Everybody, thank you for attending this afternoon's session. I'm Chris LaFemina, the mining analyst at Jefferies. It's my pleasure to be hosting this session with Richard Adkerson, who's the Chairman and CEO of Freeport. And it's gonna be an informal fireside chat. We'll take some questions from the room as well. But Richard, thank you for coming. We really appreciate you being here.
Well, thanks, Chris. Thanks to Jefferies for hosting again this year. It's great to see all of y'all. I, I don't know, I feel somewhere between a classroom and I'm testifying before some jury or something, but we've got a small enough group, and we've got some time. I'm not gonna have any formal comments. Freeport's story is well known, and, and, and so if any of you have questions, raise your hand, and we'll just-- we'll take questions as we go along through here from the floor.
Maybe to kick it off, I'll ask the first question, just about, you know, the, your outlook for copper. You were early in your views around energy transition demand, which is now, I think, becoming much more of a consensus view. But can you just talk about, you know, demand outlook, supply outlook, how your view might be changing, if at all?
Well, you know, it was really before energy transition, which is a really new piece to the pie. I mean, it really started 20 years ago when I became CEO, before we did Phelps Dodge deal, and China was just emerging. Copper dropped down below $0.70, and nobody in the industry thought it was gonna go to $1, and within three years it was at $4. And it was not only China emerged at that time, but a factor that's becoming more and more evident now is that there's real barriers that emerged at that same time to resource development. Historically, there'd always been abundant copper supplies in the world, and whenever prices went up, principally in Latin America, people would go out and develop new mines, and there was a real cycle.
Well, it was a combination of China and the fact that when China emerged with this, this new whole demand outlook, the resources that had been abundant previously were found to have not been there. And the quality of the mines was much weaker. Low-grade mines that required a lot of processing, a lot of cost to extract the copper, and then underground mines. Political complications around the world got to be more, more and more real. But today there's a whole, I'll call it the new era of demand, because it is the new economy, energy transition, artificial intelligence data centers, and all of that sort of thing. So it's added something new to it, and at the same time, the challenges for supply development continue to be strong.
I think it's striking this past year that the news out of China has been so negative. I mean, every day, you know, its property markets, financial markets, just so negative. And yet, China demand, which hasn't grown like it once did, set records, and inventories remain low. So even in this negative environment, and with the world worrying about global recession, which, you know, is better now than it was six months ago, central banks' activities, the fact that, copper inventories have remained low, prices have, you know, come off some, but I haven't tanked. I'm just more and more encouraged about the commodity and where Freeport's placed in it.
I mean, you have, you know, industry has a lot of challenges on the supply side. You have a fairly substantial organic growth pipeline, including projects in the U.S. So can you talk a little bit about kind of the cadence of that growth, the capital requirements for that growth, how you're thinking about investing in growth now versus capital returns, just capital allocation in general?
Yeah. So a real change, you know, over during my career has been what's gone on in the U.S. I mean, one of your predecessors back in the, you know, early 2000 said, "Southwest Copper District is dead." People were running away from it, you know. Two modern smelters, one by Phelps Dodge, one by what became BHP, were dismantled. There was no investment. Now, in, in, in some ways, when we acquired Phelps Dodge in 2007, people viewed the U.S. exposure as being a negative. Look at our segment information at Freeport. Go in and look at our geographical segment information. I mean, Grasberg is a great mine. I mean, it's second largest copper mine in the world, largest single gold mine in the world. It gets more relatively valued the lower the copper price goes, because it still makes money.
But, you know, at Grasberg, we have 50% plus partner that gets their share of the income. We have very high taxes and very high royalties. The government of Indonesia's participation in Grasberg is about 70%, and FCX is about 30%. It's still a great asset. I'm not diminishing it at all. You don't see that in the consolidated financial statements, 'cause we consolidate it. But you go to the U.S., where we own all the lands in fee where we mine, there's no royalties. We have very favorable taxes. The only good thing that came out of the oil and gas disaster was a net NOL carry forward. But the basic tax rate, the income tax rate, federal rate is low and we have communities that support our workers, you know, in terms of schools and hospitals, education.
