Freeport-McMoRan Inc. (FCX) Earnings Call Transcript & Summary

I think -- good to go? All right. Is this -- there we go. All right. So we're going to mix it up a little bit now with a fireside chat format. Joining me is Richard Adkerson, the Vice Chairman, CEO and President of Freeport-McMoRan. Freeport is the world's largest publicly traded copper company, also a major gold producer. Core assets are in Indonesia, North America and South America. Technically, Richard's time with Freeport began in 1989, when he was hired on to be the CFO of the newly merged Freeport-McMoRan, but it actually dates back slightly further than that. It actually goes back to 1970, when he was a very, very young -- very young accountant and one of his first clients was McMoRan Exploration. Obviously, he's one of the most tenured senior managers in the copper industry. And so what we'd like to do today is step away a bit from the typical Q&A session that you hear on the conference calls and dig in a little bit more on some of the bigger picture issues facing Freeport and the copper industry. So we are going to take questions from the app. And obviously, I've got a few as well. So we'll just fire away. But with that, I know you've got a few prepared remarks, so.

Yes, Dave. Great to be back here at BMO. I've done so many of these. 1970, man, that's a long time ago, wasn't it. Actually, the Freeport-McMoRan merger was '81. I joined the company right with the discovery of Grasberg. So that's what made me change my career from public accounting, working with natural resource companies all along to here. You and I have had a long history together, going back Dan Roling and different places you've been. So it's great to be here. I'm just going to say a couple of broad-based things about our company, where we stand right now. You could have arranged a better day for this, Dave. So it's -- so talking about Freeport. We've had a very interesting history. And we're in a very good place right now with our company and moving towards the strategic objectives that we're moving towards. Freeport is the world's foremost copper company. Looking beyond the current coronavirus situation, which we all hope, mostly for the people that are being exposed to it, will be resolved shortly, but it's uncertain right now. Copper is the best positioned, I believe, of the major commodities from a fundamental supply-demand standpoint. It's absolutely essential in the world's economy, in construction, automobiles, everything. We just saw huge copper panels behind these screens here. And then it also benefits from the move towards carbon reduction economy with the amount of copper that's required for alternative energy generation, electric cars and the like. And then copper is really supported because of the scarcity of supply. The major producing copper mines today were generally discovered decades ago. And so it's -- we're very pleased to be focused on copper. Our set of assets are large, high-quality. We're a recognized leader technically, in developing resources, in construction large-scale processing facilities and in efficient operations that span the scope of copper mining, but also the globe in terms of geographic exposure. We have a long-standing track record of successfully operating mines that are among the very largest in the world. We have a benefit at Freeport that we operate all the mines that we own interest in. And that gives us the chance to share experiences, supply side issues, equipment, people and so forth. Our assets are really long lived. They're durable, and they have significant embedded options for resource development in the future. We have strong established franchises in the U.S., where we supply roughly 1/3 of the copper to the downstream market from our mines in the U.S., in South America, in Peru, in Chile, and also in Indonesia. Through our strong execution over the year, we've gained the trust and respect of our partners and host governments. We're very well positioned in all of the countries where we operate from that standpoint. In Indonesia, we've been the industry leader for -- since the early 80s, right now, in block cave mining. And that's critically important in achieving our goals of converting the Grasberg mine from this huge open pit, which we stopped mining in the open pit in December, to what will be the world's largest block caving operations with over 200,000 tonnes per day, 200,000 tonnes per day coming from the underground to feed our mill. We -- our Americas assets are really good, strong assets, as I said, U.S., Peru and Chile. And that's -- roughly 70% of our copper production comes from the Americas now. This is a special picture to me. I first went to the site where this pit is located in 1988, took a picture of the exploration drill that was drilling at that point. And now we've completed mining this pit. It's 2.5 kilometers across, 1,250 meters deep. It has had 5 billion metric tonnes of material taken out of it, almost 2 billion tonnes of waste of ore, which then is processed, and we have to manage the tailings from that. It has, over time, at PTFI, produced roughly 35 billion pounds of copper and over 50 million ounces of gold. So that's our history. And now we are focused on moving to the underground. And as exciting as that history was, our future is equally as bright. It's an operation where we are extending the underground. We've essentially, at this point, developed all of the infrastructure for this. It's a multiyear process. Personally, I look back and I think that was the biggest risk that we faced, was in infrastructure development. We've invested in it for over 15 years, and now we've got the infrastructure basically behind us. And now we're beginning to mine on a way that we've been mining for years, on a scale at multiple locations underground that -- of the scale that we've mined for years, and we're meeting our targets in ramping this operation up. You saw that in our fourth quarter earnings release, and now we're moving forward with it. So where we are at Freeport right now, we're executing on our major initiatives, the principal one being this Grasberg operations. And we are also developing a mine in Arizona called Lone Star, which will begin production this year and has significant growth opportunities, low capital, very good returns. We've got an initiative to improve our efficiency using data analytics that we're executing. And with success in that, and we're increasingly confident with success, even at today's cash flows our -- copper prices, our cash flows will double, our costs will drop, and we're situated to benefit from an opportunity, which I believe is real, to have more positive copper markets when all this comes together. So we're limiting our strategy right now to executing that plan. We're having success with it. We have confidence about doing it, and we're looking forward -- we're really looking forward to the future. So Dave, with that, I'll turn it over to questions.

