DA [SPEAKER
Hello. Good afternoon, everyone. Thank you for joining us in the twenty twenty one Laguna Conference. My name is Carlos de Alba, cover Metals and Mining here at Morgan Stanley. It is a pleasure for me to host today Kathleen Quirk, President as well as CFO of Freeport McMoran.
Thank you very much, Kathleen, for being here again.
Thank you, Carlos. Glad to be here.
Great. So before we begin, I need to read some disclosures as usual. So for important disclosures, please see Morgan Stanley's website research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative and he or she will happily address those. Well, Kathleen, welcome back to this conference.
It is an honor to have you here. It's a little bit different to other conference maybe that you guys attend because it is more of an industrial focus, but I guess this is a good opportunity for the company to reach out to a different set of investors. So with that in mind, what I thought we were going to start our conversation with a little bit of an update or an overview on the growth profile of the company. It's something unique that you guys are delivering starting last year with the ramp up in Indonesia that helps you with more volumes, with lower costs. So I think that's something that sets the company apart.
So you can give us a little bit of an update on Indonesia's production profile and how that is going on. You have the two projects there, the granular block caving as well as the DMLC. So why don't we start with that, if you don't mind?
Okay. Great. And thanks, Carlos, for having us at this conference. We always enjoy it. We enjoy reaching out to different investor sets and hope to get back to Laguna at some point.
It's always a great great venue, but good good to be here virtually with you. Things at Freeport are are are going very well. As as you pointed out, we are in a growth mode. We have since last year, we have been ramping up our underground mines in in Indonesia. And we've also completed the the new project, our latest new mine in in The US called Lone Star, and that's gone gone extremely well.
We're we're we're ramping up Grasberg at the right time. This year, our volume growth is significant. We've got 20% copper volume growth over 2020, and gold volumes are up significantly as well. As we look into 2022, we're expecting 15 to 20%, growth in copper volumes, 15% for copper and 20% for gold. So, this is a this is a a ramp up.
It's much needed in a market that is that is that that needs copper. The the ramp up's going well. In the second quarter of this year, we averaged just under 80% of the target annual run rate that was on on budget, on track. And by the end of this year, we expect to be at a 100% of our, annual metal run rate at Grasberg. This is a major accomplishment.
I mean, when you think about, what this team has done during a pandemic is is extraordinary. It would be extraordinary at any time, but particularly given the given what we faced. The team has just done an outstanding job. We did have at in Indonesia, we did have a resurgence of of the pandemic to deal with in in in July and August and partially through September from the Delta variant. And, we had to, you know, go back to our strict protocols and lockdowns, travel restrictions that we had implemented successfully, during 2020 and had started to relax some.
So we did go back to those. Fortunately, I think we've turned the corner again, at Grasberg in terms of the caseload going down. We have very few serious cases at the moment and, very encouraged by the vaccine program that we've, rolled out there. We've got over 80% of the workforce. We've got a work total workforce of of of almost 30,000 people there, all working together in in in the same area.
And we've got over eighty percent with at least one shot, and we've got over seventy percent with with both shots. So that was a real real important thing for us is to get get our people vaccinated there. But, technically, the ramp up has gone well. We're we're continuing, you know, day by day to to increase our ore throughput rates. We put in a, a new crusher at our Westford Block cave earlier this year, and that's allowed us to expand production.
So everything is going well on track, and I can't say enough, you know, positive things about the team out there that's that's really been resilient and and plugging along with this major accomplishment in the face of challenging times.
Yes, certainly very challenging times in the last eighteen months. So congratulations on that progress. I do want to come back to Indonesia, but you mentioned Lone Star. What can you tell us there? And maybe if you could also add to the back of it the optionality in terms of growth that you have in The United States that given the current prices that we're seeing, not only you're going to generate very interesting profits there, but also you have a lot of NOLs that would result in minimum taxes on those profits in The U.
S. So if you could talk about that, I think that would be very useful for the audience as well.
Yes. Well, the Lone Star project, as I mentioned, we completed that during the pandemic as well. And these are projects that had long lead times, and, so we were well into it. But we were able to complete it, within our budget and and and on time last year. And, this is a project in in near a community where we've operated for some time now.
It's it's not common to see a new mine developed in The US. And, Freeport, with our with our franchise and our footprint and trust that we have earned in the communities, we were able to bring this project online. It's relatively small in the context of the overall company right now, but it has the opportunity and the potential to be a new cornerstone asset for us over time. It's right near Morenci. Our this is my my back my background my virtual background is our big Morenci mine, which has been in operation for decades and will be in operations for decades to come.
Morenci is the largest mine in North America of of all the copper mines in North America is the largest. Lone Star has the potential over time, to be potentially as as large as as a Morenci. We're starting out with mining the the oxide surface of the of the deposit, and that is going well. We were able to take advantage of existing infrastructure in the area, from a from a mine called Safford that had processing facilities and capacity there. So we were able to do this in a capital efficient manner.
