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

Good morning, good afternoon to all of us who joined us today. I'm Abhi Agarwal, member of the DB mining team. We have the pleasure today of hosting Ms. Kathleen Quirk, President and CFO of Freeport-McMoRan. Kathleen has over 30 years of experience in the company and is a senior member of the company's executive team. We'll start off the call with Ms. Quirk making a few comments, post which we'll have a fireside discussion. Time permitting, we'll open it up for Q&A. Kathleen, thanks a lot for taking the time out today and joining us. Over to you.

Thank you, Abhi, and thanks, everyone, for participating today, and I really appreciate the opportunity to speak with you about Freeport today. It's quite an incredibly an exciting and active time for our company. Freeport is strongly positioned as a leading responsible copper producer. Just an update on our teams. We continue to work safely and remain vigilant with our health protocols, and we continue to execute our operating plans. As you've seen, we're generating very strong cash flows, which will allow us to achieve our near-term debt targets later this year, embark on new growth initiatives and increase cash returns to shareholders. We also remain focused on our sustainability initiatives, and those are key, as you all know, in managing our operations. In 2020, we announced our commitment to achieving The Copper Mark at all of our copper-producing sites. The Copper Mark is an industry framework developed by the International Copper Association to ensure responsible production consistent with the United Nations' Sustainable Development Goals. Freeport has strong operating franchises in the United States, South America and Indonesia. And we're pleased that we've earned the trust and respect of our partners, our customers, suppliers, financial markets, and importantly, our workers, communities and host countries where we operate. We have significant project development, large-scale operating expertise and our team has all the capabilities to undertake new projects in a responsible and efficient manner. We have a long reserve life spanning over 30 years, and that's based on the proved and probable economically recoverable copper reserves. In addition, we've identified over 100 billion pounds of copper from mineral resources in our existing operations to be incorporated in our future reserves and mine plans. It's becoming more challenging and costly for the industry, as you've read about the developed supplies to meet the dramatically increasing demand for copper. And Freeport is well situated in this environment with strong current productive capacity and attractive pipeline for future growth. The outlook for copper is very exciting. In fact, it's never been better. Copper is essential, as you know, for the transition to a global cleaner energy future as clean energy initiatives are implemented, copper intensity expands in a major way. We see significant copper demand growth as inevitable. Supply to meet this growth is severely challenged and will require meaningfully higher prices to support mine investment. The combination of both rising demand and the scarcity of new supplies point to large and pending structural deficits in copper, supporting higher prices than previously anticipated, as noted by a widening group of industry analysts. Freeport is notably well positioned to benefit from these fundamentals as a leading responsible large-scale producer with near-term and longer-term embedded growth options in our portfolio. The scarcity value of a portfolio like ours is unique. And it's extremely valuable now, and we believe will become even more valuable as large market deficits emerge. We're growing our production currently for 2021. Our copper volumes are expected to be about 20% higher and gold volumes about 55% higher than the 2020 levels. We have further growth expected in 2022 with 15% to 20% increases from 2021 levels. The capital expenditures to achieve these higher volumes and execution risks are largely behind us. Higher volumes with low incremental costs will yield expanded margins. And as you'll see in our presentation materials, at prices ranging from $4 a pound copper to $5 per pound copper, we would generate annual EBITDA in 2022 and 2023 of over $12 billion to up to $17 billion per annum at $5 copper. We have multiple options for growth across the portfolio. And we started our work again after suspending it in 2020 to evaluate future organic growth opportunities. In the U.S., we are evaluating expansions at our Lone Star project and also at Bagdad. We're also evaluating opportunities to increase production from signing new leach recovery technology. The Lone Star mine is our newest mine, and that's adjacent to our existing operations in Southeast Arizona, where we have strong community support. We're evaluating expansions of Lone Star's oxide awards and conducting longer-range planning for the development of potentially world-class sulfide resource in this historical mining area. We have a great opportunity at our Bagdad mine in Northwest Arizona to construct a new concentrator, which would essentially double our production at that mine. We're also focused on technology to reduce the capital intensity of these projects. The mentioned leach technology initiatives could provide substantial opportunities for added value across the portfolio. We're continuing to assess the timing of a potentially significant expansion at our El Abra mine in Chile, and we're looking at investments in another underground ore body in the Grasberg district called Kucing Liar. This project would allow us to further leverage our expertise and long-term track record of success in block cave mining in Indonesia. We're going to continue to be disciplined in making new investments by being selective and measured in deploying capital and focused on value-added investments supported by long-lived reserves. And established licenses to operate in affected communities. Earlier this year, our Board adopted a performance-based shareholder return payout policy, which provides for up to 50% of excess cash flow to be allocated to shareholder returns and the balance to investments in future growth and to strengthen our balance sheet. As you've seen from our financials, we're in a strong financial position. We've entered a period of exceptional free cash flow generation. A long-lived asset base, growing production profile and strong markets provide the ability to continue to strengthen our balance sheet, provide cash returns to shareholders and build additional values in our asset base. Abhi, it's a very special time at Freeport. We've got the right assets at the right time. We're going to stay focused on execution and continuing our momentum as we build value in this great portfolio. And those just a few comments, and I'd be happy to take your questions.

