Good morning, and welcome back to Copper Day. My name is Emily Chieng, and I'm delighted to host our first fireside chat for the day with Freeport-McMoRan, the world's largest publicly traded pure-play copper producer. Joining us today is Richard Adkerson, Chairman and CEO, a true veteran of the industry. We've got a lot of content to get through today, but before we begin with some prepared questions, I do wanna turn it over to Richard for a couple of quick opening remarks. We'll also be taking questions from the audience, so please submit this through the webcast. Richard, over to you.
All right. Thank you, Emily, and thanks to you and Goldman for hosting this opportunity to talk. You know, Freeport has a very clear-cut strategy. We began on this strategy of being the foremost copper company 20+ years ago. Five or six years ago, reaffirmed that. What we're all about is being the foremost copper company in the world. The reason we've linked our strategy to copper is because of its very strong fundamentals. Copper is a commodity that's very difficult to build supplies, and there are a lot of barriers to supply development in the world today. On the other side, the demand factors for copper are just so strong. It's essential for global growth. As the world becomes more electrified, that adds more to copper demand.
In the years ahead, we can see tremendous elements of new copper demand coming from investments in carbon reduction area investment. Carbon reductions require more copper. It's really a fundamental story. Strong supply, strong demand, supply challenges. As a company, we've got a great set of producing assets. It's globally diverse. We've got a very large set of internal resources in our reserves, in our undeveloped resources, and so we're really focused on execution. In recent years, we've addressed our balance sheet issues and virtually eliminated our debt. We've essentially completed the ramp-up of our big underground mines in Indonesia. That's a major 25-year effort, but we've had great success with that. We're excited about the future. We understand the complications in today's world, and we'll be talking about that.
Our direction is clear and very confident about it.
Fantastic. Richard, you know, a year ago we had a discussion with the same fireside chat, and when we were talking about, you know, what were the fundamental challenges to the copper supply, the copper story, you know, one part of it was, where is the supply growth coming from? You know, I think we sit here today, and I can count on one hand the number of greenfield or brownfield projects that have actually been sanctioned in the last 12 months that will come online in the next five years. In your view, are we getting closer to more projects being sanctioned? What are the hurdles we are now still facing before the industry and yourself get there?
Well, the hurdles became really apparent way back in the 2003-2004 timeframe when China emerged with a strong demand. Historically, the copper industry always had projects to turn to meet new demand. Starting back then, geological factors and other factors presented barriers to supply. It's notable that even with all the years of strong copper prices and companies in our industry growing and having such access to capital, that the amount of supply development. I think, Emily, if you look back over the year, today is actually more complicated than it was a year ago. We've had these political issues emerging in Latin America, you know, where 25%-30% of the copper comes from, in Chile and Peru.
That's created question marks about how you can invest in the industry there. There's complications elsewhere with communities and other factors about investing in copper. Now, you know, with the questions about interest rates and potential of recession and China slowdowns, supply chain, all those things are new factors which are inevitably gonna make companies even more reluctant to commit to major projects. Ours is an industry that's so long term. You have to think in terms of multiple years for one, getting a project ready and then making the investments, permitting, gaining community acceptance and so forth is very challenging. I would say today, there's even more challenges facing supply development than there were a year ago.
Yeah, we've certainly seen that. Maybe shifting to Freeport specifically. I mean, you're coming up to the end of the ramp process for Grasberg, and Lone Star still has a little bit of debottlenecking to go. What's next here for Freeport as it relates to solving the supply gap that we have ahead? What's in your portfolio that you're most excited about?
Well, let me just say, I'm so proud of our team in Indonesia who have made the achievements that they have. It's the most complicated mine in the world. We're building an underground operation that's simply unprecedented. It had those challenges anyway, and then to be able to achieve what we've had over the last two years in the face of having to deal with the COVID challenge is just remarkable. The numbers speak for themselves. You can see how successful the ramp-up's been. Now with that, with our balance sheet being in such strong state, we are turning to what do we do next? The most exciting thing that's near-term is exciting because it's near-term, the advances we're making in leaching technology.
