Freeport-McMoRan Inc. (FCX) Q4 2010 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Copper & Gold Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Ms. Kathleen Quirk, Executive Vice President and Chief Financial Officer. Please go ahead, ma'am.

Thank you and good morning. Welcome to the Freeport-McMoRan Copper & Gold Fourth Quarter 2010 Earnings Conference Call. Our release were released earlier this morning, and a copy of our press release is available on our website at fcx.com. Our conference call today is being broadcast live on the Internet and anyone may listen to the call by accessing our website homepage and clicking on the Webcast link for the conference call. We also have several slides to supplement our comments this morning, which are also available on our website. In addition, to analysts and investors, the financial press has been invited to listen to today's call. And a replay of the webcast will be available on our website later today. Before we begin our comments, I'd like to remind everyone that today's press release and certain of our comments on this call include forward-looking statements. I'd like to refer everyone to the cautionary language included in our press release and the presentation materials and to the risk factors described in our SEC filings. On the call with me today are Richard Adkerson, President and Chief Executive of FCX; Jim Bob Moffett, Chairman of the Board. We also have Red Conger with us today and Dave Thornton. I'll start by briefly summarizing our financial results and then turn the call over to Richard, who will be going through the slide materials to review our recent performance and outlook. As usual, after our prepared comments, we'll open the call for questions. We are very pleased to report today fourth quarter 2010 net income attributable to common stock of $1.5 billion or $3.25 per share. That compared to net income of $971 million or $2.15 per share for the fourth quarter of 2009. For the year 2010, FCX's net income attributable to common stock totaled $4.3 billion or $9.14 per share, which compared to $2.5 billion or $5.86 per share for the year 2009. Our quarterly results for the fourth quarter and for the year 2010 were both new records for Freeport. Our fourth quarter 2010 consolidated copper sales of 941 million pounds were higher than our previous estimate of 895 million pounds, but as anticipated, lower than the fourth quarter 2009 copper sales of 989 million pounds. The variance to the October 2010 estimate primarily reflects favorable production performance in Indonesia, our South American operations and our Tenke Fungurume operations in Africa. The variance to 2009 primarily reflects anticipated lower sales from North America, partly offset by a higher contribution from Indonesia. Our fourth quarter 2010 consolidated gold sales of 590,000 ounces were slightly above our previous estimate of 585,000 ounces. And our gold sales in the year-ago period were 551,000 ounces. Our consolidated molybdenum sales for the fourth quarter of 17 million pounds were slightly higher than our prior estimate of 15 million pounds, primarily because of stronger demand that we're seeing in the metallurgical sector. The consolidated molybdenum sales for the fourth quarter of 2010 were similar to the year-ago sales. Our results include positive pricing for all of our commodities: copper, gold and molybdenum. Our realized price for copper in the fourth quarter was $4.18 compared with $3.20 in the fourth quarter of 2009. Our realized price for gold approximated $1,400 per ounce in the fourth quarter of 2010 compared with $1,115 per ounce in the fourth quarter of 2009. And our realized molybdenum price of $16.60 was over 20% higher than the year-ago period. As anticipated, our consolidated unit site production and delivery costs of $1.46 per pound in the fourth quarter were higher than the year-ago period. Our net unit costs, net of by-product credits, averaged $0.53 per pound in the fourth quarter 2010, which compared to $0.62 per pound in the prior year quarter. The lower unit net cash costs in the 2010 period primarily reflect higher gold and molybdenum by-product credits. Operating cash flow totaled $2.1 billion for the fourth quarter and $6.3 billion for the year 2010. These amounts were net of working capital requirements totaling just over $300 million in the quarter and over $800 million for the year. Operating cash flows at these levels were significantly above our capital expenditures, which totaled $535 million in the fourth quarter and $1.4 billion for the year. We ended the year in a very strong financial position. Our total debt was $4.8 billion, and our consolidated cash approximated $3.7 billion. During 2010, we repaid a total of $1.6 billion in debt. We also are pleased to report today our preliminary estimated consolidated proven and probable reserves. These reserves, as of December 31, 2010, are estimated to total 120.5 billion pounds of copper, 35.5 million ounces of gold and 3.39 billion pounds of molybdenum. Net reserve additions totaled 20 billion pounds of copper and significant amounts of molybdenum. Those totaled 500% of our 2010 copper production and 1,200% of our 2010 molybdenum production. We used our long-term price to determine our reserves of $2 per pound of copper, $750 for gold and $10 per pound of molybdenum. Its a bit higher than our last year's numbers, which were based on $1.60 per pound of copper, $550 per ounce of gold and $8 for molybdenum. As previously reported, our Board of Directors declared a supplemental dividend, which was $1 per share that was paid on December 30. That dividend is in addition to the regular quarterly common stock dividend of $0.50 per share. And our board also declared a 2-for-1 stock split to be effected on February 1. The additional shares will be issued on February 1 and will increase the number of shares outstanding to approximately 945 million from the current level of 472 million. I'd now like to turn the call over to Richard, who will be providing additional comments about our results and discuss our outlook.

