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

All right. Well, thank you very much for joining us. It's great to have Kathleen Quirk, President of Freeport-McMoRan, again, with us. Thank you for attending the conference. I think this is the third time or so that we [indiscernible]. when I was here with you at the podium.

Wells, copper certainly is one of the preferred materials commodities around the world. So why don't we kick it out a little bit talking about the macro context. They said, [ gold or ] copper reflects what is happening in the economy. A lot of concerns about global recession, U.S. recession. We haven't really seen that yet. Hopefully, may we won't see it. But if you can talk a little about how you are seeing from your perspective, copper demand globally, certainly, China is a focus for a lot of folks. So that will be great. We can talk about that.

Okay. Great. Thanks, and thanks for having us here. We love coming to this conference. Topic of copper and reading about the macro issues every day, the situation in China, concerns about U.S. recession or not, what's going on in Europe. When we look at what's going on in copper on the ground, we see a very different situation on the ground than we see in some of the headlines. China, you've been reading all about the property sector being very weak. But in reality, copper demand is actually growing in China. It's grown last year, second half of last year and first half of this year. And it's all driven off of the copper intensity in renewables, electric vehicles, all those things. All those things are driving copper demand and so here we are in a time where the global economy may be weak and particularly the economy in China has been weak, but copper demand is growing and you talk to our customers here in the U.S. and some of them will say, yes, the manufacturing sector, some of that is down. But some of them will say, we're really seeing growth, we're seeing growth in data centers, in the auto sector. And so we're in a situation where copper has been resilient in the face of a weaker economy. And I think it portends really well for the future because the secular drivers of decarbonization and how copper fits into decarbonization are really important. And as we go forward, there's going to be more and more, we're really in the early innings for this copper intensity of decarbonization. More and more, we're going to see demand growing from those sources and the traditional sources of copper demand will still be there. But we've got more of a structural solid demand outlook for a big part of the market as we go forward. And it's not entirely reliant on China. It's more broad-based. And so as we look forward, we're really excited about the growing demand. And as an industry, we're really focused on how can we continue to supply copper reliably, responsibly, to a world with growing demand.

And Kathleen, you're in a great position as the largest quality trade copper producer in the world to do that. Let's talk a little bit about your different assets. In Indonesia, magnificent operation, you have been there for a long time. But it's always -- it's a challenging jurisdiction for -- in many aspects. You have successfully, again, been there for decades. What can you tell us on 2 things. One is the potential for Freeport to pay higher export tariffs as we have been a little bit of a debate, maybe comment a little bit from [ black ] field. And then the other is the discussions to extend the life of mine or the contract that you have there in the country to operate beyond 2041. Because clearly, you've expressed in the past that the resource potential extends far beyond that year. And so that might be in the best interest of everyone to get a new agreement in place.

Exactly. We've been operating in Indonesia for over 55 years. And Freeport was one of the first foreign investors to come into Indonesia. We operate in a very remote part of the country in an area called Papua. And as we've been talking about, Freeport has had a successful track record. We developed the infrastructure to be able to produce. We're at very high elevations there. And over the last several years, we converted what was previously a very large-scale surface mine to 100% modern underground mining. And we did it at the scale that's never been done before in the industry. And our team there, and this was going on, we've been investing for over 20 years, but the ramp-up and start-up of it was going on during the pandemic, during COVID. And so it was a great accomplishment of our team to get that project ramped up. We're now operating very well at steady state. We just reported in our second quarter net unit cash costs of $0.09 per pound credit. So all of our costs were covered by our gold revenues. And one of the things that we've been working on with the government is around their downstream policy and the government of Indonesia has an objective to keep more resources in the country and to upgrade and refine resources that are produced in the country. Freeport built the only current copper smelter back in the 1990s, but we were still exporting because our current smelter wasn't sufficient as we've grown production to be able to produce all of our -- consume all of our production. So we agreed with the government to build a smelter, that smelter is making great progress. We're over 75% complete and is expected to be completed during the first half of next year. And part of what the government wants to do to encourage companies to build smelters is through these duties. And so the government as part of a broad regulation, not just affecting Freeport, but others in the country imposed a new duty here in July and August, that there's a question mark whether it applies to us because we have a contract that states that our duties are tied to a prior regulation. So we're working that out with the government. In any event, it would be a temporary thing because the duties are phased out once the smelter is completed. So we're very focused on getting the smelter completed. We'll work through this issue with the government on whether or not we are obligated for the duties. We're paying the duties right now, but we'll continue to look to see if there are ways that we can recover those amounts. The second thing, and this is a very exciting opportunity for us is when we first started in Indonesia, as I mentioned, we've been there since the 1970s, late '60s. And in 1991, we signed a new contract with the government that had a primary term to 2021 and 2 10-year extensions to 2041. And currently, we do not have rights beyond 2041. But the resource, as Carlos was saying, is extremely long term in nature, it's vast. And the more we have done there, the more we have discovered that there are alternatives to continue to mine in this area. And so we started having discussions about a year ago with the government after the President visited our site about the positive aspects to the government and to Freeport of potentially extending the operation beyond 2041 to encourage investment and continuity so that the benefits of what we provide there, all the jobs, all the tax revenues, the economic velocity that we provide in this region could continue long term. And so we've got great support from the government for this. We've had a lot of discussions and essentially have reached a common ground on what terms those extensions would be based on. And so we're continuing to work through that with the government. There's an election coming up in Indonesia next year in 2024. And so whether or not we can get it done this year, we don't know. But both sides want to see it done because it makes a lot of sense for investments to continue there to continue to provide these benefits. It's a fabulous ore body. We've got terrific people who have done things that have never been done in the industry, and it's a source of pride for the country and people of Papua and for the country of Indonesia. So we very much hope that we'll continue to be there long term.

