Freeport-McMoRan, Inc. (NYSE:FCX) BMO Capital Markets Global Metals & Mining Conference March 1, 2021 10:00 AM ET

Company Participants

Richard Adkerson - Chairman & CEO

Conference Call Participants

David Gagliano - BMO Capital Markets

David Gagliano

Okay, great. Thank you for joining us again. [Operator Instructions]. So our next fireside chat is with Richard Adkerson, the Chairman of the Board and CEO of Freeport. Freeport is the largest publicly traded copper producer globally, also a major gold producer.

2021 is a critical execution year for Freeport and the key part of its underground expansion at Grasberg, which, if it continues to go according to plan, will result in -- or as expected, resulting copper volume growth of nearly 20% in 2021 and then another 10% in 2022 and gold volume growth of over 50% in '21 and another 20% in 2022.

Richard is one of the longest-tenured senior executives in the copper industry. He's navigated this company through some tremendous changes, some acquisitions, political and social challenges, globally, in Indonesia, boom-and-bust price cycles, et cetera, et cetera.

So with that intro, Richard, thank you for joining us today.

Question-and-Answer Session

Q - David Gagliano

You have obviously been a long time copper bull. What do you think of the most recent move in copper prices? Where do you think it goes from here? And what does it mean to Freeport and to its shareholders?

Richard Adkerson

Well, Dave, great to see you again. We've known each other for a long time, and thanks to you and BMO for sponsoring this conference. It's always a lot of fun when we can get together in person. In fact, it was my last public -- really my last public outing last year when we left the conference and looking forward to when we can get back to have it face-to-face. But thank you for doing this and thank you for your interest in our company.

It may have been to you, but -- maybe at this conference, but several years ago, after we had gone through our challenges of 2015 and into '16, I made a comment that if we could be ramping up Grasberg at a time with good copper prices, it would be a special time for Freeport. And that's happening. Man, it was a long time coming, a long and winding road, particularly when we look back on 2020 and the challenges we were so concerned about in late March and April to end up the year as strong as we did is -- I've used the word head-spinning, and it quite frankly is. And yet, as you know, I have been talking positively about copper for a long time.

It led us, when I became CEO so many years ago, to acquire Phelps Dodge in 2007. It was a bet on copper then. Our company was 2/3 copper, 1/3 gold with the Grasberg mine and generating lots of cash, paying lots of distributions. Investors loved it, but we didn't think it was sustainable. We thought somebody would acquire us, quite frankly. When that didn't happen, we looked at the market. And there was an expectation when the super cycle started in 2003, 2004, after having copper prices below $0.70, that supply would automatically follow like it always done. That didn't happen.

And so prices went unexpectedly to $4 a pound when the CEOs running the businesses at that time didn't think it could get above $1. We went through a lot since the end of the financial crisis, the commodity downturn in 2015, 2016. And then we've had company-specific issues. An unfortunate diversion. We're not the only company to have done that, but our oil and gas deal was a disaster. Then we had issues in getting resolution in Indonesia, which we successfully did at the end of 2018. And now we're facing and meeting the challenges of the ramp-up at Grasberg.

I feel very good about the marketplace and, in some ways, better than I did 10 years ago because of the growing demand for copper beyond just global growth in standard industrial use, which had always driven in the past and which is still there. But now when you look at roll copper plays and carbon reduction in any form, when you look at the expansion of 5G networks and artificial intelligence, the build-out of infrastructure, we're talking about that here in the United States, but globally, that's a lot of copper wire wherever you turn. And so that's new elements of demand, which will be underpinned by global growth. And even though we've had long periods of time with strong prices, well-financed companies with a commitment to add copper supplies. It's just notable that, that just hasn't been successful in a significant way.

So I know I'm singing my song, and I've said it for a long time. It feels good to see it unfolding right now, but copper is very well supported. And then we can talk more about it. But Freeport, as you know, is so well placed with our strong asset base, our seasoned team of technical people who build and operate mines that are the largest in the world. So this -- in all of these personal sacrifices we've all made and everybody's had to make it, is a godsend for our company to see things unfolding as they are.

David Gagliano

Okay. Great. Just turning a little bit to the future of Freeport. You were recently named Chairman of the Board. You added that to your CEO role. And Kathleen Quirk recently added the role of President to her CFO role. Can you just comment on what these changes mean for Freeport both now and in the future?

