Freeport-McMoRan Inc. (FCX) Q4 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Fourth Quarter Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Ms. Kathleen Quirk, President and Chief Financial Officer. Please go ahead ma'am.

Thank you and good morning. Welcome to the Freeport McMoran conference call. Earlier this morning we reported our fourth quarter and year-end 2021 operating and financial results and a copy of today's press release and slides are 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. 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 today's comments, we'd like to remind everyone that our press release and certain of our comments on today's call include forward-looking statements and actual results may differ materially. We'd like to refer everyone to the cautionary language included in our press release and presentation materials and to the risk factors described in our SEC filings. On the call with me today are Richard Adkerson, our Chairman of the Board and Chief Executive Officer; Mark Johnson, who heads up our Indonesian Operations; Josh Olmsted, who heads up our Americas Business; Mike Kendrick, who leads Molybdenum business; we’ve also have Rick Coleman and Cory Stevens, who support our team with engineering and construction, technical services and support for our growth projects; and Steve Higgins, our Chief Administrative Officer. I'll start by briefly summarizing our financial results, and then I'll turn over the call to Richard who'll review the slide materials on our -- in our presentation. And I'll make some comments, and then we'll open up the call for questions. Today, FCX reported fourth quarter 2021 net income attributable to common stock of $1.1 billion or $0.74 per share, and adjusted net income after excluding net charges totaling $0.3 billion or $0.21 per share was $1.4 billion or $0.96 per share for the quarter. For the year ended 2021, our net income attributable to common stock totaled $4.3 billion, $2.90 per share, and adjusted net income totaled $4.6 billion or $3.13 per share. We have a reconciliation of our adjusted net income on VII in as part of today's release. Our adjusted earnings before interest taxes and depreciation for the fourth quarter totaled $3.2 billion and for the year totaled $10.9 billion. We've got a reconciliation of our EBITDA calculations on Page 43 of our presentation materials. Our team delivered great volume growth during the year, our copper sales of over a billion pounds during the fourth quarter, approximated our guidance going into the period. And for the year we sold 3.8 billion pounds of copper that was a 19% increase from 2020. Our fourth quarter 2021 gold sales of 395,000 ounces or about 5% above our guidance went into the quarter. And that reflected higher throughput rates in Indonesia. Our annual gold sales totaled 1.4 million ounces for the year and were 59% above the 2020 total. We benefited during the quarter from positive pricing for copper. Our average realized price of $4.42 per pound in the fourth quarter was more than $1 per pound higher than the fourth quarter of 2020. Our realized gold price of $1,808 per ounce was slightly below the year-ago quarter. And our results also benefited from improved molybdenum prices, our realization in the fourth quarter of 2021 of over $19 per pound was almost double the year-ago periods realization. Unit net cash costs during the fourth quarter averaged $1.29 per pound of copper. That was slightly above our estimate of $1.26 going into the quarter, but that reflected a charge -- a non-recurring charge associated with the successful completion of our multi-year collective labor agreements at Cerro Verde in Peru. Strong cash flow generation again during the quarter, we generated $2.3 billion of operating cash flows. And for the year we generated $7.7 billion of operating cash flow, and that exceeded our capital spending of $2.1 billion for the year. As you saw in November of 2021, our board approved a new share purchase program, authorizing purchases of up to $3 billion of FCX common stock. Through January 25, we acquired 15.4 million shares at a total cost of $600 million and that was an average price of $39 per share. The board also approved in November, an increase in common stock dividends for 2022, effectively doubling our common stock dividend. And on December 22, we declared dividends totaling $0.15 per share that will be paid on February 1 of this year to shareholders of record as of January 14. Our balance sheet is strong. You'll see that in the results. The net debt at the end of the year, totaled $1.4 billion. And we had no borrowings under our $3.5 billion revolver. So we've got strong liquidity with $8 billion of cash at the end of 2021. I'd now like to turn the call over to Richard who'll be referring to our presentation materials on our website.

