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

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Fourth Quarter Conference Call. [Operator Instructions] I would now like to turn the conference over to Ms. Kathleen Quirk, President and Chief Financial Officer. Please go ahead, ma'am.

Thank you, and good morning. Welcome to the Freeport-McMoRan conference call. Earlier this morning, we reported our fourth quarter and year-end 2021 operating and financial results, and a copy of today's press release and slides are available on our website at fcx.com. Our conference call today is being broadcast live on the Internet, and anyone may listen to the call by accessing our website home page and clicking on the webcast link for the conference call. In addition to analysts and investors, the financial press has been invited to listen to today's call, and a replay of the webcast will be available on our website later today. Before we begin today's comments, we'd like to remind everyone that our press release and certain of our comments on today's call include forward-looking statements and actual results may differ materially. We'd like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in our SEC filings. On the call with me today are Richard Adkerson, our Chairman of the Board and Chief Executive Officer; Mark Johnson, who heads up our Indonesian operations; Josh Olmsted, who heads up our Americas business; Mike Kendrick, who leads our Molybdenum business. We also have Rick Coleman and Cory Stevens, who support our team with engineering and construction, technical services and support for our growth projects; and Steve Higgins, our Chief Administrative Officer. I'll start by briefly summarizing our financial results, and then I'll turn over the call to Richard, who will review the slide materials on our -- in our presentation, and I'll make some comments and then we'll open up the call for questions. Today, FCX reported fourth quarter 2021 net income attributable to common stock of $1.1 billion or $0.74 per share and adjusted net income after excluding net charges totaling $0.3 billion or $0.21 per share was $1.4 billion or $0.96 per share for the quarter. For the year ended 2021, our net income attributable to common stock totaled $4.3 billion, $2.90 per share and adjusted net income totaled $4.6 billion or $3.13 per share. We have a reconciliation of our adjusted net income on VII as part of today's release. Our adjusted earnings before interest, taxes and depreciation for the fourth quarter totaled $3.2 billion and for the year totaled $10.9 billion. We've got a reconciliation of our EBITDA calculations on Page 43 of our presentation materials. Our team delivered great volume growth during the year. Our copper sales of over 1 billion pounds during the fourth quarter approximated our guidance going into the period. And for the year, we sold 3.8 billion pounds of copper. That was a 19% increase from 2020. Our fourth quarter 2021 gold sales of 395,000 ounces were about 5% above our guidance going into the quarter, and that reflected higher throughput rates in Indonesia. Our annual gold sales totaled 1.4 million ounces for the year and were 59% above the 2020 total. We benefited during the quarter from positive pricing for copper. Our average realized price of $4.42 per pound in the fourth quarter was more than $1 per pound higher than the fourth quarter of 2020. Our realized gold price of $1,808 per ounce was slightly below the year-ago quarter, and our results also benefited from improved molybdenum prices. Our realization in the fourth quarter of 2021 of over $19 per pound was almost double the year-ago period's realization. Unit net cash costs during the fourth quarter averaged $1.29 per pound a quarter -- per pound of copper. That was slightly above our estimate of $1.26 going into the quarter, but that reflected a charge, a nonrecurring charge associated with the successful completion of our multiyear collective labor agreements at Cerro Verde in Peru. Strong cash flow generation, again during the quarter. We generated $2.3 billion of operating cash flows. And for the year, we generated $7.7 billion of operating cash flow, and that exceeded our capital spending of $2.1 billion for the year. As you saw in November of 2021, our Board approved a new share purchase program authorizing purchases of up to $3 billion of FCX common stock. Through January 25, we acquired 15.4 million shares at a total cost of $600 million and that was an average price of $39 per share. The Board also approved in November an increase in common stock dividends for 2022, effectively doubling our common stock dividend. And on December 22, we declared dividends totaling $0.15 per share that will be paid on February 1 of this year to shareholders of record as of January 14. Our balance sheet is strong. You'll see that in the results, the net debt at the end of the year totaled $1.4 billion, and we had no borrowings under our $3.5 billion revolver so we've got strong liquidity with $8 billion of cash at the end of 2021. I'd now like to turn the call over to Richard, who will be referring to our presentation materials on our website.