We are the largest company involved in leaching, and a lot of leaching technology historically has come up through our predecessor companies. Our mine in North America, Morenci, is the largest leaching operation in the world. We have these extraordinary large existing leach stacks that the development of new additives to improve recoveries, the use of data analytics to understand the impacts of what you're doing with it. We are now using heat as an element of improving recoveries. It's just really exciting and it's significant for our company. You know, it starts with existing leach stacks.
Potentially it extends to historical leach stacks, which we have in abundance, and then potentially as alternative ways of mining sulfide resources rather than investing in concentrators. With success, the leach can add volumes with limited amount of capital and a low carbon impact. It's good on all fronts, and our team's very excited about it. You know, we have a great opportunity here, and we're actually pursuing it. Beyond that, we have other projects in the Americas that we can talk about. Emily, I'll let you ask questions about it. We are focused now on first of all executing so that we can take advantage of our existing production profile, deal with cost because cost inflation is a factor.
Looking at growth and the most exciting near term part is just leaching opportunities. We have other investment opportunities that are longer term, but we believe will provide opportunities to add copper when the world will need it.
Mm-hmm. Understood. Maybe coming back to something that's in the U.S. as well, but you know, let's talk about the Bagdad expansion. I think at the first quarter call, you guys noted that there's some early work being done here and a little capital being deployed to get this one underway. What's remaining ahead of project sanction for Bagdad? What else do we need to see before we start deploying more capital here to get this one across the line?
Bagdad is a mature mine, has a very long reserve life, 80+ year reserve life. The project we're looking at is very straightforward. Adding a mill, and when dealing with the tailings that will result from the investment, it's as straightforward a project in our industry as you can have. We have great community acceptance. Permitting will take some time, but there are no barriers to it. Even with that, you know, this is a project that's gonna take four or five years to get to production. We're moving forward expeditiously with engineering planning, permitting planning, and taking steps to deal with water and power requirements for it.
you know, we fully expect this project to go forward and to be sanctioned within the next year.
Understood. Then maybe a little bit more longer term. There's a couple that we have in mind, and that's the Lone Star sulfides and then the Kucing Liar asset there. Maybe if you don't mind touching on a little bit of, on both assets and what that could mean for the production profile for Freeport longer term.
Yeah. Well, Kucing Liar is a skarn ore body that we discovered a number of years ago that ties right in with the development of the Grasberg Block Cave and the underground complex we're mining, the D MLZ mine. This is underground Block Cave mining that we started in the early 1980s, so we've been at it a long time. We have this new ore body that lies adjacent to the Grasberg Block Cave and we can develop it with limited infrastructure requirements because of what we've already done. We began investing in it. It will add significant volumes this decade and be able to sustain the production that we're establishing now and keep it at a very high level.
It will, you know, anything you do out at Grasberg looks small in relation to the Grasberg ore body, but this will be a very large one of the largest block cave mines in the world. It's relatively straightforward since infrastructure is basically there, and we're going forward with it. Turning to the Americas, I mean, we're really excited about investing in the United States, a place where many places it's hard to develop greenfield mines. Greenfield mines have impacts on communities and impacts on terrain that's new and often faces opposition from communities. In the U.S., all of our growth opportunities are brownfield in communities where we have great support, both from the local communities and Native American groups.
We've worked hard to get that support over the years, and so we are being encouraged to invest rather than trying to have to convince people that it makes sense. Lone Star looks to be a remarkable resource. It's adjacent to our depleting Safford mine and just across the ridge from Morenci. This could be. It looks to be potentially an ore resource that could be comparable over time to Morenci. It's a very large sulfide resource with an oxide cap, and two years ago, we've been developing and producing oxide ore using the Safford available processing resources. It's profitable, and we're expanding that. In doing that, we are removing the oxide cap that overlies this big sulfide resource.
Where we are with the sulfide resource is we're doing further developmental drilling to understand the resource. We're considering its metallurgy and assessing different approaches to developing. I believe this will be a very large long-term asset that will support our operations for years in the future. Besides having community support in the U.S., we have favorable taxes. We own the lands where we have resources, so there's no royalties. It's perfect. It really adds to the economics of investments there. We currently supply close to 1/3 of the U.S.'s copper needs from our mines in the U.S. As a company, our copper production is, in rough terms, equally split between Indonesia, the U.S., and South America.