Thanks, Kathleen. And hello everyone. The end of 2021 is a special time for our Freeport team. We've met a series of multi-year complex challenges with great success. You start by looking at the debt picture, which Kathleen mentioned, just six years ago, our debt was a $20 billion, and the way to manage it was really unclear. We have now reached the point where our debt is de minimis. We have started a program of shareholder returns with higher dividends and share buybacks. We have assets in our outlook that will allow us to increase those over time. Our credit rating has been raised to investment grades by two of the agencies. Then you look at the Grasberg underground project, which goes back much further. We begin our initial plans for this underground operation in the mid-1990s. We began spending capital 20 years ago. By the end of the year, we met our target by reaching our metal long-term run rate. We are taking steps successfully and have the way forward to increase our mining rate to well over 200,000 tonnes per day from the underground that's just remarkable. During this period of ramping up Grasberg, we had challenges in our dealings with Indonesian government about our contract of work. We resolved those three years ago. And I'm pleased to report that our relationships with the government of Indonesia is one now cooperation, working together mutually for common goals. Relationships have never been better. Then two years ago, we started facing COVID. That was a huge uncertainty for us. At the time, we took aggressive steps to be prepared to manage the risks that were emerging. We've successfully managed our way through that and achieved our debt reduction Grasberg underground from that standpoint. ESG is on everybody's mind these days. It's always been part of our psyche at Freeport, because of the nature of operations that we've begun aggressive efforts to deal with climate change, impacts of our operations. We're working with the copper industry with this copper mark designation, which we have been a leader and working with ICMM with communities. I became Chairman about a year ago, I made commitments to myself to strengthen Freeport's board. This year, we've added six new directors for our well-known highly regarded CEOs with extensive international business experience who add a lot to our board. We have two women, we added that both our financial experts, experienced in audit committee dealings, one is proudly is an Hispanic. It's just been a great work by our team, we have a real sense of accomplishment. And we're really looking forward now to the future with optimism, commitment and excitement. Turning to our results, our copper volumes grew by 19% compared with the prior year, reflecting this ramp up in Indonesia. Our unit costs decline despite rising energy costs in other unit and other input cost. Our team's done a great job of managing the challenges of supply chain and cost inflation. We generate strong margins. Our EBITDA and cash flow rose by 2.5x over 2020. And we ended the year with just over $1 billion in net debt. And we're well prepared with our long live reserve and resource base to advance organic growth over time. Now with the ramp up at Grasberg reaching the point of where it is. We're now looking to our operations in the Americas for future growth. It's nice to talk about accomplishments, but we're all focused on what we go, where we go from here. How we build more value for our company. And we have a great opportunity to do that. Copper, over 20 years ago, our company made a commitment to copper and it was driven by a supply side constraints that we saw in the global marketplace, at that time growth in China. And we have fundamentally stuck with that. We -- our board made a diversion with this oil and gas deal, but that's behind us now. But the fundamental outlook for copper as positive as it was 20 years ago, is now even more positive and it becoming increasingly positive, it is driven by coppers role in the global economy, just fundamentally the need for copper and as the world develops, so that in China. China continues to be an important part of the market. Global growth will occur outside China. But the new elements of demand are really significant. Any investments in carbon reduction and everyone's talking about carbon reduction, require significantly more copper than then the world is required in the past. Electrification is the key to climate change. And two-third to three quarters of coppers use is dealt with electrification, whether it's electric vehicles, alternative energy generations, all of these require much more copper than the traditional power. Then you look beyond that to technology advances in communication is artificial intelligence. Expanding connectivity is infrastructure is developed around the world public health initiatives. All of these are creating what I'm calling a new era of copper demand. And these are broad based. They're inevitable. Copper will be affected by risk to the global economy from time-to-time. But underlying that is a long-term, very positive outlook for copper. And our company is solidly positioned to benefit from that. If you add that together with supply and scarcity and the demand factors, and you have a real compelling case for investing in our company. We're seeing increasing scarcity in supply, at a time when demand is growing so significantly. There are a limited number of projects, which have been under development for some time now that are scheduled to come on stream in the near-term. But when you look beyond that, it's hard to find actionable projects that are can be developed within a very short period of time. It just takes a long time. And then there's increasing political risk around the world that will have its impact on copper supply development. Notably in Chile and Peru, where 40% of the world's copper comes from, there's new President who run on agendas that are oriented towards social programs that require more revenues to implement and how the industry and the governments deal with that will be very important. But beyond that, you see this in countries like the United States, you see others countries restricting new supply development for community social issues. Countries around the world are demanding more of miners in terms of revenues that goes beyond Chile and Peru, ranging all the ways from Asia to Central America to Africa. All of these things add into supply constraints at a time when the world needs more copper. We're focused on the long-term outlook for our markets. We always prepare ourselves and recognize that near-term risk may emerge to the global economy. Now we're strong financially to deal with those risk. We structured our business in a way that we have flexibility to manage it, so we're much more comfortable today about whether our