Freeport-McMoRan, Inc. (NYSE:FCX) BMO Global Metals & Mining Conference February 27, 2023 10:30 AM ET

Company Participants

Richard Adkerson - Chairman & CEO

Conference Call Participants

David Gagliano - BMO Capital Markets

David Gagliano

All right. Great. We're -- as you can see, we're going to mix it up a little bit here. We're turning this into -- this next session into a fireside chat. So please send in your questions through the app. Obviously, I've got quite a few, but please send them in if you have a minute. .

Joining us is Richard Adkerson, Chairman of the Board and CEO of Freeport-McMoRan. Freeport, as I think many of you know, is the largest copper producer globally, publicly-traded copper producer globally, also a major producer of gold assets: North America, South America, Indonesia. Richard has been...

Richard Adkerson

And molybdenum.

David Gagliano

And molybdenum. True. Increasingly important, moly. Richard has been with Freeport for a couple of years. And he's one of the most senior executives in the copper industry. He's been there since, I think, the '90s. And obviously, he's steered the company through quite a few changes over the years. And currently, I would argue they are one of the best positioned times for the company in terms of capitalizing on that, what we think is a very strong outlook for copper and molybdenum and gold.

Question-and-Answer Session

Q - David Gagliano

So Richard, with that, I'm going to start it off with a pretty broad question, if you don't mind, if you could just share with us. 40 years ago versus now in the copper industry, 2 or 3 of the most significant changes that you've seen and what you think are the implications for the copper industry over the next 4 years?

Richard Adkerson

Thanks. It's -- first of all, it's great to be back here at the BMO conference. It's a fun time every year. I think this is -- I think, at least my first one was 20 years ago or more. So I really enjoy and appreciate BMO making the effort to have this kind of conference. It's really special. So I've actually been an employee of Freeport since 1989, although I worked with the company for a number of years before that. I mean, all through the '80s as the company was being created. So I've been around the company a long time. First trip to Indonesia was 1988.

So the way I think about it, and this had a really strong reason for why we are here today is after we developed the Grasberg mine in Indonesia during the 1990s, and we're going into 2000 and early 2000s, global economy was bad, copper prices were very low. We -- at that time, we didn't think Freeport should continue as a single-asset company. It's 1/3 gold and 2/3 copper, and we tried to sell the company or divide it and do all sorts of things.

Up until that point -- I became CEO in 2003. Copper had been driven by the industrialized countries. It was a commodity most closely linked with industrial production, and so -- if copper prices would rise and fall with the business cycles. The industry was highly fragmented at that time, companies were much smaller than they are today. And there were a lot of known deposits, primarily in Latin America, so that when prices jumped up, there would be investments made, there'd be a time lag, and you end up with this copper cycle. So that -- up until that point, there was a copper cycle.

China emerged in 2003 and just a year or 2 earlier, prices dropped below $0.70. And then China came in with a boom. I remember in early conference, may have been years, may been the other one, in 2003, met with all of the CEOs of the industry, I was a new CEO at the time. And nobody expected price of copper to go to $1.90. It was one of the big companies. Economists said the long-term price of copper was -- real price was $0.80 and dropping. Well, by 2006, it was $4.

And so we made a commitment to copper at that time with Freeport when we couldn't sell the company. It went down to South America, I said where the new project is coming from because of the conventional wisdom, there be new projects. And there weren't new projects like they had been in the past. That led us to do the Phelps Dodge deal in 2007, which -- it's been just a great deal. And looking back at it, the next year of time was China. China was a sole source of global growth in copper up until very recently and grew more than anybody expected.

So that was kind of the Chinese era. Now I see a new era of copper demand, all this -- everybody here is talking about. People focus on investments in carbon reduction, and that's going to be a big source of demand, the amount of copper that's going into electric vehicles, energy generation and the supporting infrastructure. 70% of copper goes into electricity in some form and all that's going to require more electrical infrastructure.

And then I still believe in global growth and rising standards of living over time around the world. So we're increasingly comfortable with Freeport's commitment to copper. And that is our strategy, is to be the foremost copper company in the world. We've got a great set of assets, a great team. We've done projects of size all over the world, the different kinds of technology. and we've got a great resource base to work over. So we're very comfortable with that. We feel very good about it and increasingly so after we solve some company-specific issues along the way that we really like where we are, where the commodity is and what our future looks like.

