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

Hi, everybody. Thank you for dialing in to this session of our Annual Base Metals and Battery Materials Summit. It's my pleasure to host Richard Adkerson, the Chairman and CEO of Freeport, who all of you know. Now a lot going on in the copper market, there's a lot of coming on in Freeport specifically, which has been there a long time, and you've seen a lot in the industry and looking forward to this trend.

Maybe Richard, just to kind of kick things off. I mean, there's a lot of things that have been changing in the world. The one thing that's changed at Freeport is the progress that Grasberg. So maybe you can just give us an update as to how the Block Cave are projects are progressing? I mean, it seems like a lot of the derisking has already been done and you're ramping these things up. And what's kind of going on there most recently? And also maybe any commentary around the impact of COVID in Indonesia. How is that affecting your operations and the projects in particular?

Thanks, Chris, and thanks for hosting us. Appreciate your coverage of our industry and our company. Let's just schedule these future meetings when the markets are better than they've been in the last days. So looking back on my career, in the mid-90s, we designed the long-term plan for the open pit at Grasberg, mid-90s. And then we started investing 15 years or more in the underground, and we completed -- just note that Freeport has been doing substantial block cave mining at Grasberg in addition to the open pit since early 1980s. We also have a large block cave molybdenum mine here in the United States. So we're really experienced with it. But it was a major undertaking. I mean a really major undertaking, and key for our company in its future. We completed mining in the open pit right at the end of 2019, went out there for the final part of it. And then COVID hit us early in 2020. So it was white-knuckles time. We were at trough production out of Indonesia, which has always supported us during periods of low copper prices and a lot of uncertainties, physically about operating, what was going to be the impact on the economy and so forth. So what is really, really gratifying in a lot of good things with our company, but is to see the progress that our team was able to make as they managed COVID during the last almost 2 years now since we stopped mining the open pit. We have almost 30,000 people working in Papua and it's at a damp environment because it rains a lot there. It's an altitude, people live close together. And we've had cases. There was the initial outbreak and then this summer, in July and August and into September, the Delta brought a new round of cases and we put in protocols that we've had before. We've been able to continue to operate since early September, the cases have dropped. We've got a significant number of people vaccinated there of all things. We worked hard with the government to get that. And I'll just check my note, we have at PT-FI, we have almost 75%, 80%, really had at least 1 shot. And so now the physical progress, we've reported on it quarterly, we set out our -- we give a lot of details about what we're attempting to do. And man, it's going incredibly well. As we speak today, at the end of the last quarter, we were up to like 80% of our targeted mine rates, we'll be at 100%, close to it now, but by the end of the year, the risk associated with the development of the underground mine is now behind us. We have the infrastructure in place, the equipment. We added a new crusher recently to the Grasberg Block Cave mine, which gives us a lot more flexibility there. We're doing a middle expansion that we're -- is now underway. It will be our third SAG mill by 2023, that will be up and running, which will allow us to process the volume of ore that we have. Our team is meeting the targets, the number makes it look easy, but it's not, there's always issues that come up in a project of this scale and our team meets those and it's carried forward them. So I'm just -- I'm really proud of them. And for me, first, first visit to Grasberg was 1988, and I saw the second drill hole is being put in the ore body. So I've watched this whole thing developed, knowing this conversion to underground what's coming and now to see it. And for it to be successful is really gratifying. And hats off to our technical team who has planned it, executed it, and our PT-FI team is doing so well.

It's really an incredible asset in terms of how it was developed initially and the scale of it and obviously the geography and the geology, all very unique. It's kind of the eighth wonder of the world and we've seen the progress you've had there recently has been very impressive. So it will be nice when that gets back up to full capacity, obviously, very low cost asset. But I think maybe one of the aspects of Freeport that is often underappreciated is that you're not just an Indonesian mining company. Obviously, you have very large scale, very consistent operations in the U.S., in Peru and then you have an asset in Chile as well. So when we think about the assets outside of Indonesia, in particular, Peru and Chile, political environment in those countries has changed. Of course, in strong commodity cycles, tax and royalty risk kind of becomes tax and royalty reality everywhere. How do you think about kind of tax and royalty and just geopolitical factors in Chile and Peru? Are those governments -- do they understand the importance of foreign direct investment? Are they partners of the mining industry and how do you see this all playing now?

