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

Okay. Great. Our next session is with Freeport-McMoRan. We're going to mix this up a bit and do a fireside chat format. Obviously, we'll be pulling questions from the app. So if you have any questions, please send them through. Joining me is Richard Adkerson, Chairman of the Board and CEO of Freeport-McMoRan. Freeport is the world's largest publicly-traded copper producer, also a significant producer of gold and molybdenum. Core assets in Indonesia, North America and South America. Richard is one of the longest tenured senior executives in the copper industry. He's navigated Freeport through quite a few very, very eventful years during his time, and Freeport is arguably now positioned better than it's ever been before. And with that brief intro, Richard, I'm going to turn it over to you for your -- for some opening remarks.

Thanks, Dave. I'm not going to say much. I mean it's been really exciting 3 years at Freeport after challenges. We all still face challenges, of course. But 3 years ago, we reached an agreement with the Indonesian government after years of really challenging discussions, and that agreement has worked very effectively our relationships with our government and our shareholder partner. They had a state-owned company MIND ID, have never been better and working very good. Two years ago, we completed mining the Grasberg open pit. I went out there in 1988 and took a picture of the exploration check. And to see the picture, I get a picture at the end of every year of the pit. At the end of this year, made me realize we mined almost 5 billion tons of material out of it, 50 billion pounds of copper, almost 50 billion pounds of copper -- almost 30 billion pounds of copper and 50 million ounces of gold. And now our underground mine, which we began developing underneath the Grasberg open pit when we finished mining in the pit at the end of '19, is intersecting with the pit. So my picture this year shows this big wide section of the mine where the material is going down in the block cave. That was something we had to plan for. Challenging, but all of that's going just extremely well. We began investing in that more than 20 years ago, and it was a topic of conversation at each one of these BMO conference ever since then. So that went really well. It's going really well. Our operations in the Americas are progressing. We're now focusing in on taking advantage of our reserve life. I mean we've got 25 years approved in probable reserves. And we have roughly twice that -- that's at $2.50 copper, roughly twice that in resources at $3 copper that are not yet proved reserves in the contained copper in it. So now we're focused on looking forward to taking advantage of that internal growth opportunity, which we will approach in a very disciplined way. And then debt reduction, I mean we've come a long way. 2016, we were in really a tough situation for several factors, and now we've got investment-grade ratings. Our debt is de minimis. We're returning cash to shareholders, increasing our dividends, buying stock back. All I'll say is just a great, great feeling to be where we are here today. We were actually there in 2012, no debt, $60 billion market cap, and then events happen. We got a great team. We're bolstering our team even though we're working with COVID. Done a great job in managing COVID. It's not gone away. We're still having cases. People think Omicron is just a case of head cold, but it's tough keeping people come in to work, and we're doing that effectively. So I look forward to your questions, always enjoy this conference. Thanks, David, thanks, BMO for hosting it.

All right. Great. Thank for the opening remarks. Thank you very much. So I'll start it off. You've seen a lot in your career, obviously. And the question is, how do you see the industry and end markets today in the copper industry compared with when, for example, Grasberg was developed effectively 40 years ago?

Well, I've talked about 3 eras of copper demand pre-2003. I became CEO in 2003. It was strictly driven by global industrial production in the developed world. China emerged, turned it upside down. And historically, before the mid-2000s, there was always a lot of known copper deposits to be developed. But really what led us to do the Phelps Dodge deal in 2007 was a recognition that copper markets had changed then, and the industry was really challenged in meeting new supplies, and that's been proved over all that time. Now today, we're not looking just to China for growth, China is an important part of the market, but copper demand is coming from a number of different sources outside China. And we can talk more about that. 2/3 of copper or approximately 2/3 goes into electricity uses in the world. It's just getting more electrified, and then coming is this huge new element of demand that's going to come from carbon reduction investments. It's not here yet, but it's beginning to be there, but it's going to be a big part of the future. I'm sure [ Roe ] talked about that this morning. So it's -- I'm just really excited. Our company with our breadth of producing properties, and we've shown we can develop, operate properties anywhere around the world. We've got a great team of people. And I just believe it'd be hard for us to ever find a commodity -- a major commodity that's as well situated for the future as copper is. And that's what our strategy is focused on, to be the world's foremost copper company.