David Gagliano

Okay. Just on a short-term basis, there was a bit of an issue at the mill in Grasberg in February. And I was wondering if you could just give us an update on the mill. Is it running? And if so, what's the status?

Richard Adkerson

So many in the industry have read enough about Grasberg to know that its setting is just unbelievable. I mean, it's high in the mountains of New Guinea really steep elevations in constant rainfall. The road leading up to Grasberg, the UN is designated as the wettest spot on earth. That's very unusual for copper mines. Copper mines are typically in airy locations. And it rains virtually every day there, 200 to 400 inches a year at the mine. Think about that. In Phoenix, it rains less than 7 inches a year. And we have that kind of rainfall.

Our mill, which traditionally has been the largest valued insurance site in the world, it's -- and it's set and we just expanded and expanded over the years. And it's set in the steep ravine that just goes straight up like that. And over years, we've done -- we've taken steps to mitigate rock fall and to try to divert water off. We had an incredible rain burst for a short period of time that came there. And for those of you from the United States, you read in Canada, read about what happened in the Yellowstone Park a couple of years ago, where it was a similar sort of event. It was just a rush of debris and water that came down into our mill area. Fortunately, none of our people were injured. Unfortunately, a couple of downstream artisanal miners were swept away. And it turns out that the physical damage to the mill was limited. It was more of a debris situation.

And we've had instances like this over the years. This was probably the most severe and being at the mill was particularly an issue. So it did cause us to cease operations at the mill for a period of time and then mining was ultimately affected. We -- our team has been experienced. We come back a long ways. We've now -- all of our mines are operating, the mills operating, the impacts, we're still getting our arms around to let the market know for the first quarter, but it should not be significant for the year, and we're taking steps to mitigate it. But just one of those things that you have to deal with in this hard business.

David Gagliano

Okay. Switching gears a little bit to the broader industry. Freeport over the years has been in and out of the M&A side of the business. And I'm just wondering, what are your views towards M&A opportunities in the sector over the next 3 years?

Richard Adkerson

The next 3 years are very uncertain. I don't tell anybody here. We got just things overhanging the global economy right now that none of us can predict and everybody is trying to understand, adjust to it and governments are trying to deal with it. So I think that's just a real uncertain question for 3 years. The -- with a long-term outlook for copper being so positive with the opportunities to grow through exploration and development being limited for a number of factors, I think that will inevitably lead to M&A activity.

David Gagliano

Okay. Freeport's balance sheet is very strong. Things are -- got in next pipeline. That being said, historically, there's been some appetite for growth within Freeport in terms of inorganic acquisition opportunities. Will Freeport participate -- is Freeport a buyer, basically?

Richard Adkerson

The -- our strategy is focused on this great set of assets we have to grow internally. And that is in large part in the United States, which is really a great place to do business from a mining company. We also have a very significant growth opportunity in Chile, which is currently a bit up in the air with the political situation going on there.

And then we're working with the government and having some positive discussions about extending our operating rights in Indonesia beyond the current 2041 limitation. That 2041 date's been there for a very long time, it was in our contract and now into our mining permit. So we really haven't done extensive delineation drilling in the Grasberg district, even in the ore bodies that we're currently producing. So with the success in getting that extension, it's not immediate, but boy, the value proposition for the long-term future of our company is really important. So that's what we're really focused on.

You'll probably want to ask about this leaching technology, which is huge opportunity for Freeport that's emerging. It's not been defined yet, but that's what we're really focused in on right now. And then what are the next steps in developing mines, the world will ultimately need to mine at our El Abra mine in Chile. And then we have a whole series of good growth opportunities in the U.S. We're investing in a new underground mine, which looks small in Indonesia, but it's a 90,000 tonne per day block cave, the Kucing Liar mine in Indonesia, which will help sustain our production there, and it has life beyond 2041, too. So that's what we're really focused on.

Otherwise, when I step back and look at M&A in the mining industry broadly and with Freeport's experience, when companies try to force a strategy to say we want to achieve a strategic goal and force an M&A idea to do that. The results have often not been good. I think it's much better to be opportunistic about things, which we worry about Phelps Dodge. We didn't have a strategy of acquiring a company, but when they wouldn't acquire us, all of a sudden, the financial markets came into place and for a company that hadn't been very small. I mean, 2 years before Phelps Dodge, I spent a month on the roads to raise $200 million literally.