Richard Adkerson

Well, our past Chairman was a longtime Board member, Gerry Ford, who stepped up to become, first, our Lead Director and then Chairman 5 years ago and performed great service for our company. So here I am, in fact, there's article in Financial Times today where I comment on Freeport having a 30-year reserve life and actually double that when you look at our resources. And I said, Richard doesn't have that kind of reserve life, I mean in my age. So as -- I don't have plans to retire. Thank God, I've got good health and energy and a really strong personal desire to personally be part of what I think is going to be a great near-term future for our company.

But reality is, I'm 74 years old. And so during the time I have left, I want to focus on execution, and that's the keyword for us in recent years, continues to be that in 2021. I want to build a sustainable Board. We're in an effort to expand our Board. Our Board is small for historical reasons and the need to add board members with different capabilities and expertise and ways to contribute to the future of our company. We need to make sure we have a sustainable management team.

Now we've got really good, deep, young management team. We had 3 senior people to leave in the last couple of years of retirement. So I mean we've had very little turnover. Amazing, Dave, when you look at all the trials and tribulations of Freeport that people have stuck with it, it's really heartwarming. But we replaced each of those 3. Our Americas Chief Operating Officer, our General Counsel, Chief Administrative Officer with internal promotions. And we've added some new people dealing with sustainability, ESG issues and other issues. We'll continue to look to do that.

Kathleen has just done a great job. She joined Freeport at the same time I did. Early on our career, she worked a lot with Chip Goodyear when Chip and I partners at Freeport and learned a lot from Chip. And then we became partners in the late '90s and dealing with the financial issues with Freeport, became CFO when I became CEO in 2003. And in recent years, she's expanded her role of responsibilities to work with our operating team. Beginning in 2016, she started working in Indonesia and has now taken the lead there.

So it's just like when I became CEO following Jim Bob, I was actually doing most of the job before I was named, and Kathleen is doing more and more responsibility, which is allowing me to focus on these strategic issues for this company, spending a lot of time talking with investors, listening to them, spending a lot of time and listening to people on ESG issues. And I'm Chairman of ICMM. We're going through a lot of changes there and a strategic review. It's giving me the chance to -- we've got a huge number of new CEOs in this industry, some longstanding companies, but some other companies that are emerging. The landscape is changing. The challenges are changing. So I'm really enjoying spending time with these new CEOs. We've got a new CEO at Rio Tinto. He's the seventh CEO that would have worked with at Rio. And they've been great partners and got a great company.

And so it's a natural progression that's going on. I'm not backing away from the business in any way. Kathleen and I talk every day. We have a great informal way of working with our team. So there's others on our team that I want to talk to, I pick up the phone and call them. We don't have a hierarchical structure. We work informally, learning to work remotely and using platforms like this fits right in with the way Freeport operates. So we've got great morale, as you can imagine, with the stock price movement, the debt reduction, the progress in Indonesia. So really, it's a natural progression, I would say.

David Gagliano

Okay. Great. The prompt for questions definitely worked here. I've got quite a few coming in from the app here. I just -- I'll try and take these and assemble into order.

One of the questions is, there's been some press lately regarding your U.S. copper operations and potential expansions in the domestic U.S. And I was wondering if you could just comment on the status of those plans.

Richard Adkerson

Yes. So I have been out talking with media. I'm going to do some more of that as we go forward because we have a lot of questions and so forth. And orders started to came out, it was a good article and reporter earnings follow us later. But we're not on the verge of approving projects right now. We have great opportunities. We actually, a year ago, suspended our spending on evaluation of these projects. We reinstituted that, and I'm totally confident the world is going to need that copper. And the U.S. is a great place for us. We have a very favorable tax position. We own virtually all of our mining lands and fees, so there's no royalties. When you look at royalties and taxes internationally, and that's a huge advantage for the U.S. We've got good energy situation, community support. Notably, all of our expansion opportunities are brownfield expansions, and we have tremendous relationships with communities and in the U.S. with native American groups, who have been our partners. So in many areas, and we continue to work closely with them.

