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

Well, good afternoon. This is Timna Tanners. I am the Americas metals and mining analyst here with Freeport. It is a real treat to welcome Richard Adkerson again to this conference. And we thank him and the company for their support. With that, Richard is going to make some opening remarks, and then we'll start with the fireside chat after that. Richard?

Thank you, Timna. Anticipating this conference for many years, as many of you know, when I think back of Dublin and 15 years ago at the Hotel van Oranje outside Amsterdam, which I'm sure none of you remember. But in Boston, Miami, Barcelona, I never thought that I'd be sitting here in a sweatshirt and sweatpants with my 3 dogs, talking to the computer screen. It's a world that's unimaginable in many respects. But I want to say it's really good to join you virtually to be able to talk about Freeport and the compelling story we have, which is, of course, is focused on copper as a metal. To all of you on the webcast, the Freeport family wishes you and your families all the best. We hope you're safe. We really feel for all the poor people around the world who've been sick or lost love ones but also this economic hardship that's affecting so many people in such a significant way. It's really heart-tugging. We benefited as a society and as a company from these health care workers, government people and others who are right on the frontlines working, often at personal peril, to protect our people and all the people of the world, and we have the utmost respect for them and trying to support them every way we can. At Freeport, we're prioritizing the health and safety of our workers and supporting communities where we operate as we continue to work to serve our customers with their ongoing requirements of copper, which is an essential metal for the global economy, even in times like this. Everywhere we can, we're working remotely. And I will say, we've all been struck and impressed by how well we're doing our work remotely, and that's going to affect us on a permanent basis as we go back to having the opportunity to work in offices. We'll work in a much different way and a much more efficient way. As soon as this thing developed, my attention turned towards our situation in Papua with PTFI's operations at Grasberg. We have a large population living in a remote environment where the climate is conducive to viruses. Fortunately, we have a young, healthy workforce, in large respects, but we've instituted a whole series of world-class health protocols with state-of-the-art screening and testing, isolation, medical treatment and so forth. And we've been able to restrict travel, get nonessential people out of the highlands. And while we have some cases, we're managing that in a very effective way and been able to continue operations. In Peru at Cerro Verde, the government by edict ceased mining for a period of time. By April, we were back up to 1/3 of our output. We're gradually increasing that and expect to be at full production at the end of the year. We made some adjustments for health reasons in the Americas, but overall, we're operating effectively. Then as we work to protect our workers, we address the current financial challenges, and we relied heavily on the experience and successful experience that Freeport had in dealing with the 2 previous downturns since we acquired Phelps Dodge in 2007. We had a playbook that came out of 2008, 2009 and then in '15 -- 2015 and '16, and we were prepared to do what we had to do financially, taking into account current conditions. Just over 2 weeks ago, we announced a comprehensive response by our company with carefully planned actions to bridge ourselves to a brighter day. And our brighter day is not dependent on recovery in copper prices. Economic recovery has a lot of uncertainties. But the brighter day comes to us because of our ramp-up in volumes at Grasberg, which we're on track to achieve and which we're doing everything we can to achieve. In the meantime, the bridge was to protect liquidity by cutting costs and maximizing cash flows and taking financial and administrative steps to protect liquidity. As we've done before, we had each operation develop a plan to maximize near-term cash flow at low prices with a view towards protecting long-term asset values. The savings that we reported in our plans in April are supported by very detailed analysis. We didn't leave anything untouched. Everybody was charged with looking at all aspects of our operations and our business in great detail. It wasn't a top-down exercise. Our operating teams developed these plans with guidance and communication. They own them, and now they're committing to executing them. And that's our challenge: executing. As I said, brighter days are ahead for Freeport, apart from experiencing a recovery from this uncertain global economic because of the high volumes coming from Grasberg, the strong execution of these plans will set us up for significant improvements in 2021, apart from any improvement in price of copper. At current prices, we're projecting more than a 25% increase in sales volumes in 2021, a 75% increase in gold volumes. We took -- we're taking about 400 million pounds of copper production away from the Americas, and we're assuming that's going to remain idle in 2021. Our unit costs are going -- are projected to decline significantly, and our 2021 EBITDA will double 2020 levels at $2.30 copper and $1,600 gold. Grasberg benefits from a higher gold price. But more important, copper is structurally positioned for a rebound as global economies improve whenever that occurs. Our actions provide substantial liquidity for our business. These 2 weeks 2 months ago would have not been in my realm of possibilities, but we came up with a plan that we're actually projecting to end 2020 in a stronger position after losing $0.50 a pound on copper than our plans had projected earlier when we developed our original plans for 2020 going into the first quarter. We stress test the plans at lower prices to ensure that we have the liquidity to bridge us through 2020 and put us in a position to benefit in 2021. So we have taken these steps. Fortunately, we benefited from the financial steps that our team had taken over the past years of extending our credit facility, getting better