Yes. This is a feature of the global mining industry, always has been. We've dealt with contract issues in Indonesia. We reached a global settlement of those in December of 2018, and that's working very well. We've got a great partner with a state-owned company MIND ID there. We faced issues in the Congo with that when we were there and political issues in the United States. And in Latin America, Chile produces 25% of the world's copper and it has created the strongest economy in Latin America because of the way that it brought in the mining industry in the late '70s and encouraged development. The countries, and we're seeing this globally, are struggling to deal with income inequality and how does that get addressed. And so the leaders are faced with the issue of balancing, supporting mining operations and meeting the calls within their countries for people to do more for the less fortunate people in the countries. And so it's understandable what's going through. It's somewhat different dynamics in Chile and Peru. There always are and the industry is well established in Chile and is working together with the government as it tries to reach its balance of how to deal with income inequalities to meet social goals. It's going to take some time. They're on a schedule of reviewing their constitution, the industry is represented. It's presenting its views and listening to the views of the other side. So I'm confident that something will be worked out, but it's going to be a degree of uncertainty paying there where 25% of world's copper comes from. Chris, we have a great development project there with our El Abra mine there. You mentioned Freeport going from an Indonesian-only business. We've really created a modern Freeport in 2007 when we acquired Phelps Dodge. And man looking today, this El Arba resource was a very small operation and thought it had a limited life. And as we've done brownfield exploration drilling and understanding the ore body, it's tremendous opportunity. The world is going to need that copper at some point. But we're not making an investment decision on that project until we have a better understanding of the direction of what happen to taxes and royalties in Chile. So this is going to be an overhang for the industry in terms of supply development. There are a number of those, and we'll talk about that more later from a macro standpoint. But it's there. Now Peru is in a different situation. It's now the world's second largest copper producer. We have a big presence in Peru with our Cerro Verde mine. It's an enormous operation. It's got the largest scale milling facilities in the global copper industry there. And it's a very long life profitable operation. The operation has been around for a long time, goes back 30 years or more. There's been 2 major expansions, one that was done in 2005, 2007 and another was completed in 2016. We do have a stability agreement there, but we're engaged with the industry and talking with the government. I just had dinner on Sunday night in Washington with the group, with the new President of Peru, and he was explaining how he perceives the needs of the poor regions of the country for support. As an industry, we've got to find a way to do that. I spoke with him about what we've done for the region right around our mine in Arequipa, where we're very well supported. We put a lot into community affairs. But what I think as an industry, we're going to have to come together and think about how do we make sure the people in the remote areas of Peru who are generally very poor understand that mining is a solution to their problems. And it's going to be a process because the President, he talked to me about his background, he was a teacher in a rural area, and he has these genuine feelings about desires to help people. And we feel that way too. It's one of the really good things about being in this industry is you can do a lot of good for people by giving jobs and helping communities, deal with environmental issues. We built Arequipa's first wastewater treatment facility to -- and improve the standard of living in the city, improve the ecology of the river that runs through the city and downstream for farmers. It was a heavily polluted river now it's got fish and everything. So all that thing is good. We have common goals for helping people as we run our business. And so we're going to have to work with the President and his new administration in finding ways of -- as I see it and I listen to them very carefully of expanding our impact to the rural areas where people can see that mining can make an impact. And he understands the need to having a mining industry. He's not the first elected President in Peru that's come in with this type of agenda, and we found ways of working with others. I described to him the way that we've worked with Presidents since I've been involved since 2007, and committed to working with him, too. So -- but it's an issue because of this need to -- people feel to address the poor populations of their country. So it's something that we've got to work through. All of this is going to overhang supply development and operations for the industry. And when you take these 2 largest countries as being in that situation, it definitely will have an impact on supply development.

And when we think about supply development to Freeport, I mean you have -- you mentioned El Abra, we have expansion potential, but you also have projects in the U.S., right in your backyard Lone Star in Bagdad. Can you just kind of give us an overview or remind us of what your project pipeline looks like in the U.S.? What the timing is in these projects? The next steps are, et cetera.