So there's a lot of reasons to look to expand the U.S., and we've got the resources there. Our Bagdad operation in Northwest Arizona has a resource that looks attractive to expand. We have to deal with tailing sites and water issues, and -- but that's a project we're looking at. This Lone Star project, where we just completed our first step with that, is immensely important for the future of Freeport. It was an oxide development where we're using available processing facilities in the nearby Safford mine. We have, in all likelihood, another oxide opportunity, and then there's a huge sulfide resource.

And this is not only there at our Safford mine, but just across the mountain range from Morenci. I mean in a county, both of those in counties, where we just we have great acceptance by the local communities. And this could be, like Morenci, is the biggest mine in North America, Lone Star could challenge it in the future. It will take some time. But then in South America, we've got El Abra, where we're partners with CODELCO. It's kind of a typical major project for the industry. A low-grade sulphide deposit that's going to require desalinization and transportation of water to heights, but it's, again, it's a project that the industry is going to need in the future.

Now we're in 2021 we're going to execute. I mean, we're not going to be approving new projects in 2021. The Board, with our recommendation, adopted a new financial policy that's a shareholder-friendly policy with this significant increase in cash. We turned the corner in the third quarter. When you look at our cash flows, at lower prices, but at current prices, there's a tremendous amount of cash coming in. And the Board signaled to the market that this is what I was advocating 10 years ago. We're going to be distributing cash to shareholder in the form of dividends, perhaps stock buybacks, and then we'll have $4-plus copper. Our debt is going to be $2 billion or so by the end of the year. And so that's not an issue, and that will leave cash over to consider growth projects.

And then we're going to be positioned strategically to consider other things. So it's really where I wanted our company to be, and it took 10 years to get back here and move back. And so we're going to be very disciplined, initially generating cash, continuing to improve the balance sheet, returning cash to shareholders and looking at disciplined brownfield growth opportunities.

David Gagliano

Okay. Just picking up on that. I appreciate those details. The capital allocation policy is really centered around up to, I think it's up to 50% of available cash to return to shareholders. That does leave the door open a bit to interpretation, whether it's more heavily weighted to the low end or the high end of that range, obviously. So over the next 1 to 2 years, is there more emphasis on returning the cash to shareholders or funding these organic growth projects?

Richard Adkerson

The truth is we are just in the last 3, 4 months, reinstituting economic evaluations of those projects. And these projects take time to unfold. So when you're talking about a 2- or 3-year time frame, you're looking more at cash distributions. I mean, Dave, this is trite to say, but I say it all the time, if the price of copper goes to $10 tomorrow, it's still 7 or 8 years before we get significant volume increases. That's what's supported copper prices.

In light of this very favorable demand picture, there's still very limited projects. There were a couple of projects that are good projects that were deferred because of COVID. Those will be completed. There are a couple of other good projects around the world, but it's limited in terms of the overall marketplace. We have this great set of assets, but I know how long it's going to take us to increase volumes significantly. We got a good project in Indonesia that's going to add value there. Each one of these projects is going to look at not by trying to get bigger. But will they add value to our shareholders to allow us to return cash to shareholders, that's what's going to drive us.

David Gagliano

Got it. Okay. Great. I have another one from the app here. You actually might be -- there's a bit of a curve ball. You might have a better perspective on the Indonesian nickel industry than perhaps anybody. And the question is, do you think that the battery industry might be facing nickel shortages in the coming years based on your perspective?

Richard Adkerson

I've watched the nickel industry in Indonesia. We had good relationships with INCO and Vale. And so we're aware -- we look at a couple of projects ourselves years ago and decided not to pursue it. So -- but I'm not an expert that I know Indonesia. We're working with the government on the smelter project, and they have aspirations of using their nickel resources and building a downstream industry for that. And God bless them. I hope they're successful with that.

Before, there's a lot of differences in copper and nickel and copper and other resources. In copper, you create 95% of the value through what we do in our mines. Our mines are concentrating. Nickel is -- much of the value is created downstream. And until recently, much of that downstream value was done in other countries. And so now the Indonesians are pressing and working with the Chinese and other investors to develop a downstream industry. And with their big population and so forth, I think it's a good thing for the country to do, but I can't answer your question about the resource.

David Gagliano

Fair enough. So just switching gears to the ESG theme. Obviously, you mentioned you were named Chairman of ICMM again, previously held that position from, I think, 2008 to 2011. So the question is, how do you think the industry is doing in managing ESG risks? And how has that changed during your career?