And then all of a sudden, we did a deal that had a combined market cap of $38 billion, the largest high-yield financing ever done in any industry, the largest bank term loan. And it was all because opportunity came about, and we acted on it. So we don't have a strategy, but if an opportunity comes up that we can act on, it makes sense for our shareholders and doesn't distract us from our longer-term strategy of developing our own resources, then we'll consider it.

David Gagliano

Good to know. All right. There's a question here...

Richard Adkerson

I'm not sure how much you know from that, but it's...

David Gagliano

At least you said, we'll consider.

Richard Adkerson

We'll consider, absolutely.

David Gagliano

Because you have shut it down in the past, you said, no? I think you have. But moly prices and sustainability of moly prices in your view. And we'll -- does Freeport have any interest in expanding its existing platform?

Richard Adkerson

Well, our expansion will come back from maximizing operations, which had been constrained because of past low. And you look at the history of moly prices and then it's just a rollercoaster. It's been up and down. It's important to us. We're the world's largest producer of molybdenum. We have 2 stand-alone molybdenum mines in Colorado and it's a byproduct in several of our mines. And so it's a big incremental value, it's like -- its higher price is like a copper expansion project in terms of revenues. But it's a small market. So I don't see us -- I see us maximizing what we have and not looking to do anything other than that, what's expanding of our copper mines that have moly byproducts, that would be a source of future volume growth.

David Gagliano

Okay. South America, a decent amount of social political unrest lately. Can you comment about Freeport's exposure there at Cerro Verde? Any disruptions either at or near the assets and any situation there?

Richard Adkerson

Man, I'm so proud of our Cerro Verde team. I mean, it's a big mine. I mean it's the largest milling complex -- concentrated milling complex in the world, and it's located adjacent to the city of Arequipa, which is over the years, had social unrest issues. During COVID, because our workers lived in the city and commuted out to the mine, we were able to sustain operations really effectively by building some housing and working with the community. So the team there has done great. It's kind of the modern copper mine's big resource, low grade, have to move a lot of material to cover the -- and processes to recover the copper. We've done a great job of developing community relationships by supporting the city by providing fresh water and then building a wastewater collection system. Previously, they were just dumping all their wastewater into the river there and the of the river was terrible. So when we did that, it made the city more modern, but also improved life for the downstream agriculture interest. So we have a positive relationship there. We've had some disruption but not major as a result of the recent protest and we had to do some supply chain issues. But we're up to normal production there now and really feel good about our ability to continue to operate effectively in Peru. We're not really looking at new investments there, but focusing on this great mine we have there. And then Chile is a different story with the uncertainties about the direction of the government with respect to fiscal terms for mining. I did meet with President Boric at APEC in Bangkok this fall and really have an appreciation of what he's dealing with. Things are changing, and we believe we'll get to a point of where it's economic for us to go full speed ahead with El Abra, but that's not now. We're doing planning, we're developing water supplies and being prepared to make the major investment there with our partner, CODELCO.

David Gagliano

Switching gears to the industry, in general. One of the common things we're already hearing is pretty big valuation gap under -- between metals and mining and EVs. We've heard some presentations earlier today that laid that out, I thought really well. What, in your opinion, can the metals and mining sector do to help itself close that gap?

Richard Adkerson

We'll run our businesses in the right way, responsibly and safely and focus on doing things in the right way. You're not going to get governments to let you do things that are contrary to the interest of local communities and groups. You just got to find ways of bridging those gaps. That's been the big lesson in my career. And starting in Indonesia so long ago was -- you can't rely on contracts internationally, like you can in the U.S. You have to have ways of gathering support from people and communities and governments that change and times change and it's hard work in terms of how we get valued. I think that's coming. I mean if we carry our strategy of building our resources and having economical production unless there's just some unforeseen catastrophe in the world, inevitably, copper prices have got to be higher. There's just not the copper there to meet the demand that's coming out of the world as we see it in the future. I just went out with Caterpillar to observe a trial of their new prototype electric , that things got 8,000 pounds of copper in it, in that 1 truck.

And then you've got batteries that weigh enormous amounts, they're short lived, they have to be trolly-assisted recharging as they work and you got to have all the electrical support to support that. And that's just a mechanism of what the world faces as it tries to deal with carbon issues, it's just going to be remarkable. And I think -- there will be a lot of changes made in terms of conservation, substitution, technology advances, all that stuff to help meet it, but I can't see any way that happens without a really much higher copper price than we have today.

