Freeport-McMoRan Inc. (NYSE:FCX) Citi Basic Materials Virtual Conference December 2, 2020 1:00 PM ET

Company Participants

Kathleen Quirk - Chief Financial Officer

Conference Call Participants

Alexander Hacking - Citi

Alexander Hacking

Hi, good afternoon everyone and welcome to the Citi Basic Materials Conference discussion with Freeport. Very happy to be joined today by Kathleen Quirk, who is the CFO of the Company. I think Kathleen has been CFO for since 2003 and been with the Company since the nineties. I’m sure you will know but Freeport is just about the largest private copper miner in the world, or I’m sure it will be once Grasberg ramps again. They come in as major operations in North America, South America, Indonesia now including very substantial Tier 1 copper mines. At the moment the company is focused on ramping the Grasberg mine back up for full production after transitioning to fully underground mining and again I’m sure you know that Grasberg also has very significant gold deposit and I think also maybe the world’s single largest gold mine.

So with that, I’m going to turn over to Kathleen who’s going to talk for a couple of minutes, five minutes. Then I’ll ask some questions and if any of you have questions, then please email them directly to me, and I’ll address them to Kathleen. So again, thank you very much Kathleen and the floor is yours.

Kathleen Quirk

Great. Thank you Alex and, and Citi for hosting us this year at the conference. We’re doing it virtually like many other things these days and look forward to getting back together in New York next year, hopefully, but just I thought maybe just to kick this off that we could talk a little bit about how Freeport is positioned for the future. And reflect a little bit back on what we've done this year during 2020, which is was very important, critical transition year for Freeport.

And as all of you know, back in April, with the onset of the pandemic, we adjusted our operating plans very significantly to better manage our costs and capital spending, and address uncertainty in the market at that time. And looking back on what we've accomplished this year, it's quite remarkable. We have managed very effectively the pandemic in terms of protecting the health and safety of our people, working with communities where we operate, and being able to operate our business in an effective way during the pandemic.

At the same time, we've addressed costs, brought down our costs, reduced capital spending, and also delivered on two major initiatives this year. We have been making huge progress in ramping up the Grasberg is, is Alex was just referring to. You've probably seen in our third quarter results, we were at a run rate of almost 60% in the third quarter that will be continuing as we go through the fourth quarter and into 2021 to set us up for a very long live, large scale, low cost operating base in Indonesia.

We also completed the expansion of our newest mine in Arizona, the Lone Star mine and started production there. And that's just the start because we believe that that mine has the potential to become another Cornerstone asset for the company over time. We've also addressed our balance sheet; we're continuing to strengthen our balance sheet.

During the third quarter, we reduced our net debt significantly. And that will continue in the fourth quarter and into 2021. So as we look forward at Freeport, we're in an excellent position. We've got increasing volumes, declining cash costs, expanding margins, a very positive outlook on the commodity copper where Freeport is foremost in copper, declining capital spending, which is going to give us substantial amounts of free cash flow generation, which will enable us to continue to enhance our balance sheet, provide cash returns to shareholders, and invest in projects over time when conditions warrant.

So we're in a really good position. We've got franchises, strong franchises in the U.S, Indonesia, and South America, as Alex was saying we're the world’s largest or one of the world's largest copper producers. Not only do we have a significant reserve life of 30 plus years, we also have resources and a project pipeline that we can look to overtime as conditions warrant. So we're very well situated, this was a really important year for us. We feel that we've stepped up to the challenge we've delivered. And now as we look forward, we see a situation where demand for copper is accelerating. We see that the strategic nature of copper is becoming more important especially when it comes to the delivering on clean energy transition. Our copper is going to be very important in managing that transition. We're also committed to be a responsible producer. And we signed on to the copper mark, which is an assurance program to be a responsible producer of copper, one that has a social licence to operate with communities and all of our stakeholders.

And so we're really looking forward to the future, to delivering on our business plans with our focus strategy of managing costs, improving our volumes, managing our environmental responsibilities, and responsibilities to communities in an effective manner, and delivering strong returns of long term to our shareholders.

So that's where we stand and we're in a weird and neat position now looking, looking at forward to 2021 and beyond. And I'm sure you have questions as well, happy to move on to that.

