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

Hi. Good morning, everyone, and welcome to Citi's 2021 Basic Materials Conference. I'm Alex Hacking, our U.S. metals and mining analyst. Very happy to be joined this morning by Kathleen Quirk, who is the President and CFO of Freeport. I'm sure you all know, but Freeport is the largest private copper company in the world, mines in U.S., South America and Indonesia. So thanks for joining us this morning, Kathleen.

So I mean, I'll start with a sort of very broad question/statement. Is this sort of the best moment for Freeport in the last 10 years, given the combination of the copper outlook, the successful ramp-up of Grasberg and the strength of the balance sheet?

Yes. Well, it's clearly a great time, Alex, for Freeport, and thanks for hosting this conference by the way, but we're in a terrific position, as you referenced with the copper market as a leading producer of copper with very significant reserves and production capacity, a very great pipeline for future growth embedded in the company. We have done a terrific job over the last several years in executing our plan. It's all been all about execution for us and we've proven our resilience. We faced ups and downs, but we're really in a great position as we enter -- close out 2021 and enter 2022. You referenced the balance sheet. We've made incredible progress with the balance sheet, now in a position where we're returning substantial cash flows to shareholders. You referenced the Grasberg underground ramp-up, just credit goes out to our team there. We have been planning that for 15, 20 years or more and they've just executed masterfully through this -- through the pandemic and we're now producing very large-scale production at very low cost there. And our team throughout the globe has done really, really well in managing costs in a difficult environment, bringing back production after the pandemic and keeping everybody safe. So really good and while these are great times for Freeport currently. We really do believe our best years are ahead. And you referenced the copper markets. Fundamentally, we believe copper is very, very well placed. We've got a situation where we're entering a new era of copper demand, which includes the massive amounts of copper that is used in decarbonization and that transition is really just starting. So we've got really strong growth in demand expectations and globally limitations on supply and I'm sure we'll get more into that situation. But really, really pleased with where Freeport is and our strategy of being foremost in copper.

Okay. And I guess more specifically on the copper price how do you see the copper price heading into next year? I think investors have some concerns around what's happened in the Chinese property market, but we can see that inventory is still very, very low. So maybe just your thoughts on copper for next year.

Yes. And I think you just said it. We're in a situation now where inventories are at multiyear lows and multi-decade lows in some areas and you've seen GDP growth come back from the pandemic. But as I mentioned, we're really just getting started on the decarbonization and the adoption of electric vehicles continues to expand. We see that as a big growth market for copper and then just ongoing growth in the economies as we recover from the pandemic. The neat thing about where we sit right now in copper markets is over the last 10 or 15 years, most of the growth has come from China. As we look forward, we see demand growth being much broader based, coming from all over the world, the decarbonization is going on globally. So really, as we look forward to seeing broad-based global demand growth and limitations on supply. There are some projects that are in the pipeline that are coming online. Grasberg has been ramping up, there are some projects in Chile and Peru and DRC. But as you look forward, there's really not enough copper supply in the pipeline and as you know, Alex, it takes 5, 10 years and sometimes longer to bring on new supply. So we are really in a great position fundamentally for copper, of course, there will be ups and downs associated with them. People's concerns about what's going on in China's property sector or whatever might be the headline. But really underlying that as you look at the physical markets, the fundamentals of the market and copper is really well positioned as we go into next year.

And I guess, does Freeport have any view on how many tonnes are we going to need over the next -- or how many new tonnes are we going to need over the next 5 to 10 years?

Yes. Well, there are a lot of estimates out there and -- the common theme is a lot more. I think consensus around something on the order of 5 million tonnes of copper demand over the next 10 years is going to be needed or copper supply is going to be needed and Citi has talked about this call on scrap. But there is substantial amount of copper demand associated with the decarbonization. I think you guys estimate 70% of the growth in copper demand is coming from decarbonization and if you think about 5 million tonnes of copper, that's sizable. That's -- you look at the top 10 mines -- producing mines, and you'd need to have that much more production coming in, which really is just very, very difficult to see that happening. So there are going to have to be other things. We're going to have to be very innovative and that's -- Freeport's working on that. We're working to get more out of the assets that we have, working on leach recoveries, we're working on debottlenecking everything that we can do to improve supply, but big major projects are very, very challenging in this environment. Takes years, and there's really a limitation of what is in the pipeline.