And so I think for Freeport, and I'm not going to tell other companies, I don't run their business. But if we stick to our and keep our balance sheet strong, focus on these relatively little risk asset and mine's always risky, but we have relatively low-risk assets. We don't have to go off into troublesome jurisdictions and new deals. There may be an opportunity for us like there was in 2007, 2008 in the Congo when we did Tenke, we had to sell that asset.

But we are really focused on these resources that we have, the team we have, being safe. I have a hell of a problem right now with getting workers in the United States. I mean that's kind of common for a lot of industries, but it is affecting our mine rates and having some effect on our growth opportunities. All of these things are building up to constraints to supply that were always -- they were there 20 years ago, but they've gotten more and more challenging and the demand has gotten more and more better.

So here we are, being this large copper producer with a set of assets, a strong balance sheet. We just -- we need to maintain our position, do things in the right way and be at the forefront of technology advances and all the other things that are going on. And I think the market is going to come. I really, really believe that. I'm not going to tell you when, but I believe it's a great opportunity for us.

David Gagliano

So you mentioned just something about labor challenges in the U.S. Can you expand on that a little bit? And how do they compare to historical challenges with labor?

Richard Adkerson

We've had other challenges before when we acquired Phelps Dodge, when Arizona was, I think, the fastest-growing state in the country and investing everywhere. It's hard to get miners. Our mines are in remote locations. It's hard work. And so we've had these challenges before. But it's really persistent right now. We've got 1,300 job openings in our U.S. operations. For us and I know other countries have it. But for us, we don't have problems in Peru and Indonesia. I mean our jobs are sought after there.

But in the U.S. there's some social changes, I think, that's coming out of COVID, where people are making some value decisions about how they want to live their lives. We've increased our pay where pay is very competitive and attractive. And -- but we're working hard to do it. The ultimate answer, I believe, is going to be automating. And we're investing in automation because I think it's just a real challenge in getting workers, but it's -- right now, it's affecting our mine rates. And it's had an impact on our decision at our Bagdad mine, remote area of Northwest Arizona trying to get workers to come there to live to allow us to expand it. So it's a real issue.

David Gagliano

There's a question here from the app. Broad question. Do you worry that the mining industry might be blamed for slowing down the energy transition through lack of investment?

Richard Adkerson

Yes. No. I love Warren Buffett's comment this morning about stock buybacks. I just thought that was great. If I live to be 90, I hope I can say some Buffet kind of things. But I was just -- I thought that was just great because sure the mining industry is going to be criticized for it. And for us at Freeport, it's a relatively new deal for us to have cash flows to distribute to shareholders. We had to go through it, a tough time. We've got to establish financial policy for doing that. It in no way detracts from investments for us. We have the wherewithal to do investments. There are other factors that will drive the timing for investments. But there will be that.

But the world is going to come to need copper, and we got to work to produce it and all these other things would just be sideshows. And I believe that there will be a time when copper is going to be very valuable when Freeport's assets are going to be really, really valuable because of the assets we've accumulated over all these years and the strategy that we have to build a company around those assets and a team that can operate them very well and develop new things. I just -- at this stage of my career, I could not be more happy about where our company is and where our future is, and that hasn't always been the case with me at Freeport.

But it is right now. And appreciate the opportunity to talk to all of you. If you have questions, anybody who wants to challenge me, let me know. I've been saying that for a long time, if anybody has a different view, because I lived through the oil industry in the '80s, I saw shale oil come about in the '80s. I saw conservation happen in the early '80s that took the sale out of the high copper oil prices in. So I've lived through these sorts of things. I keep looking for them in the copper industry. Is there going to be a shale all moment. This leaching thing is going to be a good thing, but it's not going to be industry-wide game changer. It's going to be really big for Freeport. Morenci is the largest leaching operation in the world. We've got all these old leach stacks around the U.S. that have a lot of copper in them. So -- but there will be changes. I mean, it's not just going to be a static situation for now. Conservation, innovation, technology substitution, although there's limits to what substitution could do. But I really -- I keep saying it, I really like where commodity as a copper is and where Freeport is with that commodity.

David Gagliano

That's a great opportunity to wrap it up. That's a great summation. Thank you very much.

Richard Adkerson

Thank you.