Richard Adkerson

Oh, man. Well, they take great times they asked me to do this. In 2008, 2011 was a financial crisis, and now we're dealing with COVID. ISMM has done a great job. It was created back in the 2000 time frame. I was really involved from the start and trying to deal with the criticisms about broadly sustainability issues for the industry. And organization dealt with that.

Now it's getting much more complicated. Civil society, and that's going to government bodies, communities, banks, investors, this is at the forefront of what people are considering. And it makes our job in running the mining companies more complicated. It makes ICMM jobs more complicated. And we have to rise up and meet the challenge. There's a consensus among counsel members that we need to do that. We're now 28 of the world's largest mining companies, and we're going through a strategic review on how to do that. There's a number of groups involved. There's issues with different groups trying to establish different standards, and we've got to be engaged in that and take a leadership role, but listen to others.

I mean -- and so that's what -- we added resources in Freeport. We published our first climate report last year. It's always been part of our culture. And I think we learned so much about it getting in the mining industry in Indonesia. That's a very complicated place in Papua with indigenous people, the environmental challenges, the changes in the government in Indonesia, what it's gone through over the 30 years I've been going there. And so we were there then we went to Africa and dealt with the DRC successfully, in Peru and in Arizona with the native American Group. So it's something that's -- it's not new for us. It's been part of every day life. I've been actively involved. Our senior management team has. But now, this whole issue of the pressure of climate change, which was debated for several years and now is why they recognize we've got to do things.

And then how do you measure ESG performance? There's a number of initiatives going on with that. It's something we all are having to deal with, and there's no easy answers, but we're going to be fully engaged both as a company and with ICMM.

David Gagliano

Okay. Great. We've got time for one more question, so I'm not going to let you off the hook here that easily. So I do want to ask about your view towards Freeport's role and M&A opportunities in the sector. Would Freeport prefer to be a buyer or seller of assets over the next, let's say, 3 years? And if you could just give in some commentary how the low multiples, the pervasively low multiples throughout the sector, how that factors into your thought process.

Richard Adkerson

So when I look back on things -- and I was engaged in debates years ago with the diversified companies about the benefits of diversity, I've always had a strong view that the success of a mining company is based on the quality of its assets, the quality of long-life, attractive cost structure and growth opportunities. And I think 2008, 2009 proved you're not going to be built out of a down copper market with nickel. It's just -- everything -- demand is too correlated. And so we're going to keep focusing on our things.

Another observation is -- and Freeport's Board did this -- but when companies have made mistakes, too often it's been a Board or management team comes out with a strategic view of something that needs to -- that they think needs to be done and then forces a transaction. And too often, those turn out to be bad decisions. You can tick off a whole list of those in our industry. I think, like what we do with Phelps Dodge, it was an opportunity that came to us because of our situation, in Phelps Dodge's situation at that time in the financial markets.

So I want to position us so that, if opportunities come, we have the chance to do it. We don't have any strategy for doing M&A deals. There's no Freeport strategy for doing that. If you ask me for the next 3 years, something may come up, but that would be as a result of an opportunity that comes up, and we don't foresee that right now, could happen. But I want to be positioned to take part of it.

I don't believe combining a company like ours with a gold company makes any sense at all. When I look at what gold companies' investors look for to invest in gold companies, the nature of their assets, the short lives, the reinvestment risk they have, it's just inconsistent with a company like ours, where copper is built on global economic growth and positive economic outlook. We've got such long lives. We don't have to do any deal. We don't -- we do exploration. Hopefully, it's successful and nothing like it in the natural resource industry.

But we don't have to have success in exploration. We don't have to make acquisitions. Besides, the 35-year-plus reserve base we have, and that's recoverable, proved and probable reserve. We've got resources that essentially double that. So this company can continue to succeed, continue to grow without doing anything from an M&A standpoint. If opportunities make sense for shareholders, then we'll be positioned to consider it.

David Gagliano

Excellent. Well, great answer. Unfortunately, we've run out of time. However, it is a good segue because, I believe, Mark Bristow is our next speaker. So interesting comments at the end there. I appreciate the time and, obviously, hope everything goes well for the rest of the meetings this week. Thank you.

Richard Adkerson

All right. Thank you so much, Dave, and thanks to BMO for hosting this.