Yes, it's really exciting. I mean we all remember -- not all of you because I'm sure some of you are too young to remember, but when you go back into the '90s, and everyone thought that the copper industry was dead in the Southwest U.S., mines were closing, smelters are being decommissioned. And now it's really exciting to look at the resources that we have that's going to provide development for the long term for our business in the U.S., where U.S. benefits from a currently favorable tax regime that's being discussed as we speak. We own our properties in the U.S. in fees, so there's no royalties. And our workers get the benefit of the support of communities that you don't have elsewhere in terms of health and education and so forth. There are a lot of advantages to doing business in the U.S. And you can see it in our operations where we are very profitable with low-grade mines that are very old and that we're expanding. And with the use of technology that we've been pursuing over the past couple of years in terms of being able to use information technology to monitor operations, make them more efficient, understand the resources that we have and what's going on in stockpiles and so forth, that's really good. And then this Lone Star project is tremendously exciting. It's an ore body that was known about for a very long time. We have begun developing an oxide ore, covering over what is an enormous sulfide resource. We completed that, we were able to use facilities that are nearby Safford mine, which was just completed back when we acquired Phelps Dodge, but had a limited life. And so it has available processing facilities that's allowing us to begin, which in one sense is a stripping operation, but we're making money out of it because it's oxide ore and we're being able to take advantage of this facilities that we have, and that's going to make money for us. It's going to be a nice operation. We've got expansion opportunities there. It started small. But what's really exciting is the sulfide deposit, and it's just across the mountain ridge from Morenci, which is the largest mine in North America. Inside our company, we believe that Lone Star will be ultimately as big as Morenci. I mean, is that -- the resource is that large. It's going to take time to do that. But in an industry -- one of the things I like about our industry as compared to other industries like the oil and gas business or like gold miners, we have long reserve loss. We don't have the reinvestment risk that others have. And so while -- earlier in my career, I was in the -- I came up to the oil and gas business and you open [indiscernible] our present values. Present values can be a bit misleading because by having a long life resources where your present value is discounted, by not having reinvestment risk, it really creates substantial value in your company. And that's what Lone Star represents for us. And it's really exciting, community support us. The native Americans support us. We've built training facilities for them. We're assisting in building educational facilities, met with Chairman of the San Carlos Apaches recently, and they're really excited. Want to be more involved with us. So we benefit by having support from the local communities, the state and the native American groups there for this operation. So it's really going to be good. The initial project we're going to be starting on is on the other side of Arizona and North West Arizona in our Bagdad mine. And there, we have a long reserve life, and we're basically going to be doubling our mill capacity, and we'll start on that and we'll get formally improved. I feel confident in the next few months. And we'll be off and running on that. We worked for years to secure water resources for it. Water is always an issue in Arizona and Chile and Peru for mines in getting the water resources for us. It will be a straightforward mill expansion and will shorten that reserve life, bring values forward. And then beyond that, Morenci itself has tremendous underground resources. I mean undeveloped resources, our mines in New Mexico do as well. So we've got a long life ahead of us in the United States. Our company particularly benefits by having a loss carryforward kind of the only silver lining out of the oil and gas deal the company did earlier. So it really gives a lot of advantages, favorable taxes, community support, no royalties. And we have been fortunate in developing, I mentioned that, community support. That's really important because you can see just how hard it is to develop new mines in the United States or really anywhere around the world.

Great. So if we look at the global copper market, there's clearly significant supply challenges. New projects are simply not being sanctioned, lead times are getting longer. This renewable energy kind of decarbonization, demand component that could lead to fairly significant kind of structural deficits in the copper market where some people like myself believe that it could be in a period of -- extended period of very high prices. And maybe like nothing we've seen before. But then I guess the question is how does the market ultimately balance? Inventories can't go negative. So you're going to need more supply to be developed. You're going to need more scrap. You're going to need some potentially demand substitution. But what about the potential impact of technology? So I mean even for Freeport, the use of kind of new leach technologies. Do you think that's going to be a potential part of the solution to the kind of structural gap between demand and supply? Or is this a gap that's going to be very difficult to resolve?

