Freeport-McMoRan (FCX) Earnings Report: Q1 2015 Conference...
Transcript of Freeport-McMoRan (FCX) Earnings Report: Q1 2015 Conference...
CompanyName:Freeport-McMoRanIncCompanyTicker:FCXSector:BasicMaterialsIndustry:Metals&Mining
EventDescription:Q12015EarningsCallMarketCapasofEventDate:21.39BPriceasofEventDate:20.66
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Freeport-McMoRan(FCX)EarningsReport:Q12015ConferenceCallTranscriptThefollowingFreeport-McMoRanconferencecalltookplaceonApril23,2015,10:00AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
KathleenQuirk;Freeport-McMoRan;CFORichardAdkerson;Freeport-McMoRan;ViceChairman,President,CEOJimFlores;Freeport-McMoRan;President-Freeport-McMoRanOil&GasJimBobMoffett;Freeport-McMoRan;ChairmanRedConger;Freeport-McMoRan;President-Americas
OtherPart icipants
TonyRizzuto;CowenandCompany;AnalystJorgeBeristain;DeutscheBank;AnalystBrianYu;Citigroup;AnalystDavidGagliano;BMOCapitalMarkets;AnalystCurtWoodworth;NomuraSecuritiesIntl;AnalystOscarCabrera;BankofAmericaMerrillLynch;AnalystBrianMacArthur;UBS;AnalystOrestWowkodaw;Scotiabank;AnalystParetoshMisra;MorganStanley;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
WelcometotheFreeport-McMoRanfirst-quarterearningsconferencecall.
(OperatorInstructions)
IwouldnowliketoturntheconferenceovertoMs.KathleenQuirk,ExecutiveVicePresidentandChiefFinancialOfficer.Pleasegoahead,ma'am.
KathleenQuirk(CFO):
Thankyouandgoodmorning.WelcometotheFreeport-McMoRanfirst-quarter2015earningsconferencecall.Ourresultswerereleasedearlierthismorning,andacopyofthepressreleaseandslidesfortoday'scallareavailableonourWebsiteatfcx.com.
OurconferencecalltodayisbeingbroadcastliveontheInternet.AnyonemaylistentothecallbyaccessingourWebsitehomepageandclickingontheWebcastlinkfortheconferencecall.Inadditiontoanalystsandinvestors,thefinancialpresshasbeeninvitedtolistentotoday'scall.AndareplayoftheWebcastwillbeavailableonourWebsitelatertoday.
Beforewebeginourcomments,wewouldliketoremindeveryonethattoday'spressreleaseandcertainofourcommentsonthecallincludeforward-lookingstatements,andactualresultsmaydiffermaterially.Iwouldliketorefereveryonetothecautionarylanguageincludedinourpressreleaseandpresentation
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materials,andtotheriskfactorsdescribedinourform10-KandsubsequentSECfilings.
OnthecalltodayJimBobMoffett,ourChairmanoftheBoard;RichardAdkerson,ViceChairmanandPresidentandChiefExecutiveOfficer;JimFlores,ViceChairmanandFreeport-McMoRanOil&GasPresidentandChiefExecutiveOfficer.Wehaveseveralotherseniormembersofourteamintheroomtoday.
I'llstartbybrieflysummarizingourfinancialresultsandthenwewillturnthecallovertoRichardwhowillbeginreviewingourrecentperformanceandoutlookintheslidepresentation.Afterourformalremarks,wewillturnthecallovertoquestions.
TodayFCXreportedanetlossattributabletocommonstockof$2.5billion,or$2.38pershareforthefirstquarterof2015.Thelossattributabletocommonstockincludednetchargesof$2.4billion,or$2.32pershareinthefirstquarter,primarilyforthereductionofthecarryingvalueofoilandgaspropertiespursuanttoSECfullcostaccountingrulesandarelatedtaxchargetoestablishadeferredtaxvaluationallowance.Ouradjustednetlossattributabletocommonstocktotaled$60million,or$0.06pershareduringthequarter.