And I understand that you're still in discussions, but I think it came up in the press and maybe you -- in order to extend the contract, you have to give up an interest, I think it was 10% or so. Is this something -- how do you see this from the company perspective in a hypothetical case that this is what is eventually unfolds?

Yes. One of the things that the government has asked for in terms of being able to extend our rights beyond 2041 is an additional interest. Freeport, FCX, currently owns 49% of the business and the Indonesian state-owned company, MIND ID owns through a consortium, 51%. And the government has asked for some sort of compensation to be able to extend and get additional shares. Conceptually, we're okay with the idea of divesting an additional 10% to the government so long as the economics work out for us on it, and it's a fair deal. Because right now, we don't have rights beyond 2041. So that incremental value that we will get will just be on top of what we already own. So that's on the table and has been discussed, and we've been open to the idea of potentially transfer an additional 10% interest to the government.

And you will continue to operate [indiscernible] of the asset?

Right. Yes. We have an agreement -- a shareholders agreement with our partner there, where Freeport has certain rights to manage the control of the operation. We have a fantastic team there, a fantastic team of Indonesian nationals. It's truly a great place where there's no challenge that the team can't overcome. But Freeport has been actively involved in the planning and because the underground block caving is -- can be very complex, but it's been a great example of how a company, a foreign company like Freeport can operate successfully in a developing country and now becoming a developed country in Indonesia over -- spanning over 50 years. So we're real proud of what we've done there. We've done everything there as we would in any other country in terms of meeting international standards, and we look forward to being there for many more years in the future.

All right. Now let's switch gears and come back closer to home, the U.S. We just published a report last week in conjunction with our sustainability team and our U.S. policy team. We basically looked at investment in mining that has taken place in the U.S., and we're at record low levels in decades. And clearly, sort of a little bit in contrast with the objective of the administration to increase the reliability of the U.S. domestic supply chains and critical minerals, even though copper is starting to get in that list, right? It hasn't been there in the past. You are -- you have a lot of exposure in the U.S. Copper is critical to the transformation of the electrification of the economy and the world. Can you talk a little bit about the different growth rates that you have? You have leaching, you have expansion of your current operations in Lone Star and potential very big expansion in Bagdad. Give us a little bit of color on those, please? And why you might not be moving faster on those?