Okay. Yes, 500,000 -- building 1 -- 500,000 tonne a year -- mine a years -- or 2 -- 250,000 tonne a year, mines a year is not an easy task.

Yes.

I guess, turning a little bit to the company. Could you maybe give us an update on how the underground is coming at Grasberg and the expectations for next year? And is that project fully derisked at this point in your view? Or is there still some lingering operational risk?

Well, as I mentioned the team has just done an incredible job in ramping up the production. The execution has been extremely positive as we've gone through 2020. As you remember, we stopped mining from the surface at the end of 2019 and so we were ramping up the underground in the midst of the pandemic and if you've seen the results each quarter, we've built that production profile. And as each quarter has gone by, we have derisked the project in a significant way. You'll always see risk in mining, I think you understand that Alex, underground mining has its own characteristics. But the major risk, the major risk that we faced in ramping up these very large-scale mines that really have not done at this scale globally are behind us and as we go forward, we're going to continue to execute. We've got a new SAG mill that we're putting in, in 2023 time frame and so during 2022, we'll be pretty much steady state as to the ore throughput rates of where we were at the end of the third quarter. But that's a very significant amount of metal that we're producing. But the team has done an outstanding job in planning and that's been a big part of this. As I mentioned, we've been planning for this since the mid-90s and actually started investing in the underground infrastructure in 2003. So it's a long lead time project. It was planned exceptionally well, and it's being executed in an outstanding fashion. So -- While we understand this risk and we try to plan and mitigate risk, we'll face challenges, but we've got a great team out there supported by a great technical team at our headquarters and we feel very good and the government feels very good about how we've executed to date and the outlook as we go forward.

And I guess, could you just maybe touch on a little bit of the relationship with the local partners and the government. It seems like everything is very positive at the moment, you worked through some of the challenges over the past few years.

Yes. Well, this agreement that we reached with the government at the end 2018 to extend our operating rights and restructure the ownership when the government bought Rio Tinto's interest has gone extremely well. What's really been positive about the new arrangement is this very strong alignment between FCX and the government of Indonesia. The government now owns 51% of PT-FI subsidiary and FCX controls the operation through a management committee -- operating committee and it's been just really, really good. We have great rapport,, great cooperation between the parties. The team at PT-FI is focused on maximizing the value of the interest of PT-FI and we're just operating according to our agreement. It took many years, as you know to get to an agreement, but we really put together an agreement that's a win-win for the investors and for the people of Indonesia, and it's being executed very well. We just -- the President just attended the inauguration ceremony for the smelter and we'll just start a groundbreaking there and that was one of our commitments associated with our agreement in 2018, but the partnership is very strong. I would say our relationship with the government of Indonesia is stronger than it's ever been and it gets back to this alignment of interest.

Okay. And then turning to South America. I think most of the headlines recently have been around political noise. So I guess starting with Peru, I guess, any comments around how you're viewing Peru under the new regime, the potential there for higher taxation?

Yes. Well, we operate one of the largest concentrators in the world at our mine in Cerro Verde and located in Arequipa, which is the second largest city in Peru and we've had a long history of successful operations there. One of the things that we've done over the years -- over many years in Peru is really strengthened partnerships with the local community. And in many cases, we've done that voluntarily and that's one of the things that's really helped us in Peru, is to have a strong partnership with the local community. We've made significant investments in the local community. As you probably know, when we did our expansion in 2015, we put in a water treatment facility that is providing clean water to the city, which is a great asset for that community. And so we haven't had the types of issues from a social standpoint that some other mining companies have had in Peru that are operating in different areas. We'll have our challenges, we know and there'll be aspirations that the community has and we'll have to find balances, but we've really focused our political risk mitigation there on partnering with the local community and that's proven to serve us well. In terms of the new administration there, we're listening. We don't have any expected changes to our taxation at this point in time. We want to find ways to support the agenda of the administration to the extent that we and others in the mining industry can support education in Peru and help bringing more education across the country. But we're just, right now, just in execution mode and listening to the aspirations and trying to figure out how we can be responsive to those, but at this point in time, we have a stability agreement in Peru. There's no indication that the government will want to change that at this point, but as we operate all over the world, we have to be an integral part of that discussion and we have to operate in any political environment. So we're a good corporate citizen there. The jobs that we provide in Peru are very significant. We talked about copper prices and copper prices really benefit our workers there. There's a profit-sharing mechanism that they benefit from. So it's a good situation. Of course, we're watching all the headlines. But in terms of our operations there, it continues to go very well.