Thanks, Kathleen, and hello, everyone. The end of 2021 is a special time for our Freeport team. We've met a series of multiyear complex challenges with great success. You start by looking at the debt picture, which Kathleen mentioned. Just 6 years ago, our debt was at $20 billion and the way to manage it was really unclear. We have now reached a point where our debt is de minimis. We have started a program of shareholder returns with higher dividends and share buybacks. We have assets and an outlook that will allow us to increase those over time. Our credit rating has been raised to investment grade by 2 of the agencies. Then you look at the Grasberg underground project, which goes back much further. We began our initial plans for this underground operation in the mid-1990s. We began spending capital 20 years ago. By the end of the year, we met our target by reaching our metal long-term run rate. We are taking steps successfully and have the way forward to increase our mining rate to well over 200,000 tonnes per day from the underground. That's just remarkable. During this period of ramping up Grasberg, we had challenges in our dealings with the Indonesian government about our contract of work. We resolved those 3 years ago, and I'm pleased to report that our relationships with the government of Indonesia is one now of cooperation, working together mutually for common goals. Relationships have never been better. Then 2 years ago, we started facing COVID. That was a huge uncertainty for us. At the time, we took aggressive steps to be prepared to manage the risks that were emerging. We've successfully managed our way through that and achieved our debt reduction in Grasberg underground from that standpoint. ESG is on everybody's mind these days. It's always been part of our psyche at Freeport because of the nature of our operations, but we've begun aggressive efforts to deal with climate change impacts of our operations. We're working with the copper industry with this Copper Mark designation, which we have been a leader in working with ICMM with communities. I became Chairman about a year ago. I made commitments to myself to strengthen Freeport's Board. This year, we've added 6 new directors. Four are well-known, highly regarded CEOs with extensive international business experience who add a lot to our Board. We have 2 women we added that both are financial experts, experienced in Audit Committee dealings. One is probably an Hispanic. It's just been a great work by our team. We have a real sense of accomplishment, and we're really looking forward now to the future with optimism, commitment and excitement. Turning to our results. Our copper volumes grew by 19% compared with the prior year, reflecting this ramp-up in Indonesia. Our unit costs declined despite rising energy costs in other units and other input costs. Our team has done a great job of managing the challenges of supply chain and cost inflation. We generate strong margins. Our EBITDA and cash flow rose by 2.5x over 2020. And we ended the year with just over $1 billion in net debt. And we're well prepared with our long-life reserve and resource base to advance organic growth over time. Now with the ramp-up at Grasberg reaching the point where it is, we're now looking to our operations in the Americas for future growth. It's nice to talk about accomplishments, but we're all focused on what we -- where we go from here, how we build more value for our company, and we have a great opportunity to do that. Copper. Over 20 years ago, our company made a commitment to copper, and it was driven by supply side constraints that we saw in the global marketplace, at that time, growth in China. And we have fundamentally stuck with that. Our Board made a diversion with this oil and gas deal but that's behind us now. But the fundamental outlook for copper, as positive as it was 20 years ago, is now even more positive and becoming increasingly positive. It's driven by copper's role in the global economy, just fundamentally, the need for copper and as the world develops. We saw it in China. China continues to be an important part of the market. Global growth will occur outside China but the new elements of demand are really significant. Any investments in carbon reduction, and everyone's talking about carbon reduction, requires significantly more copper than the world has required in the past. Electrification is a key to climate change, and 2/3 to 3/4 of coppers used is dealt with electrification. Whether it's electric vehicles, alternative energy generations, all of these require much more copper than traditional power. Then you look beyond that to technology advances in communications, artificial intelligence, expanding connectivity as infrastructure is developed around the world, public health initiatives. All of these are creating what I'm calling a new era of copper demand. And these are broad-based, they're inevitable. Copper will be affected by risks to the global economy from time to time, but underlying that is a long-term very positive outlook for copper, and our company is solidly positioned to benefit from that. You add that together with supply scarcity and the demand factors and you have a real compelling case for investing in our company. We're seeing increasing scarcity in supply at a time when demand is growing so significantly. There are a limited number of projects, which have been under development for some time now that are scheduled to come on stream in the near term. But when you look beyond that, it's hard to find actionable projects that are -- can be developed within a very short period of time. It just takes a long time. And then there's increasing political risk around the world that will have its impact on copper supply development. Notably, in Chile and Peru where 40% of the world's copper comes from, there's new presidents who run on agendas that are oriented towards social programs that require more revenues to implement it. And how the industry and the governments deal with that will be very important. But beyond that, you see this in countries like the United States. You see other countries restricting new supply development for community social issues. Countries around the world are demanding more of miners in terms of revenues, and that goes beyond Chile and Peru, ranging all the way from Asia to Central America to Africa. All of these things add into supply constraints at a time when the world needs more copper. We're focused on the long-term outlook for our markets. We always prepare ourselves and recognize that near-term risks may emerge to the global economy. Now we're strong financially to deal with those risks. We structured our business in a way that we have flexibilities of managing it. So we're much more comfortable today about whether our company is positioned to take advantage for what