Good morning, everyone. It's a real pleasure to be reporting on a year in which we had such strong operating and financial performance. We are making great progress in the restart optimization projects that we have previously talked with you about. In aggregate, these projects are moving towards adding 500 million pounds of annual copper production. We're also aggressively working on identifying major growth projects. We have a very significant opportunity to create value for our company through investing in our existing resources and reserves and create development projects and add future cash flows. Our reserve base allows us to do this. As Kathleen indicated, we had significant reserve additions this year, continuing the experience that we've had in past years and, with the strong commodity prices, that is significantly enhancing our financial and liquidity position and allowing our Board of continuing our long-standing tradition of Freeport of returning cash to shareholders. If you turn to Slide 4, these are some of the numbers that Kathleen reviewed with you. And I'd like to make just a couple of big-picture comments about these results. First of all, with copper prices in excess of $4, many expect them to go higher, and the market is strong globally, we are earning extraordinary margins. Our unit cost in 2010 of $0.80, and that will increase to just over $1 next year because of mine sequencing at Grasberg and some increased input costs, still at those levels, given the fact that we have such strong levels of consolidated production volumes, roughly four billion pounds a year. And we can see that continuing with minimal capital expenditures going forward. At today's copper prices, that generates operating cash flows in the range of $8 billion a year. We only had $1.4 billion of CapEx this past year. Our estimate for next year is $2.5 billion. We won't spend more capital as we advance our growth projects. And we do have a very attractive opportunity to grow internally, which we want to pursue aggressively. So the big picture, when you look at these numbers, our reserve base, our plans, is we have a company that had the opportunity to grow in markets that are favorable and look to be favorable for the future, and at the same time, earn excess cash, which gives our Board the opportunity of providing those kinds of returns to shareholders. On Page 5, we saw the details of our unit production costs for the fourth quarter of 2010. You can see that we do have impacts of higher input costs, which are rising, but not to the levels of where they were prior to the financial downturn in 2008. And yet copper prices are stronger, so our margins are growing. You can see just how strong this PT-FI asset at Grasberg is in Indonesia. With the quarter in which we had good gold production, not our highest, not the strongest quarter that we've had by any shot, there we ended up with a net unit cost of $0.91. So we sold almost 300 pounds of copper there at a price of $4 and a net credit of almost $1 a pound. It's a great asset. But we have a set of great assets that gives us a range of production from North America, South America. And you can see Africa is meeting its design capacity for copper. And all together, we end up with the consolidated unit cost of $0.53 for the fourth quarter. In terms of markets, China continues to be strong. The news out of China this morning is that their economy is growing at a stronger rate than it has been. And the market's concerned that that's going to lead to steps to control that growth. China has had a great run now of being able to have very significant growth and to manage that growth in a way that it doesn't create the kinds of ups and downs that you see in a lot of other economic situations historically. But China's internal economy is growing. The world's economy, overall, is improving. As we talk to our customers in North America, and we supply almost half of the copper rod to the North American market, we see sectors of the U.S. economy responding favorably. Of course, anyone involved in either residential or commercial real estate continues to see weakness. But in the export economies and manufacturing economies, the automobile business here, we're seeing positive developments. Northern Europe is strong. And so we add to the fact of the continued strength in China and the emerging markets, sectors in the U.S. and North America of improvement. And that's added up to a copper market that's very tight globally and a positive outlook for those marketplaces. We benefit from the high gold prices. Molybdenum prices have come off their lows, and they're at levels today that our world-leading molybdenum business is a significant contributor to our company's profitability and growth opportunity. At Freeport, we have just a very straightforward operating strategy. We focus on safety. Our business is inherently dangerous. And whenever we talk about our operations to our people, we talk about safety first. And then we talk about maximizing production volumes and controlling costs. It's that simple execution is what drives it. And we've had a history of executing very well, and very proud of our operating teams for doing that. Then in terms of building values for our shareholders, we start with this large mineral resource base that we have associated with our existing mines. When we do greenfield exploration, and success there would be incremental to this, but we don't depend on acquisitions or success in our greenfield projects to look for future growth. We have that within our set of assets. And those resources are creating additions to our proved and probable reserves. Significant additions this year, but we've had a run of years in which we've had reserve additions. And now we're working hard to convert those reserves into development projects so that we can grow our production and create future incremental cash flows and provide returns to our shareholders. Page 8 details the changes in our reserves. You can see, this year, we added 20 billion pounds to our proved and probable recoverable reserves that we report to the SEC. That reflects the higher copper price that we used this year, $2. Still much lower than current prices, of course, but that increased our reserves 5x over our production, to 120 billion pounds of proved and probable copper reserves, 6x additions in the molybdenum reserves over our production for the year. And as you can see, if we go back a number of years, we've had increases in our reserves. And we see, within our set of assets, the ability to continue that going forward. And then beyond our proved and probable reserves is this mineralized material, which will be the source of future reserves, future production opportunities for us. We're undertaking exploration to grow those resources. To illustrate it, we have this chart on Page 9, which is a bit of apples and oranges when we add reserves to mineralized material, because the mineralized material is contained copper, not recoverable copper. But at $2.20, you can see over 1 billion pounds of contained copper within the zone. It's over 100 billion pounds of contained copper within areas of where we've done drilling to identify this mineralized material. To get that to reserves, we often have to do further drilling. We have to develop mine plans. And assure we have power, water and resources to develop it, but it's identified already. It's not something that we have to go out and, as I said, do acquisitions or have success in greenfield projects. It's there for us. And it is interesting to look in Page 10, to see where our reserve additions are coming from. We have had significant reserve additions in 2010 at our Cerro Verde project in Peru, which has a great development opportunity. But 80% of our reserves came from our properties in the U.S. You don't have to go back many years to hear people in the industry and in the investment community talk about the poor assets that were located in the southwest U.S. Well, that's simply not the case in the context of the markets that we face today. These assets contribute significant profits. They have the opportunity for significant growth opportunities. And it's a real focus of our company as we go forward, is to identify how to expand them and take advantage of these very large reserve and resources that we have there. Jim Bob did a presentation in New York in November, which is on our website. And I would encourage you to go review those slides in which he talked about our exploration from a big picture standpoint. But it's these really very significant sulfide resources that are below the oxide deposits that the company has been mining traditionally, that give us this opportunity for growth. So as we look forward for these expansions, we're looking at mill investments. That's significant. The mill investments allow you to have significant recoveries and be able to produce those reserves in an economic fashion. So that's what we're doing. This slide is a little simple. It's not quite that bright line change between oxides and sulfides, but we have the technology, the capability to do it, and we're committed to going forward and growing our business. We have some detailed reports on where we stand with some of the projects that we have been pursuing. At Morenci, we've restarted the mill. It's operating over 40,000 tons per day and on its way to 50,000 tons per day. That's allowing us to process the material more efficiently than we otherwise could. We had cut our mine rate at Morenci in half at the end of 2008 and going into 2009. That was done in response to low prices at that point and driving down unit costs. Now we're stepping it back up, and we're ramping it up to a current target of 635 metric tons. Sometimes, we talk about short tons at Morenci, but this is metric tons. And we're looking at further rate increases. We're doing this in a way and with a view towards containing costs. But it does give us an opportunity to add volumes on an economic basis. And we are looking at, aggressively looking at a potential investment in a major new mill to mine the sulfide ores that have been identified and continue to be expanded. Miami, which is the historical mining district here east of Phoenix, we had significant reclamation activities there. Now we are doing stripping activities to allow us to mine copper as we reclaim this area. We're ramping up to 100 million tons per year -- pounds per year. Relatively low-cost project. We're using some of our existing equipment. We've got reserves to allow us to operate for a number of years. We're doing drilling there. This is a place that has significant historical production. It's also in the area of where the resolution project is being pursued. And there are opportunities there that we're going to see if they're available to us. At Safford, which is a relatively new mine near Morenci, we have a sulfur burner project that's progressing. That's going to allow our project to be more efficient, more profitable and will be beneficial for the long-term development of that district, where we have an ore body called Lone Star that has significant resources. It will be part of our future. In New Mexico, we're restarting the Chino mine where we had stopped mining and ore-crushing activities. This is turning out to be a good project with the higher copper prices. Our reserves that we identified last year of just over 1 billion pounds have grown to over 2.5 billion pounds. We're investing money. We're working towards reaching a production level of 200 million pounds a year by 2014, and the economics of that are very attractive. In South America, the El Abra Sulfolix project is progressing. Here's