Great. Maybe pivoting lastly to El Abra. I mean, that's a region we haven't actually talked about yet, South America. You do mention Freeport does have some exposure there. We also have a question from the audience, which I'm gonna weave into here. Essentially, you know, El Abra has been put on the back burner a little bit relative to some of your other growth projects in the U.S. and in Indonesia. Part of that is, you know, due to reasons you mentioned before around, you know, changing fiscal landscape there. What expectations do you have around tax regime changes in Chile and Peru as well? Are both these jurisdictions still attractive for mining investment?
Well, they're attractive because they have resource opportunities. I mean, you have to go where resources are for investments. You can't decide that you wanna invest in a certain region. You have to go where the resources are. You know, in Latin America, we have this really large, profitable mine in Peru, that our Cerro Verde mine, which we expanded several years ago and which has enormous resource base, again, in an area where we've gotten good community support, which is a real challenge in Peru these days. We invested in the community and have built a good partnership there, so we haven't been subject to the disruptions that others have in Peru.
Peru's going through a process of looking at its fiscal taxation and royalty situation in that country, and that's going back and forth. We'll have to wait and see. We have a stability of contract, and we have support from the local community. In Chile, where we've had historical operations, we sold a mine several years ago there, but we have the El Abra mine, which has been producing for a number of years, using leaching technology, and it has a life for that. We've done sufficient exploratory drilling to justify the development of a large sulfide deposit. It would be a major capital investment, and it would require investment in a desalination plant and transporting water to the high altitudes there.
Where we are, we're continuing to do engineering work and work for ourselves for permitting, and we're waiting to see how this constitutional process goes forward. You know, issues that are being considered really go beyond fiscal terms. You know, it's beyond taxes and royalties, but to basic fundamental ownership rights and access to water and so forth. It's a lot of complications, a lot of lack of clarity. There's a time schedule that we should know that is projected to present some initial directions by the summer and hopes for voting on it next fall. We're monitoring to see how that turns out, you know. Both the situations in Chile and Peru are having an impact on supplies, again, being supportive long-term of the copper price.
Maybe sticking with the theme of South America. You know, a lot of your peers actually faced some production challenges during the first quarter. Perhaps some idiosyncratic issues may be related to grades, weather, social unrest. South America as a whole has taken a lot longer to ramp back to pre-pandemic levels. We've been interested in noting that, you know, Freeport has actually seen steady growth back towards those pre-pandemic levels. Maybe can you touch a little bit about, you know, perhaps what's different between the assets that you have versus perhaps some of your peers? Any comments you can make around sort of grades in the region? Is this more structural in nature or should we really expect a recovery?
You know, I'm like everyone else, I'm just now, you know, getting the information about the production shortfalls that have happened during 2022 in Latin America. Our production in very large part comes from Cerro Verde in Peru. We had our challenges with COVID because we are very near the city of Arequipa, and that's where our workers live. Early on, we were having to deal with community outbreak of COVID in Arequipa, and there were restrictions. We had to take steps of building temporary housing for workers to work with. We're not yet back to the levels at the mill or at our mine rate that we were pre-COVID.
Our team has done a great job in keeping our production volumes up, and dealing with cost issues. This is a very attractive long-term asset. You know, it's typical of new mines today. It's relatively low grade, so we have to process a lot of material to recover the copper. It's the world's largest concentrator mill complex in the industry. It's been operating well. Our team's done a great job. We will have opportunities of improving the mill rates and mine rates going forward. Other places have been subject to these community disruptions. Lots of times that comes about towards issues like traffic congestion and competition for water.
We made a great decision to invest in Arequipa and providing the community with fresh water supply. We built a wastewater treatment facility for the city, which provided us access to water for our expansion and improved the ecology of the city and the river, where previously waste was dumped untreated. All of those prior decisions and actions are paying off for us in terms of having support from the community.
Maybe last one around sort of the geographic discussion there is on Indonesia. You know, you did mention that it's been a journey to get to where you are today with the Indonesian government. Maybe catch us up on what's the latest around the relationship there. You know, you're starting construction on the smelting capacity that was requested by the government. You're beginning to invest in Kucing Liar. What are the discussions that you're having with the government today? I know we're 20 years away, but how are any early discussions around extending the operating license beyond 2041 progressing?