Indeed, it is, Kathleen. Yes, indeed. This should be a good -- a very good time to be a copper miner. And if I can say even a better time to be covering miners. Thanks a lot for that introduction, Kathleen. So the first question from me. The recent copper price value, as you said, has been quite dramatic and has been a function of a very strong demand rebound post-COVID and its weak supply backdrop. So in terms of the near to medium term, you laid out that the prices should remain strong. What sort of -- do you think we are on the cusp of a super cycle here for copper?

Well, it's an interesting time for copper because not only are we benefiting from the economic growth and recovery from the pandemic and all the stimulus activities across the globe, but also we're entering a new era for copper, we believe, where demand will be accelerating, associated with decarbonization initiatives. And you've seen all of the information about the decarbonization. And you can't really have decarbonization without copper. The copper intensity of clean energy is very significant. 3 to 4x more copper used in electrification of vehicles and transportation than in traditional sources. Of course, across the renewable energy chain, it's very copper intensive. So we see, Abhi, now a situation for copper, where the demand is broader based. It's not just China that is expanding, like we saw in the last 15 years, it's broader-based across the globe. We've got economic recovery going on as well as longer-term demand associated with decarbonization. So that is a very important element of the market today. In addition, the supply side has become more challenging. If you go back 10 years and look at the number of projects and the size of projects that were available to the industry. Today, it's a fraction of what it was 10 years ago. So we've got a real structural situation here where we're in a period of rising demand likely. And an absence of the ability for the industry to be able to meet the increased demand. And so we believe we'll have to see higher prices to incentivize new mine supply in addition to higher prices to attract more sources of scrap and potentially maybe even see some substitution as we go forward. But as you know, the properties of copper are strong, very difficult to substitute for its efficiency and conducting electricity. So we see a very strong outlook for the copper market and Freeport is well situated to benefit from an environment like we have today.

Got it. Super. So sort of diving a bit deeper on the supply side, could you talk a bit about the recent developments in Chile and Peru, and how you think this is likely to impact yours and the industry's investment decisions going forward?