But we have opportunities to incrementally expand, and that's what we're doing. The project was originally developed and designed for £200,000,000 per year. Our objective now is to get that up to roughly £285,000,000 a year. We can do that by filling up the existing, processing facility at Tank House, making some minor additional investments in in equipment to increase our mining rates. And so what we're doing there is really exciting because as we're mining the oxides and generating profits from the oxide material, we're exposing the deeper, mineralization that will be available over time to expand and and then we call it the sulfide mineralization to potentially develop a major concentrating complex at this site.
So very, very attractive initial investment. Started out relatively small, but we'll build on that, and we'll have the chance to incrementally expand and then potentially consider a major expansion down the road. As you mentioned, we've got other opportunities in The US. We are working to to qualify a project at an existing mine. What we have really is brownfield projects, lower risk than than going into a a totally new location that our community support by by doing a brownfield expansion.
But we're looking to potentially double our production from Baghdad mine, which is located in Northwest Arizona. And so we're working on the engineering and and design associated with that project, working through, you know, the considerations we need in terms of where we'll put tailings and and and the water requirements that we'll have. So we're working through those things, but expect that we'll be in a position next year maybe to start going forward. Now it's a multiyear multiyear project, but it's one that we think because of the long reserve life there, we've got over eighty year reserve life currently. We're looking to bring some of that value forward.
So that's exciting at Baghdad. Elsewhere in The US, we've got a really exciting, I know you'll probably ask me about this, but a really exciting opportunity, to get more out of what we have. We've been working over the last few years on automation, artificial intelligence, really trying to work our assets harder, improve productivity, improve in in improve automation. We're digitizing pretty much everything that we can in the workplace. So we're doing a lot to try to get more out of what we already have.
And in that regard, we have a a real opportunity to to get additional recoveries from material that has already been mined. And we've got substantial stockpiles of material across the world, but mainly in The US. If you look at our last presentation, we identified 38,000,000,000 pounds copper contained copper that's not in our reserves. This is material that's already been mined, and we don't expect to recover. Because when you leach, you only recover a a a certain percentage of the of the metal.
And so we are looking at technologies, both internally and externally to try to increase the amount of, of of of recovery we can get from from that material. And think about this, Carlos. This is material that's already been mined. So the carbon footprint of it is is low. You're not having to go put new trucks or new shovels and and or use a lot of energy to to bring this to, to production.
It's it's really trying to it's r and d, so there's still risk with it. But it's trying to get more out of what we already have, incremental value. And we believe that is the place where we can go and create value for our shareholders as opposed to, you know, trying to do a lot of greenfield exploration right now. So this is really our focus is getting more out of what we have, in additional value, tracking value in the markets we believe we're going to need.
Well, that's very interesting. Thank you for that summary. I want to ask a question that I just got from the audience and I'm going to put it in the context of another question that I have for you, Kathleen. So they are asking that since you operate in multiple jurisdiction, can you try to put some ranking around where do you think the lowest and the highest political regulatory risk to operate globally are. And I would like to bridge this question from the audience with something that I wanted to ask you about.
What would be how do you see the pecking order of all these options for growth that that you just sort of alluded to a minute ago?
Yeah. Well, it's a it's a it's a great great question, and and we do have insights because we operate in in multiple jurisdictions and have opportunities really across the globe within our portfolio. And, you know, in our business, as you know this, we have to take a long term view. And, we have to make sure when we go into a project that it has the, opportunity to, to to meet the the needs of society. Right?
We we need to make sure that communities, benefit from these operations. We need to make sure that that that that the the workforce is there. We need to make sure there's a regulatory environment and rule of law that, that we can we can rely on. Now recognizing that regulations change over time, and we need to anticipate that, but we need to have robust enough economics to be able to, to to address those risks, and we have to take a, you know, a long term view. And so where where we are attracted is not only just the the the regulatory and and and and and and risk political risk, but also the resource.
You know, you've gotta start with a resource that is long term. If you're trying to make your return in a very short period of time, you could get something wrong. You could get the commodity price wrong. You could get the political situation wrong. Really, what we're trying to do as a company and an industry is create value for all of our stakeholders producing a product responsibly that the world needs.
And so when we go to rank projects around the world, there are many criteria that we take into account. But the first criteria is really the resource. And is the resource, a long term resource that because the capital investments upfront are very, very large, something that you can develop over time and create economic velocity for the community and returns to shareholders over a long period of time. And so that's really what we're looking for. We're looking really for places that we already are, where we have experience, where we have, community support, where we have the workforce, And and we have those opportunities really within our portfolio.