a picture of where, just within the last week to 10 days, we initiated the stacking of ore on the new Sulfolix system. That sulfide ore will replace the depleting oxide ore that we've been mining and give us a long-term life from that mine. The project is 80% complete and has gone on schedule within our capital budget. And as we've gone forward with this, one of the things we found since completion of the merger is that there's a significantly larger sulfide resource there than we had anticipated. And so we're looking at ways of accessing that through, potentially, a major mill development and working with our partner, CODELCO, to do that on an economic basis. Cerro Verde in Peru, we completed a $50 million de-bottleneck project. That increased our mill rate from 108,000 to 120,000 tons per day at a very low cash cost. This is a mine that has the capacity to be expanded significantly, and we're working right now on plans to do that. We expect to complete a feasibility study for a major expansion during the first half of this year and to move forward with permitting on it. The expansion itself would be for either a doubling or tripling of the current mill throughput rate. And we are very positive about the progress that's been made on both the feasibility study and on the important issue of identifying water resources to allow us to expand this in such a significant way. In Indonesia, we've continued to progress the development of our underground reserves, a very large, world-class, profitable ore body for the long range because of the very significant copper reserves, together with the significant gold resource in the same ore. Our DOZ mine, which is currently operating at a 80,000-ton-per-day level, is one of the world', if not the world's largest, block caving mine. We've also begun mining the smaller Big Gossan mine that has very high grades and is contributing to our profitability. We'll be moving to the Grasberg block cave after the depletion of the Grasberg open pit currently scheduled for 2016, maybe extended for a period of time. But that has very large reserves and would allow Grasberg to continue as a major low-cost copper mine for the long-term future. In Africa, Tenke Fungurume, we're benefiting from the fact that the mill that was designed for our initial development project is operating significantly above capacity. It was designed for 8,000 tons per day and has operated in the fourth quarter at 11,000 tons per day and 10,000 tons per day for the year. Now those tonnage, when you compare it to Grasberg, sounds small. But the grades at Tenke Fungurume are so large, roughly 4% copper equivalent, that these increases in capacity for the mill translate into significant volumes. The original project was designed at 115,000 tons of copper per year, roughly 250 million pounds. You can see our numbers. We're operating at that level in 2010. Taking advantage of this higher mill capacity, we bought some mining equipment we're putting in place. And that will allow copper production to increase to an estimated 290 million pounds in 2011. We are moving forward with our expansion project. We've had a goal to double the initial project through mining additional oxide ore. We'll be doing that in steps, and we're progressing plans to do that. We're looking to add 100 million to 200 million pounds to this roughly 300 million pounds over the next two to three years. At the same time, we're drilling a lot of core holes, doing exploration analysis to see where the future of this goes. We continue to believe this has the resource to allow this to be a world-class mine. And that's our goal for being there. We completed the contract review process with the government of the Democratic Republic of Congo. The appropriate government officials for the different agencies and our company have signed the amended contracts. We are waiting formal presidential decrees which would finalize the process. But we have a good working relationship with the government on the project at this point and anticipate working to keep that in that status. At Climax. Climax is, we believe, the world's most attractive development project in the molybdenum business. It's a pure molybdenum mine located near Leadville, Colorado. We are advancing construction to give us the ability to make the decision to start it up. We're spending money to -- even in the winter, we've advanced construction projects. We will continue this mine development in 2011. It's a $700 million project with remaining costs of $450 million. Our plans include spending $350 million in 2011. So you can see that we're going to be nearing completion by the end of 2011. The project has design capacity of 30 million pounds annually when it begins operation, and it has the resource to allow us to consider really significant expansion options beyond that. We'll continue to make the decision as to when to start hiring people to start this operation up. We're going to be in a position to do that, though, because of the money we're spending. Page 20 outlines the specific projects that we're working on that I mentioned earlier. It shows how they aggregate to these 500 million pounds of additional incremental copper production. And this is just from de-bottlenecking, restarting deferred operations, tweaking the business, not making major capital expenditures. But the major capital expenditures are things that we're really focused on. Page 21 divides those projects into two basic types. One is projects that replace depleting ore. That include Sulfolix at El Abra, the Grasberg underground to replace the pit there. Significant projects, very important to the future of our company. But beyond that, we have these resource opportunities that would allow us to significantly add incremental production to our current base levels. That includes the projects in South America, North America and in Africa with the Tenke oxide project. In aggregate, that's over 1.5 billion pounds of copper. Annually, it involves spending capital, which we're prepared to spend, have the resources to spend over the coming years. And then beyond that, there's other significant expansion opportunities that we're evaluating, studying. With good copper markets, we expect to go forward with those. And that's the Tenke sulfides, other North American mill projects, the Lone Star development. And we continue look at resources through spending money on exploration. We're increasing our exploration budget significantly this year to $200 million. You can see that's going to be spent globally, really focused on our existing properties and brownfield expansions. When we look at our 2011 outlook, we can report to you now the results of this annual process that we go through in finalizing our budgets, which our Board will be approving at its upcoming meeting. But our current sales outlook is for 3.85 billion pounds of copper; 1.4 million ounces of gold, which reflects the sequencing at Grasberg where we'll be mining in lower-grade areas this year, moving back to higher-grade areas in the future; 70 million pounds of molybdenum. Net unit cash costs at those levels and at $15 moly and $1,350 an ounce of gold, of $1.10 a pound. At current copper prices, our model would indicate $8 billion of operating cash flows with significant leverage to copper. Each $0.10 is $300 million; and $2.5 billion of capital expenditures. So very strong free cash flows. Page 24 shows that we will be producing larger volumes as we go forward. This shows the outlook for 2011 to 2013. The gold sales reflect the mine sequencing at Grasberg. And the molybdenum sales at this point do not include Climax. And when we make the decision for Climax, that would be in addition to these volumes. I've mentioned these projects under evaluation to add to those volumes, and that's what our plans are. Our objectives are: further increases in Morenci and Safford; plans in the Sierrita district, where we acquired the Twin Buttes ore body that's adjacent to Sierrita, looking for how to deal with that, either as separate ore bodies or on some kind of combined basis; the Climax restart; the major mill project; the major expansion at Cerro Verde; the mill project for major expansion at El Abra; further development of the Tenke oxides and the long-term sulfides. So these are the numbers that are approved, we're going forward with. This is what we'll be working on to add to those numbers in the future. Looking at 2011, because of mine sequencing, we'll produce higher volumes during the second half of the year than the first half. But this gives you the quarter-by-quarter outlook for copper, gold and molybdenum sales. And when you add all that together, you can see how our 2011 sales by region compare with this year. You see higher volumes in North America, South America volumes being relatively consistent and then lower volumes in Indonesia because of this mine sequencing issue. That translates into unit costs by region, which we show on Page 28, you can see the swing is really basically at Grasberg. And that is shown on Page 29, where we have a reconciliation. It reflects 16% lower volumes of copper at Grasberg and 26% below lower volumes of gold. And now, again, that's at $1,350 gold price. So the unit cost is really more of a function of volumes. It does have some impact from higher energy costs and other input costs, but it's driven principally by volumes. Page 30 shows the analysis of operating cash flows and EBITDA numbers that we typically present and that I referred to earlier. At current copper prices, $8 billion of operating cash flows and with EBITDA between $11.5 billion and $12 billion at current prices. And you can see how that varies with changing prices. Sensitivity data for your use and information is presented on Slide 31. Our current approved capital expenditures are shown on Slide 32. As we go forward, we would expect these to be adjusted upward as we deal with these projects that we are studying and have plans to pursue. We have financial resources to do this. Our company is financially very strong at this point. You can see how our debt has been reduced from the acquisition in 2007. To the end of 2010, our gross debt was $4.8 billion with no really near-term required maturities. We may have the opportunity to deal with some debt because of the call features in that debt. But net of cash, our debt is $1 billion. At December 31, the transaction that was previously announced to make the investment in McMoRan exploration was closed. FCX purchased $500 million of McMoRan 5¾% perpetual preferred convertible stock as part of a $900 million financing by McMoRan. It's convertible at $16 a share. McMoRan is engaged in drilling high-potential wells in the shelf of the Gulf of Mexico that's redefining, really, geology on the shelf, and has the potential of having very significant increases in the value of that company. And FCX now has participation in that through this convertible preferred stock. Financial policy continues to be one that's focused on maintaining the balance sheet, investing in our growth projects that we have, dealing with debt repayments when that's economic to do so. And our Board in 2010 declared a supplemental dividend that was paid in December. We'll have a 2-for-1 stock split effective the 1st of February. The current dividend is now $2 a share. Of course, that will be $1 per share past the split on February 1. And the Board will continue to have the opportunity to review ways to return cash to shareholders because of the financial performance of our company. With that, we will be prepared to open the line for questions. We appreciate your interest in our company and look forward to hearing your questions.