We make a lot of money in the U.S. in the copper business, and it's really highly leveraged prices... if our view of the world, and we can talk more about it, transpires, and the shortage ultimately leads to very high copper prices, Freeport's gonna do great in the U.S. because we have expansion, we have high levels of production, and ours are brownfield projects, so we don't face the community opposition that greenfield projects face. So it's really the future of our company. We've got a great future in Indonesia. We're working to expand our operating rights beyond 2041. We got some growth opportunities in Latin America, great operations there. But the U.S. is really key, and it kinda distinguishes us from others.
Can you talk about the timing for some of that growth in the U.S.?
Well, that's the, you know, that's the challenge, right? You know, you... Even brownfield projects require lengthy permitting deals, as we're working with the government right now. The U.S. government's focused on critical minerals and what it takes. We're trying to encourage them to make permitting more efficient. You got federal and state overlaps in timing, and you need to put more resources, better resources on it to raise questions and get them answered quicker. We're not suggesting lower standards, I mean, environmental standards or anything, just make the process more efficient. You know, this, the uncertainties about China and the global economy is another factor that says, you know, "Don't rush." Inflation, which, you look at our second quarter, I... We did a better job than I expected in terms of managing costs.
You know, we still have fuel costs with oil prices going up. But look at the major capital projects that have been done recently and how much more they spent than people expected to spend, and so that makes a company like ours that's not under time pressures to push projects, to say, "Let's make sure we understand what we're doing. How can we control costs and not let them get out of sight?" So you got all these things working that says, "Don't rush. Don't rush." In the meantime, we have this, and I'll not comment on it other than just point to this leaching technology that's really important to Freeport, that can be very profitable, that doesn't have some of the same challenges in terms of permitting and carbon emissions and capital requirements.
We can add volumes and make a lot of money off of it by avoiding some of these other challenges. So, I believe so much in the long run that I don't wanna take chances in screwing it up in the short run. We wanna be very prudent, keep a strong balance sheet, keep ourselves positioned, and if the world emerges as I'm getting increasingly confident that it will, there's gonna be a shortage of copper, prices will go higher, Freeport will do great.
What time horizon are you thinking about for these shortages and much higher prices? Is it two, three years from now, or is it 10 years from now?
Let's say five. I don't know.
Thank you.
You know, it depends on how the world develops. Unless there's World War III or some global economic catastrophe, you can't, in my view, you can't find a scenario where there's not gonna be a shortage of copper.
Mm.
When that happens, there'll be technology, conservation, substitution, project development, technology advances, all those things will come into play b ut to me, it's clear it's gotta be in the context of much higher copper prices than we have today.
Mm.
And so if we've got this big resource base, this high levels of production that's sustainable, we don't have the reinvestment risk that you have in some industries, because of the long lives of the assets, it positions us to take advantage of that, and that's a strategic decision we made starting 20 years ago, that, to me, just keeps getting supported by newer developments.
Can you use M&A as a tool to increase your exposure to that before those shortages actually kick in, and prices are higher and valuations are higher?
I wouldn't say it's a tool. M&A is coming to this industry-
Mm.
... because you've got some very well-financed large companies with lots of resources that keep talking about forward-looking commodities and wanting to be part of that world. They've been saying that for 20 years, with, you know, remarkably little success in developing new resources. And I think shareholders globally are asking companies more about growth now than capital returns, which dominated the discussion for so many years, and that's gonna be put pressures on management teams and boards to do something. We don't have that pressure. We don't have that pressure. And so a tool, when I look back, the best deals that have been made have been deals that are made on the basis of opportunities that arise, as opposed to boards or management saying, "Strategically, we're gonna go invest in aluminum," or, "We're gonna do iron ore.
We're gonna do this, that, and the other." So we're positioned that if an opportunity came up for us to grow our company or be part and participate-
Mm-hmm.
... in an M&A deal that creates value for shareholders, we're gonna be prepared to do it, but we're not gonna be an aggressive bidder-
Mm
... for assets... we, you know, we're not gonna force a deal, but if a deal comes about where it makes sense for two companies to get together and do something together-
Mm.