company is positioned to take advantage for what we believe will be a very positive view for copper as a commodity. If you look at our reserve base, the report reserves this year, based on mine plans of $2.50 copper. We don't limit ourselves to looking at projects on that basis, because we have an optimistic view about copper that we have a more than $2.50 copper, we have more than a 25 year reserve life approved in probable reserves. And beyond that in our incremental mineral resources, we have enormous amounts of copper that over time will be brought into reserves as we doing Asian drilling and engineering work that you bring those into reserves and up with the new projects. This is really a key asset for Freeport. It provides us a lot of options for the future. When you look at the scarcity in the industry for development opportunities. Report does not need to rely on acquisitions to support our long-term future. We always monitor opportunities, but we have the assets within our company and how to sustain our business in growing significantly over time. With these favorable markets, our margins and cash flows are growing. We have well established plans. Our whole team globally is focused on executing plans to produce more copper, produce it at a lower cost. We built a strong foundation for the future. We had significant sales increase in 2021 that growth factored in. For the near-term. There's no 13% in 2022 improving in 2023. We have the risk in our plans, expect growing margins and are really prepared to execute to generate the cash to support returns to shareholders as we invest in future growth. Looking at the slide now, now that shows the successful ramp up of the Grasberg in underground. I just wish you all had seen him, because I got a big smile on my face. When I look at this. It's really significant with what we've done there. Our team there is just really to be complimented. Meeting all these challenges. It's not -- was not to ensure of a monumental task. As I mentioned earlier, it was years to achieve this. The underground development. Turning to the next slide, over 350 miles of tunnels seven miles of an underground railroad with tea and electric trains running for huge crushers, five miles of conveyor belts, these shafts to take large numbers of people down underground. It's all underground, over 500 drawbells have been open, almost 350,000 meters of undercut. And we're really on track to achieve long-term sustainable rates of in excess of 200,000 tonnes a day from our mines through our mills. This gives us a very strong base of long-term, we've done this now to create return Grasberg to be the second largest copper mine in the world, the largest single gold mine even though it's a byproduct, look at it fourth quarter when we had our net cash costs in the face of all this inflation of only $0.08 per pound for the second largest copper mine in the world. We achieve long-term run rate of 1.6 billion pounds of copper a year, over 750,000 tonnes. All this looks simple on paper, but man it was a challenge to get it done and our team deserves a tremendous amount of credit for doing this. Now we look at where are we going to grow for the future? How are we going to sustain our business for the future? This new lease technologies that we're working in the Americas is a huge opportunity for Freeport. Our company historically was a leader in developing leaching. Our Morenci Mine in Arizona is the world's largest leaching operation in today's global copper market. And this technology that we will have to improve recoveries and achieve recoveries from historical waste stacks is creating copper that no one thought we had the opportunity to recover is really significant for us. Then we have our mine in Northwestern Arizona, the Bagdad mine which has a long reserve life, set up perfectly for mill expansions and to achieve greater volumes out of it in a relatively straightforward way. In Eastern Arizona, we have the Lone Star mine, which I truly believe someday will be the All Star Mine for Freeport, we're working in expanding recoveries from the oxide ore that is there, taking advantage of facilities that are nearby us, Safford mine, which is where production is declining, as planned. But underneath that the Lone Star mine has a sulfide resource that I really believe will make it be the All Star Mine for us. The project in Chile that the world will need we're waiting to see how things unfold there. And then this Kucing Liar mine that we have undeveloped at Grasberg is going to be an important part of our future there. This will be one of the world's largest Block Cave mines in its own way 80,000 tonnes a day. It's got resource of six billion pounds of copper, five million ounces of gold for 2041. We're talking with the government now with preliminarily about rights beyond that, and that mine will be producing well below 2041. Well, that's on stream, we are targeting getting up to 240,000 tonnes a day of mine rate, mill rate out of the operations Grasberg. There's a slide on Lone Star that I referred to earlier, you can see the data how we are increasing it, but the real there, the oxide development will be profitable at the volumes attractive cost. But the real long-term price there is this sulfide resource and underlies the oxide. It's very large, it take time to do it. But it'll have a complex we believe ultimately similar to the Morenci mine, which is the largest mine in North America. Now, this unique technology is something you'll hear a lot about from us, throughout the energy industry. We will be a leader here, we are looking at several different types of technologies. All of them are excited, Cory is leading our team here. And it's really a new element of demand just in our existing waste stacks. We have, we believe we have almost 40 billion pounds of copper in those stacks. And even small recoveries out of that could result in copper, that would be equivalent to developing a whole new mine. So it's early stage technology, lot of work to do, a lot of excitement by our team about doing this. So it's really good. I want to close by just recognizing our team around the world. I'm so proud to be part of this team. We got a group of people that are technically competent, that are highly motivated that work together cooperatively that are buying into making Freeport, the foremost copper company in the world and keeping it there. And we have the capabilities on hand to meet and exceed our expectations, exceptional opportunities for our business. And I want you to know that regardless of what you read out in London, I'm planning on staying part of this team for as long as God's willing to allow me to do it. I'm having more fun now than I've had in years. And I'm really excited to be part of this team as we go forward. So Kathleen, I will turn it to you.