Okay. There's a few questions already coming in on the app regarding the supply side constraints that we're seeing, some of which are precipitated by increased regulatory environment, government changes, things of that nature. And one of the questions is, how does El Abra fit into your future thinking given the leadership changes in Chile?

Okay. So El Abra is a property we have in Chile where we're 51% and CODELCO is 49%. It's a historical operation, and one of the things we did after the Phelps Dodge deal was do a lot of core drilling to understand what our resources were. And we found El Abra has been a Sulfolix leaching operation. We find this enormous sulfur resource, and we're in the process of assessing how to develop it. It would require a major mill investment, desal plant and getting water to altitude. So it's a serious project, the world will need it someday. But for the time being, we're continuing to working on engineering, permitting plans. We're not going to make an investment decision until the uncertainty about the physical regime in Chile comes into play.

Okay. Freeport's balance sheet, rightsized again. Nice growth pipeline now set up nicely, good capital allocation communication moving forward. So the question is what is Freeport's view towards M&A opportunities in the sector? And would Freeport prefer to be a buyer or a seller of assets over the next 3 years?

So we are not forced in any respect to act on M&A opportunities. And in fact, our strategy is built on focusing on operating our business and growing our production internally. Now with copper being a scarce asset, and I think increasingly a scarce asset, M&A is inevitable in our industry. It's just inevitable. And my experience has been when I look across the industry and our own company's situation that M&A is something that is most successful when it's done on an opportunistic basis. So we're positioning the company not with plans to be buyer/seller, but we'll be in the marketplace and from a position of strength. And if opportunities come, we'll be in a position to consider them. But we have no plans to now.

And so when you talk about considering opportunities in terms of being a buyer or seller, would there be more emphasis on the buyer side or the seller side?

It depends on the opportunity. I mean we're focused on running this business for our stakeholders, okay? And old Phelps Dodge is one of those industrial companies where they try to build a moat around the company and protect it above all other things. But we're in this business for stakeholders, shareholders and other stakeholders that we represent, our workforce, our communities and governments where we operate. So it depends on what opportunity might emerge. And I don't -- I'm trying to be careful because I don't want anybody to interpret what I'm saying is that we've got something in mind, whatever. It's strictly a positioning phase. Looking out at this industry from copper because I think copper's demand is going to continue to be strong, there will be ups and downs, as always. And supply development is really challenged. And there's -- it goes -- starting with geology, you just don't have the kind of high-quality ore bodies around the world that you once did. Grades are lower. Many of the resources are underground. Costs are rising. So developing new supplies are really challenging. And then you have the issue of community opposition to greenfield development. You have governments that can be complicated to deal with. I mean you just have to look, 40% of today's copper comes from Chile and Peru and they each have new presidents who ran on social programs that need revenues to fund those programs. And so all of this -- and it's not the only 2 countries. So I like the commodity, and I really like where Freeport is positioned with it. It's a long-term business.

In terms of the pipeline within Freeport, Kucing Liar is the -- really the next really, really big one, $4 billion over 10 years. Can you speak a little bit about the challenges and the opportunities within Kucing Liar as you start developing that next...