We'll be prepared to act on it if it makes sense for our shareholders.
Like a Phelps Dodge type deal, right? That was in that-
Exactly. I mean, I tried to get Phelps Dodge to buy our company for almost 10 years. Seriously. I mean, 'cause I could see the match between Grasberg and Phelps Dodge's low-grade mines in the Americas.
Mm.
How they support each other, and you could be more aggressive in the Americas mines if you had Grasberg supporting it. They just didn't have the wherewithal to step up and do it, and then all of a sudden, the commodity prices ticked up, financial markets opened up, and we were able to buy a company three times our size. And thank God we did. I mean, it's been great since then. So if that kind of deal opens up, and if companies restructure or other companies say, "Look, we're better off to be together and let's do something together"-
Mm.
Then we'll be prepared to do that. But to say we're gonna go out and go on a bidding war for a, you know, company, that's not likely at all.
We have 12 minutes left. What do we have in the room? There must be some questions out here.
Yes.
Can you talk a little bit about how you see the price escalating? Is it gonna be as commensurate as the demand for copper? And is there some way to offset that with some of the automation investments, either above ground or underground? Can that help offset some of that, cash cost escalation?
Absolutely, it's a step beyond just escalation. We're having a hell of a problem right now with finding workers in the United States. I mean, it's not in Latin America, not in Indonesia, but here in the U.S. I mean, you read about it across other industries, but, man, when you're recruiting people to go work in remote areas, you know, rural areas, and mines and so forth, you know, things changed with COVID. You know, I think people enjoyed being home. They're willing to, you know, I think, balance compensation with other things in their lives. So automation, we're taking a first step towards... We've been watching the development of autonomous trucks that's been used in the iron ore business and in the tar sand business, but not so much in our business.
But we're introducing those into Bagdad, which is our mine we have in northwest Arizona that's very rural and very tough to get people. It has a housing problem, and we got a big expansion project that's kind of being on hold till we can solve the people. That's one example of it, but technology is also helping us in other areas, in mill efficiency and scheduling mining operations. So it's something we've gotta do. And the technology's also allowing us to expand our workforce by adding more women to the workforce. We particularly see that in Indonesia, where underground, it's a lot more robotics than historically it would be.
We've got this great picture of Kathleen Quirk, our President, with these Papuan women running underground mining equipment, using, like, they look like joysticks, you know, and... But that's the future to help make your work more efficient, deal with the cost issue you raise, but also help address the issue for the challenge of getting enough workers. Yes?
Can you talk a little bit about the political risk in Indonesia and how you manage that as a company, and as investors, how we should, you know, so what can you tell us to help us get comfortable with that? Thanks.
That's been the story of my life. I mean, just a year ago this week, I was with the President of Indonesia, not only on his first visit out there, but the first president since Suharto in the early 1970s to go out there. We were standing before the Grasberg open pit with 3 billion tons of rock taken out of it. It was finished. I said, "February 1988, I was standing on that ridge before any of this happened." He was so engaged by it, about what we've accomplished. We went underground. Although he had the numbers, he was shocked to see how few expatriates. We have almost 30,000 workers there, and now 40% of our employee part of that worker force is Papuans.
We have senior Indonesian, young Indonesian engineers doing things, and we, of course, put them out in front of him to show him around and show him the underground and all this kind of stuff. But it's been quite a journey. I never thought I'd have this much patience in my life to deal with what we did there. We didn't have the ability that oil companies have had or the coal companies had of walking away from Indonesia. That was our company, so we had to make it work. We had a breakthrough deal at the end of 2018. Beginning of 2017, I did a news conference and threatened arbitration over there, and that caused a firestorm. But then we went to work and we did a...
A settlement, a broad scale settlement deal at the end of 2018, where we worked to get the Indonesian equity ownership up. Rio Tinto sold out. I was an investment banker in that, that deal, and that gave the Indonesian government a 40% interest ultimately in the project. We agreed to build this smelter, which now is more than 75% completed in Surabaya. It's the largest single line smelter in the world. It's a huge construction site, but it's progressing on schedule, and right now within cost budgets. In return, they gave us assurance of operations through 2041 with fixed taxes, financial terms, and importantly, allowed FCX to operate the business. Since that time, that investment they made in Rio Tinto has just bloomed in value.