All right, thank you Richard. And I'll just start on Slide 17 and make some comments on our operating and financial matters and then we can turn it over to your questions. We're providing some additional details on our fourth quarter operating activities on Slide 17. And as Richard said, the Lone Star mine, he has now renamed it is All Star Mine but it continues to perform above the design capacity, you'll recall we commissioned the mine in the second half of 2020. And last year, we produced 265 million pounds of copper. That was a 30% increase from the original design of 200 million pounds per year. We've incorporated now a further incremental expansion into our plants, which will take us up to 300 million pounds per year by 2023, with an investment of approximately $250 million. And as Richard mentioned, as we accelerate the mining of the upside ores, this will expose us to a larger sulfide opportunity. At Morenci, we're gaining momentum on our leach initiatives. We have substantial material that has already been placed on leach stockpiles, which provide an opportunity to increase our copper production at a low incremental costs and notably a low carbon footprint. We're applying new technologies and using data analytics and censoring to measure our success. And we're very encouraged by some early wins and are optimistic that there's much more to come. We started the effort at Morenci because of its significance, but the early wins at Morenci have allowed, the team at Morenci to share its findings across the portfolio. And this gives us a significant value opportunity for Freeport, and we hoped to report progress, ongoing progress to you as we go through the year. We also continue to ramp-up mining and milling rates at Morenci and we estimate that production from Morenci will be about 10% more copper in 2022 compared with 2021. In South America, our teams there doing great work to restore production to pre-pandemic levels. The 2021 sales from South America were about 8% higher than 2020 and we're projecting an additional increase in 2022. We continue to target a full restoration at Cerro Verde of its mill operations during this year. And we'll be on our way to getting back to a billion pounds per annum from this large scale operation. Our team at Cerro Verde continues to do outstanding work and managing the pandemic and had really a terrific fourth quarter. We were also successful in finalizing our multi-year labor agreements at Cerro Verde during 2021. At El Abra in Chile, we're making good progress and increasing our stacking rates of material on our leach pads there and we're also advancing construction of a new leach pad to accommodate the higher rates. We're expecting a 30% increase in 2022 production at El Abra off of a relatively low base. But we plan to sustain a level of 200 million to 250 million pounds per year for the next several years as we assess opportunities there for future growth. At Grasberg as Richard mentioned, the highlight of the year was really reaching our targeted net metal run rate in the fourth quarter. This was an enormous milestone of success for us. We're all proud of it. We're focused on sustaining this during 2022 and we'll have opportunities to increase our mill throughput rates in the second half of next year with the completion of our new SAG circuit which is under construction. Our team at Grasberg is as energetic as ever working to advance Kucing Liar and several other projects in the portfolio. Our next slide of Slide 18 is just an update on our progress to develop new smelting capacity in Indonesia to meet our commitments to the government. The site for the new smelter is starting to take shape as you can see from the photo on the slide. In the fourth quarter we completed the pile support for the flash furnace and are starting to pour concrete. We also completed agreements in the fourth quarter with our Japanese partner to expand the existing smelter at P.T. Smelting. We're focused on completing these projects as efficiently and timely as possible. We've been funding the cost of the smelter through a $1 billion bank credit facility that PT-FI secured and we're planning additional debt financing at PT-FI which can be obtained at attractive rates to complete the project. As indicated on the slide, the long-term cost of the financing for the smelter would be essentially offset by a phase out of the 5% export duty, so the economic impact is not material, we provide on Slide 19, a three year outlook for volumes and just we're pleased to report our execution is on track, we have some minor offsetting changes to our prior guidance for copper sales for 2022 and 2023 and now included our current outlook for 2024. After delivering a 19% increase in copper in 2021, we're projecting a 13% increase in 2022. And this includes higher production across the portfolio. We've got further growth planned for 2023 in our leasing plans and our sales for copper in 2022, we estimate about 36% will come from the U.S., 27% from South America, and about 37% from Grasberg. We're showing on Slide 20 how the quarterly volumes work out we're expecting grades will be lower in the first half at several of our sites in the Americas and that will be increasing throughout the year. You can see our gold sales are fairly steady and roughly 400,000 ounces per quarter during 2022. On Slide 21, we show a comparison of our net unit cash costs for 2021, and we roll that forward to 2022. And you can see that the costs are pretty similar between the years. For some time, our global team has been focused on cost management and efficiency projects to extend equipment lives, improve energy efficiencies, maintenance practices, and using technology to help us in all of this. This is serving us very well in the current environment. And we're also supported by is the great global supply chain team who's doing terrific work with our site operations management and through our partnerships with long-term suppliers to address our business needs. As you'll see on the slide, our estimated, consolidated year in cash costs for 2022 are expected to be very similar to 2021. We've got increases that we're experiencing in for input costs, including energy, sulfuric acid, we've got some higher labor and outside services costs for 2022 compared to 2021, and higher costs for materials and supplies, but that essentially is being offset by our higher volumes. We're going to continue to focus on cost management provide our operators with technology driven solutions to assist with the current cost pressures and inflationary environment. Richard mentioned the strong cash flows that we're generating, and we see that continuing in the future. On Slide 22, we show the significance of our cash flow using our volume and cost estimates and prices ranging from $4 to $5 copper, and holding gold flat at $1,800 per ounce and molybdenum at $19 per pound. We show modeled results excuse me using the average of 23 and 24 and you see here that annual EBITDA over this period would range from $12 billion per annum at $4 copper to over $16 billion per annum at $5 copper, and our operating cash flows would range from nearly $9 billion a year to $12 billion per year using these scenarios. As demonstrated in the last several quarters, we're generating significant free cash flow and this trend is expected to continue with cash flows significantly above our capital spending. Moving to capital spending, we show on Slide 23 our outlook for capital. For 2021, our capital expenditures, excluding the smelter costs totaled $1.9 billion and that was slightly below our guidance excluding the smelter of $2 billion. We're projecting capital of $3.3 billion in 2022 and $2.7 billion in 2023. The primary change from our guidance -- prior guidance for 2022 reflects the addition of the incremental Lone Star expansion, and our plans to advance the Circular project at Atlantic Copper. You'll also notice a large decrease in spend on the Grasberg Block Cave and Deep MLZ beginning in 2023. And you've also seen here the discretionary projects that we're advancing to improve profitability and value as we go forward and about 20% of the capital for the next two years reflects recent value enhancing additions. And those are detailed more on Slide 24, where we have a summary of the discretionary capital, we've added to our plan since achieving our net debt targets last year and commenced our shareholder return policy. These projects all have solid financial returns, great operational benefits and again represent value enhancing investments using a portion of the 50% of free cash flow, we are earmarking for organic investments and balance sheet improvement. Our free cash flow generation is significant. And that's supported by growing volumes, positive markets and low capital requirements. You'll see on Slide 25, and Richard highlighted this, not only the last what we've done over the last several years, but just in 2021 alone, we reduced our net debt on nearly $5 billion and our EBITDA continues to grow. We're really in a fantastic position to execute our strategy, maintain a solid balance sheet and return substantial cash to shareholders. Our financial policy is summarized on Slide 26 is centered around a strong balance sheet and combined with the performance based payout policy that provides for up to 50% of free cash flow to be used for shareholder returns with the balance for growth and further balance sheet improvements. As you'll see on Slide 27, we commenced the implementation of the policy following our board's actions in November of last year. We purchased nearly $500 million in stock in the fourth quarter, and through January to-date, our purchases, cumulative purchases total $600 million. We're well on our way to using our $3 billion authorization. Our Board also approved a variable dividend for 2022 which essentially doubles our common stock dividend. The combination of the share purchase program, and our dividends are designed to distribute 50% of our cash flow, while maintaining the balance sheet in a super strong position and providing flexibility for our long-term investments. So in summary, I just want to echo what Richard said, we're well positioned for success in 2022 and beyond. Our team is passionate about execution. We've got momentum, and we look forward to building on the success. And operator will now like to turn the call back to you to start the Q&A session.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. The first question comes from the line of Emily Chieng from Goldman Sachs. Your line is now open.