terms, doing 2 bond offerings to push out maturities. We have no debt maturities for the next 2 years and a limited amount in the third year out. So what we benefit from is having a company with very long life, very durable reserves and resources. I'm confident that these actions that we announced in April will allow us to benefit from these as we go forward in the future. Our management team is battle-hardened by dealing with these tough market environments in the past. Leadership teams across the company are seasoned and been effective and successful in the past. Out of each one of the past 2 crises, we've come out stronger. We'll do that this time. We benefit from a management structure and a team that works on a collaborative basis. We're experienced, we're decisive, cooperative. We never cut corners on issues like workers' safety or environmental obligations. And we keep a long-term focus on our license to operate, and we're a world-class leader in ESG matters. And we've worked hard to earn that status. We're all committed to successfully executing these plans, intensely focused, and we are looking forward to the prospects for our shareholders to benefit from significant capital appreciation as we go forward. Copper prices have dropped, no question, from weakened demand by global GDP. Supplies have been impacted by the pandemic. Mines and development projects have been curtailed or canceled. Scrap market, which applies a large part of refined copper, is currently very weak, both from the low copper price but also the industrial cutbacks that's being caused by COVID. China is clearly in a recovery mode. Governments around the world are likely to continue to stimulate their economies, helping to boost copper demand from the current low levels. Long term, copper looks great, highly positive, supported by fundamentals. The role in the economy, the important role that it will play as we move towards lower carbon energy generation and increasing digital economy, requires more copper and copper devices, cables and so forth. Supplies of copper will continue to be challenged. None of us can predict with confidence when the economies will recover, but copper is a highly attractive commodity with the opportunity for its price to move substantially higher. As conditions improve, Freeport, as a company, will be a major benefit of this movement. You've seen the reports on the growing recognition of copper's antimicrobial properties. Bank of America, Timna, has recently held a call with clients that highlight these important properties. Copper can play a significant role in preventing transmission of viruses like COVID-19 and bacteria. We knew that before, but the current pandemic is putting a spotlight on this, on what copper can do to achieve public health. No question, its use will be growing in the future because of this factor. Our operating teams are performing well around the world. I mentioned the ramp-up in Cerro Verde where we hope to get to normal operations in the second half of the year. We're completing our new mine in Eastern Arizona called Lone Star. It's 90% complete. The capital is largely behind us. We're using available processing facilities at the nearby Safford mine. Initial step is 200 million pounds of copper a year. It's very profitable. Big opportunities to increase and oxide deposits that's there in the future. But what looks to be a huge sulfide deposit, we're deferring that right now until market conditions justify it, but we're excited about this can be a cornerstone asset for us. You saw in the first quarter that Grasberg's underground ramp-up is on schedule. It's going well now in the second quarter. We are the global leader in block cave mining. We've achieved these important milestones -- if you go back a year or 2 at this conference, that was on everybody's mind: skepticism about whether we could achieve this. We're meeting the targets and going forward. Full rate, these 2 orebodies we're developing will produce, on average, 1.3 billion pounds of copper a year, 1.3 million ounces of gold a year. In the early years, cash cost are expected to average less than $0.20 a pound for the first 5 years of full production. So our PTFI development team is supported by FCX, a global, world-class copper technical organization. Freeport has industry-leading technical capabilities in block cave mining and really across the board in all aspects of developing and operating copper assets, great track record. Our technical strengths are unparalleled. We benefited in Indonesia now with our new 51% shareholder, Inalum, part of the state-owned MIND ID company. Our relationship with the Indonesian government is positive following the conclusion of our December 2018 IUPK permit. Shareholder interests are now aligned overnight. Inalum announced a new successful $2.5 billion international bond financing for uses in its business outside Grasberg that follows a $4 billion financing late in 2019 -- 2018 to finance the Rio -- acquiring Rio Tinto's joint venture interest. Our CFO, Kathleen Quirk, our Jakarta team, supported Inalum's financing. Serving this state-owned entities debt will require success at Grasberg. So we're marching in lockstep to achieve that success. Timna, I'll close by noting that Freeport is the foremost copper producer in the world. Looking beyond today's world, copper is widely considered the best positioned major commodity from a fundamental supply-demand standpoint. Our assets are large and high quality. We're an established industry leader as the operator of mines, among the largest in the world. We operate all the assets we have interest in, which gives us valuable synergies and flexibility. Our assets are long-lived and durable, and we have strong and established franchises in the U.S., Latin America and Indonesia. And near term, Freeport is in advanced stages for enhanced margins. We've earned the trust of our partners, our customers, our suppliers, the financial markets and our workers, communities and host countries. This block caving experience and capabilities that we have is really special and critical to being able to successfully develop and operate the Grasberg. So we are confident, as in the past, we can prove our metal, which was a theme of one of our annual reports recently. And Timna, with that, I'll turn it over to answer yours and others' questions.