we believe will be a very positive view for copper as a commodity. If you look at our reserve base, we report reserves this year based on mine plans of $2.50 copper. We don't limit ourselves to looking at projects on that basis because we have an optimistic view about copper. But we have more than -- at $2.50 copper, we have more than a 25-year reserve life, approved and probable reserves. And beyond that, in our incremental mineral resources, we have enormous amounts of copper that, over time, will be brought into reserves as we do delineation drilling and engineering work to bring those into reserves and ultimately into new projects. This is really a key asset for Freeport. It provides us a lot of options for the future when you look at the scarcity in the industry for development opportunities. Freeport does not need to rely on acquisitions to support our long-term future. We always monitor opportunities, but we have the assets within our company in how to sustain our business and growing it significantly over time. With these favorable markets, our margins and cash flows are growing. We have well-established plans. Our whole team globally is focused on executing plans to produce more copper, produce it at a lower cost. We've built a strong foundation for the future. We had significant sales increase in 2021. We've got growth factored in for the near term, additional 13% in 2022 and improving in 2023. We have derisked our plans, expect growing margins and are really prepared to execute to generate the cash to support returns to shareholders as we invest in future growth. Looking at the slide now that shows the successful ramp-up of the Grasberg underground, I just wish you all could see me because I got a big smile on my face when I look at this. It's really significant with what we've done there. Our team there is just really to be complimented in meeting all these challenges. It was nothing short of a monumental task. As I mentioned earlier, it was years to achieve this. The underground development, turning to the next slide, over 350 miles of tunnels, 7 miles of an underground railroad with 10 electric trains running, 4 huge crushers, 5 miles of conveyor belts, these shafts to take large numbers of people down underground, it's all underground. Over 500 drawbells have been opened, almost 350,000 meters of undercut. And we're really on track to achieve long-term sustainable rates of in excess of 200,000 tonnes a day from our mines through our mills. This gives us a very strong base of long terms. We've done this now to create -- return Grasberg to be the second largest copper mine in the world. The largest single gold mine, even though it's a byproduct. You look at the fourth quarter when we had our net cash cost in the face of all this inflation of only $0.08 per pound for the second largest copper mine in the world. We are on track to achieve our long-term run rate of 1.6 billion pounds of copper a year, over 750,000 tonnes. All this looks simple on paper, but man, it was a challenge to get it done, and our team deserves a tremendous amount of credit for doing that. Now we look at where are we going to grow for the future. How are we going to sustain our business for the future? These new leach technologies that we're working in the Americas is a huge opportunity for Freeport. Our company historically was a leader in developing leaching. Our Morenci mine in Arizona is the world's largest leaching operation in today's global copper market. And this technology that we will have to improve recoveries and achieve recoveries from historical waste stacks and just creating copper that no one thought we had the opportunity to recover is really significant for us. Then we have our mine in Northwestern Arizona, the Bagdad mine, which has a long reserve life, set up perfectly for a mill expansion and to achieve greater volumes out of it in a relatively straightforward way. In Eastern Arizona, we have the Lone Star mine, which I truly believe someday will be the all-star mine for Freeport. We are working and expanding recoveries from the oxide ore that's there, taking advantage of facilities that are nearby Safford mine, which is -- core production is declining as planned. But underneath that, the Lone Star mine has a sulfide resource that I really believe will make it be the all-star mine for us. Good project in Chile that the world will need. We're waiting to see how things unfold there. And then this Kucing Liar mine that we have undeveloped at Grasberg is going to be an important part of our future there. This will be one of the world's largest block cave mines in its own right, 80,000 tonnes a day. We've got a resource of 6 billion pounds of copper, 5 million ounces of gold through 2041. We're talking with the government now preliminarily about extending our rights beyond that. And that mine will be producing well beyond 2041. When that's on stream, we are targeting getting up to 240,000 tonnes a day of mine rate mill rate out of the operations at Grasberg. There's a slide on Lone Star that I referred to earlier. You can see the data of how we're increasing it. But the real prize there, the oxide development will be profitable, add the volumes, attractive cost. But the real long-term product there is this sulfide resource that underlies the oxide. It's very large. Take time to do it, but it will have a complex, we believe, ultimately similar to the Morenci mine, which is the largest mine in North America now. This leach technology is something you'll hear a lot about from us throughout the energy industry. We will be a leader here. We are looking at several different types of technologies. All of them are exciting. We are -- Cory is leading our team here, and it's really a new element of demand. Just in our existing waste stacks, we have -- we believe we have almost 40 billion pounds of copper in those stacks, and even small recoveries out of that could result in copper that would be equivalent to developing a whole new mine. So it's early-stage technology, a lot of work to do, a lot of excitement by our team about doing this. So it's really good. I want to close by recognizing our team around the world. I'm so proud to be part of this team. We've got a group of people that are technically confident, that are highly motivated, that work together cooperatively, that are buying in to making Freeport the foremost copper company in the world and keeping it there. And we have the capabilities on hand to meet and exceed our expectations, exceptional opportunities for our business. And I want you to know that regardless of what you read out of London, I'm planning with staying part of this team for as long as God's willing to allow me to do that. I'm having more fun now than I've had in years, and I'm really excited to be a part of this team as we go forward. So Kathleen?

