very strong balance sheet that now the company has and the significant cash flow generation, how should we think about maybe dividends and share buybacks in the context of the new capital allocation model that you have put in place?

Kathleen Quirk

I am glad you squeeze that one in and I am happy that you did that. We reached our net debt target at the end of June. We had been targeting $3 billion to $4 billion of net debt. We achieved, we got to $3.4 billion at the end of June, several months in advance of our original target. So now we're in a position we're generating cash flow well above our planned capital expenditures. Now we're in a position to implement the framework that we announced in February to return up to 50% of our cash flow beyond our planned capital expenditures to shareholders in the form of dividends and share buybacks.

And the other 50% would be used for investments in our growth. And those are longer dated, but we want to have a balanced approach to where we're returning substantial cash to shareholders and investing in our long-term future. So with our year-end results, we'll be in a position to give some numbers around, we'll know what the numbers are, with some numbers around you can make your own estimates on what we're generating, but some numbers are around those excess cash flows.

We'll be talking a lot with our shareholders about dividends versus share buybacks and getting feedback from them on their preferences. We've done both in the past. We've had strong dividends. We've had buybacks, may have a combination of both, but the main thing is we're in a very strong position at Freeport with the balance sheet now in a position to return cash to shareholders. And it could be very sizeable given where we are, where a lot of capital has been invested, and now we're in more of a harvesting mode of cash flow. And this will give us a great opportunity not only to give really strong returns to shareholders, but also invest in our future. And that's our plan and that's how we're so focused on execution. And I'm looking forward to that day where we can show the incremental returns to shareholders.

Carlos De Alba

Well, I'm sure - I'm really sure that this is very encouraging for our shareholders and we're looking forward for those for the details. With that Kathleen, it was pleasure talking to you, catching up. Thank you for joining us again. And I guess we'll keep talking in the coming weeks as you report the third quarter numbers, but good luck with the rest of the quarter and with the closing of the year. Thank you very much.

Kathleen Quirk

Thank you. Thanks, Carlos. Thanks Morgan Stanley for hosting us.

Question-and-Answer Session

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