[Operator Instructions] Your first question comes from the line of Sal Tharani with Goldman Sachs.

If I'm looking at this slide on the growth project of the production project projection for PD or Grasberg, you have copper going down again in 2012. Is it safe to assume that costs will actually even go up further because of that?

Well, there's cost, which is the cost that you incur in running that operation. And then there's unit cost. And unit cost, if all costs stay the same and units are down, then your unit costs are rising. But costs really haven't risen. It's primarily a fixed-cost operation. So, Sal, the unit costs are a reflection of the units that are produced, both units of copper and gold, and then the gold price.

The latest merger between Lundin and Inmet, does it change anything for you at the Tenke, your plans? And since you have now resolved issues with the government, would you be interested in buying that portion for yourself?

The transaction that Lundin is pursuing is a corporate transaction involving Lundin's, and it's their own business. It does not have any impact on the structure that we have at Tenke, or it has no impact on our plans at Tenke .

Your next question comes from the line of Brian Yu with Citigroup.

My question that's on the reserve additions, could you parse out how much of that is attributable to drilling and exploration versus your changes in your price assumptions?

It's really a combination of the two. It's essentially -- the bulk of it is through drilling activity. And it's the transfer, as we've talked about, of resources to reserves. So we had these significant resources, we're doing work every day, all the time, to qualify those resources reserves. And while there is some impact in going from $1.60 to $2, the bulk of the change has to do with the physical activities through drilling, mine planning analysis that gets those resources into reserves.

Essentially, what we were able to do is to move -- a lot of this material was in our mineralized material previously. And so that was able to be moved into the reserve category, which is our goal going forward, to continue to find ways to move mineralized material into reserves. And it reflects, as Richard was talking about, the several years of drilling that was done. The price impact and economic assumptions did allow us to move it into reserves, but it was a result of the drilling over time.