Well, Chris, it's all of the above. And you mentioned briefly scrap development. There will be some substitution that will happen. And it will all be needed, it will all be needed. And complicated development projects like El Abra will ultimately help fill that gap. But there are a lot of barriers to supply development. And all of that's going to probably -- you took the words out of my mouth with the recent report that you wrote, Chris, in talking about the impact of carbon reduction. It really is beneficial for copper producers and other -- some other resource producers. But man, we're all committed to it. I'm Chairman of ICMM now, and we're working on a new client position for our members that we're going to be issuing shortly. I can tell you, across the board of the 28 members of iCMM. Companies recognize the need to reduce carbon for their own operations and for the way their products are used downstream. That's going to cost a lot of money. I mean it's -- there's this huge wave of aspirations that's coming from communities, governments, civil society, investors, banks to reduce carbon. And while that was debated for some time and avoided, unfortunately. Now everybody is all in on. And for us, it means as a company, and I was just meeting with the CEO and Head of Mining of Caterpillar, we've got to develop vehicles that don't use diesel to haul. I mean, it's an enormous task to think about these large-scale haul trucks that have to climb. You see the pit behind you, and this is not going to be like driving a Tesla. I mean the batteries will weigh a ton and they'll require frequent recharging. And when you think about replacing a truck fleet with these vehicles, I mean, and developing new mines with all this carbon reduction issues coming into it, that's going to be another burden on supply development. So when you step back and look at the impact on Freeport, copper is just critical in every investment to reduce carbon, whether it's alternative energy generation from solar, wind. Whether it's electric vehicles that are emerging quicker than anybody thought. And I think that pace of change is going to quicken rather than fall off, but they require 4x more copper than internal combustion engines plus charging stations. You think about artificial intelligence and 5G networks and all the wiring that's going to be needed to support that, which is all going to be key to carbon reduction that have other benefits as well. Spending on infrastructure to expand connectivity to rural areas in developed countries into undeveloped countries. There's just a lot of good things going on from copper demand standpoint. We're always going to be subject to near-term market situations and a lot of uncertainties going on around the world. So it's not going to be constant ups. But nothing -- we jumped on this bandwagon. In fact, and an analyst just wrote a piece on a conversation we had back in 2005 when we were restructuring Freeport and deciding where to go with our future. And we bought into the copper story that early. So I've been singing this song for a long time, and it led us to acquire Phelps Dodge. But times change and we go through different things that none of us can predict. But the underlying story is really solid. I mean it's just really solid. Now it's pretty widely recognized when you look back and think how large companies have grown over that period of time in terms of their market caps and their profitability and how much they've all sought to grow their copper business and how little success has been made in that. It's really striking to think about companies with the resources, technology and the desire to build copper production and these barriers are keeping people from doing it. And as we speak now, even though prices jumped up so quickly after COVID, you don't see big new projects being announced. There were some projects that were starting back 3, 4 years ago, '17, '18 that will be finished, and some of those are good projects. But it's structurally, from a fundamental supply/demand standpoint, it's hard to imagine a commodity that's as well situated as copper is.

And it's not only the commodity, but if we think about the progression of Freeport, right, 5 or 6 years ago, you had a lot of debt, copper price was low, you were dealing with the issues in Indonesia regarding the ownership of Grasberg. A lot of the risks around the business from 5 or 6 years ago have been resolved. You've cleaned up the balance sheet, we're at a point now our capital returns will begin again. The political climate for you in Indonesia appears to be materially better now than it was then. You are arguably in a position of strength now. Obviously, the copper price helps as well. But even if we -- let's assume that we go into -- this things are unpredictable, you go into the downturn in the U.S., with the Chinese property market problems. You're in a kind of position where you can be opportunistic through the cycle. And at the very least, I suppose you're in a position where you can continue to invest in the business through the cycle. So what's the strategic approach to Freeport in terms of looking for opportunities? I mean do you feel like you have enough in your own kind of on your plate internally that you don't need to look for any potential compelling opportunities? Or could you be opportunistic if market conditions allowed that for you?

Yes. It's interesting to look back over my shoulder, Chris. I mean we had built this company up to this situation we're in now back in 2011, coming after the Phelps Dodge deal, paying off all that debt after the financial crisis. Then we got diverted when our Board went off on this oil and gas deal and then commodity prices dropped, situation in Indonesia became complicated. Fortunately, the Indonesian thing. It was years of hard work. We ended up with a better result than I expected us to. A lot of it had to do with Rio Tinto deciding to sell their joint venture interest and then the government was able to achieve its desired equity ownership in the project as well as high taxes on oil. So all that's good. The underground conversion is good. We had to sell some good assets and raise some equity capital to get out of the debt of 2015, 2016. And we had exit oil and gas business. And all of that is just -- I mean, it's really gratifying to be here right now because we have the issues to face every day. But now the opportunities are our focus. Now we benefit from having this really enormous resource available to our company that's already in our portfolio. It's brownfield resources, and we can do a long -- we're already -- for example, we're already starting talking with the government of Indonesia about extending our operating rights there beyond 2041. The current rights circa 2041, it will make no sense for anybody to run that business with a stop date like that. So we'll find a way forward there. And I mentioned Lone Star, but other resources. So it's really great to think about not having to have greenfield exploration success, not having to do -- make acquisitions but having a base that will allow us to sustain and grow our business From there. We've got this new technology stuff we're working on. We're looking at ways of recovering copper from old waste stacks, and I don't know if anyone in the industry has the opportunity for that, that we have. I mean, we've identified 38 billion pounds of copper is sitting there in waste stacks, and we can't recover all of that. We have 10% or 20% of the success, and we're working. Our guys are really excited about it. We're working with series of different technology approaches to that. We're not focused on any one, but we're looking at all of them, and it's really exciting. So strategically, it's just great, not having to do something. But we'll be there if opportunities arise. Phelps Dodge was an opportunity that rose because of the stars aligned in 2006, with that company, with markets, with financial markets, and we were able to do a $38 billion deal for a company that 2,3 years earlier had been on its back financially. So I really feel like we're in the catbird seat. We have a set of resources that would be impossible to replicate. The value of those resources are going to grow, the scarcity value of these assets is really significant. And we're going to be well positioned. We've got a great team. We've -- I had a personal commitment at this stage in my career. And I'm not planning on going anywhere. We got 2 characters talking about running for president a couple of years from now. Both of them are older than me. So -- but at this stage of my career, I wanted to see us have a sustainable Board and a world-class Board this company deserves. We've added 4 new Board members since I became Chairman, and we're not done yet. I want to see us have a sustainable management team. We've had 3 members of our senior management group leave the company over the past couple of years, and we replaced them with internal younger people, and we're doing really well. We've added a number of resources, young people who come in and help us with ESG matters. When I became Chairman, Kathleen became President. You can see us at some point find -- having a new CFO to -- so the company is going to be well situated not only from an asset, resource basis. Our technical team is really good. We manage things in the Americas as one business. We share resources and people and supply chain issues in Indonesia is going so well. So we're well situated to succeed.