Good morning, Kathleen and thank you for the update this morning. My question is just around the Bagdad expansion. I believe in this slide. There is a comment around potential for construction to commence in 2023 with a potential 2026 turn out. That's could you talk about the progress you've made to date there and advancing sort of technical studies as well as any final hurdles to be met before project sanction and early indication of what CapEx could potentially look like for this CapEx?

Emily, we are starting feasibility of that project now. And we've been working on various scoping level studies over the past several years, as we've been discussing, but we are starting the feasibility study, and that will really define the final cost estimates. But we think it'll be efficient, because we've got a lot of infrastructure already there. We're adding a new concentrator that really take into account the efficiencies that we've gained that Bagdad existing concentrator in recent years. And once we go forward and get the feasibility studies done, we have a limited permitting process we believe and that's what gives us hope that that project could be in operation in 2026. The economics of it will be -- we believe will be positive in really advancing in an efficient matter -- manner the production that double the production there, because it is a very long reserve life approximating roughly 80 years. And so we're bringing that, looking to bring that value forward.

Great, thank you.

Your next question comes from the line of Lawson Langer from Bank of America Securities.

Hello, good morning, Richard and Kathleen. Very nice to hear from you both and thank you for today's update. Maybe I can ask about the All Star Mine. Could you also -- could you update us in your thoughts in terms of what's driving the current outperformance? Is that just better recoveries or is there other aspects at play? And then when we think about the current Lone Star mine and your expansion to 300 million pounds. I mean, it's outperforming by 5% or 6%. So, how should we think about that 300 million pounds? Should we think about it in terms of being more like 318 million pounds to 320 million pounds? Thank you.

Josh, do you want to take that?

Yes, Josh, why don't you respond to it. Josh is our Chief Operating Officer for the Americas.

Good morning. Yes, realistically if we look at Lone Star and what we've been able to achieve since we've started up. We really leveraged a lot of the learnings that we had seen from our exercises and experience at Bagdad with respect to identifying bottlenecks in the process, and leveraging the workforce through kind of an agile way of working. And as we've done that the team at Lone Star has been able to identify opportunities that really eliminated bottlenecks and allows us to work on incremental gains over time. And as we think about the next step in that. It was just a continuation of that same process in the sense of identifying what's limiting our ability to maximize the production of the site. And so the team has done a great job of going through that entire system, identifying what those bottlenecks are. And we put projects in place to really attack those bottlenecks and maximize where we're at. The 300 million pounds is probably at the limit of our current existing Hydromet facilities and the tank house capacity. So anything above and beyond that would be a bit of a challenge. But I'm not going to say that the team there isn't going to continue to look for opportunities to add additional incremental pounds. But I think that 300 million pound target that we're headed for is, is pretty close to that limit based on what we have today.

Yes, thanks very much.

Your next question comes from the line of Christopher LaFemina with Jefferies. Your line is open.

Hi, thanks. Hi, Richard and Kathleen, thank you for taking my question.

Hi, Chris.

So if we look at the progress that's report in the last five or six years, you've obviously overcome some really substantial challenges. And the company has -- you find yourself in a position of clear strength today. And you're kind of unleashing what is ultimately a massive organic growth pipeline with probably more growth than we even are aware of today, just because the resources are so substantial. And you talked today Richard about leaching technologies, as you mentioned last quarter as well, but you talked about this as a huge opportunity. And my question around that is, first of all, how much production potential could we see from these new leaching technologies? What's the timeframe? Is it in any good guidance yet? We're sort of operating costs, just like the economic benefit that you will realize from this leaching. And I guess the reason why I asked that question is because a lot of other major copper miners are talking about various new leaching technologies being substantial. And it really comes down to -- there's going to be an economic benefit due to having more volumes. But the question then is, what does it mean for overall global copper supply and demand? So how much when is it coming online, it is in your guidance and what sort of operating costs?

We do have a small amount of benefit factored into our guidance from some early successes at Morenci. But that's just a very small fraction of what we expect to get. We do have some, and this is unfolding, Chris. So it's going to be evolving as we go. But we've kind of internally said, let's go after trying to get 100 million pounds to 200 million pounds from this -- in the near-term. And so where we're looking to gradually improve where we are in 2022, and you'll be hearing more about it. But from a cost standpoint, if you think about where the incremental costs of this is. We've got much of this materials already in our leach stockpiles. So we've already expanded the funds to mine it, and it's in stock piles. And so it's a very low incremental cost to be able to recover it. So that's the opportunity for us, as we look at it having low incremental capital to go after it low incremental operating costs. We have latent tank house capacity, Josh mentioned. We're filling the tank house at Safford. But at all of our mines, we've got some tank house capacity that that we can fill, if we're able to get more recoveries. So economically, this is a real opportunity for us. But when you're talking about 100 million pounds to 200 million pounds, and we've got 38 billion pounds of material and stockpiles, that's a small amount, but it does have value to us. And we hope to go capture it. But in terms of this being a sea change for supply for the industry. We just don't -- we don't see it, it'll take time. And it'll come out over time. But it is, it's a meaningful value opportunity for us as a company given our set of circumstances with the large stockpiles in the latent tank house capacity. And Cory I don't know if you want to add anything to that. But that's where we are with it.