Yeah. Well, in December of 2018, when I signed the resolution of all those issues that we had been debating for so many years, I told President Joko that it had been a long and winding road, and indeed it had. That agreement has turned out to be notable because it was a win-win-win for all the parties involved. The government was able to achieve its objectives of acquiring 50%+ equity ownership interest in the project. And with the high level of taxes and royalties they have, the economics of that Grasberg district goes, you know, goes 70%-75% to the government. They insisted on us building a smelter, which we conceded to as part of the agreement.
We at Freeport were able to essentially maintain our interest in the asset that we had going into it. We had a joint venture with Rio Tinto, which had a significant interest in the operation that was sold to the Indonesians, and Rio Tinto was happy with the opportunity they had to sell that interest at a price they thought was acceptable. That investment has been a tremendously positive investment for Indonesia with the success of the underground ramp up and with higher copper prices. They rightly so feel very good about. We've established a tremendously positive relationship with the state-owned company, MIND ID, and we are progressing the smelter development. We had just a remarkable bond offering by PTFI. I mean, it's the first debt offering that we've had at that level.
We were able to get investment-grade ratings, had a heavily oversubscribed deal and raised $3 billion that's available that we use for the smelter development. It really is one of those things after a lot of difficulty ended up where all the parties are really happy that the Indonesian share of dividends will increase to 50%. At the time, that was when Rio Tinto's joint venture interest would have increased to 40%. It was all as planned. With the success of the underground, with the strong current copper price outlook for copper prices, this is just a great deal for Indonesia, and it's an example of how foreign investment can work well for host countries and for our foreign investors.
I'm gonna tie in a question from the audience here, and it relates to one part of the capital allocation discussion we do wanna have, which is around M&A. What are your thoughts around inorganic growth? Perhaps on that vein, given the geographic diversification you have currently, is there an interest in further diversifying that footprint and looking at regions such as Africa?
Well, Emily, I do wanna mention, you raised this issue about the 2041 deal. That was the original term of our 1991 contract of work, and it's what's reflected in our current IUPK permit. There's no benefit to any stakeholder of running this asset with a drop-dead date of 2041. We had to first put our focus on resolving the contract issues and doing the ramp-up of the underground. Now we're beginning discussions about the way forward to extend that 2041. All of our reserves, all of the economics of Kucing Liar and so forth are based on a time period that ends in 2041. I believe we'll find a way of extending that because it's in everyone's interest.
That will open up new reserves, new investment opportunities and further growth to Grasberg . Anyway, let's turn to your M&A question. Look, we're very satisfied with our current geographical diversity of our assets. Credit rating agencies are, you know, so we don't feel any need to further diversify. You mentioned Africa. We had a very positive experience with investing in Tenke Fungurume, going back to 2008, where that was the largest investment in the Congo at that time in the history of the country. In a difficult environment, we developed a lot of value for our shareholders.
We ended up having to sell that asset, not for strategic reasons, but for financial reasons when we had to deal with our balance sheet issues following the unfortunate oil and gas deal that we did. We created a lot of value and sold it. You know, at this point, we believe that we have the resources within our company to meet our objectives. You know, we are constantly monitoring activity in the industry and so we'll be in a position to take opportunistic advantage if something makes sense. It's not our strategy. Our strategy is being focused on execution of our large scale production opportunities of taking advantage of our internal resources for organic growth.
Anything we do beyond that would be, have to be a special opportunity, but it's not something we're aggressively seeking, but we don't shut our eyes to potential opportunities.
Understood. Speaking about, you know, financial position and sort of capital allocation there, I do wanna, you know, commend the sort of strong progress that you have seen with the balance sheet over the last 18 months. Freeport has now addressed that capital returns piece with a new capital allocation policy, and that's the targeted returns of 50% of available free cash flow. Maybe talk through the rationale behind that capital allocation framework. You know, I do think it's quite unique and worth highlighting that discretionary growth CapEx is being excluded in the calculation of available free cash flow. Maybe what was the thinking behind that?