Okay, great. Thanks for that summary. So I'm going to go right -- cut right to the topic of the day, at least from my seat. We've actually seen a lot of press regarding Freeport and M&A activity. I was wondering if you can just comment on your views on Freeport and M&A activity.

Yes, I read the papers too, as do our partners and as do government officials around the world. So now is just not the time for Freeport to think about it, doing a big strategic move. Stock price is just too cheap. It's not just market conditions, but where we are with our production being in a trough period as we stopped mining from the pit and as we're ramping up our underground. And so clearly, we're -- I've said before, we're in a show-me mode. Market wants to see us execute this. We're doing it, but we've got ways to go. And so now, it's simply not the time for us to think about doing anything. It wouldn't be right for our shareholders. And as I talk to our shareholders, there's consistent support for that.

As a follow-up, when do you, in your view, think is the right time?

Well, okay, let's envision a scenario. And all this time I spent in the commodities businesses makes me not feel that I'm smart enough to define markets in short term. So I'm very confident about the long-term situation for copper. But let's say a scenario is that the copper markets are better 2 years to 3 years from now. We will have completed the ramp-up. We will have our production back to normal levels. You saw those numbers, really remarkable numbers just from Grasberg, 1.5 billion, 1.7 billion pounds of copper and well over 1 million ounces of gold annually. Our cash flow is doubling. That will give us the ability to further strengthen our balance sheet. We were in a tough situation 4 years ago, as we -- it was truly a workout situation. And 4 years ago, I was returned with the responsibility for running our company. We took the steps to get the balance sheet in a very positive situation. But experience has said, the stronger the balance sheet is, the better off you are in this business. So with cash flows, we will take further steps to strengthen our balance sheet. It will give us a chance to focus on shareholder returns, either through dividends or stock buybacks, depending on the marketplace. Today, I'd be buying stock back if we were there at that point. And then we have a number of internal growth projects that we're assessing. We're going to be very disciplined about doing that. So we're not making those decisions now, but the range of options would be broad, and it will be a fun time. I mean, quite frankly, it's the reason I'm here. We're looking forward to seeing exactly what we do, do. It will be focused on what's best for our shareholders. So we're going to be talking with our shareholders and listening to their views. The one experience that I got from Freeport's unfortunate experience with oil and gas deal was that the Board didn't listen to shareholders. And I told them that, so -- they did it anyway. But when a company makes a decision to go contrary to what the shareholders want, you're really exposed, particularly if things don't turn out like you hope they would. So when oil prices dropped, copper prices dropped, we were upside down. And so that's something I'll never forget.

I guess, you're not getting into the oil business again anytime.

No.

Okay. It's pretty obvious question.

Did you all get that? No.

Just switching gears.

And I grew up in the oil business. It's not bad. It's just shareholders look for Freeport -- we -- before Phelps Dodge, in 2007, for -- from the time I joined the company to 2007, we were a company that was a copper-gold company, single asset, it was 2/3 copper, 1/3 gold. And we never could get that -- we can -- you remember this. We couldn't get a good response from the marketplace for it because our goal wouldn't get the goal multiple and yet, we had a higher multiple than other base metals companies. And so that's what led us in the early 2000s to try to do something strategically with FCX. We tried to get somebody to buy us. That didn't work out. And so we ended up acquiring Phelps Dodge to where we then made our commitment to the copper business, and I think that's the right commitment. And I'm really optimistic about what that means for us in the future. We'll have our day in the sun.

Somewhat related question. A comment on your views, I think you may have, but product diversification, commodity diversification, how do you feel about that within Freeport?

Well, you remember the big discussions before the 2008 financial market, the model for success was metal diversification, strong balance sheet. And I would debate the CEOs at the time. I've lived through like 3 generations of CEOs. And I would say, the real key to success in this business is asset quality. By quality, I mean long lives with an attractive cost structure. So I can never see us, with the Grasberg being such a great asset, of diverse -- selling interest in it just for the sake of diversification because of the correlation of economic impacts on different commodities. That was validated in 2008. So I think we are going to be focused on having high-quality assets, long lives, attractive cost structures, running them the right way, being responsible to communities, that's been part of our DNA all along, to our workers, to the environment and to communities around us. So that's what we're going to do.

Great. So just switching gears, drilling down a bit into Indonesia. Obviously, significant transaction. Negotiation was completed in 2018. It's been over a year now, and the question is, how does Freeport Indonesia feel? How do you feel? And how does Freeport feel and Indonesia feel about the sustainability of the current agreement? And what's changed since the deal was signed?