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

Next up, we have Freeport. We will do this as a fireside chat. So if you do have questions, please send them in through the app. With us today is President and CEO, Kathleen Quirk. Kathleen, thank you for joining us today. And maybe to kick us off, I will turn it over to you for any opening remarks.

Great. Thank you. Thank you, Katja. It's great to be here. Happy 35th anniversary, BMO Conference. You guys have just knocked them out of the park every year, and it just only gets better. And we've just been happy as Freeport to be participating over a long period of time in this conference. The Freeport story, all of you know well. We're very focused on our copper portfolio. We're -- we've got a big agenda for 2026. We're going to be focused on getting Grasberg back up and running. We've got great momentum there, have made good steady progress towards our scheduled plan to get our Grasberg Block Cave back up in the second quarter. We're doing a lot of work with our U.S. business to increase production and reduce costs. And then in South America and I see our great partner here at the front table, CODELCO. We're very excited about the El Abra project, which we'll be filing our environmental impact statement on in the middle of the year. So lots going on. We're focused on being foremost in copper, and it's well structured. Of course, copper is well structured. We have a great portfolio to build from and enhance shareholder value as we go forward. So I'm happy to be here and ready for your questions.

Perfect. So last week, you signed an MOU with the Indonesian government to extend your mining rights in Indonesia. Maybe first question there would be, is that a -- once it's formalized, is that going to be a permanent expansion? Or is there an expiration date?

So last week, we were in D.C. and Richard Adkerson is actually here. He was with me there. It's something that's been a personal goal of his to see Grasberg's mine life be extended, our rights to be extended for the life of this great resource. This is a place where we've operated for almost 60 years. And even though we've been there for 60 years, there is significant production in front of us, reserves in front of us, potential in front of us as we go forward. So with the completion of the smelter that we built, we now have the ability to apply for a life of resource extension. And this MOU basically set forth the terms that would set our operating rights out for the life of the resource. It will be the license will have to be granted and the license will be reviewed every 10 years more for administrative purposes. But actually, now we can think about this great resource, planning it out, what's the optimum NPV over its life as opposed to a limited period of time. So it's very, very exciting milestone for us to be able to get that extended.

And just in regards to that, can you discuss how you think about the longer-term potential at Grasberg? In other words, are you planning to grow production there or maintain it?

Well, actually, with this extension, we can think about growing. What we have been doing up until now is looking at what our production profile is over the period before 2041 and maximizing the net present value of that resource over that period. Now with an extension beyond 2041, we can look at the resource more broadly over a multi-decade period. And when you think about mining, it is a multi-decade view. Some mines, we've got mines in the U.S. that we've been operating for over 100 years and have 100 years left of life in them. So you really need to think about these resources with a long-term view, and that's what it will allow us to do at Grasberg. So we're very excited about it. We're going to do some more exploration drilling. We haven't done extensive exploration drilling in recent years. So we'll do -- we have some ideas about where we're going to drill. And so we're excited about that. The Kucing Liar deposit, which we're developing now, the life of that deposit will go well beyond 2041. So we won't have to spend extra capital, but we'll get more value out of Kucing Liar just by virtue of the extension. So it really does open up a lens into Grasberg that hasn't been opened for decades now. So this is really a good thing for the company, but also the Indonesian government, the people of Papua because now we can think about continuity over a very long period of time.

And then as part of the news, it was also mentioned that you could broaden marketing of Indonesian refined copper to the U.S. market if the U.S. needed it. Would that copper be shielded from any potential current or future tariffs?

So historically, Grasberg has been a concentrate -- principally all concentrate producer. We had one smelter in Indonesia that processed about 40% of our production there, and we just completed a second smelter. And so now Freeport PTFI, Freeport Indonesia is fully integrated. And so now copper cathode is produced and it could go anywhere. Wherever the market is best for that material to go, it can go anywhere. Now our plan was that the cathode would likely be in the Southeast Asia region, some in Indonesia, but other parts of Southeast Asia and China. But the U.S. is looking to broaden its supply chains. And with Freeport as an American company, having a significant participation in this mine, it does provide for good security of supply, if needed, from this asset to the U.S. But ultimately, economics will drive us to determine where the best place for the copper cathodes to flow.

You mentioned Grasberg and the restart plans. Can you talk a bit more about how the restart of the PB2 and PB3 area is current, or how you're progressing towards that?

