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

Good morning, and welcome back to Copper Day. My name is Emily Chieng, and I'm delighted to host our first fireside chat for the day with Freeport-McMoRan, the world's largest publicly-traded pure-play copper producer. Joining us today is Richard Adkerson, Chairman and CEO, a true veteran of the industry. We've got a lot of content to get through today, but before we begin with some prepared questions, I do want to turn it over to Richard for a couple of quick opening remarks. I will also be taking questions from the audience, so please submit this through the webcast. Richard, over to you.

All right. Thank you, Emily, and thanks to you and Goldman for hosting this opportunity to talk. Freeport has a very clear-cut strategy. We began on this strategy of being the foremost copper company 20-plus years ago. 5 or 6 years ago, we reaffirmed that. And so what we're all about is being the foremost copper company in the world. The reason we've linked our strategy to copper is because of its very strong fundamentals. Copper is a commodity that's very difficult to build supplies. There are a lot of barriers to supply development in the world today. And on the other side, the demand factors for copper are just so strong. It's essential for global growth. As the world becomes more electrified, that adds more to copper demand. And in the years ahead, we can see tremendous elements of new copper demand coming from investments in carbon reduction, reinvestment. Carbon reductions require more copper. So it's really a fundamental story. Strong supply -- strong demand, supply challenges. And as a company, we've a great set of producing assets, is globally diverse. We've got a very large set of internal resources in our reserves and our undeveloped resources. And so we're really focused on execution in recent years. We addressed our balance sheet issues and virtually eliminated our debt. We've completed -- essentially completed the ramp-up of our big underground mines in Indonesia. That's a major 25-year effort, but we've had great success with that. So we're excited about the future. We understand the complications in today's world, and we'll be talking about that. But our direction is clear, and we're confident about it.

Fantastic. Richard, a year ago, we had a discussion with the same fireside chat. And when we were talking about what were the fundamental challenges to the copper story, one part of it was where is the supply growth coming from? I think we sit here today and I can count on one hand the number of greenfield or brownfield projects that have actually been sanctioned in the last 12 months that will come online in the next 5 years. In your view, are we getting closer to more projects being sanctioned? And what are the hurdles we are now still facing before the industry and yourselves get there?

Well, hurdles became really apparent way back in the 2003, 2004 time frame when China emerged with a such strong demand. And historically, the copper industry always had projects to turn to meet new demand. Starting back then, geological factors and other factors prevented barriers to supply, and it's notable that even with all the years of strong copper prices, and companies in our industry going and having such access to capital that the amount of supply development has been [indiscernible]. I think, Emily, if you look back over the years, today is actually more complicated than it was a year ago. We've had these political issues emerging in Latin America, where 25%, 30% of the copper comes from, in Chile and Peru. That's created question marks about how you can invest in the industry there. There's complications elsewhere with communities and other factors about investing in copper. And now, with the with the questions about interest rates and potential recession and China slowdown, supply chain, all those things are new factors, which are inevitably going to make companies even more reluctant to commit to major projects. Ours is an industry that's so long term, you have to think in terms of multiple years for one, getting a project ready and then making the investments, permitting, getting community acceptance and so forth is very challenging. So I would say today, it's -- there's even more challenges facing supply development than they were a year ago.

Yes, we're certainly seeing that. Maybe shifting to Freeport specifically. I mean, you're coming up to the end of the ramp process for Grasberg and Lone Star still has a little bit of debottlenecking to go. But what's next year for Freeport, as it relates solving the supply gap that we have ahead? What's in your portfolio that you're most excited about?

