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

All right. Why don't we get started? Kathleen, probably most of you are familiar with Kathleen Quirk, the President and CEO of Freeport. Thank you for being here. We've done this for several years. It's always a pleasure to host you and have this conversation. So maybe why don't we start with some introductory comments, maybe something that you want the audience to take away for sure today, and then I have some Q&A that we would go through.

Perfect. Great. Thank you, Carlos, and thanks, Morgan Stanley, for hosting this conference. We -- we enjoy being here every year and look forward to the continued engagement with the investors here, a lot of interest. And what we're doing at Freeport. We've got big agenda going on copper is our focus, and we're working -- we're entering a new period here of growth. We've got some key initiatives that we're pursuing. One is the recovery of the Grasberg, which is going very well, and we can talk more about that. We've got a very exciting growth profile in the U.S. that we're pursuing. We've got brownfield expansion opportunities that we're moving forward to make a decision on in the U.S. as well as a big investment or a big opportunity we have in technology. We're leaning very heavily into innovation and technology, which will allow us to capture some value, some significant value associated with processing of above ground material that is right for Freeport to take advantage of. So that's a big initiative. And then we've got growth also in South America. So it's a very exciting time within our industry at Freeport. In the near term, our focus is going to be on growth in the U.S., where Freeport was a very advantaged position as being Americas Copper Champion, where we supply about 70% of the copper that's produced in the U.S. comes from the Freeport operation. So anyway, great time to be in copper, big challenges because as we look forward, we see a world that's becoming more copper intensive with electrification. And it's up to us to continue to be able to supply that market efficiently and reliably. And that's -- we're up to the challenge, and that's what we're working to do.

Great. I mean, that sets the stage very nicely for the conversation. But maybe before we get into company specific, on the copper market. I think everyone understands very well the demand story. Electrification of the world will require a lot of materials and certainly copper is one of them and maybe at the top. But on the supply side, this is what I would like to score with you. We have had a series of issues in the last 12 to 18 months that have reduced production. But also prices have now been elevated for quite some time, and yet the supply response is taking a lot of time to arrive. We think that is from a company perspective, what is delaying the sanctioning of new projects.

When you look at our industry and go back historically, there have always been, it seems, periods of time where demand has accelerated and there are supply responses. There have been projects waiting to -- for the opportunity to develop when demand accelerates. This time, we don't have that. We -- I think one of you start with one of the issues for copper supply is that discoveries, major new discoveries of new resources is extremely rare. And so you don't see constant replenishing of projects because there aren't significant new discoveries. When you do have a discovery, it can take 2 decades or so to be able to develop it. So there's a real challenge now with the lack of greenfield opportunities. There are a number of projects that the industry is pursuing and you've seen a lot in Argentina in different places. But we don't have the pipeline of projects that we once had in the industry. So copper prices could go. You've seen copper prices go from $4 through $5 through $6. And to your point, not a near-term supply response. But -- so what it's going to take for our industry? There is still a lot of copper out there and what it's going to take for our industries to be more innovative. And you've seen, at the same time, you've seen inflationary pressure. So it costs a lot more to develop a major new copper mine than it used to cost. But it's going to require us to be more innovative. And so what we're doing at Freeport is working on technology and other innovative opportunities to recover more of what we have. And we still have a lot of copper within our operations that for various reasons, hasn't been recovered. The technology wasn't there to be able to recover all the copper out of the ore. And so one of the things we're doing is investing in technology to get us there. We're also investing in brownfield opportunities. Those can be done more quickly with less risk than a greenfield development. And so I think you're going to see not only Freeport, but others in the industry start to work to get the brownfield projects moving. But it's the fundamentals of copper, in my view, as we look forward, have not been this strong in some time. Over the past 20 years, you're seeing demand grow. Most of the growth has come from China in terms of demand drivers. Over the past 20 years, now with what you referenced in terms of the electrification, all of the power and energy infrastructure that's needed, it's more broad-based. And so we're going to need to work hard as an industry to find new ways of developing supply on a cost-effective basis in light of all the inflation we're seeing. So -- but at Freeport, we're up to the challenge, and we've got a number of levers that we're working for.

Yes. And you mentioned innovation and Freeport. And I wanted to get into that discussion. The leaching project that you have, obviously, we'll give you that. We'll give you volume. We'll give you low cost. Do you have, I think, a target of 300 million pounds this year and a long-term objective of maybe getting closer to 800 million pounds. What is the road map to take us there any updates, any latest developments on how that is going?

