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

Good evening, good night, depending on where you're joining us from. Welcome to the session, the fireside session with Kathleen Quirk, Executive Vice President and CFO of Freeport-McMoRan. Thank you very much, Kathleen, for joining us. Before we begin, I'll need to read some disclosures. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley's employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley Research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your sales representative. With that, Kathleen, again, thank you very much for joining the conference and for doing this -- having this conversation. Why don't we start perhaps with a few prepared remarks that you might have, where you give us a little bit of an update on the different operations of what is going on at Freeport these days.

Okay. Great. Thanks, Carlos, and thanks to you and the Morgan Stanley team for hosting this conference. The technology has been great, and we've really enjoyed the opportunity to get together with our investors virtually. Just to make a few comments before we get into questions. We're really proud of how our team has risen to the challenge this year. The team has just done an outstanding job in protecting our workers, everybody has joined together to continue to operate efficiently and safely and continue to serve our customers. And we've been through a lot of challenges in our industry in the past and we've got a really seasoned team that allows us to quickly deal with issues like we're seeing this year with the unprecedented nature of the pandemic. And so I'm just really proud of how the job our team is doing, not only in managing the pandemic, but also in conducting our business in a very efficient and effective way. I'll start just commenting on some of the projects that we've got going. As you all know, we announced a plan in April, a comprehensive plan to how we were going to manage the business in this environment. We ended up cutting costs and capital expenditures very significantly. We cut all levels of costs, operating, administrative, exploration, et cetera, and we're continuing to execute on that plan. A big part of our plan was to continue the ramp-up at Grasberg. And you saw in the second quarter results that we continue to make progress, and that's continuing as we go forward. This is a very important and critical focus area of ours. And the team has just done outstanding work in both managing the pandemic there as well and health issues as well as delivering on our expectations which we've done now for several quarters. If you saw in the second quarter, we were about 50%, almost 50% of the way there on a metal run rate, annual run rate basis. We expect to be 70% or so in the fourth quarter. And by middle of next year, we expect to be 90% of the way there on a run rate basis. This completely changes the cash flows of the company. We're already getting into a free cash flow situation in the second half of this year, and that will accelerate as we go into 2021 and beyond. So very positive momentum in getting the expansion done. And as you all know, we're relying on our 50 years of experience in Indonesia and our high-quality technical capabilities in block caving. At our Cerro Verde mine in Peru, which was impacted earlier in the year from a government-mandated shutdown, that's recovered nicely. We're continuing to ramp up production there. And we're hitting the numbers according to our plan. The team there has just done exceptional work in managing through this difficult situation, ramping back up and doing it safely. So that's running according to plan. And we're pleased to also say in the U.S. that our Lone Star project is being completed. This is a brand-new mine in Arizona in our backyard, where we've operated for decades, and that's gone really well, came in under budget, on time. And so that's going to start adding to our free cash flow. We're in a very good position. We've got -- we're foremost in copper. And copper is more and more a strategic metal, particularly as the world moves towards decarbonization. So we're very well placed. We've seen copper inventories decline this year, which is striking because during the middle of a pandemic, you would expect to see inventories of products like copper, which are economically driven be impacted. And China has come back strong. Supplies have been impacted as well. So as a result, we've seen decline in inventories, which really sets us up for the long-term as we look forward in '21 and beyond as the whole global economy begins to improve, gives copper a real shot at another leg up and Freeport is really well positioned there with very long life reserves and an attractive portfolio of copper assets. Putting this together, we're very focused on cash flows. As I said, we'll be generating free cash flow beginning in the second half of this year. We've managed through the trough. And as we increase production at Grasberg, it really changes the complexion of our company. You'll start to see very significant EBITDA generation, cash flow generation, putting us in a position to begin to continue to strengthen our balance sheet, and consider resumption of cash returns to shareholders. So Carlos, we're feeling very good about where we are. We're not changing our plan. We're being very deliberate about execution. We're very focused on execution. And we think that if we continue along this path, executing strongly against this plan, we're going to provide great opportunities for our shareholders and really all stakeholders. So we're happy to take your questions.

Yes. Great. A very good update. Thank you, Kathleen. So everyone knows you can submit your questions via the webcast. There is an outer, therefore, to do so. And as I receive them, I'll be reading them to Kathleen. But maybe to start with, you mentioned that the situation -- the COVID situation in Indonesia is going relatively well. But can you maybe give us a little bit of details on what happened a few weeks ago where you had some sort of a strike that lasted just a few days. But is there any -- what are the precautions, if any, in terms of potentially cost or production? And how is the situation going right now in Indonesia?

Yes. Well, as I mentioned, we've had very strict protocols associated with mitigating and managing the COVID situation in Indonesia. We operate in a very remote location. It's the eastern most province of Indonesia called Papua, and our mine is located in a remote area. So what we did early on is we have leveraged the ability of our medical providers there. We already had world-class health care. But we quickly moved to procuring testing. We have state-of-the-art testing facility there. We've thousands and thousands of tests that we administer with the assistance of our health provider. So we really took steps to try to isolate and control any mitigation of the virus in our workplace. A large portion of our people work in the highlands area, which is remote. And so we cut off travel between the lowlands and the highlands for a period of time so that we could make sure that we kept people safe. And what you saw a couple of weeks ago was that some of our workers, and it was principally local workers that have families down the lowlands, wanted to be able to travel more frequently to see their families, which we understand and certainly have sympathy for. So we started a process to increase the buses that go from the highlands to the lowlands. We're being very careful about how we do that, making sure that we have testing, adequate testing on the way back up after they take their time off, and that we can do it safely. So just like everybody around the world that are growing tired of being isolated, I think some people wanted more freedom to move around. And so we're modifying our plans, and we're going to continue to be very disciplined about making sure that our people are safe. That's our first priority, is to maintain the health of our -- and safety of our workers. So -- but that's what it was. And it was about plus or minus a week, it might have been 4, 5 days that we were down, but our team has done a great job in bringing things back up and bringing them back up safely. And so we're -- no significant changes to our plans and certainly not to our long-term plan. Things are on track.