Well, we were engaged in conversations with our shareholders, after. You know, the focus for so long was in dealing with our debt situation. You go back to 2016, and that was critical. I mean, that was a real challenge. Our share price was single digits, and we had $20 billion of debt. Our bonds were trading at 20%. I mean, it was a true workout. As we took the hard steps to do that, selling assets and managing capital to get you some equity, we were able to get our balance sheet to the point of where it ought to have been, and we're committed to keeping a strong balance sheet going forward. Investors were looking for some guidance as to how we would be.
With a strong copper price and falling CapEx, increasing production volumes, all the things you see in our financials, investors were asking us to give them some guidance of what we would do. We gave thought to it and came up with this financial policy of taking excess cash flow and targeting retention for investments and returns to shareholder. We ultimately adopted a combination of a higher dividend as well as a stock buyback program. That was for guidance purposes, and our board continually reviews that and looks at it. The facts are because of the challenges in making investments, and even though the copper price has come off from, you know, its recent highs, I think a lot of that's event-driven. The fundamentals stay in place. My expectation is, over time, copper prices will get much stronger.
We can talk about that, but the likelihood is, cash is gonna come into us quicker than we're gonna be able to spend it, 'cause we're gonna be disciplined, and as we talked about, these projects take time. We'll be continually reviewing it and, you know, we can expect our company to have strong returns to shareholders.
Great. I'm gonna have to ask because I know a lot of investors are wanting to know the answer. Any color you can provide on the cadence of the buyback program that you have outstanding? I think you've got $1.9 billion remaining. Should we expect that to be executed this year, or if not more?
Well, you can see from our cash flows that we have the financial capability, even at $4.25 copper, of executing that. We're approaching this in a very structured, disciplined way. We're not trying to see this as a price-picking exercise, but we see it as an efficient way of returning cash to shareholders. Yeah, you can assume. The likelihood will be that we'll continue on a steady path of buying shares.
Fantastic. Maybe switching gears a little bit, and I do wanna talk about cost inflation because that has been top of mind for investors and corporates across the last couple of quarters. Freeport did update 2022 cost guidance for the year. I don't think it was surprising given you know the inflationary pressures we have seen across a number of different raw materials and energy costs there. Perhaps talk about some of the efforts that the Freeport team is taking to mitigate some of these pressures.
Yeah. You know, one thing that was kind of. I mean, we're like everyone else. I mean, we're facing higher energy costs, higher steel costs, you know, higher sulfuric acid costs, ammonium nitrate. A number of our cost inputs are going up for, I would say, event-driven reasons. Some of that wasn't as apparent with us as others because as we were ramping up Grasberg's production and our unit cost numbers, that reflected, you know, very low unit costs because of the significant gold component to Grasberg. First quarter, Grasberg's net, I mean, PTFI's net unit cost was $0.06 a lbs. You know, it's gonna be very low. As that production ramped up, it got to be a greater proportion of the consolidated total. You know, our costs remained very low.
Now, with Grasberg reaching its run rate of production, the higher copper input costs are being shown. We went from guidance, I think, around $1.35-$1.44 for 2022 because of these input cost factors. Our production volumes were relatively the same. You know, some of this will depend on net cost on moly prices and gold prices. I mean, the margins at $1.44 when even today at $4.25, and you're producing over 4 billion lbs of copper a year, I mean, that's great business. We are taking steps to do what we can to reduce costs. Some of this is coming as we transition our energy costs towards new sources of energy, you know, solar and wind. We're managing.
We have great relationships with our suppliers. We have not been hampered to a great extent by these supply chain issues. It's a daily management effort that we've got to deal with.
That makes sense. Maybe in your view, is this more transitory in nature, or should we expect these cost inflationary pressures to be more structural? I guess the offsetting factor is, you know, to your point around gold and moly by-product credits, you know, certainly, the commodity price environment for those have been very strong, as a nice little offset for Freeport.
Yeah, no question. We're price takers there, you know. We are the world's largest molybdenum producer, and Grasberg is the largest single gold mine in the world. So, you know, a small, relatively small percentage of our total revenues, but important economic drivers for our business, and it's real positive that we have it. Look, this is a very complicated world today and, you know, we're prepared to deal with what comes down the road. We don't have confidence in our ability to predict it. That leads us to really want to have a strong balance sheet. We are confident, very confident about the long-term fundamentals of the copper business, and we don't think that changes now. You know, near-term events will affect it.