Thanks. No Kathleen, you covered it well.

Thank you. Cory Stevens, by the way is stepping up to lead our project development engineering and he is the key guy leading us on this -- in this deal. And Chris, in an earlier life back in the 80s, I was working in the oil and gas business when the shale business really got initially kicked off. And so this team here will tell you, I'm always looking around corners to say is there some kind of shale, oil and gas development it could change the industry like that did for the petroleum industry. And this is a huge opportunity for us, huge in the sense of being able to add value of significance. But in terms of being a shallow kind of sea change for the industry, as Kathleen called it. We think that's not in the guards.

That's very helpful. Thank you, Richard.

Your next question comes from the line of Michael Dudas from Vertical Research. Your line is now open.

Good morning, Richard, Kathleen.

Good morning.

My questions around given the -- you highlighted that this coffee and supply growth that you see in the pipeline being somewhat thin. Can you may be characterized, like from where you thought a year ago, three or today. Given the political dynamics, especially in the two largest copper producing countries, and given your kind of positioning in much better jurisdiction. So it seems, is that going really be a delayed and further just in the next six to 12 months, as the industry kind of figures out how to best negotiate and deal with those new government's? And certainly, there could be some other opportunities over the next several quarters on those issues limiting. Even getting some of these much needed projects to get out in the marketplace by the end of this decade?

There's no question. I mean, you just look at our situation at our El Abra. We would be in a different situation with El Abra this what. It's a political issues about royalties and the fiscal regime for our copper production in Chile were different. We would be moving more aggressively right now with El Abra. What we're doing is we're preparing ourselves to move forward, but we're not we're deferring any decision to move forward until we get some clarity from the government in Chile. And so that's just one example. There's no question. It's affecting people. It's some have stability agreements. And the question is, the government's going to honor stability agreements. You've seen recently in other countries where miners have had to go back and change deals were they thought they had firm contractual agreements. We had to make some concessions in Indonesia to get our issue with the government resolve there, which we did in a favorable basis. But that's just reality around the world today.

And if the U.S. look like it's a much better place to be relative to some of these other countries. Certainly your investment, what you're talking about today seems like you want to enhance and accelerate that in your asset profile?

Yes, well, in the U.S. I would make a distinction between Greenfield developments and brownfield developments. And all of our developments are Brownfield, it's places where we have established operations, and a solid track record of doing things in the right way. And we have developed a positive relationships with local communities and with governments, state, local governments, and with indigenous people. That's a different deal than trying to go in and developing a new mine, where there's not an existing mine, because mines inevitably significant mines have impacts on the physical environment where they operate on the local communities. There's competition for water resources. There's issues related to historical factors with indigenous people and all that make it much more complicated. You can tick off a list of projects in the U.S. that way. But there also international projects that face the same deal. So for us, the U.S. is particularly attractive, favorable tax situation, support for mines by communities. It's not true in other places in terms of having community, educational systems, health care systems. We were in other countries, we escalate and provide all that. So it's very attractive for us. We own all of our, virtually all of our lands in the U.S. and fee. So there's no royalties. And you think you look at the royalty rates that are being jacked up around the world, and that's a big difference. And then we have the company specific situation of having a significant net operating loss carry forward, maybe the only good. I'm trying to think was another, maybe the only good thing that came out on the oil and gas deal. We got a big NOL that protects us from taxes for years to come. Even though in U.S. we have lower tax rates, fundamentally than we do internationally. So for all those reasons, our established presence in the U.S. is really the big one that makes it so attractive to us.

Appreciate that. Thank you, Richard.

Your next question comes from the line of Alex Hacking with Citi. Your line is now open.

Yes. Good morning, Richard and Kathleen, and thanks for the call. I just want to follow-up on a couple of the earlier questions. The CapEx for Bagdad, if that moves ahead. Would that be planned CapEx or discretionary? I assume it would be discretionary. And then just quickly on Lone Star. The increase in the production right, that you've achieved and it's been announced? Does that meaningfully pull forward the potential for the sulfide project by years or does it not really matter? Thanks.

No, well, Bagdad is totally discretionary. I mean, we could continue to operate the existing scale of business that we have there. If that were to make sense, I think what the markets we're facing and the opportunities that that poses, it's highly likely we'll do it, but it is discretionary. And we will update the market on plans as we make commitments to go forward, which I expect us to do. And the point about Lone Star is, you can just look back at the other major projects around the world where to get to the mineral resource you have to sometimes take years of investment in stripping to remove overburden to get down to the ore. Here, we have the benefit of mining the overburden, which is oxide ore profitably. And by doing that, we are stripping that material that is overlays the sulfide resource. So it is tremendously beneficial to the long-term development this opportunity. And as I said, we're going to make money out of this oxide. And at the end of the day, we're continuing drilling, continuing economic studies. But I see a future of building a major mill complex at Lone Star to process this very large sulfide resources we're talking about is 50 billion tonnes of ore.

And Alex, I think if you were asking about specifically Bagdad with respect to the financial policy, the answer is yes. In terms of how we will treat that 50% that we're retaining of free cash flow. We're earmarking for future investments and growth as well as to maintain our balance sheet. So that's how we're thinking about it.

Thanks.

Your next question comes from line of Carlos De Alba from Morgan Stanley. Your line is now open.