Question-and-Answer Session

Q - Alexander Hacking

That's great. Thanks, Kathleen. And, let me add my congratulations on, like, the drastic steps that the company took earlier this year, when things look a whole lot worse than they do right now. I'm sure you're sure it was easy. And it's impressive how much the company achieved in a very short time period.

I guess just coming back to the copper market, obviously, the copper prices today is, the highest that we've seen in in many years. Are you seeing increased demand for copper? Are there signals that you're seeing that are suggesting that copper demand is, is going to be improved in 2021?

Kathleen Quirk

Well, a couple things. We're very encouraged by what we're seeing in terms of the recovery in China, following the pandemic, and the economic data coming out of China continues to be good. And so I think that has, has started in what we hope will be China leading the recovery and other countries to follow. We're very encouraged by the medical solutions that are being rolled out. And I think that will set up nicely for a recovery in the economies in the Western world and U.S. and Europe and other places, which will help stimulate demand. I think the market is expecting to see some on-going stimulus to get the economies back up and running, those will be positive for copper.

And I think a big demand driver that all of us are focused on is coppers role in decarbonisation. The more you look at coppers uses with respect to alternative energy and electric vehicles. It's a very copper intensive program and the rate of adoption continues to accelerate by countries around the world. So we're optimistic about demand, of course, we recognize that the things happen, so we have to be prepared for to adjust our business like we did earlier this year. But we have a good long live asset base, a management team that knows how to operate in good times and bad. And, and so we feel that we're well set up now.

We've got, as I mentioned, the demand side looks to be accelerating. But there really isn't a supply response. It's -- so it's difficult in copper, to find new sources of supply. And even though prices have risen to the levels that they are today above 340 per pound, it's not like additional supplies can come on very quickly.

As you know, it takes a very long time to develop new supplies and copper. It's new discoveries are very rare and we haven't seen many in years in our industry, and may the projects that are out there or are becoming more and more challenging to develop. So we see a situation, setting up for copper structurally, of having a tight market as we go forward.

Alexander Hacking

Okay, that's great. Thanks, Kathleen. And I guess that sort of transitions to my next question on Grasberg. I was actually looking at our copper supply demand model the other day, and we have Grasberg as the largest source of increasing copper supply in 2021, as it ramps up. How -- I guess, in terms of ramp up there, what should investors be looking for in 2021 to get comfortable with the fact that the ramp up continues, to be on the successful part that it has been so far.

Kathleen Quirk

Yes. This has been a project that we at Freeport have been planning for many, many years. It was part of the original design, at some point to go underground. And we started investing actually in the infrastructure in the 2003 timeframe.

So this has been a project that's been in the planning phase and investment phase for many, many years. And 2020 was really the first year that we were able to start, what the infrastructure have been in place to start in production mode. And with blockade mines, you gain scale over time, by increasing the footprint, and adding new draw points that allow you to collect or at scale from multiple access points.

And so that's what we've been doing. And you can see, you can measure our progress each quarter during 2020, where we've had increasing volumes coming from, from our major underground ore bodies, including the Deep MLZ and the Grasberg Block Cave. We were just under 60%, on a on an annual run rate, in the third quarter, we expect by middle of next year, to be at about 90% on a metal one rate.

We have some higher grades, particularly from Deep MLZ in the early years of ramp up. So that has helped us with gaining some, some additional metal during 2021, and 2022. But it's just really doing more of the same of what we have been doing, which is continuing to add new access points, collecting ore from these multiple points and transporting it to our mill facilities.

I might mention, with the technology that we're using, we're using state of the art technology underground. We've got an underground rail system, a very efficient electric rail system, underground, very, very efficient collection points for transporting the ore. And really what we need to do is just keep doing what we're doing, but build scale over time. And we're gradually doing that quarter by quarter. And the team has done a really good job. I think we need to keep in mind that we've been doing this during the pandemic. And our team has been managing that very well while also continuing this project, which is no small feat. So we're looking forward to ending the pandemic behind us. So our sole focus will be on this ramp up, but the team's been doing well. And we've got a lot of confidence that we'll continue to, to execute with, it's not without risk. We understand that. But we're very focused on delivering on continuing to deliver on these plans.