Freeport has a fantastic position in the U.S. We operate 7 copper mines, principally in Arizona. We've got a couple of mines in New Mexico. But we operate -- we're the largest producer of copper in the U.S. and have mines with established footprints and established operations going back for a very long time and established relationships with communities, which is so important in the U.S. and everywhere we operate. But even though some of our mines, our biggest mine in the U.S. is Morenci, even though it's been around for 100 years or so, it will likely be around for another 100 years. And one of the things, but it just gets harder and harder as you go because miners always take, always going after the highest net present value and always try to take the best things first. So as you go through a life of a large operation, your ore grades tend to go down, you tend to have to move more material to get the same amount of metal. And there a whole lot of challenges that go into running a mine for decades and in some cases, centuries. And so we have really been Freeport, while in Indonesia, our rates are so high that our cost management is -- of course, we manage cost, but in the U.S., we have to really manage costs because the grades are low, and we have to be very, very good about being on top of productivity, being on top of innovation. And that's really where we're excited about for the future because there's more innovation, technology available to our industry than we've ever had, the data analytics, the machine learning, the automation, we talked about some autonomous trucks, are all things that are going to help us with productivity in the future. One of the things that we're working on now that's so exciting such an opportunity for us for value enhancement is to increase our recovery of copper in our leach stockpiles. And what we're going to have to do because there's a limited amount of copper in the world, all of us in the industry have to get more out of what we already have. And so we're going after opportunities with material that's in our leach stockpiles that's already been mined, going after opportunities to enhance recoveries. Now we have -- this is a big number, [ 38 billion pounds ] of opportunity, a big playground there. And so what we're trying to do is employ, deploy new technologies, new focus areas to get a portion of that. And what's really neat about it is it's not capital-intensive. It's not carbon-intensive because it's already been mined. And so it has a low incremental cost and Freeport has been a company that anything that we focused on, put our mind to, we've got some of the most talented mining and processing people in the world. This is a focus now of ours. And so we're all over it, and we develop mines all over the world. We were successful in the Congo. Now we're trying to be successful in our backyard, in the U.S., basically taking advantage of what we already have to get more out of now, but it was easy, it would have been done before, but we're about 60% of the way there on our initial target to get 200 million pounds of copper a year from this initiative. And if you were to go build a mine and produce 200 million pounds a year, it might cost you $3 billion. This isn't costing us hardly anything to do. So we see an opportunity to grow that to potentially 800 million pounds a year. That's the size of our existing mine at Morenci. The one I said it's been around for over 100 years, and we've invested billions in it. So it's a really neat opportunity for us. It's something we feel we can do in the next 3 to 5 years to move the needle in an environment where it's very difficult to find new sources of copper supply. In addition to the leach project, we also have a major expansion opportunity in our Bagdad mine in Northwest Arizona, and we have a big opportunity in our Lone Star mine, which is adjacent to the Morenci mine in Arizona. So our U.S. opportunities actually that's really where our growth opportunities are. And these are brownfield projects. These are not new greenfield things that you read about that are very, very challenging from a community perspective. These are places where we already have an existing footprint. We already have existing relationships with communities and trust built over time. So while it's not easy, we feel our path to success may be less challenging than those that are trying to do new greenfield projects. So really excited about the opportunities in the U.S. It starts with the leaching initiative, and then we're going to build on it and do more capital-intensive type projects, but the world is going to need that copper as we go forward.

And what would you answer to those investors that ask us like why are they not moving faster? What are the type of restrictions or constraints that you are facing in the U.S. in order to more quickly potentially get to that level?

Yes. Well, on the leach thing, we're moving as quickly as we can. On the commissioning or the -- making a decision to move forward on, take the Bagdad project, as an example. This is a project we already have existing operations. The investment would be fairly straightforward to build another concentrator, basically double the production. But we have to double the mining rate. We have to make sure we have enough tailings, storage material. So there's a lot of planning involved, but we're going through the feasibility study. Now we expect to complete it this year because there's a lot of technical things you have to work through. And at the same time, while we're doing this, we're looking at, wow, we've got capital cost inflation that's gone on. We've got workforce challenges, particularly in Arizona, which is really -- the economy is really going very well there. There's been a lot of investments in infrastructure. And of course, this big chip semiconductor plant that's going on. So it's a competitive work environment there. And so just -- but any project, any mining project takes probably 7 to 10 years to do. And so that's just the reality of it. Now this project could probably be done in 3 to 4 years from now. But the question we're asking ourselves is, can we do it efficiently? Can we deploy that capital efficiently in an environment where we've got big capital cost inflation and this workforce issue, where this resource, we own forever. It's not like Indonesia, where you have a certain amount of time to mine it. In the U.S., we own all of the rights, so we'll produce it, whether we produce more tomorrow, we'll produce it longer term. So anyway, those are the kinds of decisions that we're looking to make. But in reality, the whole mining industry has to accelerate. And everybody's incentive to do that. It's just you've got to work with communities, you've got to work with states, regulators, you've got to work with federal regulators, and it's a complex world to do that in. But we do need to move faster.