Perfect. Richard. And thanks for calling attention to the microbial -- antimicrobial properties discussion that Michael Widmer hosted. We have, in the presentation, over 80 slides, so a quite detailed analysis, as you mentioned. And thanks for the overview. Especially interesting is the COVID-19 response. I think in our assessment, Freeport had probably the most comprehensive of our coverage in terms of bottoms-up analysis asset by asset, as you mentioned. There was a question I got earlier today actually about the Indonesian assets and some reports of an outbreak there. Is it still up-to-date to say that the mines are operating okay and that there's provisions in place across your different operations then? Is there anything that's new in the Indonesia region?

Focusing on Grasberg and PTFI, as I said, as soon as this thing developed, I and our management team recognized that this required our full attention. And early on, we brought in our partners, International SOS, to supplement our existing strong health care facilities with literally state-of-the-art screening, testing, isolation procedures and as well, as to the extent we can, using social discipline and sanitization procedures. We've had, the last count, 50,000 quick test kits there. It's really special that we now have on-site and operating the blue standard viral testing units and PCRs. We have equipment in the lowlands and the highlands, and we're having an expanding program of following up with the quick test, the PCR test, that we can process on site. We are bringing in the new testing devices at our own site. So we've got an active program now. With an active program for testing, and this is true all over the world, you identify cases, and we've identified a number of cases there without symptoms. And we are treating those people, isolating them. Many of them recovered. So we have cases, but the government is supportive of us. In large part, the local community is -- well, we're helping them as well, our workers are. If workers don't want to work, we're allowing them leave. The facts are, they get better health care with us than they would likely get anywhere else there. So to answer your question directly, today, we are operating. It is a matter which we monitor every day. Every morning, I wake up, put on my computer and get the report from that day at job site as to how we're dealing with it. Very pleased with our team so far, but it's a challenge we recognized early, and we're managing.

Okay. That's helpful. So just wanted to discuss a little bit more some of the cost-cutting initiatives that Freeport announced. Some of those measures, it sounds like maybe were good to put in place irrespective of the broader pandemic. So is it fair to say that the really broad deep cuts were a combination of response and also just necessary that will be in place even after this is over? Do you think that there's more that can be cut? Or do you think this is pretty exhaustive?

Well, we have contingency -- to answer the last part of your question first, we do have contingency plans that if the copper price weakens that we are prepared to put in place to respond to that. And with the plan we announced just over 2 weeks ago, we said at a $2 copper price, we could end the year with only $1 billion drawn down on our $3.5 billion bank credit facility with remaining liquidity in place. So we'll take the liquidity steps we need to. Your point is a good one, though. We had started initiatives already to deal with cost cutting and improved efficiency. You'll recall that we talked a good bit about the agile work process that we tested last year at our Bagdad mine in Northwest Arizona, and we were carrying that to other mines. We were looking at doing things with our centralized group. Because we operate all of our mines, we have more centralized functions as other miners may have because we can bring things together and operate more efficiently in managing these sets of mines that we have as a single business unit. And we were dealing with things like that. Now what we're struck by is the fact that we are working so effectively, because we had to in working remotely, virtually everybody that can is working remotely, and we're using modern technology to do that. We just surveyed all of our people to try to identify problems. And what we're coming back with is some real interesting ideas about how do we change work in a fundamental way to reduce commuting time, reduce office space requirements, reduce travel, reduce face-to-face meetings. That's going to be long-lasting. And then at sites, as we learned in 2008, 2009, 2014, when you're faced with having to do things, you face up to it in a real, realistic way. And ideas come out that's going to carry forward to make us more efficient from a cost standpoint in a number of ways going forward. You learn really to sort out where you're making money and where you're not and to focus on areas where you can earn high margins and direct resources away from low-margin operations.

Okay, Richard, I'm down with that as long as the -- and I'm down with doing remote as long as they let my kids go back to school, I'm good. Wanted to -- if we could talk a little bit more about the playbook.

Timna, I will say my retriever, my bird dog, are going to miss me when I go back to work.

I've got that image of you in your sweatpants with the dog. It's a nice one. But I guess the playbook from -- yes?

I also have an early Jim Morrison haircut, so don't even think about that.

Good one. All right. So yes, Freeport, I feel like the last couple of years, we've been talking about Indonesia. We are past that. Then we were talking about other things. And now we're talking about a pandemic we wouldn't have anticipated. But if you will indulge me, I did want to ask you about copper. And I feel like as long as -- we've known each other. You've been more constructive on copper, and I've been a little more skeptical. And is this the time where the copper bull case works because, finally, some of the capacity is curtailed that's high cost? Is there an argument now that this kind of sets copper in a better position? Or are we still facing these challenges of digging our way out of the demand hole that we're in? I'd love your perspective really on copper markets here.