All right. Thank you, Richard, and I'll just start on Slide 17 and make some comments on our operating and financial matters, and then we can turn it over to your questions. We're providing some additional details on our fourth quarter operating activities on Slide 17. And as Richard said, the Lone Star mine, he's now renamed it the all-star mine but it continues to perform above design capacity. You'll recall we commissioned the mine in the second half of 2020. And last year, we produced 265 million pounds of copper. That was a 30% increase from the original design of 200 million pounds per year. We have incorporated now a further incremental expansion into our plans which will take us up to 300 million pounds per year by 2023, with an investment of approximately $250 million. And as Richard mentioned, as we accelerate the mining of the oxide ores, this will expose us to the larger sulfide opportunity. At Morenci, we're gaining momentum on our leach initiatives. We have substantial material that has already been placed on leach stockpiles, which provide an opportunity to increase our copper production at a low incremental cost and notably a low carbon footprint. We're applying new technologies and using data analytics and sensoring to measure our success, and we're very encouraged by some early wins and are optimistic that there's much more to come. We started the effort at Morenci because of its significance, but the early wins at Morenci have allowed the team at Morenci to share its findings across the portfolio. And this gives us a significant value opportunity for Freeport, and we hope to report progress -- ongoing progress to you as we go through the year. We also continue to ramp up mining and milling rates at Morenci. And we estimate that production from Morenci will be about 10% more copper in 2022 compared with 2021. In South America, our teams there are doing great work to restore production to pre-pandemic levels. The 2021 sales from South America were about 8% higher than 2020, and we're projecting an additional increase in 2022. We continue to target a full restoration at Cerro Verde of its mill operations during this year, and we'll be on our way to getting back to 1 billion pounds per annum from this large-scale operation. Our team at Cerro Verde continues to do outstanding work in managing the pandemic and had really a terrific fourth quarter. We were also successful in finalizing our multiyear labor agreement at Cerro Verde during 2021. At El Abra in Chile, we're making good progress and increasing our stacking rates of material on our leach pads there, and we're also advancing construction of a new leach pad to accommodate the higher rates. We're expecting a 30% increase in 2022 production at El Abra off of a relatively low base, but we plan to sustain a level of 200 million to 250 million pounds per year for the next several years as we assess opportunities there for future growth. At Grasberg, as Richard mentioned, the highlight of the year was really reaching our targeted metal run rate in the fourth quarter. This was an enormous milestone of success for us. We're all proud of it. We're focused on sustaining this during 2022. And we'll have opportunities to increase our mill throughput rates in the second half of next year with the completion of our new SAG circuit, which is under construction. Our team at Grasberg is as energetic as ever, working to advance Kucing Liar and several other projects in the portfolio. Our next slide, Slide 18 is just an update on our progress to develop new smelting capacity in Indonesia to meet our commitments to the government. The site for the new smelter is starting to take shape, as you can see from the photo on the slide. In the fourth quarter, we completed the pile support for the flash furnace and are starting to pour concrete. We also completed agreements in the fourth quarter with our Japanese partner to expand the existing smelter at PT Smelting. We're focused on completing these projects as efficiently and timely as possible. We've been funding the cost of the smelter through a $1 billion bank credit facility that PT-FI secured, and we're planning additional debt financing at PT-FI, which can be obtained at attractive rates to complete the project. As indicated on the slide, the long-term cost of the financing for the smelter would be essentially offset by a phaseout of the 5% export duty so the economic impact is not material. We provide on Slide 19 a 3-year outlook for volumes, and just we're pleased to report our execution is on track. We have some minor offsetting changes to our prior guidance for copper sales for 2022 and 2023 and have now included our current outlook for 2024. After delivering a 19% increase in copper in 2021, we're projecting a 13% increase in 2022, and this includes higher production across the portfolio. We've got further growth planned for 2023 in our existing plans. In our sales for copper in 2022, we estimate about 36% will come from the U.S., 27% from South America and about 37% from Grasberg. We're showing on Slide 20, our -- how the quarterly volumes work out. We're expecting grades will be lower in the first half at several of our sites in the Americas, and that will be increasing throughout the year. You can see our gold sales are fairly steady at roughly 400,000 ounces per quarter during 2022. On Slide 21, we show a comparison of our net unit cash costs for 2021 and we roll that forward to 2022. And you can see that the costs are pretty similar between the years. For some time, our global team has been focused on cost management and efficiency projects to extend equipment lives, improve energy efficiencies, maintenance practices and using technology to help us in all of this. This is serving us very well in the current environment. And we're also supported by just a great global supply chain team who is doing terrific work with our site operations management and through our partnerships with long-term suppliers to address our business needs. As you'll see on the slide, our estimated consolidated unit net cash costs for 2022 are expected to be very similar to 2021. We've got increases that we're experiencing in -- for input costs, including energy, sulfuric acid. We've got some higher labor and outside services costs for 2022 compared to 2021 and higher costs for materials and supplies. But that essentially is being offset by our higher volumes. We're going to continue to focus on cost management and provide our operators with technology-driven solutions to assist with the current cost pressures and inflationary environment. Richard mentioned the strong cash flows that we're generating and we see that continuing in the future. On Slide 22, we show the significance of our cash flow using our volume and cost estimates and prices ranging from $4 to $5 copper and holding gold flat at $1,800 per ounce and molybdenum at $19 per pound. We show modeled results using the average of '23 and '24, and you'd see here that annual EBITDA over this period would range from $12 billion per annum at $4 copper to over $16 billion per annum at $5 copper. And our operating cash flows would range from nearly $9 billion a year to $12 billion per year at this scenario -- using these scenarios. As demonstrated in the last several quarters, we're generating significant free cash flow, and this trend is expected to continue with cash flow significantly above our capital spending. Moving to capital spending, we show on Slide 23 our outlook for capital. For 2021, our capital expenditures, excluding the smelter costs, totaled $1.9 billion, and that was slightly below our guidance, excluding the smelter of $2 billion. We're projecting capital of $3.3 billion in 2022 and $2.7 billion in 2023. The primary change from our guidance -- prior guidance for 2022 reflects the addition of the incremental Lone Star expansion and our plans to advance the CirCular Project at Atlantic Copper. You'll also note the large decrease in spend on the Grasberg Block Cave and Deep MLZ beginning in 2023. And you've also seen here the discretionary projects that we're advancing to improve profitability and value as we go forward. And about 20% of the capital for the next 2 years reflects recent value-enhancing additions. And those are detailed more on Slide 24, where we have a summary of the discretionary capital. We've added to our plan since achieving our net debt targets last year and commenced our shareholder return policy. These projects all have solid financial returns, great operational benefits and again represent value-enhancing investments using a portion of the 50% of free cash flow we are earmarking for organic investments and balance sheet improvement. Our free cash flow generation is significant, and that's supported by growing volumes, positive markets and low capital requirements. You'll see on Slide 25, and Richard highlighted this, not only the last -- what we've done over the last several years but just in 2021 alone, we reduced our net debt by nearly $5 billion, and our EBITDA continues to grow. We're really in a fantastic position to execute our strategy, maintain a solid balance sheet and return substantial cash to shareholders. Our financial policy is summarized on Slide 26. It's centered around a strong balance sheet and combined with a performance-based payout policy that provides for up to 50% of free cash flow to be used for shareholder returns, with the balance for growth and further balance sheet improvements. As you'll see on Slide 27, we commenced implementation of the policy, following our Board's actions in November of last year. We purchased nearly $500 million in stock in the fourth quarter, and through January to date, our purchases -- cumulative purchases totaled $600 million, so we're well on our way to using our $3 billion authorization. Our Board also approved a variable dividend for 2022, which essentially doubles our common stock dividend. The combination of the share purchase program and our dividends are designed to distribute 50% of our cash flow while maintaining the balance sheet in a super strong position and providing flexibility for our long-term investments. So in summary, I just want to echo what Richard said. We're well positioned for success in 2022 and beyond. Our team is passionate about execution. We've got momentum and we look forward to building on this success. And operator, we'll now like to turn the call back to you to start the Q&A session.