This is Jim Bob. Let me re-emphasize what both Rich and Kathleen has said. The reason why it's a combination is, if you get a chance to review my presentation in New York early last year, we had this huge resource. But if you don't have core holes that are drilled into it. It doesn't matter what the prices are. You can't sit back and say, "Well, we've got this big resource and that. Prices have gone up. We'll use a $2 price." If you haven't drilled the core hole and gotten the spacing, there's less area [ph] allowed to use, the definition of a proven and probable resource going into reserves, and then you can't add it to your reserves. So if you just imagine a deposit that's got an open pit, and it's sitting there, and then the deepest wells that have been drilled right below the pit level, and maybe there's one or two to three core holes that have been drilled deeper, you might put that in mineralized material, but you can't discuss it even as a possible resource, because with just one or two or three drill holes, the spacing is just too wide. What we've done is at all of our major projects, gone in, spent probably in excess of $400 million or $500 million since the acquisition of the Phelps Dodge company, and by getting the core holes and having the data spacing, it's necessary to be able to define by assays. And then, of course, by taking the average span of those assays, we can add these major volumes. I hope that gives you some idea of why we say it's a combination of the drilling. And of course, once you get the drilling, it gives the prices that you use to cut off for a $1, $1.60 or $2. That's going to have an impact on how deep you take some of these pits and add these reserves as you drill out.

And Brian, just one more comment along those lines. It's not something you can really divide easily. Because at higher prices, your entire mine development approach may change than it would at lower prices. So you may have a bigger footprint, bigger processing facilities. And this is an exercise that we do for purposes of public reporting with the SEC. When we get into planning actual development activities, it's not targeted to a specific price. We look at an array of prices and think about how that would fit into our portfolio, what would be an opportunity to us, and how would we manage it within our portfolio. And so it is not a simplistic thing of looking at a price and saying that's going to drive how we decide to spend our money.

With your 2011 exploration budget, it looks like most of it is for your North America and South America in terms of the incremental increases. Along those same lines, can you give us a sense of how much of that is attributable to more an infill drilling versus stepping out of your existing resource base?

It's still targeted at brownfield projects and gaining defined, as I just described. We obviously have some greenfield stuff that we always have in front of the exploration program, and we've got some very interesting greenfield projects. It means that, that will be pursued. But the majority of the money that you see for our budget will be a continuation of this effort to convert mineralized material around our substantial holding and continue to add to the reserve base vis-à-vis the techniques we just described to you.

Our next question comes from the line of David Gagliano with Crédit Suisse. David Gagliano - Crédit Suisse AG: My questions relate to your project pipeline, or Slide 25 and Slide 21 on the slide deck. First on Slide 25. Of the eight or so projects that are still under evaluation, I was wondering if you could prioritize that list and, also, give us a sense as to when we should get definitive go, or no-go decisions for those projects?

It is a question, David. We're working on all of these projects. So it's, in some cases, different teams within our company working on them. So it's not like we just go from one to another. But the one really to watch near-term is this Cerro Verde project. We expect to have a feasibility study during the early part of 2011. And that will lead to a permitting process. And the major decision we're evaluating there, a lot of it driven by water resources, is whether double or triple. So that's one to watch. At Tenke, we're doing this in steps. We have permits that allow us to expand there. So it's a different process than at Cerro Verde. And we will be making progress on that and reporting that to you as we go along. I'd say the next major project that will require -- that we're working on, we're very encouraged by the progress we're making and what we're seeing with it, is this idea of a concentrator mill at Morenci. And that would be a significant capital project, but a significant incremental value driver for Morenci in our North American operation. With the Climax startup, you can see how much money we're spending. We have our plan. We're just doing it. And it's just going to be a question of saying, "When do we start hiring the operators and going to work there?" And that's going to be based on our assessment of the marketplace. But we're spending money on a much more accelerated rate than we had previously planned to spend money. David Gagliano - Crédit Suisse AG: And just to clarify, none of these are in the current mine plans for 2013, correct?

That's correct. Nothing is in our volumes or the CapEx for these projects. Except the Climax CapEx is there, but not the volumes. David Gagliano - Crédit Suisse AG: And then my last question, on Slide 21, I was wondering if you could just divide the bucket in terms of the $8 billion to $10 billion of CapEx between the left side of replacement and the right side of growth projects?

Well, at El Abra, we're just about finished with the sulfide spending there. On the replacement, we're going to be spending roughly $450 million to $500 million on Grasberg development over the next several years. So the balance of what we're talking about in $8 billion to $10 billion, aside from the Grasberg development of roughly $450 million to $500 million a year, is coming from the projects that Richard just talked about. David Gagliano - Crédit Suisse AG: And $450 million to $500 million per year over the next ...

Per year. David Gagliano - Crédit Suisse AG: Over the next four or five years sort of thing?

Right. That's correct.

Our next question comes from the line of Brian MacArthur with UBS Securities.

I just want to follow up a little bit on Dave's question. On 21, you talk about 850 million pounds out of South America, potential new copper production annually. Is that a consolidated number? I mean, where I'm going with this is, Cerro Verde could be doubled or tripled to make up a good portion of that, but do we have anything in five years for, potentially Candelaria or El Abra, at Deep? Are you thinking about that? Or is that just really Cerro Verde?

It's Cerro Verde and El Abra. It's the Cerro Verde mill project that we've been talking about, and it's a potential project at El Abra for a mill.

And second question, just on 32. When we're talking about capital going forward, you gave us $1.3 billion in 2011, which is for major projects, which I assume is $470 million for Grasberg, $350 million for Climax, $200 million for the rest of El Abra and Osden Sods [ph]. Does that mean the other $1.2 billion for all other, is that kind of a sustaining CapEx number going forward? I mean, up from sort of $700 million to $800 million?

Yes, some of the timing, Brian, of what we -- we were budgeting around $900 million or $1 billion a year in sustaining CapEx. And some of what you're seeing in 2011 and 2012 is really from prior years. But a good number is around the $900 million or $1 billion for sustaining capital.

And part of it's just this catch-up. The last half of '08 and through at least half of '09, we really cut back capital. We were cannibalizing equipment, not buying spare parts. And now, those hundred trucks we had parked are either cannibalized or going back to work. And now we're having to get some restocking coming in on that.

Right, which is why you've carried it forward for another year after that, right?

Right.