So the Grasberg ore body is a porphyry, and there was skarn deposits off that porphyry, which was the original Ertsberg mine and then the series of underground mines forward mining the Deep MLZ. I was out there in the '90s when we were driving and add it from our mill site to dewater the Grasberg open pit, and I remember our senior engineer came running out with this big hunk of ore that we had not identified. And they like to gig the geologists, particularly one geologist we had in the company at the time, about the engineers discovered this ore body. And so we drilled it out. We understand it's got some complications. It has pyrite in it. And now we're starting to -- we've revised the mine plan to reduce the amount of pyrite we have to mine and to increase the value of it. And the infrastructure is in place. It's not having to develop infrastructure. We developed these mines horizontally at Grasberg because of the elevation, and it will be a large world-class block cave. 90,000 tons a day is a big block cave mine. And it will fit right in with our current production profile as grades change with the -- particularly the Deep MLZ mine. And there's resources there that go beyond 2041, where our current rights to operate are scheduled to retire. It makes no sense for any stakeholders for us to run this operation with a drop dead date. And we've done discussions with the government of Indonesia and our partner, and there is recognition that it makes sense for us to find an approach to extend the operations. And that will open up further exploration. We really haven't been spending money on further delineating opportunities there because we filled our mill through 2041. So this will give us a chance to go in and look at KL and look at other potential opportunities in -- with this porphyry and the skarns that are there.

So you have a long history of discussions with the Indonesian government, and they tend to take a fair amount of time. What would you envision as -- from a time frame perspective in Freeport's opinion, what would be the best time to sell up this next...

Freeport's perspective tomorrow?

Tomorrow. What's the realistic time...

That's not realistic. I will say the government officials are reacting positively to the very preliminary discussions, but we just haven't been able to do that in the past because we were focused on the original contract deal, and then we're focused on the underground ramp-up. We had labor issues at one time. Our labor relationships are just incredibly positive there now. So we'll be advancing those discussions this year. And we'll have to see how we can find a way forward. It's real compelling logic, though, for everybody.

Switching gears back from the -- switching back to Chile and Peru. What's your outlook for the countries for the next 10 to 15 years? And what would you need -- what would need to happen to make them more mining-friendly?

Uncertainty is what the challenge is. Now we've had previous presence in Peru run on similar agendas to the current President's agenda. And when governments have these things and then they're faced with a developing economy having a strong currency, having employment, having things like that, that's the opportunity for our industry to come together and say what are your concerns, how can we contribute to them and work out solutions that make sense for all the parties. So that's a process going through, and I'm confident that it will. I don't know how long it will take, but we're certainly engaged with it. Peru is a much more significant operation for us. The Cerro Verde mine in Peru is -- has the copper industry's largest mill processing facilities. We're operating today at like 400,000 tons a day through the mill, and we were above that before COVID. So it's real -- and it's -- kind of the today's copper mines are low grade. You have to move a lot of material. The tailings dam we built in there is going to be one of the largest earthen dams ever built in the history of mankind. I mean this is enormous, and so it's really important to us. And so we're engaged with the government and trying to find ways of being responsive to the aspirations of the people in a way that we can operate profitably.

Another question, labor, labor shortage. The question is, have you seen a labor shortage like the current one in your career?

Well, I would say it's regional. So let's look at the U.S. When the boom leading up to the mortgage crash, it's 2007 until 2008 -- I mean '08,'09, when we bought Phelps Dodge, it was a real problem. I mean I was looking then at working like the offshore oil industry works in, have fly in, fly out. But we -- instead, we built a stronger community where families can live with health, recreational facilities and so forth. But that was a challenge. Today, it's a real challenge, particularly for skilled workers. We're doing a little better, I think, with college grads. I was just talking with the engineering mining schools at the University of Arizona, which supplies a lot of our workers, and modern mining is different for mining before. You can talk to them about using data analytics and more cutting you always have to deal with. Indonesia, we had great workers because we pay very well. Pay very well in Peru, they have a profit-sharing plan for their workers, this government mandated. So it's an ongoing thing we have to deal with, and -- but we'll find ways.

Okay. And that leads into actually the next question, which is innovation. There's been quite a bit of it lately, and Freeport's also been at the forefront of some of that commentary. How has innovation changed the way Freeport operates? And how do you see it changing?

It's remarkable. And what's to intelligence with our milling operations, and now we're expanding the mining, really exciting thing is what we're doing with leaching to gathering data within these massive leach stockpiles. Before, it was more of a trial and error deal. You came up with a mixture of acid and water, and you see how it work. Now we're being able to measure things, so it's given us a pause for our company, and Morenci is the largest leaching operation in the world. And then beyond our active stockpile, there's all these inactive stockpiles from the history that we've had. So it's a real -- it's a great combination of fundamental research and the ability to use technology to measure the impact of things that you're doing so that you can make adjustments on much more of a timely basis.