I think all eyes have been on South America, particularly in Peru, with the elections that have just taken place over the weekend. As well as in Chile, where they're in the process of looking at a new constitution and potentially higher taxes and royalties for the industry. Freeport has a large mine in Peru. We have a mine called Cerro Verde, which is -- has one of the largest concentrators in the world, and we've had successful operations there for many years. We also have a smaller operation in Chile, but also have a large development opportunity in Chile. Speaking for Freeport in terms of investing capital at this time in Chile, we're watching very closely the situation. As you're aware, these investments are large and require significant upfront capital, and the returns are generated over a multi period and sometimes a multi-decade period. So we're watching very closely the developments there. I believe the industry is unlikely to take on substantial investments currently until there's more clarity around the fiscal regime there. Copper is very important to Chile's economy. It's a big source of state revenues as well as a significant employer in the country. So ultimately, I believe the right structure will be worked out, but it may take some time to get there, and we're going to be monitoring the situation very closely. In Peru, we've made major investments in the past, and particularly when we basically tripled the size of our concentrator there back in the 2015 time frame. We're watching the developments closely also in Peru. We do benefit from having a stability agreement, which provides us some assurances around our taxes and royalties. But at the end of the day, we really want to be good partners to host countries. We want to make sure that our operations provide great benefits, important jobs, great support to communities, which we've really stepped up during the pandemic. In fact, it was a real-time for our industry to shine during the pandemic, while protecting our own workforce, we also worked very hard to supply important needs to the local communities where we operate. And that's -- I think that's a key part to political risk mitigation is staying very close to communities and making sure that our operations not only provide good returns to our shareholders, but also provide benefits to -- significant benefits to all stakeholders. And that's really what is a big feature of the mining industry because in investing in these operations, you're not only investing in mining, but you're investing in these communities and the success and the sustainability and resilience of communities. So I think we have a good model for our industry. It's one that balances returns to shareholders with benefits to all stakeholders. And I think that will be an important part of the license to operate in the future.

Super. So next one. So as you laid out in your opening remarks, you have an impressive growth profile over the next couple of years with Lone Star, Bagdad, Grasberg ramping up. And hopefully, COVID restrictions are removed in South America, that adds a substantial amount of tonnes back into your profile. Apart from that, what are some of the longer-term projects you are working on? And when could we hear more about them from you guys?