Alexander Hacking

Great, thank you. I guess, turning to capital allocation, as you said, it's obviously going to be a lot of real free cash flow inflection point for Freeport, especially given the price where it is, but also with Grasberg where it is. How are you thinking about, I guess capital allocation for the next couple of years in terms of the balance between the balance sheet capital returns, and then potentially even thinking about future investments that you might make.

Kathleen Quirk

Yes, well, we've been given a lot of thought to this and having discussions with our board and we'll continue to have those discussions going into 2021 as we continue the ramp up at Grasper. I think in terms of our balance sheet we've made, enormous progress in terms of, of reducing our net debt. We've got significant liquidity and flexibility with our maturity schedule. But we firmly believe that a strong balance sheet in our sector with the operating leverage we have to the commodity is, is positive to have lower debt rather than more debt. And we believe that we're better able to reduce our cost of capital and drive shareholder returns over the long term with lower levels of debt.

And so we'll have the ability to continue to, to improve the balance sheet. We're looking at targeting a level of debt, which can be we feel that we can we can manage our business at any commodity price with, and then over the next couple of years really looking to begin returning cash to shareholders in a significant way.

And, many of the International mining companies use pay-out formulas to determine the based on performance to determine the amount of cash distributions, both in shareholder returns dividends or stock buybacks. And we're looking at the same type of model, where once we hit a certain depth target, to pay out a significant portion of our cash flow, excess cash flow to shareholders. And we're looking forward to that. And we'll be talking more about more about that with our board during 2021. But we expect to be in a position to begin returning cash to shareholders again during 2021.

Alexander Hacking

Okay, great. I have a few questions that have come in on email here. So let me just wrap up with my question on ESG. Could you maybe you know, describe how Freeport is approaching ESG? What your priorities are initiatives? What are the opportunities? What are the risks? Thank you.

Kathleen Quirk

Yes, well, this is an area, that our whole industry is spending a lot of time on. And, and as you mentioned, I've been in the industry for a very long time. And the topic of ESG is not a new one to us, really in the mining business, because of the long term nature of the assets, the interaction with communities, governments, regulators, big workforces. It's been an important part of a social licence to operate in our business going back, for decades. So, the work that we're doing in this area is not particularly new.

But what's new is being able to put it in a context that investors can understand and hold us accountable for what we're doing to sustain a long term business. And so the communication of what we're doing, the way that we communicate it, how we are rated or ranked, those things are all new, but the programs that we have are well established. But we're constantly looking to raise the bar, and we're doing a lot of work on, on things like water conservation, we're doing work on climate, while copper is so essential in terms of the clean energy transition, it doesn't mean that we can ignore our carbon footprint.

So we're doing a lot of work in looking at how we can become more energy efficient. How our sources of power that come into the, the come into the company that we use, can be sourced with alternatives, to typical fossil fuels. So we're trying to do our part wherever we can, on climate, on water, on our work with communities, on our work with, with our workforce in terms of inclusion and diversity, I mentioned the copper mark, which is a framework and assurance framework that will have an independent body to really assess our, our, our programs and how we are responsible in terms of producing copper.

So I think that's an important thing, but being transparent and open about our performance, worker safety. How we've performed during this pandemic, all these things, are real important to investors, they're important to us, as managers are important to our people and our communities. And so we're spending much more time now in communicating and packaging and providing data to investors, so they can assess it as well.

Alexander Hacking

Okay, thank you. I have four questions here from investors. So I'll just, I'll just read these off. The first one is on the balance sheet again; do you continue to expect to have 2X leverage by the end of this year? And to deliver under 1X by the end of next year? And when do you expect to be upgraded to investment grade?