Grasberg taxes in the fourth quarter were down to 40%, which is lower than the year. Is that just clean-up of truing up? And I know it varies a lot. But nothing has changed going forward as far as the tax rate, it's just the way it worked out this quarter? Because that is lower than...

No, that's sort of strictly just the way that -- we make calculations on a quarterly basis, and it's trued up every quarter. And that reflects that. The tax rate is set by that contract award. The income tax was 35%, the withholding tax is 10%, so that has not changed.

Just with gold price over there, is there anything going on at Wabu or anything at all? Any change there?

No, there's no change at Wabu. Our work to date does not indicate that there's a resource that warrants development from our standpoint. I will say though, we do have continued exploration/drilling outside of Block A. And that work continues, as well as significant exploration within Block A.

Our next question comes from the line of Tony Rizzuto with Dahlman Rose. Anthony Rizzuto - Dahlman Rose & Company, LLC: One is, I noticed that around the holidays, there was a threat of a potential labor action there, which is not unusual. But I was wondering if you could provide us a little bit of color behind maybe what you guys agreed to with the labor there? And it seems to me that there was a very important component of allowing the increased and further development there, along the lines of expanding the operations. And the second question I have is on Tenke, and that's in regards to -- tackle that one first?

Tony, let's go ahead and let Red talk about Cerro Verde.

Tony, the team there did a great job understanding what the union's concerns were, primarily around how we do shift change and hot changes to maximize the utilization of the equipment. We got that resolved satisfactorily. And we're also looking into some of the details around how medical benefits are done. And we're going to jointly look at that going forward. So good resolution there, and we continue to be pleased with the workforce at Cerro Verde.

We do have our contract up for renegotiation this year. I recall back in 2007 and prior, it was not uncommon to have strikes at Cerro Verde for any number of reasons, some totally unrelated to our employees. And we had plans and still have plans that allow us to operate when those strikes occur. And not all of our workers would be subject to a union strike there. But one of the things that's really improved is Cerro Verde's relationships with the community in Arequipa. We're building a major water plant for them now. The community relationships are much improved. And we just don't have the kind of issues related to work stoppages that we had going back three years ago. Anthony Rizzuto - Dahlman Rose & Company, LLC: The other question I have, gentlemen and lady, is on Tenke. And obviously, with the contract review process completed, I understand there's another political or another election this year, if I'm not mistaken. I'm wondering how comfortable are you that this whole thing may not be reopened again?

Well, there is a presidential election scheduled for the end of 2011. That's a normal cycle presidential election. There has been some changes in the constitution there about how that election will be conducted. But we're confident that our contract now has completed this 2 1/2 year-plus review process. I don't think anybody will have an appetite for opening it up. We'll be a significant tax payer. The government will be getting -- after a recoupment of the capital that we've invested on their behalf, in the future, there's dividends coming to them. We have a workforce that approaches 5,000 people, 80% of those are Congolese. And the operation's going relatively smoothly, and everybody's focused on expansion. So we think all that adds up to giving us a lot more comfort about our relationships with the government than we've had during the course of this contract review.

Our next question comes from the line of Mark Liinamaa with Morgan Stanley.

I'd like to just ask about the new royalty structure that was discussed in some articles yesterday in Chile. Is that included in your guidance? And how much of a change is it? And do you expect that sort of thing to maybe happen in Peru or elsewhere?

Let me just say, and then I'll let Kathleen talk about the details, this is a special situation in Chile that's related to the country's recovery from the earthquake. And it's been a matter of discussion for some time now. And there was a give-and-take between the government, the administration, the parliament and the industry to come up with a structure that would provide some near-term cash to the government to deal with the significant investment they're having to make from earthquake recovery and to do it in a way that would be acceptable to the miners there. And we're supportive of it and believe that they've come up with that. Now Kathleen will talk about how it affects us.

It is reflected in our results for the year 2010. The impact of pre-minority interest was about $16 million. And it is reflected in our results going forward, and it depends on prices and margins at each operation. But as Richard said, it is a contribution to the recovery of Chile. And we were pleased to be a part of contributing to that effort. And you asked also about Peru...

Peru, we have a current stabilization agreement at Cerro Verde in connection with our expansion, which the government is very supportive and encouraging of us expanding there. We will be talking about the possibility of a new stabilization agreement with the government at that point.

Is there any comment you can make associated with, maybe, non-Freeport investments in infrastructure in the Congo that would allow you to develop Tenke up to its full potential?

The infrastructure development in that country is a major priority and a great need for the country. There is work being done with the Chinese, and they're discussing issues with the Koreans and others about it. We're having discussion with other miners there about the ultimate development of a rail connection, most logically through Angola. That would be done on a cooperative basis with companies and the government. And so that's something we're working on. Power development is another factor that we're investing in significantly now. Will require further investments, roads. So this whole infrastructure development issue is an important one, and we will be a player in that and there will be other players involved. We'll say, though, we talked a lot about this trucking issue, and it's not without its adventures, but overall, it is working very well. I mean, we are able to move product going all the way down to Durban. And costs are up because some diesel costs are up. But overall, that system's working well. And that will be the source of transport for the next expansion that we work on.

Our next question comes from the line of John Redstone with Desjardins.

Firstly, off the top of the bat, if you could clarify the situation regarding Climax? In other words, given where we are today, what would be the earliest date that, that operation could be into production?

2012.

Early 2012 or late 2012?

Well, the earliest would be early 2012.

On Slide 31, you've outlined in great detail, actually, the impact that diesel, purchase power and currencies have on your EBITDA. And I was wondering if you had or if you were considering taking any steps to mitigate the risks of these inputs and maybe locking prices and so forth going forward?

No. I tell you, we look at this and we see correlations between many of these costs and the copper prices. And philosophically -- we have not hedged copper prices. And as a result, with a couple of minor exceptions, and historically, we've not hedged any other costs as well.

Our next question comes from the line of Jorge Beristain with Deutsche Bank.

Related to the use of cash flow. If you could rank in terms of your preference for use of cash in 2011, CapEx dividends including extraordinaries, the potential for buybacks and, lastly, M&A. Because it would seem that given the consolidation happening in the copper industry, just wondering what Freeport's thoughts are in terms of how the potential for M&A? And would you remain copper-focused?