[Operator Instructions] The first question comes from the line of Emily Chieng from Goldman Sachs.

My question is just around the Bagdad expansion. I believe in your slide, there is a comment around potential for construction to commence in 2023 with a potential 2026 start-up. Perhaps could you talk about the progress you've made to date there in advancing sort of technical studies as well as any final hurdles to be met before project sanction? And any early indication of what CapEx is potentially required for this CapEx -- for this project?

Emily, we are starting feasibility of that project now and we've been working on various scoping level studies over the past several years as we've been discussing. But we are starting the feasibility study, and that will really define the final cost estimates. But we think it will be efficient because we've got a lot of infrastructure already there. We're adding a new concentrator that will really take into account the efficiencies that we've gained at the Bagdad existing concentrator in recent years. And once we go forward and get the feasibility studies done, we have a limited permitting process, we believe, and that's what gives us hope that, that project could be in operation in 2026. The economics of it will be, we believe, will be positive in really advancing an efficient manner the production that -- double the production there because it is a very long reserve life approximating roughly 80 years. And so we're bringing that -- looking to bring that value forward.

Your next question comes from the line of Lawson Winder from Bank of America Securities.

Maybe I could ask about the all-star mine. Can you also -- can you update us on your thoughts in terms of what's driving the current outperformance? Is that just better recoveries or is there other aspects at play? And then when we think about the current Lone Star mine, your expansion to 300 million pounds, I mean, it's outperforming by 5% or 6%. So how should we think about that 300 million pounds? Should we think about it in terms of being more like 318 million to 320 million pounds?

Josh, you want to take that?

Yes. Josh, why don't you respond to it? Josh is our Chief Operating Officer for the Americas.

Yes. Realistically, if we look at Lone Star and what we've been able to achieve since we started it up, we really leveraged a lot of the learnings that we had seen from our exercises and experience at Bagdad with respect to identifying bottlenecks in the process and leveraging the workforce through kind of an agile way of working. And as we've done that, the team at Lone Star has been able to identify opportunities that really eliminated bottlenecks and that allowed for us to work on incremental gains over time. As we think about the next step in that, it was just a continuation of that same process in the sense of identifying what's limiting our ability to maximize the production at the site. And so the team has done a great job of going through that entire system, identifying what those bottlenecks are. And we put projects in place to really attack those bottlenecks and maximize where we're at. The 300 million pounds is probably at the limit of our current existing Hydromet facilities and the tank house capacity. So anything above and beyond that would be a bit of a challenge, but I'm not going to say that the team there isn't going to continue to look for opportunities to add additional incremental pounds. But I think that 300 million pound target that we're headed for is pretty close to that limit based on what we have today.

Your next question comes from the line of Christopher LaFemina with Jefferies.

So if we look at the progress of Freeport in the last 5 or 6 years, you've obviously overcome some really substantial challenges, and the company has -- you find yourself in a position of clear strength today and you're kind of unleashing what is ultimately a massive organic growth pipeline with probably more growth than we even are aware of today just because the resources are so substantial. And you talked today, Richard, about leaching technologies, which you mentioned last quarter as well, but you talked about this as a huge opportunity. And my question around that is, first of all, how much production potential could we see from these new leaching technologies? What's the time frame? Is it in any of your guidance yet? What sort of operating costs? Just like the economic benefit that you will realize from this leaching. I guess the reason why I asked that question is because a lot of other major copper miners are talking about various new leaching technologies being substantial. And it really comes down to -- there's going to be an economic benefit to having more volumes, but the question then is what does it mean for overall copper supply and demand. So how much? When is it coming online? Is it in your guidance and what sort of operating costs?

We do have a small amount of benefit factored into our guidance from the early successes at Morenci. But that's just a very small fraction of what we expect to get. We do have some, and this is unfolding, Chris, so it's going to be evolving as we go. But we've kind of internally said, let's go after trying to get 100 million to 200 million pounds from this in the near term. And so we're looking to gradually improve where we are in 2022 and you'll be hearing more about it. But from a cost standpoint, if you think about where the incremental cost of this is, we've got much of this material already in our leach stockpiles. So we've already expanded the funds to mine it and it's in stockpiles. And so it's a very low incremental cost to be able to recover it. So that's the opportunity for us as we look at it, having low incremental capital to go after it, low incremental operating costs. We have latent tank house capacity. Josh mentioned, we're filling the tank house at Safford. But at all of our mines, we've got some tank house capacity that we can fill if we're able to get more recoveries. So economically, this is a real opportunity for us. But when you're talking about 100 million to 200 million pounds and we've got 38 billion pounds of material in stockpiles, that's a small amount. But it does have value to us and we hope to go capture it. But in terms of this being a sea change for supply for the industry, we just don't -- we don't see it. It will take time and it will come out over time. But it is -- it's a meaningful value opportunity for us as a company, given our set of circumstances with the large stockpiles and the latent tank house capacity. And Cory, I don't know if you want to add anything to that, but that's where we are with it.