Kathleen Quirk

We do expect our leverage to come down very significantly during 2021. We've got a -- we've got a chart in our recent earnings, that that shows what our leverage would be if we applied the cash flow to debt reduction. And so we looking at this model, it showed us being below $5 billion in net debt by the end of next year. With commodity prices where they are and continued strong execution, we ought to be able to achieve that. And you know, it copper prices ranging from $3 to $3.50. And we're more close to $3.50 a day EBITDA is in the $7 billion to $9 billion range. So you're well below one turn of EBITDA. I think as we continue to demonstrate that, we demonstrated in the third quarter, have the opportunity to demonstrate again, in the fourth quarter, continue to demonstrate this, this, this very strong cash flow generation. I think it gives us the opportunity to go back to the rating agencies and look at the ratings. The quality of the company's assets, as you referenced earlier, the life of our reserves, the management track record, and the credit statistics that we have will all point to investment grade. And so we have an objective to get back to investment grade, at some point. We need to continue to execute. And I think well, I think we have a great, great shot of getting there.

Alexander Hacking

Okay, thank you very much. The next question here is when will you re-evaluate the production cutbacks announced earlier this year?

Kathleen Quirk

Well, with you know, continuing to do that on an on-going basis, we did announced during the third quarter that we will be bringing back on the Chino mine in, in New Mexico at about half rate. So that's, that's a portion of it. We're going to look at you know, whether it in our stalking rates at El Abra, which we had cut back.

At Cerro Verde, we had some changes in the mill rate, mining rate and Cerro Verde in our revised plan. That's unlikely to change until things get more back to normal after the pandemic. We’re still have some restricted protocols so that we feel that the rates that we're operating like now are better suited to protect, worker health. So that's our priority. And in all this that we're doing, that really is what we're most concerned about is making sure that we're able to bring things back in an orderly fashion without impacting, health of the workers or our community.

So we're constantly reviewing these plans, but one of the things that we, one of the things that we were successful in doing with these revised plans is bringing down costs And we want to retain as much as that as possible. And so while we'll evaluate whether it makes sense to bring back some production, we want to continue to execute as cost effectively as we can and keep capital as low as possible as well.

Alexander Hacking

Okay, that actually leads to another question here, which is will you see some slightly higher costs in 2021, as a result of resuming normal stripping and maintenance activity?

Kathleen Quirk

That's already in our plans. So we update our plans every quarter. And, so you're not, we're not showing you an apple in 2020 and orange in 2021. So we're reflected in our plans is over time to increase the mining rate again. And that's reflected we've said next year that our cash costs will be expected to be below $1 20 per pound compared, they're a bit higher this year. So really, what's driving the decline in cash costs next year is a continued ramp up at Grasper? But we're trying; we're working really hard to try to keep costs low. The team in the Americas is just doing an outstanding job. On our productivity initiatives, we're using, continuing to lean into technology that's available to us.

In terms of looking at automate -- automation and digital, we're where we've got a, a way of working in an agile way, with our, with our teams across functions. And so we're really, really excited about keeping trying to keep as much productivity as possible, even though we're going to over time, be increasing mining rights again. But that's all baked into our plans that we've, that we've, guided too. So there's there shouldn't be any big surprises out there.

Alexander Hacking

Okay. I saw one last question here, which is on Peru? And so effectively saying, do you have any concerns about the political situation there, with the election next year and some of the instability that we've seen recently in the government?

Kathleen Quirk

Yes. Well, I think we could say that around the world, and also here in the U.S. about elections. But we, we really stay out of politics. We focus on what we can control and focus on operating efficiently providing benefits to the host country, and the communities in the forms of taxes and royalties and jobs and economic multipliers for our investments. What we're doing for the community in Peru in terms of water, providing clean water. So we focus on those kind of things on what we can control. As long as we are a good citizen in terms of what benefits we're providing. I think the mining industry will continue to be strategic there because of the jobs and the economic impact that it provides.

But we've got to, we've back to the social licence. We've got to make sure every day that we're earning that and providing benefits to the country and to its people, and we're committed to that. We can't worry about the day to day politics. I think big picture though Peru has been a good mining country. And I expect, the copper that's mined in Peru is going to be necessary to supply the world as we go forward. So I think there was there'll be a place in Peru for on-going mining, like it has historically.

Alexander Hacking

Okay, that's great. Thank you, Kathleen. That's all the questions that we have. So I guess let's wrap up there. And let me just say thank you again, for taking part. And best of luck next year should be a really transformational year for Freeport, especially with copper prices at these levels.

Kathleen Quirk

Yes. Right, we’re looking forward to it. Thanks everyone. Appreciate it. Thanks Alex.