I mean it seems like the logical progression, again, going back the last 5 or 6 years, there's been a lot of hard work for you getting Indonesia sorted out in terms of ownership of Grasberg, developing the block caves, where there was a lot of skeptics originally in particular on the DMLZ, which appears to be working relatively well, fixing the balance sheet. Copper prices helped as well, your shares have really strongly recovered. You're in a position now of being on the verge of doing relatively large scale capital returns. It seems like -- the question is in terms of timing, after the block cave and Grasberg are both kind of at full capacity. It's almost like a natural -- it's the next phase of Freeport, right? So it's about the longer-term organic growth in the U.S., it's about -- it's kind of cash flow and capital return. Strategy, which could be a very powerful component to the investment case. But I would think, if we go back 5 or 6 years, it was a list of kind of items you wanted to check off that you needed to really feel like you've succeeded at the end at Freeport, you would have checked off of those items by now once those Grasberg projects are done. So is that kind of a logical point where obviously, depending on what's going on, I mean logical point where you might feel like you've kind of done what you wanted to do and then succession becomes more relevant? Or is it maybe -- it's right -- it's really time to sort of figure out when you want to step down?

Well the big thing is health and energy. That's the big thing. And I've had really long talks with our Board members. Clearly, the new Board members that are recruited. We're very interested in that. And around the company I just want to be sure that I can perform at a high level. There are lots of things I like to do. I mean if I got fired tomorrow, I'd have a lot of fun. But I think one of the things that's driving me to want to stay is to see this thing through, to be here and be part of the success. I love the people I work with. I've gone from having 15 people report to me after Phelps Dodge to have like 2 or 3 now. But I'm engaged in the business on a full-time basis. We've got a great collaborative way of working together. We don't have Dukes and [indiscernible] there are Duchess and [indiscernible]. We approach everything on a teams approach. I brought that philosophy with me, I think, from years in public accounting and it's really good to see us having the kind of Board this company needs and deserves right now with the management team we have. So Chris, I -- we've been through the tough times and good times in the past. And you can tell how I feel about where we are and what our future looks like. And I, quite frankly, just want to be -- I want to be part of it, provided I can contribute in the way that I do. I enjoy. I mean it's the first time I met the President of Peru after knowing all of his predecessors and he ran on a complicated and controversial -- but I enjoyed meeting the guy. I mean he was impressive to me. A younger guy. He made some comment about my experience, and I said, "Listen, experience is overrated." And so it's that sort of thing that you have is enjoying getting to know people in the industry. I really enjoy being part of ICMM's, it's my second time around to be Chairman. We got 18 new members in ICMM. So you're constantly meeting new people and getting to know them, and that's a lot of fun. So I really enjoy it for me, quite frankly, I enjoy.

Richard, I think we've gone over our allotted time here. So thank you very much, as always, for taking the time to speak with us. And best of luck to you, and we look forward to catching up again soon. But thank you again for your time, I really appreciate it.

Thank you, Chris. Thanks for sponsoring this. And again, thank you for your coverage.

My pleasure. Talk to you soon. Thank you all for dialing in and cheers