Yes. Thanks. So this is a very exciting and ambitious undertaking for Freeport. In recent decades, really starting in the '80s, there was a technology developed that allowed companies to extract copper from a process we call leaching where solution is used into release into the ore, and you can recover copper and actually produce copper cathode directly. And that was effective for some time. But over time, the amount of production available from leaching started to decline. And that's because you only get a small portion of the overall recovery through this process using historical technology. You may only get 30% of the copper that's in the ore recovered in using old technology. What we've been working on at Freeport is using new technologies to recover more of that copper. And so we've been at it for the last few years using some different operational tactics initially. And now we're starting to get into deploying some of the new chemistry that we're applying and other initiatives that we're applying to these stockpiles to recover even more copper. So when you think about it, having 800 million pounds a year from or that has already been mined, and we're essentially just reprocessing. It's not a capital-intensive initiative. It's low incremental operating cost because you've already incurred the mining cost. So this is essentially reprocessing material and you have the ability to do it at scale. Now so far, on our journey, we've gotten 200 million pounds a year, roughly, out of the 800 million. So we still got a lot more to go. And so what we're doing now to be able to scale it, as Carlos says, we're working to get to a run rate around 300 million at the end of the year. so that would allow us to increase our production, increase the scale. We're doing 2 things really. We have been working to qualify a new additive, a new reagent chemical reagent that we could apply to these stockpiles. The one we're using now that is a new technology was readily available. And so we procured some of it and started testing it, and it's providing some positive results. But there are 2 additional additives that we've been working on in our laboratories, which is showing multiples of the recovery potential compared to the one we're using now. So we had to especially go and get this material procured and manufactured, and so we've been working with various chemicals manufacturers to manufacture the products. And now it's on order. It's being manufactured, and we expect to get it at the end of this year. and early into next year, which will allow us to start deploying it at scale in the field rather than just in a lab. So that has enormous potential. It's not proven yet. It's proven in a lab. It's got to be proven in the field. But once it is, and it's a huge amount of value we're unlocking. And so the second value driver for the leaching initiative is around the increasing the temperature of our stockpiles. We've got 40 billion pounds of copper in our stockpiles. We know that if that copper reacts more favorably when it's under high temperature. And so we're working to put higher temperatures actually starting to heat solutions before they're injected into stockpiles. And so the new additive plus the heat technology, will allow us to, we think, scale materially this opportunity. It's not a slam dunk. We're proving -- we're having to prove new technologies and new ways of doing this process, but the reward is tremendous. And so we think based on our modeling to date of what we've been able to achieve in our lab and applying that to the field, we think we have the opportunity for -- to go from 200 million pounds to 800 million pounds within a 3-, 4-year period. And when you think about that, that's the size of a major new compromise.

And how much of the incremental volume is embedded in the guidance for 2027 or 2028?

Yes. We don't have a lot of that in there because we need to prove it to ourselves as well. So we're confident in the ability to get scale this to the 300 million-pound level. That's in our guidance for next year. But beyond that, we want to see how these field testing work comes together, how the heat trials work. So we've got upside in our guidance numbers, but we've got to get the results. And over the coming quarters, we should have better results communicated to you. But a really, really significant opportunity. It's a competitive edge of Freeport because we have all this experience in terms of leach processing, but we also have the inventory. As I mentioned, we've got 40 billion pounds of copper that's above the ground. It's not -- it's already been mined and we just need to find ways to recover more of it and the technologies are evolving so quickly. So it's exciting. It's going to take this. It's going to take these kinds of technologies to meet this demand that you're talking about that's coming from all these new sources of electrification, which is copper is key copper is very key when it comes to electrifying the world, which we're doing. So...

And obviously, you mentioned -- you highlighted the point that you have already mined material in profiles. So there is a cost advantage to process those into copper. Company has mentioned something around $2.50 per pound in cost in -- maybe in 2027, 2028. How are we tracking -- how are you tracking towards that? Obviously, a lot of volatility on ramps, diesel oil prices and whatnot. But then question that oftentimes we discuss with investors is why even though you're producing 200 million pounds, why costs in North America really haven't necessarily reflected that? Can you elaborate on...