Good morning, Rich and team. Just a question around cash costs for the year I guess for the first quarter, how should we -- could you provide a bit more color, I would have expected higher -- guidance for higher costs in the first quarter above and beyond the 135 per pound given the comment of lower grade suspected in the first half of the year. Are there other factors that will mitigate the negative implications on costs from the lower grade suspected in the first semester?

Yes, well and part of it too is waiting, waiting the low cost in Indonesia to the higher costs in the U.S. and South America. So that's why you're not seeing much fluctuation between the first quarter and the full-year.

Thank you, Kathleen.

You think about as Indonesia ramps up, fourth quarter was $0.08 a pound for the year it was on the order of less than $0.20, I don't know, $0.18, $0.19 per pound and we see costs going forward with higher volumes in that same range in Indonesia. So, it's a big factor in our business and our team has done a good job of controlling costs and we're like everybody else, we have our energy costs and other input costs are going up. So it's just what we have to deal with. But that was the whole basis for putting these companies together, back in 2007 was to match up the Indonesian assets, which is special because of its copper grades and its gold content with these lower grade mines in America, which are profitable but which have higher costs. And so that's just a carryover benefit for what we did so many years ago.

Thanks for the color, Richard.

Your next question comes from the line of Michael Glick from JPMorgan.

Let me correct myself, I said 50 billion tonnes of ore at on start and 50 billion tonnes of copper resource.

Good morning, guys, just relative to your financial policy, could you remind us how often you'll revisit the variable portion of the policy on a practical basis?

Our board reviews it on a regular basis formally, it's at least annually, but it's something that we review with the board on an ongoing basis.

Okay, got it. Thank you.

You can see the example for that what we did in the third quarter, when we started the policy of paying variable dividend buying stock back a year ago, when we started looking at this, we had planned to do that at our first meeting in 2022. But we have made such progress, markets were so good, we advanced it. So just a little color on the way we run Freeport, we don't have an annual planning process. We update our long-term plans every quarter and we go through a really disciplined process to do that. So everything is real time. So while we talked about looking at this financial policy on an annual basis, as Kathleen says, we talk with our board about it continually. And if things change, we don't limit ourselves to acting on any kind of straight jacket timeframe.

Got it. Thank you. That's helpful color.

Your next question comes from the line of Abhi Agarwal from Deutsche Bank.

Thanks, operator. Good morning, Richard and Kathleen. Thanks a lot for your presentation. Richard, you mentioned that you are in preliminary talks with the Indonesian government to extend the contract of work to beyond 2041. Can you share a bit more detail around what the critical path is for that agreement to be signed? Thank you.

Yes, we have preliminary talks, we really tried to address that years earlier. And it was just so complicated to get everything else done. It's in everybody's interest, all stakeholders interest for us to have a continuation of operations beyond 2041. It makes no sense for anybody for us to run this business with any kind of drop date. And so there's a broad acknowledgement that we need to do it. It's very preliminary, so I don't have the answers to your questions about how we structured, what we would mean. But I can say that these preliminary talks are being very well received. And there's a recognition that it's in everybody's interest for us to go beyond 2041.

Thank you.

Your next question comes from the line of John Tumazos from John Tumazos Very Independent Research LLC.

Thank you.

Hey, John.

First on Moly, recently as 2017-18, the output was 95 million pounds. And industry statistics are 5.4% decline in World Mine Output last year through November. So I guess a lot of the copper mines are having lower Moly grades, world steel and stainless steel outputs are rising. Do you have any opportunities to expand Moly throughput further to offset the lower grades at Cerro Verde or some of the other copper mines?

Well, John, we have two primary molybdenum mines in Colorado, the Climax mine and the Henderson mine and we did cut back production from those mines, when the market was in a different situation than it is today. But we do have the opportunity to expand production from our primary mines, particularly at Climax and we're doing some work now to advance some stripping activities, so that we do have more flexibility in the future to raise our primary molybdenum mine production to respond to this increased demand and limited supplies of Bolivia. So we do have a lot of optionality in our primary mine for molybdenum.

Thank you. Concerning the costs in Indonesia for smelting, you're reporting $0.24 for treatment charges and $0.20 for export duties. That I guess those are averages where some of the output is in country at Gresik and some of it is exported concentrates. If it were say half and half domestic versus export, would it be right to think of the costs of something like $0.18, when you export concentrates to Asia and $0.30 for the treatment costs at your own smelter. And then the export duties would be nothing if you treated them at your own smelter more than $0.20 for that portion, you're exporting maybe $0.40?

Yes, you're directionally right, John. And maybe we'll get back to you with some details, because I think some of the export numbers that you talked about are in the range of what we're doing it is $0.16 to $0.18. And we do pay this export duty while the cost for domestic processing at the smelter, will be much higher particularly when you provide for any kind of cost factor for the capital that will go into it, it will eliminate the export duty and so the net economic effect on PT-FI together with the fact that the cost of the smelter will be included in PT-FI's consolidated tax return. So any kind of cost to go through there will serve to reduce taxes. So the reduction in taxes not having to pay the export duty. In a broad sense offsets the economics to PT-FI buildings smelter.

Yes, so as we're thinking about it John, the capital costs, amortization over the long period of the smelter will essentially offset the duty. And then really, when you look at the operating costs, the cash operating costs of the smelter, it shouldn't be that much different than exporting than TCRCs, so that's kind of how we were thinking about the two elements.