Well, let me just say I'm so proud of our team in Indonesia who have made the achievements that they have. It's the most complicated mine in the world. We're building an underground operation that's simply unprecedented. And so to have those challenges anyway and then to be able to achieve what we've had over the last 2 years in the face of having to deal with the COVID challenge is just remarkable. And the numbers speak for themselves. You can see how successful the ramp-up is in. So now with that, with our balance sheet being in a such strong state, we are turning to what do we do next. The most exciting thing, it's exciting because it's near term, is the advances we're making in leaching technology. We are the largest company involved in leaching and a lot of leaching technology historically has come up through our predecessor companies. Our mine in North America, Morenci, is the largest leaching operation in the world. So we have these extraordinary large existing leach stacks that the development of new additives to improve recoveries, the use of data analytics to understand the impacts of what you're doing with it. We are now using heat as an element of improving recoveries. It's just really exciting and it's significant for our company. It starts with existing leach stacks. Potentially, it extends to historical leach stacks, which we have in abundance, and then potentially, as alternative ways mining sulfide resources rather than investing in concentrators. With success, the leach can add volumes with limited amount of capital and a low carbon impact. So it's good on all fronts and our team is very excited about it. We are -- we have a great opportunity here, and we're actively pursuing it. And then beyond that, we have other projects in the Americas that we can talk about, and I'll let you ask questions about it. But we are focused now on, first of all, executing so that we can take advantage of our existing production profile, deal with cost, because cost inflation is a factor. But then looking at growth and the most exciting near-term part is just leaching opportunities. And then we have other investment opportunities that are longer term, but we believe will provide opportunities to add copper when the world would need it.

Understood. Maybe coming back to something that's in the U.S. as well. But let's talk about the Bagdad expansion. I think at the first quarter call, you guys noted that there's some early work being done here and a little capital being deployed to get this one underway. What's remaining ahead of project sanction for Bagdad? What else do we need to see before we start deploying more capital here to get this one across the line?

So Bagdad is a mature mine. It has a very long reserve life, 80-plus year reserve life. And the project we're looking at is very straightforward: adding a mill, dealing with the tailings that will result from the investment. It's as straightforward a project in our industry as you can have. We have great community acceptance. Permitting will take some time, but there's not barriers to it. So -- and even with that, this is a project that's going to take 4 or 5 years to get to production. But we're moving forward expeditiously with engineering planning, permitting planning, and taking steps to deal with water and power requirements for it. But we fully expect this project to go forward and to be sanctioned within the next year.

Understood. And then maybe a little bit more longer term. There's a couple that we have in mind, and that's the Lone Star sulfides and then the Kucing Liar asset there. But maybe if you don't mind touching on a little bit of -- on both assets and what that could mean for the production profile for Freeport longer term.

Yes. Well, Kucing Liar is a skarn ore body that we discovered a number of years ago that ties right in with the development of the Grasberg Block Cave and the underground complex where we're mining the Deep MLZ mine. This is an underground block cave mining that we started in the early 1980s. So we've been at it a long time. We had this new ore body that lies adjacent to the Grasberg Block Cave and we can develop it with limited infrastructure requirements because of what we've already done. And it will -- and we began investing on it. It will add significant volumes this decade and be able to sustain the production that we're establishing now and keep it at a very high level. It will -- anything you do at Grasberg looks small in relation to the Grasberg ore body, but this will be a very large -- one of the largest block cave mines in the world but it's relatively straightforward since infrastructure is basically there, and we're going forward with it. Turning to the Americas. I mean, we are really excited about investing in the United States, a place where -- many places, it's hard to develop greenfield mines. Greenfield mines have impacts on communities and impacts on terrain that's new and often faces opposition communities. In the U.S., all of our growth opportunities are brownfield in communities where we have great support, both from the local communities and Native American groups. And we worked hard to get that support over the years. And so we are being encouraged to invest rather than try and to have to convince people that it makes sense. Lone Star is -- looks to be a remarkable resource. It's adjacent to our depleting Safford mine and just across the rigs from Morenci. This could be -- it looks to be potentially an ore resource that could be comparable over time to Morenci. It's a very large sulfide resource with an oxide cap. And 2 years ago, we've been developing and producing oxide ore using the Safford available processing resources. It's profitable, and we're expanding that. And in doing that, we are removing the oxide cap that overlies this big sulfide resource. Where we are with the sulfide resources, we're doing further developmental drilling to understand the resource. We're considering its metallurgy and assessing different approaches to developing. I believe this will be a very large long-term asset that will support our operations for years in the future. And besides having community support in the U.S., we have favorable taxes. We own the lands where we have resources, so there's no royalties. So it's perfect. It really adds to the economics of investments there. And we currently supply close to 1/3 of the U.S. copper needs from our mines in the U.S. As a company, our copper production's, in rough terms, equally split between Indonesia, the U.S. and South America.