Yes. So what Carlos is referring to is our U.S. business is higher cost than the rest of the places we operate. It's very efficiently run, but the reason why it's higher cost than, say, South America or Indonesia is because the grades that we mine in the U.S. are lower than the assets are more mature, the grades are lower than we have internationally. So we have to be in terms of running our U.S. operations, we have to be extremely efficient, and we've been investing in automation. We're investing in different technologies to help us bring down our costs. But importantly, while our costs in the U.S. might be $3 a pound on average, and we have a goal to get that down to the $2.50 range. When you think about the margins and the bottom line contribution, particularly in the context of today's copper market, you're talking about a copper market where prices are above $6, roughly $6.50 per pound, that margin in the U.S. essentially drops to the bottom line. So it's very impactful. We don't have the level of tax burdens in noncontrolling interest in the U.S. that we have in other places. So when you look at our results, our recent results, the U.S., while it may be a higher cost market really contributed more than half of our bottom line net income. So in this kind of copper market environment, the U.S. has a lot of very significant earnings and cash flow leverage. But we've been working to bring down, to your point, we've been working to bring down our costs in the U.S. and roughly $3 range when targeting getting the $2.50. We thought we were on the verge of driving to that level in 2027, and that was more an environment where inflation has moderated. But we've just now moved into some headwinds with energy, and particularly diesel prices and some other areas like sulfuric acid, other parts and supplies, et cetera, that will start to bleed in. But fundamentally, we're still looking to drive costs lower than what they would otherwise be through these initiatives. Through this innovation, and technology initiatives. And when you think about the fact that we've already mined the material, the incremental cost of bringing on the new copper unit is low relative to the average cost. So, so far, this 200 million pounds has been incrementally a cost of less than $1. And cross asking why our average is still $3, and that's because we continue to fight the lower grades. But as we scale from here, as we scale more production from this innovative leach process as we get more efficient with our U.S. operations, I think you'll see costs trending more positively. We've got headwinds with energy prices that we've got to deal with. But we're making great strides in the U.S. business. And again, coming right to the bottom line, every dollar that we save and cost goes to the bottom line as does the revenue. So that's what we're focused on is creating more value from our U.S. business.

And maybe before we go to Indonesia, given the leverage that you have operating leverage that you have in the U.S., what can you tell us about back that expansion? I think the economic breakeven for the operations is -- or the project is around $4. We're at $6.50. How is the progress towards a final investment decision going? And what are the key challenges that you envision as a company to develop these projects?

Yes. So what Carlos is referring to is a very exciting brownfield investment opportunity we have at a mine in the U.S. that's probably a couple of hours, 2, 2, 2.5 hours away from our headquarters in Phoenix. It's a mine that's been around since the 1940s. And the reserves of this operation have grown to where the current processing capabilities or undersized relative to the size of the resource. So we've been studying for some time the opportunity to do a major expansion at this mine. And it does require a copper price and incentive price to earn our cost of capital of at least $4 a pound. And so we've been monitoring it. We've been monitoring this overall capital cost inflation that the industry is dealing with. We've been monitoring the availability of skilled trade in this area to be able to execute the project construction. So whole things we've been doing in terms of studying, we've been looking for creative ways to execute the project. We -- in fact, in terms of this labor tightness that I talked about, we converted that mine's haul truck fleet all to autonomous recently. So all the trucks that we operate, call trucks that we operate, the big -- all trucks we operate at that mine are all being run without drivers and that's a technology that we look to adopt that will adopt across the U.S., but it's our first U.S. site to adopt that technology. We're looking at how we can maybe build some of the components of the expansion off-site in areas where there may not be as much tightness in terms of labor. So we're working on those kinds of things. But we're competing also with others that have deep pockets and looking for skilled trade as well. They're looking to build data centers and other energy infrastructure in the region. And so we're competing for labor with those markets as well. But we've got plan outline to take to our board later this year and very excited about the opportunity to invest in this operation, it would become the second largest copper mine of any copper mine in the U.S. It would importantly provide economies of scale, break down its operating cost structure by having more economies of scale and allow us to have a more resilient operation there and profitable operations. So we're excited. We're nearing the point where we think we can bring it for a final decision and hope to have a positive green signal of this one by the end of the year.

All right. And then moving to Indonesia. I think about a year ago, right before this conference last year, unfortunately, Freeport had a terrible situation in Indonesia in underground mining there. Can you walk us through the turnaround and where do we stand right now? What are the milestones that we need to look for in the next few months?