We converted, you know, the operation into the largest underground operation ever done in the mining industry. We're mining over 200,000 tons a day underground there, you know, and we've just been very successful, and we're more and more... It's an Indonesian company. PTFI is an Indonesian company. FCX is a shareholder and operator of the company, but it's majority owned by Indonesians. And so I was just with a group of Indonesians here yesterday from MIND ID, and they were talking just how the perception of Freeport has changed from being kind of the, you know, the foreign investment with a black hat to being a positive contributor to the country. And so it's a new world out there. I'm confident we will get an extension beyond 2041.
Need to do that quickly 'cause we need to drill to see what's there and do long-term plans for investment, how to maximize resources. So it's just changed a lot and I'll be happy to talk with you more about giving you comfort because I'm... There were times when it was white male times over there, and that's not the case now.
Sorry, but even operationally, I mean, the fact that you developed the underground projects there as successfully as you did, you know, you say they, you know, allow you to operate the asset, but the operating track record there has been pretty remarkable.
They're, they're proud of it. I mean, they're proud of it. And even this year, we had a huge flood event in January. We had, we went from a flood event in January to El Niño with dry weather and it's the wettest place on earth, by the way, the road leading up to Grasberg. You know, it's just a fantastic place. But, and then we had the administrative snafu with our export permit, and, and our team just come right out of it. I look forward to reporting third quarter results to you 'cause we're, you know, we're, the team's performing so well.
Richard, thanks for coming. Good to see you again.
Good to see you, too.
Taking the previous question a little further, the sort of resource nationalism that we're seeing around the world, which areas and which geographies do you think are best, and which geographies would you avoid like the plague?
Years ago, I redlined Russia, okay? So-
Good call.
... But there's no place to operate better than the U.S. I mean, we got the rule of law. You got low-grade mines. I mean, that's one thing you gotta deal with. But, man, you know, if you can build community support like we have, we got support by the Native American groups for our operations that we worked hard to do for over the years. You know, it's just great to know that you got... You know, like everybody, I'm just, you know, the current political situation in the U.S. is just appalling. But, you know, you do have the rule of law, you do have the rights to do what you wanna do. You have, you know, the right to work with workers in a way that's different. So that's good.
Other places, it's amazing how you just gotta get ready for change. Time's running out, but before I joined Freeport, Freeport had the chance to take what is now the Rio Tinto interest in Escondida, and didn't do it because of political risk in Chile-
Wow.
... in the 1980s. By the end of the 1980s, we bet the whole company on Indonesia. You know, Chile, you know, was the best place in the world to operate. Now, you know, it's complicated. I spent time with the young president of Chile when I was at APEC in Bangkok, and, you know, they countries face political issues, desires of the people, so you just gotta be ready, you know, be ready for those changes. And the problem in the mining business is you have to make all these big upfront investments, and at that time, the countries are romancing you. They want you to come in and spend the money, you know.
Then the government changes, commodity prices change, "Oh, this is a natural treasure, and we need more of it." And so you just gotta recognize that's the landscape of the world that you, that you have to do in. You can see it country after country after country, that you go through that. All of that is another of these barriers to development that I think makes our industry so attractive. The demand side is, through global growth and connectivity expanding, and now the new economy side of things, the demand side's good, but there's barrier after barrier to developing resources, and that's what is the basis for Freeport's strategy.
One more quick one in the room. We have another minute to go. Richard, thank you again for taking the time today.
Nobody, nobody asked about cybersecurity or when I was gonna retire?
Well, now that you mention it. Now that you mention it-
Yeah.
What was that all about?
Oh, gee. Well, I tell you, it, this is annoying. I hope your companies never have to deal with it. These are just common crooks-
Mm.
... and they just try to put you in a corner and make you do something. We're fighting it, so far successfully, to keep us from having to do it. But it's... I don't know why the authorities don't track these guys down and put them away, 'cause they really need to be.
Yeah.
Anyway, thank you for your attention. Really appreciate it.