Yes. We just gave an update on our year-end call, and things are continuing to progress from there. We have made steady progress. The mud removal within the tunnels has essentially been completed. We've been installing protective barriers, concrete plugs to isolate the area that was the area where the incident occurred. So that's essentially been done. The last part of the puzzle in order to restart PB2 and PB3 is the installation of communications and electrical services within the mine that were impacted by the incident. As you all probably know, we operate the extraction of ore from the surface. And so there is a sophisticated communication system, electrical system underground that was damaged during the mud flow. And so we're reinstalling these communication lines and that's progressing. We expect for the construction to be completed by the end of March, and we'll start ramping up Production Block 2 and 3 during the second quarter. By second half of this year, we will have 85% of Grasberg restored. So that's a big deal. We're confident that we've got the right plan in place, the risk mitigation in place. During 2027, we will start -- we have plans to start PB1 South by middle of the year and PB1C, which is where the incident occurred, at the end of the year. Those are smaller areas of the mine. But once we get those restarted, we'll be at full production.

Are there any opportunities to maybe speed up the restart of PB1 South area?

We'll always look at those potential opportunities, but our focus is on a safe and sustainable restart of PB2 and 3. That will derisk a lot of the production if we are able to get the startup to go smoothly. We'll always look at opportunities of what we can bring forward, how we can optimize. But the team is focused on PB2 and PB3 initially.

Then when you look longer term, will the incremental risk management strategies you're currently undertaking impact the costs at Grasberg?

Of course, there will be some impact, but it's not -- it's on the margin. And at Grasberg, this has been a mine that we've had continuous improvement over our 60 years there. The automation that's taken place, the investment in technology, it's very, very sophisticated in terms of automation, underground mining, the work we do around risk management and water management has been one of continuous improvement. We benefit there from gravity drainage. We don't have to pump up water like some underground mines do. But -- so there's a lot of aspects of Grasberg that are beneficial. But it's been one of continuous learning and continuous improvement, leaning into new technologies there. And what we found is, as we have invested in new technologies, it allows the operation to be safer. Over time, you've got investments that you're making in these technologies, but the costs actually are better if you're able to automate and put in some of these systems. So it's -- the cost issues are not something that are a big deal for us. It's more what's the right technology for the site-specific conditions that are present there.

And earlier, you mentioned the new smelter in Indonesia. Can you talk about what the current status of the smelter is?

So it's actually on standby. It's not operating. We had finished the smelter. Actually, remember, we had a fire there that we recovered from. And so it was operating -- had restarted and it was operating when this incident occurred. But it is on standby. We've got another smelter that is receiving concentrate now. That smelter is being operated. We expect that when we bring back the production in the PB2 and 3, we'll start to send concentrate to the new smelter in the second half of the year. So we'll fill up the first smelter first. And then towards -- in the second half, we'll have enough concentrate to start feeding the new smelter. So I mean when you think about Freeport, and you talk -- and Maximo knows this, when you talk to governments around the world, every government wants to know where is your smelter? What's your smelter? Yvonne doesn't want a smelter. But at Freeport, we're fully integrated essentially. We've got a smelter in the U.S. We have a smelter in Spain. We have 2 smelters in Indonesia. So when you look at our production globally, we're fully integrated. Some of our production is produced through a leach process where you don't need a smelter. But when you look at Freeport and look at the security of supply provided by Freeport, you don't need to use a third-party smelter. Now right now, the rates are very, very cheap to go to a third-party smelter. But strategically, we can control our own destiny by having the -- already having the smelter integrated within our global portfolio.

So shifting gears to the North American operations. You're targeting potentially a 60% increase in production there. A lot of it or majority is coming from leaching and then potential Bagdad expansion. So when we look at the growth from leaching in '25, it seems like it slowed down a little bit. What gives you confidence that you could still get to that 800 million pounds per year?