No, Kathleen, you covered it well.

Cory Stevens, by the way, is stepping up to lead our project development, engineering, and he's the key guy leading us on this deal. And Chris, in an earlier life back in the '80s, I was working in the oil and gas business when the shale business really got initially kicked off. And so his team here will tell you, I'm always looking around corners to say, is there some kind of shale oil and gas development that could change the industry like that did for the petroleum industry? And this is a huge opportunity for us, huge in the sense of being able to add value of significance. But in terms of being the shale oil kind of sea change for the industry, as Kathleen called it, we think that's not in the cards.

Your next question comes from the line of Michael Dudas from Vertical Research.

My question is around, given the -- you highlighted the difficulty in supply growth that you see in the pipeline being somewhat thin. Can you maybe characterize from where you thought a year ago to where you are today, given the political dynamics, especially in the 2 largest copper-producing countries and given your kind of positioning in much better jurisdictions, so it seems, is that going to really be a delay even further just in the next 6 to 12 months as the industry kind of figures out how to best negotiate a deal with those 2 governments? And certainly, there could be some other opportunities over the next several quarters on those issues in limiting -- even getting some of these much needed projects to get out in the marketplace by the end of this decade.

There's no question. I mean, just look at our situation at El Abra. We would be in a different situation with El Abra if the political issues about royalties and the fiscal regime for copper production in Chile were different. We would be moving more aggressively right now with El Abra. What we're doing is we're preparing ourselves to move forward, but we're not -- we're deferring any decision to move forward until we get some clarity from the government in Chile. And so that's just one example. There's no question, it's affecting people. Some have stability agreements. And the question is, the government is going to honor stability agreements. You've seen recently in other countries where miners have had to go back and change deals where they thought they had firm contractual agreements. We had to make some concessions in Indonesia to get our issue with the government resolved there, which we did on a favorable basis. But that's just reality around the world today.

Does the U.S. look like it's a much better place to be relative to some of these other countries? Certainly, your investment, what you're talking about today, it seems like you want to enhance and accelerate that in your asset profile.

Yes. Well, in the U.S., I would make a distinction between greenfield developments and brownfield developments. And all of our developments are brownfield. It's places where we have established operations and a solid track record of doing things in the right way. And we have developed positive relationships with local communities and with governments, state, local governments and with indigenous people. That's a different deal than trying to go in and developing a new mine where there's not an existing mine because mines inevitably -- significant mines have impacts on the physical environment where they operate on the local communities. There's competition for water resources. There's issues related to historical factors with indigenous people and all that make it much more complicated. You can tick off a list of projects in the U.S. that way, but there are also international projects that face the same deal. So for us, the U.S. is particularly attractive, favorable tax situation, support for our mines by communities. It's not true in other places in terms of having community educational systems, health care systems. We're -- in other countries, we actually provide all that. So it's very attractive for us. We own all of our -- virtually all of our lands in the U.S. in fees so there's no royalties. And you think -- you look at the royalty rates that are being jacked up around the world, that's a big difference. And then we have the company-specific situation of having a significant net operating loss carryforward, maybe the only -- I'm trying to think of another -- maybe the only good thing that came out of the oil and gas deal. We got a big NOL that protects us from taxes for years to come, even though in the U.S., we have lower tax rates fundamentally than we do internationally. So for all those reasons, our established presence in the U.S. is really the big one that makes it so attractive to us.

Your next question comes from the line of Alex Hacking with Citi.

So I just want to follow up on a couple of the earlier questions. The CapEx for Bagdad, if that moves ahead, would that be planned CapEx or discretionary? I assume it will be discretionary. And then just quickly on Lone Star, the increase in the production rate that you've achieved that has been announced, does that meaningfully pull forward the potential for the sulfide project by years or does it not really matter?

No. Well, Bagdad is totally discretionary. I mean, we could continue to operate the existing scale of business that we have there, if that were to make sense. I think with the markets we're facing and the opportunities that, that poses, it's highly likely we'll do it. But it is discretionary and we will update the market on plans as we make commitments to go forward, which I expect us to do. And the point about Lone Star is you can just look back at the other major projects around the world where to get to the mineral resource, you have to sometimes takes years of investment in stripping to remove the overburden to get down to the ore. Here, we have the benefit of mining the overburden, which is oxide ore, profitably. And by doing that, we are stripping that material that is -- overlays the sulfide resource. So it is tremendously beneficial to the long-term development of this opportunity. As I said, we're going to make money out of the SOx side. At the end of the day, we're continuing drilling, continuing economic studies, but I see a future of building a major mill complex at Lone Star to process. It has very large sulfide resources, we're talking about -- it's 50 billion tons of ore.

And Alex, I think if you were asking about specifically bad debt with respect to the financial policy, the answer is yes in terms of how we will treat that. 50% that we're retaining of cash -- free cash flow, we're earmarking for future investments and growth as well as to maintain our balance sheet. So that's how we're thinking about it.

Your next question comes from the line of Carlos De Alba from Morgan Stanley.