Situation in China, which I do believe is transitory. I think, you know, China is dealing with some issues with COVID, and that creates supply chain issues, but I do believe that'll come back. Then we'll just have to see about this recessionary concerns and interest rate concerns. They'll be what they'll be. I'm just really pleased with the business we're in, our strategic focus on copper, our set of assets, and the way we're executing and running the business, and that's what you're gonna see about Freeport going forward.
Shifting gears and talking about things that we might not have the answers to, and it's around demand growth and your demand expectations. Richard, have you seen any signs of perhaps demand slowing down? You know, clearly China and what's happening around the COVID lockdowns has been very topical. Do you think that China can continue to be a driver of copper demand going forward as their infrastructure needs perhaps start to decelerate? You know, what maybe are the sort of puts and takes elsewhere that could fill in for some of that slowing demand pull from China, which had previously been about 50% of global copper consumption?
Yeah. It's not only it was 50% of consumption, but from 2003 up until the current time, it was really the source of all growth globally in copper. China will continue to be an important consumer of copper, and that will be important to the global marketplace. What's emerging is growth coming from the U.S. and Europe, you know, which constitute an important part of the global market growth and have been stagnant for years. Now, with COVID recovery, infrastructure development, to a certain degree, efforts to deal with income inequalities, but increasingly investments in alternative energy, the U.S. and Europe will become sources of growth. Asia, outside China and the developing world over time, will also be growing uses for copper.
Because with 2/3 of copper going into electricity and with the way the world is increasingly relying on electricity, not only for alternative energy, but for connectivity, artificial intelligence, it's just electricity is increasingly part of the world. I'm for years I've been talking about the growth that's coming from the undeveloped part of the world, and that's not the sort of thing that has the headline changes that investors are often focused on. All of that underlies this really fundamental long-term story of really strong demand drivers for a commodity that's really challenged to meet that demand with new supplies.
Fantastic. We do have a question from the audience, and I think it'll give you an opportunity to sort of hit home, the point on copper supply and the challenges there. Essentially the question is, if we're not seeing significant new greenfield mine investments being announced by some of your peers, and given your views on the strong copper demand outlook, what's the one or two or maybe multiple things that you think are stopping you and your peers from getting more bullish and investing in mines at a faster clip?
The most important thing is the availability of projects. I mean, it's different than most other commodities in that it's not an investment decision that's driven by price. A higher price usually translates into increased investment. That was a historical story of in the copper business. Now just the nature of the projects and the availability of them are the real barriers. Even at higher prices, that doesn't necessarily mean that these projects come on stream. Some of them, you know, the quality of resources are much inferior to what they were historically in terms of grades, and many are located underground. Then you have these geopolitical events that are not just limited to Latin America, but in Africa and other countries around the world, and even in the U.S.
You know, while we have great support for our brownfield investments, there are a number of greenfield projects in the U.S. That face tremendous hurdles, and some of them are being, you know, abandoned because of the lack of community, government, environmental issues and so forth. It starts with just a simple change in our industry that's occurred over the past 30 years that is more 25 years. I've been involved for over 30 years now. Just where once when there was needs, you had resources that people knew about that you could go invest in. That's not the case today. Those resource opportunities are limited. They have a lot of problems with them in terms of grades and localities and geopolitical factors, environmental issues.
It's just you're hard-pressed to see a commodity that's from a long-term basis, and I always distinguish this long term, short term. We run this business for the long term, but the long-term fundamentals are incredibly positive.
Great. Richard, we're almost at the top of our allotted time, but I do wanna leave you with the opportunity to maybe share with us what in your view is still underappreciated about the copper story or the Freeport story.
You know, I just don't think it reaches the headline status of some other commodities. One good thing about copper is that it's not the driving force for investments where copper is used. It's an element of cost, but not the major element of cost. You know, energy projects or housing developments or other things are not gonna be passed because of a higher copper price. It just doesn't stick out to the same extent of other commodities. In many ways, that's positive because it doesn't mean that that's there and as much as companies would like to, you can't overcome the need to gain community acceptance for projects.
Fantastic. Well, thank you, Richard, for joining us today. We really appreciate your time and insights. It's been a pleasure to catch up again. Look forward to the next one.
Me too, Emily. Thank you.
Thank you.