Great. And maybe pivoting lastly to El Abra. I mean that's a region we haven't actually talked about yet, South America. And you do mention you guys do have some -- Freeport does have some exposure there. We do also have a question from the audience, which I'm going to weave into here. But essentially, El Abra has been put on the back burner a little bit relative to some of your other growth projects in the U.S. and in Indonesia. Part of that is due to the region -- due to reasons you mentioned before around changing fiscal landscape there. What expectations do you have around tax regime changes in Chile and Peru as well? Are both these jurisdictions still attractive for mining investment?

Well, they're attractive because they have resource opportunities. I mean you have to go where resources are. For investments, you can't decide -- if you want to invest in a certain region, you have to go where the resources are. And in Latin America, we have this really large, profitable mine in Peru that -- our Cerro Verde mine, which we expanded several years ago and which has an enormous resource base, again, in an area where we've gotten good community support, which is a real challenging for real these days. But we invested in the community and have built a good partnership there, so we haven't been subject to the disruptions that others have in Peru. Peru is going through a process of looking at its fiscal taxation and royalty situation in that country. and that's going back and forth. And so we'll have to wait and see. But we do -- we have a stability of our contract, and we have support from the local community. In Chile, where we've had historical operations, we sold a mine several years ago there, but we have the El Abra mine, which has been producing for a number of years using leaching technology. And it has a life for that, but we've done sufficient exposure or drilling to justify the development of a large sulfide deposit. It would be a major capital investment and it would require investment in a desalinization plant and transporting water to high altitudes there. But where we are, we're continuing to do engineering work and work [indiscernible] for permitting, and we're waiting to see how this constitutional process goes forward. And issues that are being considered really go beyond fiscal terms, it's beyond taxes and royalties, but to basic fundamental ownership rights and access to water and so forth. So there's a lot of complications, a lot of lack of clarity. There's a time schedule that we should know so as projected, to present some initial directions by the summer and hopes for voting on it next fall. And so we're monitoring to see how that turns out to go. But both the situations in Chile and Peru are having an impact on supplies again being supportive long term of the copper price.

Maybe sticking with the theme of South America. A lot of your peers actually faced some production challenges during the first quarter. Perhaps some idiosyncratic issues may be related to grades, weather, social unrest. South America as a whole has taken a lot longer to ramp back to pre-pandemic levels. We've been interested in noting that Freeport has actually seen a steady growth to pre-pandemic levels. Maybe can you touch a little bit about perhaps what's different between the assets that you have versus perhaps some of your peers? Any comments you can make around sort of grades in the region? Is this more structural in nature? Or should we do -- should we really expect a recovery?

So like everyone else, I'm just now getting the information about the production shortfalls that have happened during 2022 in Latin America. Our production in very large part comes from Cerro Verde in Peru, and we had our challenges with COVID because we are very near the city of Arequipa and that's where our workers live. And so early on, we were having to deal with community outbreak of COVID in Arequipa and their restrictions. And so we had to take steps to building to warehousing for workers to work with. And we're not yet back to the levels at the mill or at our mine rate that we were pre-COVID. But our team has done a great job in keeping our production volumes up and dealing with cost issues. And so this is a very attractive long-term asset. It's typical of new mines today. It's relatively low grade, so we have to process a lot of material to recover the copper. It's the world's largest concentrator mill complex in the industry. So -- but it's been operating well. Our team has done a great job. We will have opportunities of improving the mill rates and mine rates going forward. We -- other places are more -- have been subject to these community disruptions. Lots of times, that comes about towards issues like traffic congestion and competition for water. We made a great decision to invest in Arequipa, providing the community with fresh water supply, and then we built a wastewater treatment facility for the city, which provided us access to water for expansion and improve the ecology of the city and the river where previously waste was dumped untreated. So all of those prior decisions and actions are paying off for us in terms of having support from the community.

Maybe last one around sort of the geographic discussion there is on Indonesia. You did mention that a journey to get to where you are today with the Indonesian government. Maybe catch us up on what's the latest around the relationship there. You're starting construction on the smelting capacity that was requested by the government. You're beginning to invest in Kucing Liar. What are the discussions that you're having with the government today? And I know we're 20 years away, but any early discussions around extending the operating license beyond 2041 progressing?