Just a question around cash costs for the year, and I guess, for the first quarter. How should we -- could you provide a little bit more color? I would have expected higher -- guidance for higher cost in the first quarter, above the $1.35 per pound, given the comment of lower grades expected in the first half of the year. I don't know if there are other factors that would mitigate the negative implications on cost from the lower grades expected in the first semester?

Yes. Well, and part of it too is weighting the low cost in Indonesia to the higher costs in the U.S. and South America. So that's why you're not seeing much fluctuation between the first quarter and the full year.

You just think about it, as the Indonesia ramps up, fourth quarter was $0.08 a pound. For the year, it was on the order of less than $0.20, I don't know, $0.18, $0.19 a pound. And we see costs going forward with higher volumes in that same range in Indonesia. So it was a big factor in our business. And our team has done a good job of controlling costs, but we're like everybody else. We have higher energy costs and other input costs are going up. So it's just what we have to deal with, but that was the whole basis for putting these companies together back in 2007 was to match up the Indonesian assets, which is special because of its copper grades and its gold content with these lower-grade mines in America, which are profitable but which have higher costs. And so that's just a carryover benefit from what we did so many years ago.

Your next question comes from the line of Michael Glick from JPMorgan.

Let me correct myself. I said 50 billion tonnes of ore at Lone Star. It's 50 billion pounds of copper resource.

Just relative to your financial policy, could you remind us how often you'll revisit the variable portion of the policy on a practical basis?

Our Board reviews it on a regular basis. Formally, it's at least annually, but it's something that we review with the Board on an ongoing basis.

You can see an example for that with what we did in the third quarter when we started the policy of paying the variable dividend, buying stock back. A year ago, when we started looking at this, we had planned to do that at our first meeting in 2022. But we have made such progress, markets were so good, we advanced it. And so just as a -- just a little color on the way we run Freeport. We don't have an annual planning process. We update our long-term plans every quarter, and we go through a really disciplined process to do that. So everything is real time. So while we talked about looking at this financial policy on an annual basis, as Kathleen said, we talk to our Board about it continually. And if things change, we don't limit ourselves to acting on any kind of straight-jacket time frame.

Your next question comes from the line of Abhi Agarwal from Deutsche Bank.

Richard, you mentioned that you are in preliminary talks with the Indonesian government to extend the contract to beyond 2041. Can you share a bit more detail around what the critical path is for that agreement to be signed?

Yes. It's rare preliminary talks. We really tried to address that years earlier, and it was just so complicated to get everything else done. It's in everybody's interest, all stakeholders' interest, for us to have a continuation of operations beyond 2041. It makes no sense for anybody -- for us to run this business with any kind of drop-dead date. And so there's a broad acknowledgment that we need to do it. It's very preliminary so I don't have answers to your questions about how we structure it or what we would need. But I can say that these preliminary talks are being very well received, and there is a recognition that it's in everybody's interest for us to go beyond 2041.

Your next question comes from the line of John C. Tumazos from John Tumazos Very Independent Research, LLC.

If I could ask 2. First, on moly. As recently as 2017, '18, the output was 95 million pounds. And the industry statistics are at 5.4% decline in world mine output last year through November, so I guess a lot of the copper mines are having lower moly grades. World steel and stainless steel outputs are rising. Do you have any opportunities to expand moly throughput further to offset the lower grades at Cerro Verde or some of the other copper mines?

Well, John, you know we have 2 primary molybdenum mines in Colorado, the Climax mine and the Henderson mine. And we did cut back production from those mines when the market was in a different situation than it is today. But we do have the opportunity to expand production from our primary mines, particularly at Climax. And we're doing some work now to advance some stripping activities so that we do have more flexibility in the future to raise our primary molybdenum mine production to respond to this increased demand and limited supplies of molybdenum. So we do have a lot of optionality in our primary mines for molybdenum.

Concerning the costs in Indonesia for smelting, you're reporting $0.24 for treatment charges and $0.20 for export duties. But I guess those are averages where some of the output is in country at Gresik and some of it is exported concentrates. If it were, say, half and half domestic versus export, would it be right to think of the cost as something like $0.18 when you export concentrates to Asia and $0.30 for the treatment costs at your own smelter? And then the export duties would be nothing if you treated them at your own smelter, but more than $0.20 for that portion you're exporting? Maybe $0.40?

Yes. It's -- you're directionally right, John. And maybe we'll get back to you with some details because I think some -- the export numbers that you talk about are in the range of what we're doing here with $0.16 to $0.18. And we do pay this export duty. While the cost for domestic processing at the smelter will be much higher, particularly when you provide for any kind of cost factor for the capital that will go into it, it will eliminate the export duty. And so the net economic effect on PT-FI, together with the fact that the cost of the smelter will be included in PT-FI's consolidated tax return, so any kind of cost to go through there will serve to reduce taxes. So the reduction in taxes, not having to pay the export duty, in a broad sense, offsets the economics to PT-FI building a smelter.

Yes. So the -- as we're thinking about it, John, the capital cost amortization over the long period of the smelter will essentially offset the duty. And then really, when you look at the operating cost, the cash operating cost of the smelter, it shouldn't be that much different than exporting than TCRCs. So that's kind of how we're thinking about the 2 elements.

And that was a point that I think -- and I just don't have the numbers in front of me, John, but I don't think the cost of processing at PT Smelting is the size you indicated, the current deal. And we're expanding that smelter by 30% too as part of this effort to achieve the goal of in-country processing. But it's a very, very efficient smelter. We built it back in the mid-90s, and it's kind of -- it's world-class in terms of its cost management.