And that was a point that I think, I just don't have the numbers in front of me, John, but I don't think the cost of processing at PT smelting is as high as you indicated, the current deal, and we're expanding that smelter by 30% too as part of this effort to achieve the goal of in country processing. But it's a very efficient smelter. We built it back in the mid-90s. And it's kind of its world class in terms of its cost management.

Thank you. So out of complicated details.

Yes.

Your next question comes from the line of Jatinder Goel from BNP Paribas Exane.

Thank you, operator. Good morning, Richard and Kathleen and good afternoon for those in the other time zones. Question on your 2024 copper guidance, can you please indicate where which operations will drop volumes, there'll be a 300 million pounds drop year-in-year in 2024 and Grasberg is now flat. So which operations will see that drop? And is that just a one year blip or is that a continued trend just to understand because Grasberg will lose 150 million pounds in 2025, as well. But just trying to put that discretionary and growth CapEx in perspective with the guidance and what we can't see beyond 2024. Thank you.

I'll like Kathleen, maybe Josh, talk to that. But I just make a point that these mine clan projections are subject to constant adjustments for various reasons that and some of them results in some volumes going from one year to another, but they all reflect steps taken to maximize the long-term values of the mine, we don't run these mines to achieve any kind of targeted, predetermined targets for volumes. But as I said, we have a dynamic, real time planning process in our goals throughout all those planning process is how do we maximize the long-term NPV and the resources that we have. And so you will, you look back at our history, there's continuous shifting of volumes from one year to the next and specifically.

Specific to '23 versus '24, we do have some lower grades in some of the U.S. operations, notably at Morenci and some slightly lower grades at Cerro Verde from '23 to '24. But as we talked about earlier, we don't have anything in here for of any consequence for this leaching opportunity. And so we are all motivated to get additional volumes with low capital intensity from that leaching opportunity. And then we've got Bagdad coming in beyond that. And we've got a series of other opportunities as well. But that's, it's really some grade as Richard was talking about, we do have grades shifting from year-to-year and do have some lower grades in 2024 versus '23.

Thank you so much.

Your next question comes from the line of Alex Terentiew from Stifel.

Hi, yes everybody. Thanks for taking my call. Just a couple of follow-ups to some questions already asked, first at that Kucing Liar in the Indonesian license discussions beyond 2041, is the pace of investment at that project dependent on those talks. And the second follow-up question if I may is on the Moly business. The price has obviously been quite strong the past year gone from about $12 to $19, can you give us any insight as to the demand outlook, I understand you guys have an opportunity, interesting opportunities to expand but anything you can say about demand outlook for the next one or two years?

On the KL, all of our economics will run on the basis of the 2041. So if we are successful in extending it, there's going to be a lot more reserves from KL and other orebodies that come in. But we've run the economics in our plans based on the 2041 date, and it's a very attractive project that Mark can talk to you more about this but we're really leveraging all the learnings that we gained from Deep MLZ and Grasberg Block Cave to continue our momentum in extending development and leverages off of all the infrastructure we have there. So it's really a good project on its own. And we'll just be even better if we're able to extend beyond the 2041.

Just one quick comment on that. With all these years of uncertainty related to our deal with Indonesian government now, the 2041, we've done in the fact that we had such resources already discovered to fill up our mill and so forth. We haven't done much exploratory type drilling in Grasberg district for some time now. And so that's one of the main factors that makes it desirable for all stakeholders would be for us to have a deal that goes beyond 2041, which would then allow us to undertake more delineation core drilling, our exploratory core drilling, just look at that schematic that we had on the orebodies that are there, and where they're located and where they've come from. And historically, it's just clear that that while we don't know yet, because we haven't drilled it, but the high likelihood is there's a lot more resources there that haven't yet been identified.

Okay, there's great, thanks, guys.

Mike Kendrick is on the line. And he can share with you some of our feelings about the outlook for demand from Moly.

Thanks, Kathleen. Well, a few thoughts on that is we're positive on the outlook for Moly over the next few years, you things like energy, whether it's traditional energy sources that require Moly bearing steels or if it's renewables are all very positive right now. Infrastructure development, all around the world uses Moly and is we've seen whether it's here, Europe, China, Asia, all very positive indicators and pollution control in general uses a lot of stainless steel. And there again, we're seeing very positive indicators. Our customer base, both in Europe, United States have positive outlooks over the next few years. And then if you look at the Chinese five year plan, there's definitely an up scaling of materials that they're using throughout their economy and what they're emphasizing. So we're relatively optimistic on demand.

That's great. Thank you.

Thanks, Mike.

You bet.

Our last question comes from the line of Carlos De Alba with Morgan Stanley.

Thank you very much for squeezing me in for the second time. Just on working capital, if I maybe Kathleen, the sensitivity on a number you provide guidance on international operations is around $8 billion this year, and that is made of $1.3 billion working capital and other uses. So I don't know exactly how much is working capital, but assuming that is the majority of the $1.3 billion, could you give us some color on that, I mean that's a bigger number for working capital than I was expecting?

Yes, and you saw we had a benefit, a large benefit during 2021. A big portion of that is the timing of our tax payments internationally. You generally paying on the prior-year schedule. And so there's some timing variances when you have rising volumes or rising profitability. And so that's just the timing of tax payments.

Got it, thank you very much.

Now, let's go over to management for any closing remarks.

Yes, thank you all for participating in the call today. It is real pleasure to be able to report great progress our team is making and we look forward to continuing that progress and are really excited about what lies ahead for us. So thank you for your interest and if you have any further questions or need for follow-up, please contact David Joint and we will respond to you. Have a good day everyone.

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