Yes. Well, in December of 2018, when I signed the resolution of all those issues that we had been debating for so many years, I told President Jokowi that it had been a long and winding road, and indeed, it had. But that agreement has turned out to be notable because it was a win-win-win for all the parties involved. The government was able to achieve its objectives of acquiring 50-plus percent equity ownership interest in the project. And with the high level of taxes and royalties they have, the economics of that great Grasberg district goes 70% to 75% to the government. They insisted on us building a smelter, which we conceded to as part of the agreement. We at Freeport were able to essentially maintain our interest in the asset that we had going into it. We had a joint venture with Rio Tinto, which had a significant interest in the operation, that was sold to the Indonesians, and Rio Tinto was happy with the opportunity they had to sell that interest at a price they thought was acceptable. That investment has been a tremendously positive investment for Indonesia with the success of the underground ramp up and with higher copper prices. So they, rightly so, feel very good about. We've established tremendous positive relationship with a state-owned company, MIND ID, and we are progressing the smelter development. We had just a remarkable bond offering by PT-FI. I mean this is the first debt offering that we've had at that level. We were able to get investment-grade ratings, had a heavily oversubscribed deal, and raised $3 billion that's available that will be used for the smelter development. And so it really is one of those things after a lot of difficulty ended up where all the parties are really, really happy. The Indonesian share of dividends will increase to 50%. At the time, that was when Rio Tinto's joint venture interest would have increased to 40%. So it was all as planned. But with the success of the underground, with the strong current copper price, outlook for stock prices, this is just a great deal for Indonesia as an example of how foreign investment can work well for our host countries and for foreign investors.

I'm going to tie in a question from the audience here. And it relates to one part of the capital allocation discussion, we do want to have, which is around M&A. What are your thoughts around inorganic growth? And perhaps on that vein, given the geographic diversification you have currently, is there an interest in further diversifying that footprint and looking at regions such as Africa?

Well, Emily, I didn't -- I do want to mention you raised this issue about the 2041 deal. That was the original term of our 1991 contracted work and it's what's reflected in our current IUPK permit. It is -- there's no benefit to any stakeholder of running this asset with a drop bid date of 2041. And we had to first put our focus on resolving the contract issues and doing the ramp-up of the underground, and now we are beginning discussions about the way forward to extend that 2041. All of our reserves, all of the economics of Kucing Liar and so forth are based on a time period that ends in 2041. So I believe we'll find a way of extending that because it's in everyone's interest. That will open up new reserves, new investment opportunities and further growth at Grasberg. So anyway, let's turn to your M&A question. Look, we're very satisfied with our current geographic goal, diversity of our assets. Credit rating agencies are. And so we don't feel any need to further diversify. You mentioned Africa. We had a very positive experience in investing in Tenke Fungurume going back to '19 -- 2008, where that was the largest investment in the Congo at that time in the history of the country. And we -- in a difficult environment, we developed a lot of value for our shareholders. We ended up having to sell that asset, not for strategic reasons, but for financial reasons when we had to deal with our balance sheet issues following the unfortunate oil and gas deal that we did. So we created a lot of value and sold it. At this point, we believe that we have the resources within our company to meet our objectives. But we are constantly monitoring in the industry, and there -- and so we'll be in a position to take opportunistic advantage of something that makes sense. But it's not our strategy. Our strategy is being focused on execution of our large-scale production opportunities of taking advantage of our internal resources for organic growth. And anything we do beyond that would have to be a special opportunity, but it's not something we're aggressively seeking. But we don't shut our eyes to potential opportunities.

Understood. And now speaking about financial position and sort of capital allocation there. I do want to commend the sort of strong progress that you have seen with the balance sheet over the last 18 months. Freeport has now addressed that capital returns piece with a new capital allocation policy, and that's the targeted returns of 50% of available free cash flow. Maybe talk through the rationale behind that capital allocation framework. I do think it's quite unique and worth was highlighting that discretionary growth CapEx is being excluded in the calculation of available free cash flow. Maybe what was the thinking behind that?