Okay. As you pointed out, we did last year at the height of pandemic in March, we did adjust our operating plans to reflect the constrained conditions. We've been ramping back up. Since then, we've been doing it safely and efficiently. We've been bringing back on some of the production that was curtailed in the U.S. and also have brought back some production in South America. All during the pandemic, we maintained our focus on the safety and well-being of our people. But impressively, we were able to continue the development at Grasberg, which is really important. And as you've seen, we've -- each quarter, we've been able to build on our production by the first quarter of this year, we were roughly 75% of our run rate for our metal targets in Indonesia, and we're on track to get to full run rates by the end of this year. In South America, in Peru, we're operating at about 90% today and have plans to ramp up when it's safe to do so, and we expect that will occur in 2022. So the base production is going well. The ramp-up of Grasberg, the continued progress at Lone Star will allow us to achieve the growth -- the near-term growth in our copper production and gold production as well. But we also have, as I mentioned, embedded growth in the portfolio. We have significant resources beyond our reserves that will allow us to grow in a disciplined way over time. As we've been talking about, it's difficult to develop new copper mines. Brownfield projects are generally more actionable than greenfield, but there's still a number of challenges in terms of getting the water rights and the tailings land and that sort of thing develops so that we can build the development options sustainably. But we've got a portfolio of growth projects, and we've been going through them really from a portfolio approach, looking at the risk/reward of each of the opportunities, the actionability of those opportunities and how they rank in terms of the returns on invested capital. We're really focused now on looking at our U.S. portfolio. As I mentioned, we have the opportunity in Chile, which we've advanced, but we're going to continue to watch the developments there before sanctioning the project in Chile. But we do have opportunities in the U.S. to expand our existing mines. And as I mentioned, the project we have at Bagdad is one that we're focused on. We've got right now a reserve life there of over 80 years. And so we're looking forward to putting -- investing in some additional processing capacity that will allow us to bring that value forward and give us the ability to supply the growing demand for copper. We're going through our engineering and assessment right now of that project and should be in a position by early next year to make a decision on going forward with that project. I believe there's a high likelihood that we will have an investment at Bagdad qualified within the next 12 months. We've also got projects that we're evaluating at our Lone Star mine in Eastern Arizona. And we completed the initial project for Lone Star last year. And have been ramping up to our targeted level of about 200 million pounds of copper per annum. This is a very large resource. It's in a district where there is existing mining, and that was one of the benefits of the initial project, we were able to reduce capital intensity of the project by utilizing existing infrastructure, but we have opportunities at that location to expand. We're initially looking at how we can incrementally expand the oxide production with relatively low capital intensity. And so we'll be looking at bringing on additional volumes from Lone Star from oxide material in the near term. In longer term, the real exciting thing about Lone Star is that we've got an enormous resource there, enormous sulfide resource there that we believe will support a major operation and could be a new cornerstone asset for us right here in Arizona in an area where we have a long track record of operating. In order to access the deeper sulfide material there, the oxide material would have to be mined first. And so to the extent that we can grow our oxide production, that will open up opportunities for us to develop the sulfide resources over time. But it's a long-term journey. It takes time to develop these types of resources. But we are focused on them and working to build into our plans, significant future growth. We -- as I mentioned in the U.S., we have strong franchises. We have trust with the communities where we operate. It's not easy to develop a new mine, but Freeport has done it very effectively. Last -- even during COVID last year, we were able to bring on a new mine in the U.S. and it's part of that trust that's built over many, many years in providing the community with benefits, providing good jobs to the communities where the jobs are very important and doing things in the right way. I mentioned that we hold ourselves accountable. We've been applying all of our operations to the standards of The Copper Mark, and that's a real important point because these are long-term operations that require that they be managed in the right way over long periods of time. And so I'm real happy about where Freeport sits in terms of being able to execute growth. As I said, it's not easy to get permits and to get trust from the community. But that's built over a long period of time and Freeport benefits from having existing operations in the U.S. with expansion options. And so we're very focused on that. We can't do all of these at one time. We know we do a better job at developing projects when we focus on 1 or 2 projects and do them really well. And so that's what we're really focused on is developing a pipeline that can be executed over time and generate value over time that allows us to execute our capital and operating strategies very efficiently. I didn't mention, Abhi, we also -- and this really benefits our existing operations in the U.S. and also in South America, where we have historic operations. But there are new technologies that the industry is undertaking to expand leach recoveries. And there have been, over time, product material that's been mined and placed on leach stockpiles and there's only a limited amount of recovery that you get over time from leaching. And there are new technologies being developed and being piloted that potentially could expand recoveries, increase yields from material that's already been mined. And that's a real benefit because not only does it have low incremental operating costs, but also has a very low carbon footprint. So it's very much research and development at this stage. It's not proven. But there have been some encouraging developments in this area and an area that we and others in the industry are investing in to potentially recover material that's already been mined. And that could help us at the margin in meeting what we expect to be rising demand as we go forward.

Got it. So does that speak to the recent investment by you in jetty resources, the last bit, which you just spoke about?

Yes. That is one of the technologies that we are reviewing and testing. We've also got internal programs that we are engaged in with our own technologies. And so we've got a broad-based objective to research technologies, not only internally, but also look at what external technologies that might be available to achieve better recoveries from leach stockpiles as we go forward. So it's exciting. We are making a commitment to this, both financially and from a people resource development situation because it is -- we do believe that it could have a significant value for us as we go forward.

Got it. So shifting gears to Indonesia. There was an announcement, I think, late last year that the government-imposed a $150 million fine for lack of progress on smelter development. Could you talk a bit about what the key issues are, where you are in the negotiations? And when can we expect to hear more about a potential resolution?