That's a lot of complicated details.

Yes.

Your next question comes from the line of Jatinder Goel from BNP Paribas Exane.

A question on your 2024 copper guidance. Can you please indicate where -- which operations will drop volumes because there's a 300 million pounds drop year-on-year in 2024 and Grasberg is now flat. So which operations will see that drop? And is that just a 1-year blip or is that a continued trend just to understand because Grasberg will lose 150 million pounds in 2025 as well? But just trying to put that discretionary and growth CapEx in perspective with the guidance and what we can't see beyond 2024.

I'll let Kathleen, maybe Josh, talk to that. But I'd just make a point that these mine plan projections are subject to constant adjustments for various reasons that -- and some of them result in some volumes going from 1 year to another, but they all reflect steps taken to maximize the long-term values of the mines. We don't run these mines to achieve any kind of targeted -- predetermined targets for volumes. But as I said, we have a dynamic, real-time planning process, and our goals throughout all those planning process is how do we maximize the long-term NPV and the resources that we have. And so you will -- when you look back at our history, there's continuous shifting of volumes from 1 year to the next and then other factors come into play.

Specific to '23 versus '24, we do have some lower grades in some of the U.S. operations, notably at Morenci and some slightly lower grades at Cerro Verde from '23 to '24. But as we talked about earlier, we don't have anything in here for -- of any consequence for this leaching opportunity. And so we are all motivated to get additional volumes with low capital intensity in from that leaching opportunity. And then we've got Bagdad coming in beyond that. And we've got a series of other opportunities as well. But that's -- it's really some grade, as Richard was talking about, we do have grade shifting from year to year, and we do have some lower grades in 2024 versus '23.

Your next question comes from the line of Alex Terentiew from Stifel.

Just a couple of follow-ups to some questions already asked. First, at the Kucing Liar and the Indonesian license discussions beyond 2041. Is the pace of investment at that project dependent on those talks? And the second follow-up question, if I may, is on the moly business. The price has obviously been quite strong in the past year, going from about $12 to $19. Can you give us any insight as to the demand outlook? I understand you guys have an opportunity and understanding opportunities to expand. But anything you can say about demand outlook for the next 1 or 2 years?

On the KL, all of our economics were run on the basis of the 2041. So if we are successful in extending it, there's going to be a lot more reserves from KL and other ore bodies that come in. But we've run the economics in our plans based on the 2041 date, and it's a very attractive project and Mark can talk to you more about this. But we're really leveraging all the learnings that we gained from Deep MLZ and Grasberg Block Cave to continue our momentum in extending development. And it leverages off of all the infrastructure we have there, so it's really a good project on its own, and it will just be even better if we're able to extend beyond the 2041.

And just one quick comment on that. With all these years of uncertainty related to our deal with the Indonesian government, now for 2041, we've done -- and the fact that we've had such resources already discovered to fill up our mill and so forth, we haven't done much exploratory-type drilling in Grasberg district for some time now. And so that's one of the main factors that makes it desirable for all stakeholders would be for us to have a deal that goes beyond 2041, which would then allow us to undertake more delineation core drilling or exploratory core drilling. Just look at that schematic that we had on the ore bodies that are there and where they're located and where they've come from and historically. And it's just clear that while we don't know yet because we haven't drilled it, but the high likelihood is there's a lot more resources there that haven't yet been identified.

Okay, that's great.

Mike Kendrick is on the line, and he can share with you some of our feelings about the outlook for demand for moly.

Yes. Thanks, Kathleen. Well, a few thoughts on that is we're positive on the outlook for moly over the next few years. Things like energy, whether it's traditional energy sources that require moly-bearing steels or if it's renewables, are all very positive right now. Infrastructure development all around the world uses moly. And as we've seen, whether it's here, Europe, China, Asia, all very positive indicators. And pollution control, in general, uses a lot of stainless steel, and there again, we're seeing very positive indicators. Our customer base, both in Europe and United States, are -- have positive outlooks over the next few years. And then if you look at the Chinese 5-year plan, there's definitely an upscaling of materials that they're using throughout their economy and what they're emphasizing. So we're relatively optimistic on demand.

Our last question comes from the line of Carlos De Alba with Morgan Stanley.

Thank for squeezing me in for a second time. Just on working capital, if I may, maybe Kathleen, the sensitivity on the number you provided guidance on cash from operations is around $8 billion this year, and that is net of $1.3 billion of working capital and other uses. So I don't know exactly how much is working capital, but assuming that is the majority of the $1.3 billion, could you give us some color on that? I mean, that's a bigger number for working capital than I was expecting.

Yes. And you saw we had a benefit, a large benefit during 2021. A big portion of that is the timing of our tax payments internationally. You're generally paying on a prior year, the schedule, and so there's some timing variances when you have rising volumes or rising profitability. And so that's just the timing of tax payments.

Now I will turn the call over to management for any closing remarks.

Yes. Thank you all for participating in the call today. Real pleasure to be able to report great progress our team is making, and we look forward to continuing that progress and are really excited about what lies ahead for us. So thank you for your interest. And if you have any further questions or need for follow-up, please contact David Joint, and we will respond to you. Have a good day, everyone.

Ladies and gentlemen, that concludes our call for today. Thank you for your participation. You may now disconnect.