Well, we were engaged in conversations with our shareholders. After -- the focus for so long was in dealing with our debt situation. You go back to 2016, and that was critical. I mean that was a real challenge. And our share price was single digits. We had $20 billion of debt. Our bonds were trading at 20%. I mean it was a true workout. As we took the hard steps to do that, selling assets, managing capital, [indiscernible] some equity, we were able to get our balance sheet to the point of where it ought to have been, and we're committed to keeping a strong balance sheet going forward. And so as we got to that point, investors were looking for some guidance as to how we would be [ dealing ] with a strong copper price, falling CapEx, increasing production volumes, all the things you see here. And [ angel ] investors were raising -- asking us to give them some guidance of what we would do. So we gave thought to it and came up with this financial policy of taking excess cash flow and targeting retention for investments and returns to shareholder. We ultimately adopted the combination of a higher dividend as well as the stock buyback program. That was for guidance purposes. And our Board continually reviews that and looks at it. The facts are because of the challenges in making investments. And even though the copper price has come off from its recent highs, I think a lot of that's event-driven. The fundamentals stay in place. My expectation is over time, copper prices will get much stronger, and we can talk about that. But the likelihood is cash is going to come in to us quicker than we're going to be able to spend it, because we're going to be disciplined. As we talked about, these projects take time. So we'll be continually reviewing it, and we can expect our company to have strong returns to shareholders.

Great. And I'm going to have to ask because I know a lot of investors are wanting to know the answer, but any color you can provide on the cadence of the buyback program that you have outstanding? I think you've got $1.9 billion remaining. Should we expect that to be executed this year or if not more?

Well, you can see from our cash flows that we have the financial capability, even at $4.25 copper of executing that. And we're approaching this in a very structured, disciplined way. We're not we're not trying to see this as a price picking exercise, but we see it as an efficient way of returning cash to shareholders. So yes, you can -- the likelihood will be that we will continue on a steady path of buying shares.

Fantastic. Maybe switching gears a little bit, and I do want to talk about cost inflation because that has been top of mind for investors and corporates across the last couple of quarters. Freeport did update 2022 cost guidance for the year. I don't think it was surprising given the inflationary pressures we have seen across a number of different raw materials and energy costs there. But perhaps talk about some of the efforts that the Freeport team is taking to mitigate some of these pressures.

Yes. One thing that was kind of -- I mean, we're like everyone else, I mean, we're facing higher energy costs, higher steel costs, higher sulfuric acid costs, ammonium nitrate. A number of our cost inputs are going up for, I would say, event-driven reasons. And some of that wasn't as apparent with us as others because as we were ramping up Grasberg's production, in our unit cost numbers, that reflected very low unit cost because of the significant gold component to Grasberg. First quarter, Grasberg's net -- I mean, PT-FI's net unit cost was $0.06 per pound, and it's going to be very low. And as that production ramped up, it's got to be a greater proportion of the consolidated total, and so our costs remain very low. Now with Grasberg reaching its run rate of production, the higher input costs are being shown, and we went from guidance, I think, around $1.35 to $1.44 for 2022 because of these input cost factors. Our production volumes were relatively the same. Some of this will depend on net cost of moly prices and gold prices, but I mean the margins at $1.44 when even today at $4.25, you're producing over 4 billion pounds of copper a year, I mean, that's a great business. So we are taking steps to do what we can to reduce costs. Some of this is coming as we transition our energy cost towards new sources of energy, solar and wind. So we're managing. We have great relationships with our suppliers. We have not been hampered to great extent by these supply chain issues, but it's a daily management effort that we've got to deal with.

That makes sense. And maybe in your view, is this more transitory in nature? Or should we expect these cost inflationary pressures to be more structural? And then I guess the offsetting factor is to your point around gold and moly byproduct credits, certainly, the commodity price environment for those have been very strong as a nice little offset for Freeport.

Yes. No question, we're price takers there. We are the world's largest molybdenum producer and Grasberg is the largest single gold mine in the world. So a small -- relatively small percentage of our total revenues, but important economic drivers for our business and it's real positive that we have it. Look, this is a very complicated world today, and we're prepared to deal with what comes down the road, and we don't have confidence in our ability to predict it, but that leads us to really want to have a strong balance sheet. We are confident, very confident, about the long-term fundamentals of the copper business. And we don't think that changes now. Near-term events will affect it. Situation in China, which I do believe is transitory. I think China is dealing with some issues with COVID and that creates supply chain issues, but I do believe that will come back and then we just have to see about this recessionary concerns and interest rate concerns. They'll be what they'll be. But I'm just really pleased with the business we're in, our strategic focus on copper, our set of assets and the way we're executing and running the business. And that's what you're going to see about Freeport going forward.