And then I guess just on Chile with El Abra, any views there on how the tax situation is going to evolve? I know there's a lot of moving parts. But any thoughts?

Yes, there are a lot of moving parts there. El Abra, unlike Cerro Verde, which is a significant part of our overall asset base and cash flow currently. El Abra, currently, is relatively small relative to the size of FCX, but we do have a very attractive investment opportunity at El Abra that we have been planning for some time now. We're continuing to follow what's going on there to follow the constitutional process, the discussion going on about the royalties there and also following the election process. As you know, the Chile -- copper and Chile are our partners where copper production from Chile is like 25% of the global copper supply. So it's an important part of the overall Chilean economy. I do believe that there will be a resolution that will be workable between the government and the copper miners, which provide substantial financial benefits to the country and have, for some time now. We're watching the situation. We're monitoring it. We're not making any big investment commitment to that project currently. We're keeping it warm in terms of making plans, but we're going to wait and see. I think there will be some more clarity as we look into 2022 and we'll be able to make a decision from that point, but I do believe that Chile will continue to be an important supplier of global copper as we go forward.

Okay. Yes. I mean I guess the El Abra project is a case study on what Chile -- on the potential impact of taxes in Chile. And then just on the U.S. side, could you maybe give us an update on the on the ramp-up of the Lone Star project?

Yes. Well, Lone Star, located in Eastern Arizona, is our newest mine. We brought it online in 2020. It is near the Morenci mine, which is the largest mine in North America and we're really excited about Lone Star. When you look at the potential there, we've identified resource potential of 50 billion pounds of copper, which is like 10x what the current reserve is. So the future prospects are very favorable for development at Lone Star over time. We brought on the mine, initially, producing from the oxide cap. The big sulfide, the big potential is underneath the oxide cap. But we brought that online, it was originally designed to produce 200 million pounds a year. We're currently in the 250 million pounds a year range and so it's operating 25% above its designed capacity. We've got a further increment that we're evaluating fairly low capital intensity to get to 300 million pounds a year and what that does is allows us to make profitable investments to increase the current capacity, but it also involves increasing the mining rates so that we can access the longer-term opportunity more quickly. It still takes time, probably to get to the major project there. We're probably 10 years out, but we do see a real opportunity there for Lone Star to be a large producing asset in the U.S. You've seen many companies in the mining industry have trouble getting permits or trust from the communities in operating in the U.S. Freeport has a really strong franchise in the U.S. and trust in the communities. This is an established mining area where we do have community support. So it's got all the right characteristics. It's relatively low grade when you look at a project in the DRC or another place like our mine in Indonesia, but the risks are substantially lower and we see this mine potentially becoming a cornerstone asset for us in the U.S. where we have established position and a great operating franchise. Elsewhere in the U.S., we are looking at our Bagdad mine in Northwestern Arizona. We're looking to potentially double the capacity there. We're in the feasibility part of that planning and so, a year from now or so, we'll be in a position where we -- subject to there being a fatal flaw, which we don't expect anything, we expect to greenlight that project and that will essentially double the production there. It's a very long reserve life, currently over 80 years. So we'll be bringing that value forward. The other real exciting thing that we have going on in the U.S. and in South America, but we're focused mainly on the U.S. right now, is this leaching opportunity where we are -- Basically, we've got, and you've seen in our slide, we have 38 billion pounds of material that's already been mined, it's sitting in stockpiles. So it is a very low carbon footprint from here and what we're working to do is trying to find ways to recover a portion of that material. It's not in our reserves. We don't have anything in our plans of significance to recover that material, but we're making a lot of progress. We're encouraged by the work we're doing on -- and we're using new technologies. We're using a lot of data analytics and we've had a variety of technologies that we're looking at to get a portion of that copper recovered. And that copper, if we're successful in cracking the code, which we're really excited about doing, is going to come with low capital intensity. As I said, a low carbon footprint, low incremental operating costs. So there's a lot of value, particularly for a company like Freeport that has a significant amount of material that's already in stockpiles that's not recoverable today with historic technologies.

Okay. And then I guess just following up on that leaching point, then. As a private company, I won't use their name, but since they have very, very promising technology on that front and I assume that, that technology is proprietary to them, and they're going to patent did in everything. Are you working with them? Or are you working on your own technology? And is that proprietary...