Our U.S. business is extraordinarily exciting right now. If you look at our results in the fourth quarter and our segment reporting, you can see that the income from our U.S. business was 3.5x what it was the prior year. And the leverage of copper prices really comes through in our U.S. business because it drops to the bottom line. We don't have the burdens of taxes, royalties, noncontrolling interest. So anything that we're doing either from a self-help standpoint or the market is dropping to the bottom line in the U.S. Now we are doing some things from a value-enhancing, self-help standpoint that's going to drive huge value for our U.S. business. And the leach technology that we have been working on the last 3 or 4 years is meaningful. We have reached our target of 200 million pounds per annum, and we've been kind of stable around that level. By the end of -- this past year, we were at a run rate of about 240 million pounds. But this year, we're expecting to produce about 300 million pounds from this initiative. The benefit of this is, rather than having a $3 per pound cash cost, which is our average of our U.S. business, these incremental volumes because the material has already been mined, have incremental costs of about $1 a pound. So you're talking about huge margins and cash flow generation that drop to the bottom line that allow us to essentially -- our target is to go from 200 million pounds to 800 million pounds by 2030. That's like a new mine we're developing in the U.S., principally in the U.S. We're doing some in South America, but with very little capital, very low incremental operating costs, a huge resource. We have 40 billion pounds of material that's already been mined and sitting in stockpiles and waiting for technologies that will allow us to unlock this value. This is a real important year for us because what we've been doing up to now has been more operational, finding ways using data science and data analytics to find areas within the stockpiles that need more solution. Now we're starting to deploy new additives, chemical reagents that we can apply to the stockpiles, and we're now field testing that on a broader scale, starting at our Morenci mine. And that we're doing this year. We're combining that with heat, where we're now injecting -- we'll be trialing this, this year and heating up the solution before it goes into the stockpile. And what the testing has shown us is that heat, combined with these new additives, kind of supercharges your recovery. So that's where we have a lot of potential to scale from the 250 million pound range to 800 million pound. And we're very, very excited about it. This year will be a real important pivotal year as we're trying to crystallize the value in this opportunity. But when you think about an opportunity to grow our U.S. production by 60% between now and 2030, in an industry where lead times are 10 years or more, where we've already started the process, we've already got momentum, we've got another project, a more conventional project to invest in an expansion of -- a brownfield expansion of an existing mine in Arizona, you just don't see opportunities like this in the industry. And so we're in a really, really great position to grow our U.S. portfolio at a time when the U.S. is really looking for more refined copper units, and Freeport is in a really good position to build into that position.

And you said the U.S. is looking for those units, right? For -- regarding the Bagdad expansion, are there any potential opportunities to tap into government funding?

There's potentially an opportunity and the government has made it clear that they would like to facilitate the U.S. copper industry. We have access to more conventional types of financing, but we'll look at all the opportunities there. At Bagdad, we're working to get to a final investment decision this year. We're going out now with our vendor packages to confirm the capital cost estimates. That's one of the things that we want to be very, very sure about when we go into it to make sure we've got our arms around capital given what's happened in our industry over time with cost inflation. We want to be sure that we've got all of the I's dotted and the T's crossed as we go into this project. But financing is not going to be the issue with it.

And then the other thing that has been topical in North America are the costs. You have a target to reduce them closer to $2.50 by '27. Can you remind us what's going to drive the cost reduction there?

Yes. So we're -- our average cost, as I mentioned, in the U.S. is around $3 a pound. in South America, it's closer to $2.50 per pound. In Indonesia, actually, our gold revenues more than offset all of our cash cost of production. So in Indonesia, we have a negative cost, if you will, a credit. So on average, within the portfolio, last year, we averaged in the $1.65 range. This year, we expect to average $1.75, and that will decline as Grasberg comes back online. But in the U.S., we have an opportunity. The grades are low in the U.S. But as I mentioned, that doesn't tell the whole story because what you don't have in the U.S. is you don't have big -- you don't have -- we don't have royalties. We own all the land and fees, we don't pay royalties. We don't have the tax burden. So in some ways, the all-in cost isn't -- it's probably less than it is in South America when you consider taxes and other things. But in any case, we have an opportunity to drive costs lower. And what we're doing to do that is we are working to increase volumes at a low incremental cost, which will bring down the average. And we're driving -- we're using innovation more and more in our business to improve efficiencies. One of the big areas that has impacted us in recent years, and we're not alone in this, I think it's impacted the whole industry is we've had a lot of unplanned downtime that's affected our U.S. operations and not just in the U.S. but across the globe. But the more that we can plan our work, work with our suppliers because it's not just internal, it's issues with suppliers that are providing equipment that isn't the same equipment that we've been used to getting the prior 5 years. So working to reduce downtime, to minimize unplanned downtime will allow us to not only reduce cost but to improve production. And so we -- the $2.50 per pound is a target, to go from $3 to $2.50 over the next couple of years, but we believe with the initiatives we've got underway, both with increasing our volumes at a low incremental cost and driving greater efficiencies that we can meet that target.

We're getting towards the end of our time, but maybe one quick one on the M&A. It's very topical in the space. What is your view towards current opportunities in the market?

We're open-minded to M&A if it has the opportunity to generate value, particularly if there are opportunities for synergies. We don't have to have M&A. Freeport is very fortunate to have a significant pipeline for growth. I mentioned some of the projects that we have, the significant project we have in Chile with CODELCO, all the opportunities we have in the U.S. and of course, in Indonesia now with this extension, it's going to open up a whole new set of opportunities for us. So we have internal opportunities, but we'll always be open and willing to talk with industry participants on ways that we can generate more value for shareholders through combination. So we don't rule out anything and -- but we're focused on value for our shareholders.

Perfect. Thank you so much, Kathleen.

Thank you.