All right. So let me -- I have a few questions -- a few more questions, Kathleen. Anyone in the audience has a question that would like to ask directly.

You hit on the mega project stuff, right, and it seems to be a topic across all subsectors this week. Could you just unpack that a little bit more? You mentioned you have some maybe supply constraints, but are there any specific examples you can call out that excite you about, whether it's semiconductor specifically EVs? Or is it really broad-based?

Well, for copper, the end-use market for copper, it's used in all kinds of construction and infrastructure. But the big thing now that copper is being used for is in decarbonization activities. Most of copper now is going into electricity, and it's kind of the metal of electrification. And so that's really what's driving the demand for copper is mainly those initiatives that are going on. And it's in the basic economy, in housing and autos and air conditions and all those kinds of things, it will always be there. But what's really supercharging demand for copper now and over the next 25 years plus is this move to electrification.

Any other question? Maybe ask you on, Kathleen, on capital returns and money payback to shareholders. So you have a base dividend, you have a special dividend or complementary dividend. And then in the past, you did share buyback. You made some share buyback. Is this what we should expect in the future, prioritizing first special dividend, supplementary dividend ahead of share buyback.

So our financial policy that we put in place a couple of years ago was basically, number one, first, to make sure our debt was -- the balance sheet was very strong. And that was kind of the cornerstone of the financial policy, and we've achieved that. We would -- we're below our target for net debt well below the target. So our balance sheet is in fantastic shape. And then what we said is beyond that once we hit that target, we would take half of our free cash flow and use that for shareholder returns and the other half would be earmarked for investments in our future growth projects. And so that's the balance. The balance is strong balance sheet, half cash flow goes to investments, the other half in the shareholder returns. Right now, the shareholder returns are -- we've got a -- as we set a base dividend. We've got a supplemental dividend and then to the extent there's cash above that, then we have share buybacks. So that's what it is now. Now our Board will continue to assess it. The receptivity of the program to date has been favorably received by investors, you'll get into some debate about should it be buybacks, should it be dividends. But in general, the concept of having a balance has been good. And I think we've gotten universal support for maintaining a strong balance sheet so that as we go forward, we can manage whatever situation we may be able to manage as well as not getting to a situation where we have to sell assets or sell equity at the wrong time. And so to drive long-term shareholder value, I think our shareholders recognize the importance of maintaining that balance sheet in a super strong position.

Well maybe just one more to close in the 1.5 minutes that we have. What role does M&A play in the strategy for you? Clearly, we already talked about the organic projects, very attractive organic rates that you have, but there is also M&A activity out there. Valuations arguably are not stretched from the publicly traded companies, that is what the market reflects now. But how does that play in your strategy?

Well, with respect to M&A, we really look at it from an opportunistic standpoint. Our base case is based on our organic, we think we can create value in our business over the long term with the set of assets that we have. We've got substantial reserves. We've got fortunate to have a pipeline of projects, large resources. So we have a base case that we don't have to go do M&A to support our long-term business. But there could be opportunities where we could bring synergies or require synergy as part of a transaction, whether it's a strategic fit. But quite frankly, anybody that has a high-quality copper asset wants to hang on to it. So there's not a lot of M&A going on in the copper world today, but it's something that we monitor. We'll be prepared if the right opportunity comes around, but we're going to be disciplined about it because we don't need to do it. We don't have to do it to be a successful company over the long term. But there could be opportunities that present themselves and you can't plan for them. You just have to be ready to take advantage if they're there, that could add value to our company like we did in 2007 when Freeport acquired Phelps Dodge and essentially diversified Grasberg, fabulous world-class asset with Phelps Dodge's assets, which were great assets in very safe jurisdictions and the 2 complemented each other given the nature of the 2 assets. So there could be situations like that, but they come up once in a blue moon. So we'll see how it goes in the future. But our base case, we're very comfortable with and excited about and happy about as we look forward.

All right. Well, great. Thank you again for being here. Looking forward to see you next year.

All right. Thank you.

Thank you all. Thank you, Kathleen.