Well, in terms of priority, it's CapEx, CapEx, CapEx, CapEx. I mean, that's our number one priority. To the extent that we can identify projects that have attractive rates of return and contribute to our growth, that's what's going to be our number one priority. And beyond that, because we're now an investment-grade rated company with all the credit rating agencies, banks are, can I say, very amenable to talking with us about financings if we need it. We won't have any need of keeping significant cash in the company, so that allows the Board to think about dividends and stock buybacks. That's a subject of ongoing discussions. With M&A activity, it's difficult. And we are in the deal flow information we have. You can rest assured that bankers present every opportunity that's available globally to us. And we have discussions and we have groups that follow projects and so forth. It's not something, I think, and my experience has been, you can't plan these unless you have a strategy of growing through acquisitions, which we do not. We have a strategy of growing through internal investments. And so potential M&A opportunities are opportunistic, and we're certainly listening to opportunities. It would have to be something that would be attractive to us incrementally to what we're doing with our basic strategy. We would not necessarily be limited to copper and molybdenum. And so we would be open to ideas. Our experience has been that it's difficult to see how those work for us given our company's situation and our internal investment opportunities.

Maybe you could touch upon your outlook for the copper price side. Typically in a quarter, you talk about how you're seeing better demand from industry. Could you comment what you're seeing right now in terms of the end pull for copper? And if you think the current copper price is fair in the context of what you're aware of in the world?

Well, Jorge, the copper price -- I'm asked this all the time in the media and others. And the current copper price is what it is. I mean, it's just the result of the marketplace at any point in time. It's affected by investment fund flows, that can affect the absolute price at any point in time. And it accretes, it affects the volatility in prices. All of you know that, and that's just what it is. So I don't even allow myself to think about whether the price is fair or not. It's what it is. And we don't really have a view about predicting short-term price movements. We're not traders or hedgers. So we're optimistic about the economics of this business, longer run. And that's driven by the supply challenges that you can see. We would like to turn the spigot on and produce more copper today. But we can't do that because of the time it takes to drill resources, to get permits, to get water and power and so forth. And that's the double-edged sword. We can't turn it on quickly. But because we can't, others can't either and that leads to strong prices. So we're optimistic about the future. Don't know what short-term prices are going to be. Now, in advance of each of these meetings, I have our marketing guys around the world give me comments that they're hearing from customers. And when I got those for this meeting, I looked at them and I was very encouraged by what I saw, encouraged by what we're seeing in Asia. And in the U.S., in general, it's a continuing improvement situation, same way for Northern Europe. But still, those customers that are linked in to residential, commercial real estate have weak businesses. But others are seeing their business is strong, they've adjusted to us. They are concerned about how copper prices, because of the working capital implications, the potential substitution. But offsetting that substitution is new markets that are increasingly becoming important, because of the investment in energy-saving devices, the potential future of hybrid and electric cars, the mechanization and electronics that's being put in all processes today. So fundamentally, we feel very good about the marketplace. We feel good about 2011, and we're very positive over a longer period.

Richard, let me make a comment about our investment strategy. With the kind of cash flow you heard that were going to be generating, assuming copper prices stay buoyant, it gives us a great opportunity to be on the lookout for big deals. And the answer is, one of the things that controls our investment strategy is we're not going to get into a situation where we take on a small deal. Because we've learned quickly, over the last 35 years of running this, as a resource business, that small projects get smaller and big projects get bigger. So we're focused on taking the opportunities. And unfortunately, when you define that investment strategy, it means that there's many projects that you look at that may have some interesting core holes, on an issue of drilling or additional exploration. But unless you're convinced that it's a big opportunity, especially with the fact that we have our mineralized material and our resources still are vast that we have not exploited. You've heard us say we've added significant reserves. Since the inception of our exploration, exploitation of these brownfield projects after the Phelps deal, we've added over 40 billion pounds of copper. Over 40 billion pounds of copper, 42 billion to be exact. That's the equivalent of Collahuasi, that's the equivalent of a Outonga [ph]. So you can see why we have a great propensity to continue what's been successful. To take a great resource that we have and make sure we define it. But big projects are our target, because that's the only thing that's going to add value to the size of the resources that we have. And that's what you're looking for.

Our next question comes from the line of John Tumazos with John Tumazos Very Independent Research.

How much engineering, metallurgy, geology staff do you have? The brownfield projects are superb economically but also from a personnel standpoint because you have the whole suite of specialists at each producing mine. Do you have the personnel to undertake even one project away from your core operations if there was a new discovery or a new project? How much human capacity do you have? I'm sure your guys are working very hard.

John, this is Jim Bob. With the combination of the Freeport and Phelps Dodge, human resources will remain ideal. We have the finest and deepest bench that you can imagine. And of course, in order to do all the things you've heard us say we're doing, where we react to changes in the market conditions, we've been engaged in trying to define these assets and make sure that everybody understands where our best opportunities are. But there's one thing you can be assured, we suit up the finest human resource group, all the way from our mines to our research, to our financial people. This company is blessed with the best people we could possibly have. And we have enough people with the amount of experience we have, hundreds of user experience, most of which are experienced right here on either the Freeport or the Phelps Dodge properties, so that's not an issue that we even think about. We just are blessed to have the human resources group that we have.

And one thing, John, too, that we're benefiting from is these years of experience that we have are developing new people. And they're not new now. But in Africa, Tenke Fungurume, you see a lot of Indonesian faces. We're using people from South America for the underground development at Grasberg. People that work with us, because of the broad scope of our open-pit mining, our underground mining, our concentrator mill processing and our SX/EW operations, have gotten tremendous amounts of experience. We're always looking for good people, and we're filling in. But for example, as we undertook the remaining of the Chino project with adding 500 or so people, we realigned some responsibilities, and all of that's going very well.

Your next question comes from the line of Charles Bradford with Bradford Research.

There's been a lot of talk, obviously, about the cash needs in Chile and Peru. But what about the U.S.? There had been talk a few years ago about redoing the old Mining Act. Some of the states where you operate are in pretty bad shape. Are you seeing any pushes locally or within the U.S. to increase taxes or royalties or anything else?