That's great to hear. And staying with Indonesia, what update can you give us in terms of the investment in the smelter? I mean, clearly, it's a huge piece of the puzzle, something that you agreed upon. Large CapEx number. But what can you tell us on where you stand in that negotiation on our project?

Okay. Yes. Carlos, as you know, and most investors know, in connection with our extension of operating rights in 2018, we agreed PT Freeport Indonesia agreed to construct a new smelter in Indonesia. Freeport already has an ownership interest in Indonesia's only copper smelter at Gresik. And that smelter is -- was developed in the 1990s and continues to operate today. But Indonesia was looking for another copper smelter, which we agreed to build. We were in the process of arranging financing for the smelter with a group of banks, and that was going very well. And then COVID hit, and because of where this project is located, it's in Eastern Java, and it was in an area, industrial area that was a COVID hotspot. We couldn't get the level of international contractors to the site that we needed to get to stay on schedule. And so we requested from the government a 12-month delay in having that project completed, which was planned to be completed at the end of 2023. And we've asked for that to be completed at the end of '24. The government is considering that request. In the meantime, there were some other alternatives raised about the smelter that could potentially be more advantageous to the government in terms of providing additional tax revenues to the government as opposed to building the smelter. And our partner, which is a 100% state-owned company called Inalum and they go as MIND ID, has gotten involved in this, and they, along with the Ministry of State-owned enterprises, has been working to look at alternatives, what makes the most sense long-term for the country, and so that process is ongoing. We've indicated as Freeport that we would be -- we're willing to continue to advance the development of the smelter, subject to limitations from COVID, but that's our commitment. We'll certainly live up to that. But if the government has other alternatives to consider that might be more beneficial and a win-win for both PTFI and the government, we certainly would be willing to discuss those. So right now, it's being evaluated. We don't have any more clarity to share at this point with -- in terms of timing or the project itself, but we'll be updating you as soon as we get that information. One thing we do get questions from time to time about how the smelter affects our capital allocation. And really, the smelter, when we think about it from FCX shareholder standpoint, we are planning to finance the smelter at the subsidiary level, at PTFI level, using debt financing, and we've gone out to procure a bank facility and -- or secure a bank facility, and that would be our plan to do. So really, the impact from a cash flow standpoint for FCX shareholders is the principal interest on that loan, 49% of it would burden cash flows to the parent. But otherwise, it doesn't have a cash flow effect to the parent, because it's -- because of the way we're financing it and the nature of our agreement with our partner in Indonesia. So -- and just to comment, and while we're on the subject of Indonesia, Carlos, the deal that we did with the government in 2018 was -- is being administered very well. The relationship with our partner there is very collaborative. There's really good chemistry between the companies. So it's all gone very well. You never know. We work so hard to get the deal to the finish line, and we wanted to make sure that it was administered successfully, and it's been a huge success. And of course, when we have success with operations, that helps a lot. But anyway, the deal with the government is going very well there.

That's good. Thanks for that update. It's a question that definitely we hear quite often, everything about the smelter and Indonesia and the relationship with the government. So talking about the shareholder return. There is a question from the audience saying that given where we are in terms of copper prices, and I would add gold prices, which is also a significant contributor for cash flow generation of the company, and the ramp-up of operations doing well, why not considering potentially a share buyback given where the share price is today?

Yes. Well, I think all those things will be on the table for the Board to consider. We -- it's right before us. We've got line of sight. We're executing according to plan. And we're generating cash flow -- free cash flow now, and that will just continue to accelerate. We've had a philosophy at the company in terms of debt to make sure that our -- we've got a very strong balance sheet, strong liquidity position. And we believe that lower levels of debt give us the opportunity to better drive returns for shareholders over the long term. So staying the course, in terms of the conservative approach to our capital spend, managing costs aggressively, once we get further along with the Grasberg ramp up, I think we'll be in a position -- clearly different position than we were in at the beginning of this year, be in a position to consider how to return cash to shareholders. That will be a conversation that we'll have with our big shareholders about preference towards cash dividends or buybacks. We've done both in the past. And if you look over our history, we've returned an enormous amount of cash to shareholders. We expect to be in a position to continue to do that in the future. And getting where we're getting to in terms of the progression of the Grasberg ramp up, continued execution in the Americas really puts us in a strong position. And people talk about copper and gold. And having both of those commodities move, where they are today at both up is great for Freeport. Grasberg is about 40% revenues from gold at -- once we get to ramp up rates. And so it's -- we've got a huge amount of gold exposure as well as copper. But really, our focus is on continuing to operate these assets, manage costs, continue to invest to make these assets long lived and significant cash flow generating assets, and that's really our focus.

Okay. And given hopefully, everything will continue to go well in Indonesia as well as in Lone Star. But at what point -- thinking about the reinvestment cycle in the company, in the business, at what point do you need to start developing new mines either in Indonesia or in North America?