Okay. As part of our agreement with the government in -- the government of Indonesia in 2018, when we restructured our long-term mining rights there, we agreed to construct a new smelter in country, a new copper smelter in country. Freeport had previously invested in smelter capacity in Indonesia in the late 1990s. And there currently is a highly efficient copper smelter in Gresik, Indonesia, where Freeport owns roughly 40% currently. The government has been wanting to have a policy where value-added can be added to mining and have wanted to go more downstream and copper smelting as well as nickel and other initiatives was one of the things that the government had aspirations for. So Freeport agreed in 2018 to develop a new smelter. And we had been moving forward on that initiative pre-COVID. We've selected a site near the existing smelter at Gresik and we're preparing the land and completing engineering and planning for the project. And then with the pandemic, we had a situation that involved force majeure type conditions at the location in Eastern Java where the site was that prevented us from making the progress that we had originally planned during 2020. So we had notified the government last year in April second quarter time frame that our project would be delayed. And under the regulations, there are allowances for force majeure type conditions that would allow us to change the schedule. So we provided the government with a new schedule that would show the new targeted time line. And as you've probably read, we were also evaluating other alternatives for the smelter potentially to locate it at a different site that a third-party would develop. Late last year, the government under the regulations came to us and said, because you didn't meet the progress, under the original schedule, they levy to fine on the order of $150 million. We have gone back to the government and explained the reasons why the project was delayed and cited the various regulations that provide allowances for conditions outside of our control that would prevent us from meeting the original target. The government is reviewing those conditions and working cooperatively with the Ministry of Energy and Mines to resolve the situation. We do not believe a fine is warranted because of the force majeure conditions that were in place last year, as you all know, during the pandemic. And so we expect to get a resolution with the government. There's a third party that's involved with us and the government to assess the conditions and to assess the progress that we made, but we expect it to be resolved in a matter that -- in a manner that would be acceptable to both the company and the government in the near term. We're also working with the government on our future plans for the smelter. As you've seen in our prior reporting, we have been having discussions with a third party about the potential for them to construct the new smelter in a separate location. To date, we haven't reached agreement with the third party or the government on that third-party option. And so the likely scenario at this point is that we continue development of the smelter under the original plan in Gresik. And so we're continuing with our land preparation activities and also with our with our engineering to advance that project. We are planning to finance the project with debt financing. And as you've seen in our presentation materials, the cost of the financing, both the principal and interest and amortization of the principal would essentially offset -- the cost of that would essentially offset the savings that we would get from the export duties that we pay being phased out. So we're progressing. The relationship with the government is very strong. The partnership we have with Indonesia's state-owned mining company, MIND ID, is very strong. We've got great alignment from the parties in terms of the financial interest, and things are going very well. And overall, in Indonesia, both on the development of the underground as well as just the overall relationships with the government.

Got it. So there's time for just one more question, if I can sneak that in, please, Kathleen.

Sure.

So you laid out a policy of returning 50% of your free cash flow to shareholders once you hit your net debt target. When do you expect to hit that target? And if the prices remain supportive and if the balance sheet -- and if your free cash flow remains strong, would you be -- what would be the use of the excess cash?

So we do expect at current market conditions, we do expect that we'll reach our net debt target of $3 billion to $4 billion in the second half of this year, which would put us in a position to look at increasing cash returns to shareholders. Under the policy, as you mentioned, up to 50% and of the available cash after planned investments would go to increasing shareholder returns above our base dividend, which has been set at $0.30 per annum. And the balance to investing in future growth and continuing to improve the balance sheet. As you point out, in the near term, we're likely to have under current market conditions, we're likely to have cash flows coming in more quickly than we can deploy them in these growth opportunities. So we're likely to have a situation where we continue to delever. We'll continue to have growing cash on the balance sheet, and that would be available to make disciplined investments over time, while at the same time, providing very large distributions to shareholders either in the form of additional cash dividends or in the form of share buybacks. But we've got a policy that allows us to really, as we say, tick all the boxes in giving shareholders a nice return and at the same time, investing in our long-term growth and maintaining a very strong balance sheet. So we're -- it's a good issue to have, but we think our financial policy that we outlined earlier this year really sets us up to be able to execute in the right way to create long-term value for shareholders. Abhi?

I'm sorry, I was on mute. Sorry. Thanks a lot, Kathleen, for taking out the time today. I really appreciate all the inputs you've given us. Best of luck with your investor meetings. Thanks again.

All right. Thank you. Thanks, everyone, for your participation today.