Shifting gears and talking about things that we might not have the answers to when it's around demand growth and your demand expectations. So Richard, have you seen any signs of perhaps demand slowing down? And clearly, China and what's happening around the COVID lockdowns has been very topical. Do you think that China can continue to be a driver of copper demand going forward as their infrastructure needs perhaps start to decelerate? And what maybe are the sort of puts and takes elsewhere that could fill in for some of that slowing demand pull from China, which had previously been about 50% of global copper consumption?

Yes, it's not only just 50% of consumption, but from 2003 up until the current time, it was really the source of all growth globally in copper. China will continue to be an important consumer of copper. And that will be important to the global marketplace. But what's emerging is growth coming from the U.S. and Europe, which constitute an important part of the global market growth and have been stagnant for years. But now, with COVID recovery, infrastructure development, to a certain degree, efforts to deal with incoming [indiscernible] but increasingly, investments in alternative energy, the U.S. and Europe will become sources of growth. And then Asia outside China and the undeveloped world, over time, will also be growing uses for copper. Because with 2/3 of copper going into electricity and with the way the world is increasingly relying on electricity not only for alternative energy but for connectivity, artificial intelligence. It's just electricity is increasingly part of the world. And for years, I've been talking about the growth that's coming from the undeveloped part of the world. And that's not the sort of thing that has the headline changes that investors are often focused on. But all of that underlies is really fundamental long-term story of really strong demand drivers or commodity is really challenged to meet that demand of new supplies.

Fantastic. We do have a question from the audience, and I think it will give you an opportunity to just sort of hit home the point on copper supply and the challenges there. But essentially, the question is if we're not seeing significant new greenfield mine investments being announced by some of your peers and given your views on the strong copper demand outlook, what's the 1 or 2 or maybe multiple things that you think are stopping you and your peers from getting more bullish and investing in mines at a faster clip?

The first thing that -- the most important thing is the availability of projects. I mean it's different than most other commodities in that it's not an investment decision that's driven by price. The higher price usually translates into increased investment. And that was a historical story in the copper business. But now, just the nature of the projects and the availability of them are the real barriers, and even at higher prices, that doesn't necessarily mean that these projects come onstream. Some of them -- the quality of resources are much inferior to what they were historically in terms of grades and many are located on the ground. And then you have these geopolitical events that are not just limited to Latin America, but in Africa and other countries around the world. And even in the U.S., while we have great support for our brownfield investments, there are a number of greenfield projects in the U.S. that faced tremendous hurdles. And some of them are being abandoned because of the lack of community, government, environmental issues and so forth. So it starts with just a simple change in our industry that's occurred over the past 30 years that -- is more 25 years. I've been involved for over 30 years now. But just where once when there was needs, you had resources that people knew about that you could go invest in. That's not the case today. And so those resource opportunities are limited. They have a lot of problems with them in terms of grades and localities and geopolitical factors, environmental issues. So it's just -- you're hard pressed to see a commodity this -- from a long-term basis, not always [indiscernible] with this long term, short term, we run this business for the long term. But the long-term fundamentals are incredibly positive.

Great. Richard, we're almost at the top of our allotted time, but I do want to leave you with the opportunity to maybe share with us what, in your view, is still underappreciated about the copper story or the Freeport story.

I just don't think it reaches the headline status of some other commodities. One good thing about copper is that it's not the driving force for investments in the -- where copper is used. It's an element of cost, but not the major element of cost. Energy projects or housing developments or other things are not going to be passed because of a higher copper price. And so it just doesn't stick out to the same extents of other commodities. And in many ways, that's positive because it doesn't mean that, that's there. And as much as you -- as companies would like to, you can't overcome the need to gain community acceptance for projects.

Fantastic. Well, thank you, Richard, for joining us today. We really appreciate your time and insight. It's been a pleasure to catch up again. Look forward to the next one.

Me too, Emily. Thank you.

Thank you.