Well, the Mining Act changes are still being debated. And we're engaged in that through the American Mining Congress. Most of our properties in the U.S. are owned in fee. So the discussions about government royalties don't apply to many of our operations. Here in Arizona, where the most significant of our operations are, there is a significant budget deficit. But there's a real focus on job creation. And we meet frequently. I'm meeting with a governor this afternoon, as a matter of fact, and talking about this notion of our ability to invest and add significant numbers of jobs in Arizona. So the politics are what the politics are globally, and we in the industry have to live with them. And as prices go up, governments, employees are going on a push for more. That's had an impact, as you know, in a number of operations and seeing projects deferred, as has environmental and community acceptance. So all of this adds to this issue of the supply, the supportive nature of the supply situation.

Your next question comes from the line Stephanie Chicharo [ph] with Barclays.

I just have noticed that you have done a very good job reducing debt. And I know the 2015s are callable in April. And I was wondering if you had any color on possibly refinancing those or how you view your capital structure?

We haven't made a decision. We have the ability to call those, as you mentioned. And so we'll be looking at whether to call and refinance, repay with the cash on balance sheet. We haven't made decisions as to where we go, but we have opportunities that look economically attractive.

The face interest rates on our existing debt is substantially higher than what we could obtain with new financing in the marketplace.

Your next question comes from the line of Andrew O'Connor [ph] with Harris Investment.

I simply wanted to gauge your sense of risk regarding your metal end markets today relative to, say, 12 to 18 months ago. And you've already spoken of this a little bit. But are you more inclined to use debt today at what are still low interest rates to finance the company's organic growth versus, say, 12 to 18 months ago?

Well, clearly, I think the world is stronger today than it was 12 or 18 months ago. I think most clearly evidenced by the improvement in the financial sector. The banks are stronger, pockets of growth are there. And there's still risk that you read about everyday, and those risks are still there. But I think everyone would agree the world is stronger today than it was 12 or 18 months ago. And we certainly see that for our business in terms of the fundamentals of selling copper. So it's there. Now our situation is, we're making so much cash at these levels, the need for financing is very low. The financing is there, as Jim Bob referred to, if an opportunistic big deal came along, we could finance that. But in terms of seeing our capital requirements as we go forward now, we have sufficient cash to pay for those.

Our final question comes from the line of Brett Levy with Jefferies & Co. Brett Levy - Jefferies & Company: I know that on the Alcoa call, they guided to a 2011 demand growth of about 12%. There's also been a couple of articles out there talking about certain applications where aluminum is a substitute for copper. Can you -- whether it's your own sources or an external source, can you talk about what you see is an absolute percentage of demand growth for copper globally from '10 to '11 and then maybe even '11 to '12? And then also talk about sort of whether or not you think there's any significant risk of copper-to-aluminum substitution?

Well, copper in the developed world has historically been the commodity that's most closely correlated to industrial production changes. So if you look in the developed world and take your own view of GNP/IP growth, in the large part, you're going to see what copper demand is going to be. Then China, which today is between 35% and 40% of world consumption, is its own special case. And as I said, stories today is about China's GNP growth. And they're spending tremendous amounts of money on projects that require copper. And when you look out over the future years and think about what's ahead for China, in terms of its own internal development, its demand for copper is very significant. And then the rest of the developing world in Asia and South America adds to that. So I would refer you to the analysts that follow this supply-demand balance. They've been right, they've been wrong. We sell all of our product to end users. We don't sell to exchanges. We sell very little amount to traders. And we see demand being very strong. Brett Levy - Jefferies & Company: Double-digit strong?

No, not double-digit strong. But going from the 2% to 3%, maybe to the 4% to 5% kind of levels, which is really significant for copper, considering the challenges that the market has for supply in place. I mean, most people are expecting a deficit. But I got to tell you, we're focused on dealing with our customers and our operations. We don't see ourselves as market gurus. There are lots of those out there, and we read them all and think about how we plan our businesses. And that's the way we respond.

Richard, let me add a little color to that. I'm not a market guru either. I'm an exploration geologist. But I'll tell that back in 1980, when we put McMoRan and Freeport together, the conversation about the replacement of copper with aluminum kind of reminds me of our energy policy in the United States where people in the 1950s said we were going to become independent of OPEC oil. And 1960, 1970, 1990, 2010, we're still trying to figure out how to become nondependent on OPEC oil. And back in 1980, '81, when we considered the combination of the McMoRan and Freeport companies, the big consideration was, was fiber optics going to replace copper? And all the same conversations as you're talking about right now were going on then, and yet the rest is history as to whether aluminum became -- or fiber optics became an option to using copper. But copper users are so varied today with the Third World countries becoming as economically improved as they are. So as I say, this conversation has been going on for 47 years that I know of, and it'll be going on 40 years from now.

And with respect to aluminum, there had been uses for aluminum that traditionally were copper uses. But at the same time, copper can't compete with -- I mean, aluminum cannot compete with copper because of its fundamental qualities in conducting electricity. There's a lot of barriers to substitution because of the investments that are required. And there are new uses being developed for copper because of the way the world is changing, that copper is really moving -- when it is replaced, is really moving to higher uses in the economic cycle. So it's a great commodity because it is so difficult to replace for its fundamental uses.

One last issue from my side. When you look at the copper and project the amount of copper that's going to be available to the market, to the extent that has an impact on the prices, what you have to remember is, since 1980, '81, when I started doing my research on putting the two companies together, the other issue that people continue to misunderstand, if you go back and plot from 1980 to today, there's been a hell of a lot more copper used then we've found. So we haven't been replacing our reserves. We've been lucky and replaced our reserves, as we talked earlier today. If you look at the amount of copper that's been used versus the amount of copper that's been found since 1980, it would overwhelm you.

I'll now turn the conference back to management for any concluding remarks.

Thanks, everyone. We will look forward to reporting our progress in 2011 and appreciate your interest in our company.

Ladies and gentlemen, that concludes our call for today. Thank you for your participation, and you may now disconnect.