There are gonna be times like there are today where there's heightened risk in certain places where we operate like in South America. And that you know, you can't just completely stop making investments. You have to keep keep the options open and keep things going, to be able to have the opportunity when the time is right. In Indonesia, you know, Freeport made a lot of investments during times when there was, you know, significant risk. We felt confident, given we knew that what we were doing was the right thing, that that that the country needed our project, and we needed to cooperate with the country.
So we worked out a deal that was a win win for for both parties. And that's the kind of spirit that it really we have to to do to go into these things. Now having said all that, we would love to find additional growth opportunities in The US. We have a a footprint in The US. We have customer relationships.
We're we're the largest supplier of copper to The US market. You know, with all the infrastructure demands in in The US, more copper is gonna be required. More copper is gonna be required for the decarbonization initiatives really globally, but also in The US. And so we have an opportunity as Freeport where we have existing franchises. We have the trust to, to to to build increments to our existing mining operations.
And so that's really what our first priority is, is to, continue this this, this development and growth in The US. But we've also got bolt on opportunities in Indonesia. Now our Kuchingliar deposit is an attractive deposit. We've gained a lot of experience in block caving. That's a natural progressing progression for us.
We have this wonderful opportunity in Chile with our Alapra project. The sulfide opportunity there is is is is is very attractive. That project's gonna be developed at some point. We may not pull the trigger right now, but it'll be part of the mix. We'll keep it warm.
We'll have the optionality in our portfolio. But none of these things happen overnight. You know, these these projects, they're taking longer. The regulatory requirements are are longer. We've got you know, our management team and management teams across the industry are focused on carbon reduction, and we're very serious about that.
That's not gonna result in growth necessarily. You know, we've gotta focus on getting more out of what we have, and doing that in a in a in a very carbon efficient way. So, it's a it's a it's a challenging time to develop new sources of growth. We at Freeport are fortunate that we have projects that were already in the pipeline. But in terms of new projects, they're gonna take upscale or gonna take some time to get those up and running.
Yeah. Your your comments, you're basically right in line with what Robert Friedland was telling us earlier in the week. We had we had a team in the in the conference. He was also pointing to exactly the same challenges to keep production, to keep more copper coming out of the ground, you know, that the world requires more than ever perhaps and now and in the coming years. And maybe just a little bit further on what you were discussing, is there any update or any comments that you can share on the situation in Chile and in Peru, how that is evolving with the potential royalty in Chile, with the new administration in Peru?
What can you share with investors?
Well, it's something that that all of us are are watching very closely. The the good thing in Chile is is the industry is at the table. Copper is such an important component of, of of Chile's economy. And, Chile is important to, you know, the overall world of copper. It's, you know, roughly 25% of, of copper is produced there.
And so we both have an interest, both the industry and the government having an interest in making sure we have a, you know, a balance. And we're both at the table. We're both listening, and, we're confident that over time this will work out. You know? We don't know exactly what it it the end result will look like, but it's got to be something that works for the industry, works for the government, works for society.
You know, copper industry there in Chile is a is a is a major employer, a great provider of of of social and community benefits. You know, pay the the wages that are paid to workers are very, very high and attractive. So it is a real contributor to society. Of course, we're producing a product that's needed for for decarbonization. So all that is good, but we need to listen.
You know, times change in different countries from time to time. And and as an industry, we wanna we wanna listen, and and we wanna make sure that, that we're responsive. We all all can't do everything that everybody wants us to do, but we do wanna listen and and and be constructive. In in Chile, I mean, in Peru, we've had limited discussions to date on, with with the new administration. We're looking forward to having additional discussions, here soon as we go forward.
Where we operate at Cerro Verde, we're a very sizable contributor to to to Arequipa, which is the the second largest city in in in in Peru. We we have a stability agreement there, but we do pay taxes above what the current statutory rates are under that agreement. In addition to the taxes we pay, there's also a as you probably know, a substantial profit sharing component that a good piece of that goes to our to our workers, and some of that, if there's excess, goes to to to taxes. But a big part of what we do there, is around the community. And, you know, a mine cannot be successful without the community being successful.
And over time, we've had the the the the great pleasure of working closely with the community where where our mine is. In the last expansion, we were able to put in a a clean water plant to deliver clean water to the city of Arequipa, which they didn't have enough before. And so during pandemic, we've really been able to reach out to the community and provide oxygen and other things that the community really needs, equipment, etcetera. So it's a real partnership, and it's a give and take relationship. Again, you know, we can't say enough that you have to take a long term view, and it has to be successful for all parties.
And it's an evolution, to get there. But I think, you know, we we have the right, the right framework, the right model that provides for substantial substantial benefits to the country and at the same time, provides a framework to to generate a return on investment for our other stakeholders. So it's a balancing of stakeholders, but our industry is very, very accustomed to dealing with those kinds of challenges.
Yes. Certainly, you have a lot of experience in dealing with all these topics. So in the time that we have left, there are two topics that I would like to address. One is the Indonesia smelter. Any updates there?