So at one point, Freeport provided numbers, information that suggested that Freeport could grow their volumes by as much as, I think, it was like 5% based on some innovation, a little CapEx. Is that still a valid number? And do you think the industry overall can match that kind of growth?

Well, not every -- like I said, we are situated because of the history of our operations. We have these old, low-grade ore bodies and extensive leaching. So it's -- others have that. I think we have a special place with that, and that number is a reasonable number, but it's not something we really can -- the technology is evolving. We're testing things right now. I was just out at Morenci, and you got these massive covers we're putting on these things to use heat. And not everybody believes heat's going to be a significant positive thing, our guys do and we'll see. So it's a lot going on, but it's a great opportunity. It's not a game changer for the dynamics of the industry. I mean it will be very -- a way to add meaningful production for Freeport with low capital investment and low carbon impacts. So that's good. And -- but we'll still be investing in traditional mining and processing.

Okay. You mentioned carbon, and then switching gears a little bit to the ESG topic. Obviously, quite a bit of focus and Freeport's again, always on the list. What are you -- in your opinion, for Freeport, what are the best opportunities for improvement within Freeport from an ESG perspective? And where are the biggest challenges?

So ESG, environment, social, governance. But in today's world you mention ESG, everyone's talking about carbon emissions, okay? And so we're focused on carbon emissions. Internally within our company -- copper as a commodity doesn't have the same issues with Scope 3 carbon emissions that other commodities have. But we have [indiscernible] massive coal reserves, and we built that plant a number of years ago, and so we're in the process of taking steps to convert it away from coal eventually. We're now investing in a dual fuel processing there. They'll use biofuels and ultimately likely LNG. And then we're looking at hydro opportunities there, which we've looked at before. The other big thing is big haul trucks, and so we're working with the industry and with suppliers on how to deal with those challenges. Everybody is committed to it. We had a forest fire in our Bagdad mine-in-time site last year, forest fires all over the West. I just flew there this morning from New Orleans, and you can still see the impact of hurricanes there. So it's something we all take very seriously. We all got to find ways of doing it. Today, there's still more questions than answers about how to do it, but the pressure to do it is accepted by everybody, and we want to be part of it. And then beyond climate change, we really cut our teeth with social issues in Papua and Indonesia. I mean, first of all, I think it's the most complicated physical mine in the world, but the social issues are incredibly complicated there because of the relationship between the indigenous people who now make up about 1/3 of our workforce and the central government. So we've had to learn to operate in a very complicated social situation that served us well in Africa, in Peru and in the United States. We're really committed to gaining communities' trust, and we do that every day, and we gained that. The -- I was just at the San Carlos Apache's reservation and talking to their leader, and they want us to help them develop trade schools to work in our mines, to build housing to work in our minds. Big difference in brownfield expansion than trying to build a new mine. New mine affects the terrain, the communities in a way. But when you've operated in place for a long time and done the right things and put a high priority on it, it works. Governance standpoint. I became Chairman of Freeport a year ago, I've added 6 new directors at Freeport. I'm starting to say, I don't know you'll say it, Freeport's Board was Freeport's Board. But now we've got a world-class Board. And we got CEO -- 4 new CEOs who had international business experience. We've got 2 people that are outstanding audit committee credentials. We now have 4 women on our Board, 2 women of color. We're committed to that. We've added new resources in our company recently. We have a new CFO starting tomorrow, who's one with industry experience, and we've added new resources in our ESG area. Plus, we've got a great team to start with. But it's been such a part of our -- I mean we had to deal with it in Papua, and it was complicated. And so we have just a real strong understanding of what to do and how to do it, but the issues are very, very complicated.

Okay. I've got a very long list of questions that we're not going to get to. Unfortunately, we've run out of time, but thank you very much. Appreciate it. And hopefully, enjoy the rest of the conference.

All right. Thank you so much.