Yes. Well, we're working with third parties as well as our own initiatives and as we've been talking about, the supply of copper is very limited and we're going to have -- as an industry, we're going to have to find ways to recover more from copper that we already have. And technology, Freeport's really leaned into technology to improve recoveries in our concentrator, to improve throughput rates in our concentrators. Now we're really moving to these leach technologies and there's a real opportunity here for -- when you do -- when you process through leaching, the costs are attractive, but the recoveries per pound are much lower than you would get under a concentrating operation. So our objective is, even if we find ways to improve recoveries by 10% or 20% that's really meaningful. That's really meaningful to even a company like Freeport. It wouldn't come out all at once, it would happen over time. But potentially, it would be like us having a new mine with very low capital costs and operating costs. So to answer the question, we're working with third parties. There are multiple parties that are engaged in this, but we're also pursuing our own technologies because we've got all the data. We've got all the knowledge of these ore characteristics. And we've been really focused on data analytics that help us understand the cause and effect of this leach processing technology. And so we're -- that's something you'll be hearing us talk more about as we get into 2022 and beyond, that would potentially add some incremental production as we move forward.

And then you also mentioned the Bagdad expansion earlier. So if we think about the project portfolio or investments, you already approved Kucing Liar that's going to be going on in Indonesia. Should we think about Bagdad expansion being likely the first investment? El Abra sulfides potentially -- following that, if the situation in Chile remains positive as we expect and then sort of the Lone Star sulfide project coming after that?

Yes. Yes. And we'll have -- with respect to Lone Star, we'll have probably an increment, not a major project, but an increment that will probably come in before Bagdad comes in, but you sequence that pretty much correctly. We've got Bagdad, which is a pretty straightforward project, El Abra, which is pending as we evaluate the situation, Chile and then the longer-term, Lone Star opportunity.

I guess, and then how about M&A? It feels like for the last 10 years, I've been reading nothing but media or product about Freeport, maybe, being the target of M&A, but with your share price, where it is, it seems like maybe there could be opportunities for Freeport to be buying today? Or are you just -- are you focused on the organic portfolio?

We're really focused on the organic portfolio. We are -- we keep up with what's available in the market, but we always come back to how does that compare to what's in our portfolio and we're really fortunate as Freeport to have opportunities organically that we can do over time. It doesn't happen all at once, but we can compare those opportunities to what's available externally. And as you know, with what the outlook is for copper, there really aren't a lot of companies out there that want to allow quality copper assets to be sold, but we follow the market, but it's not really -- our base case is execution of our existing asset base, which is substantial.

Okay. On the cost side, so obviously, very topical. Every CFO I talked to says cost of everything is going up. How are you thinking about the cost pressure heading into 2022? It seems like a lot of mining companies, they're talking about maybe 5% to 10% cost pressure or something like that, which a lot of it is -- well, some of it is also price-related royalties and things like that. How are you anticipating the cost pressure of seeing the cost pressure today?

Yes. Most of the cost pressures that we faced earlier this year with the increase -- significant increase in energy prices and that drives some other commodity-based input costs as well, so energy has been the biggest one. Recently, we've seen increases in other commodities that we use in our business like sulfuric acid, ammonium nitrate that we use for our blasting and mining processes. But the team has really done a good job from a supply chain standpoint in partnering and this goes back a number of years, but partnering with our suppliers, Freeport, because we manage all of the mines that we have interest in. We're able to have a lot of operating strengths in terms of purchasing power and that sort of thing and so we communicate regularly with our suppliers. And so we haven't had the issue of being able to get supplies. But you're right, the cost hasn't increased. We've been doing our best to manage that situation, but it is a factor. I will say, though, we've had some offsets in that, we've had the currency situation in South America, where the dollar has strengthened against those currencies. That's helped us from a -- from most of our labor costs are in the local currencies. Of course, this is a byproduct, but molybdenum prices have really risen. So that's cushioned some of this cost inflation, but it is -- we are experiencing it. Our labor situation is good internationally. In the U.S., we do have a tight labor situation. We've got substantial job openings in the U.S. where our team is managing through it and executing through it, but it is a tight labor market, particularly in the U.S.

Okay. So I guess we're up on half an hour here. So I'll draw it to a close. I want to thank you again for participating. I don't know if you have any final comments. But again, thank you so much. Was great to hear from you.

Thanks, Alex. Really, really appreciate being a part of the conference, and we look forward to our investor meetings today. Thank you.

Thank you.