Okay. Well, let's divide it between the supply and the demand standpoint. And I'll go back to my first Merrill Lynch conference when I was CEO in 2003, when the price of copper was -- had just returned to go over $0.70 a pound. Nobody expected it to go to $1. Gold was $350. And it was after that, that the commodities boom started. And you're right, at the next year, I did an evening talk at the Merrill Lynch conference in Boston, a dinner talk, where Dan Rawling pushed me into talking about copper markets for the first time. And that view that we developed then about the supply challenges of copper led us to do the Phelps Dodge deal, and that's been the theme of Freeport ever since. It remains today. No question, the COVID situation, the economic downturn, supports the supply situation. Projects are going to be deferred. Production is going to be curtailed. In companies like ours, we have this enormous inventory of undeveloped resources. The time for considering that is being pushed out. And so the thing that characterizes copper that has been so supportive over the years is supply, and then you come back into the fact that copper is so tied in the global GMP that you get waylaid by that by the financial crisis of '08, '09 and then what the world went through in '14, '15 and now COVID. So you have a commodity whose uses are fundamental, and many of its uses are growing because, like it or not, the world -- the developing world is going to develop. There's huge populations living today in a less developed situation that have aspirations for having better standards of living, and that's going to occur. Even China has this huge underdeveloped population that the country is -- will have to pay attention to. And so that's fundamental for copper use. And then you look at the way it's used in electronics and what 5G will bring to it. What -- we've got to face up carbon emissions. Everybody's -- almost everybody hopefully, recognizes we got to do something about that. And that means alternative energy production, which is 3 to 4x more units of copper per unit of output. Electric vehicles -- I think this antimicrobial thing is real. Some of the applications of where it will be used, like putting copper shims on things, won't require a lot of copper, but people will -- as you just look at the tremendous cost that society is having to bear, that this pandemic is causing, the barriers to using copper in the past have, in large part, been driven by cost considerations and the way that copper looks versus shiny stainless steel and aluminum. That's all going to change. And so I have been on this soapbox for years and there have been times when the economic conditions have affected it, but I do think the fundamental story is intact and growing. And we're running our company on that basis.

Okay. And we have 1 or 2 minutes left, and I need to take a question or 2 from those who sent me them. One of them, just so you know, again, not my question, but somebody else's, would you consider a buyout from a large gold company whose name I'm going to withhold. And the other one is just about your loan covenant ratios and if you can meet them over the next 6 quarters. So the 2 different questions, but I thought I'd stick it in there at the end, please. Yes.

Yes. The second one is easy. We're set up to meet our covenants we have incredibly positive relationships with our commercial bank group, in the financial markets because we've earned our stripes. We've done what we told people we'd do. And so people are reaching out to us to say if we need help, which we don't right now, but if we do, they're there to help us. Inalum benefited because Kathleen went out with them and talked with investors, and we just have great ability in the financial markets. Now the question of all the talk about this issue of us selling now. I mean you just got to ask the question, why would we -- why would our shareholders consider selling now when we have the coming together of the trough of our production at Grasberg, the trough of copper prices and where we're meeting what the market has perceived as risk for our CapEx spending going forward. You recall, Timna, the questions we got last year when people were looking at what was going on in Mongolia and just the sheer scope of the underground development. People didn't understand it. They didn't understand how we could manage it. But we are doing it, and we're showing we can. So now in a world where we've got these health care challenges, the economic challenges of COVID, all of these things have caused our assets to be dramatically undervalued in relation to their fundamental long-term values. Our share price is just too cheap to think about a deal. We have no need nor desire to sell any assets below the time when we can recognize their full potential for our shareholders. And we don't want to disadvantage our shareholders by considering advances that would only be opportunistic for an acquirer. We have a sound business plan to expand margins and cash flows. We expect we will provide shareholders with substantial capital appreciation as we go forward. I want to point out again, we have industry-leading block caving capabilities that's critically important, not only to Freeport, FCX, but the partnership that we have struck with our Indonesian partner, Inalum MIND ID to successfully complete that. We've got a commitment to them that was part of our deal when we created the new partnership in 2018 that we're going to carry this thing through and create values for all the stakeholders. So anyway, that's -- this is not the time for us to think about deals.

All right. Very thorough, helpful answer. We appreciate it, Richard. And as always, it's a pleasure to have you joining us at the conference. Thank you so much. And thank you, all of you, on the line for joining us. Next year, hopefully, in Barcelona. Thanks again.

Thanks, everyone.