What is the timeline looking like? Latest discussions with the government? And a question a more specific question within this topic is, does the precious metal refinery need to be completed in the same timeframe as the copper smelter? And then I'll come back to the last topic I want to
Real discuss with quick, Carlos, on that, we did provide an update in in July. Nothing really new from there. We are proceeding with the with the smelter, at the site in. We we have the government support for that site, and so we're proceeding. The PMR is part of that project as well, and we're looking to to complete it with the same timeline.
The whole question of timeline has been, has been interesting because, unlike the Grasberg Block Cave and and Deep MLZ, we were well advanced in construction, and we were more in execution of ramp up when the pandemic hit. With the smelter early stages. So it involves a lot of international, contractors to come in. And so we were not able to and have not been able to make the same progress there that we made with the, with the with the Grasberg ramp up. But we're we're focused on it.
We're, we're we're we've talked to the government. Our objective is to get the the smelter and PMR done as quickly as we can, but it's gonna take some time because we're in the early stages. We're just putting in, you know, preparing land, putting in pilings. We've gotta go through all the the the and complete all the engineering, etcetera. But we are trying to fast track it to the extent that we can, and the government understands.
Now this latest issue we've had with the delta variant there didn't help matters, but we're, you know, we're all committed and focused to do it as quickly as we can.
And the last topic I want to discuss is something that maybe is not as visible for people, may not be as visible for people or when they think about Freeport and that is the moly exposure that you guys have. And moly prices of course have almost doubled in the last twelve months, right? So what is your latest thinking there? Is there anything that you could do to produce more? Is that something that is an option for you?
Or you are just really more focused on taking advantage of this high price that reduces your cost, increases your cash generation?
Well, at Freeport, we do have a good bit of optionality with moly. You know, most of the production of moly comes from byproducts of mines, and we have, you know, a large portion. The majority of our production, vast majority comes from byproduct mines. Just like the issue we're seeing with with copper supplies going forward, that also will have an impact on on scarcity of byproduct molybdenum production. But we at Freeport also have, as you know, primary molybdenum mines, which we can flex to a certain degree in response to market conditions.
Molybdenum prices have risen significantly in in recent months. We will look at the portfolio. Again, you've gotta kinda take a little bit the longer term view, on it, but, but we'll look at the portfolio. We have a lot of capacity in our primary mines, particularly at our climax mine in, in Colorado where, we could increase increase some production. And we're, you know, we're looking at that.
We, you know, we wanna make sure that that the market really needs this excess production, but we have the flexibility and optionality within the portfolio to increase moly production from these primary mines over time without major new investments. It's gonna require some investment, but not not like building a new mine, and we can do it relatively quickly.
All right. Fantastic. Let me squeeze one more maybe in a minute or so. With a very strong balance sheet that now the company has and the significant cash flow generation, how should we think about maybe dividends and share buybacks in the context of the new capital allocation model that you have put in place?
I'm glad you squeezed that one in. I think that you did that. We reached our net debt target at the June. We had been targeting 3 to $4,000,000,000 of net debt. We achieved we got to 3,400,000,000.0 at the end of end of June, several months in advance of our of our original target.
So now we're in a position. We're generating cash flow well above our planned capital expenditures. Now we're in a position to implement the framework that we announced in February to return up to 50% of our cash flow beyond our planned capital expenditures, to shareholders in the form of dividends and share buybacks. And the other 50% would be used for, for investments in our growth. And those are longer dated, but we wanna have a balanced approach to where we're returning substantial cash to shareholders and investing in our long term future.
So with our year end results, we'll be in a position to, to to to give, some some numbers around. We'll know what the numbers are. Some numbers around you can make your own estimates on what we're generating, but some numbers around, those excess cash flows. We'll be talking a lot with our shareholders about dividends versus share buybacks and and getting feedback from them on on their preferences. We've done both in the past.
We've had strong dividends. We've had buybacks. May have a combination of both. But but the main thing is we're in a very strong position at Freeport with the balance sheet, now in a position to return cash to shareholders. And it could be, you know, very sizable given, given given where we are, where a lot of capital has been invested.
And now we're in more of a harvesting mode of cash flow, and this will give us a great opportunity not only to give really, you know, strong returns to shareholders, but also invest in our future. And that's our plan and that's what we're so focused on execution and, looking forward to that day where we can we we can we can show the the the incremental, returns to shareholders.
Well, I'm sure I'm really sure that this is very encouraging for shareholders and we're looking forward for those further details. With that, Kathleen, it was a pleasure talking to you, catching up. Thank you for joining us again. And I guess we'll keep talking in the coming weeks as you report the third quarter numbers. But good luck with the rest of the quarter and with the closing of the year.
Thank you very much.
Thank you. Thanks Carlos. And thanks more and Stanley for hosting us.