Ourcoppersalesduringthequartertotaled960millionpounds.Thatwasabovethefirstquarteroflastyearof871millionpounds.Goldsalestotaled263,000ounces.Thatwasalsoabovelastyearfirstquarterof187,000ounces.O ilandgassalestotaled12.5millionbarrelsofoilequivalentsinthefirstquarter.
Ourrealizedcopperpriceof$2.72perpoundinthefirstquarterwasbelowtheyear-agoquarterof$3.14perpound.Goldpricesof$1,186perouncewerebelowtheyearagoquarterroughly$1,300perounce.FMO&G'saveragerealizedpriceforcrudeoilwas$56.51perbarrelinthequarter,andthatincludedabout$12perbarrelofrealizedcashgainsonderivativecontracts.
Operatingcashflowsduringthequartertotaled$717million.Capitalexpendituresasweadvanceourprojectstotaled$1.9billioninthequarter.
Weendedthequarterwithtotaldebtof$20.3billionandconsolidatedcashof$549million.Aspreviouslyreported,wecompletedamendmentstoourbankloansduringthequartertoprovidemoreflexiblefinancialcovenantsandtoextendmaturitiesunderourtermloan.
Attheendofthequarter,availabilityundertherevolverapproximated$3billionofundrawnavailability,andundrawnavailabilityundertheCerroVerdecreditfacilityapproximated$1billion.I'llnowturnthecallovertoRichard,whowillbereferringtotheslidematerialsonourWebsite.
RichardAdkerson (ViceChairman,President,CEO):
Goodmorning,everyone.Beforeweturntotheslides,IwanttolookbackonourJanuarycallwhenwediscussedthisyear,2015,asbeingabridgingyearaswecompleteourmajorcopperexpansionprojectsthatwestartedin2010andtransitionto2016whenwewillrealizetheongoingbenefitsoftheseinvestments.
Theseprojectswillgeneratevolumesthatwillbeaccompaniedbylowercosts,lowercapitalexpenditures.Allofthisaddsuptoasignificantfreecashflowgenerationwhichwillnotbedependentonhighercopperprices.
Now,weremainveryoptimisticabouttheoutlookforthecoppermarkets.We--supportedbytheworld'sneedforcopperandthechallengesindevelopingsuppliesandmaintainingsuppliesforcopper,butwearecognizantofthenear-termuncertaintiesincommodityprices.Sowearegoingtocontinuetobediligentaboutcontrollingcostsandwillremainflexibletorespondtomarketconditions.We'vealreadytakenaseriesofactionstorespondtothesemarketconditionsandtomaintainourfinancialstrengthas
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weworkthrough2015tofutureyearswhenourfinancialmetricsareexpectedtoimprovedramatically.
WehavemadesignificantprogressandarenearingcompletionofourBrownfieldcopperdevelopmentprojects.Theseareamongthemostattractiveintheworld.Aswecompletetheseprojects,wearepositionedtoachieveourdeleveragingobjectivesovertime,increasecashreturnstoshareholders,andprovideexposuretoourshareholderstoastrengtheningcommoditymarketsinthefuture.
JimisgoingtobetalkingwithyouaboutseveralimportantmilestonescompletedinouroilandgasbusinesssinceouracquisitionsbyFCXin2013.Thecombinationofourlarge-scaleinfrastructureintheGulf,withsignificantavailablecapacitytoexpand,andourstrategicleasepositioninexplorationanddevelopmentinventory,togetherwiththeexperienceofourteamandourGulfofMexicofocusareapositionedustogrowourbusiness,generateattractiveinvestmentreturnsandincreaseassetvalues.
Whenwecompletedtheoilandgasacquisitionsweestablishedanobjectiveforthebusinesstobeself-funding.Todate,thathasbeenaccomplishedthroughcashflowsandassetsales.Wearenowevaluatingarangeofalternativestoprovidesupplementalexternalfundingforouroilandgasinvestments,andwillcontinuetodoso.
Wearegoingtotalktodaythatamongthesealternatives,weareconsideringapubliclistingofaminorityinterestinFreeport-McMoRanOil&Gas.PubliclytradedFreeportMcMoRanOil&Gaswouldhighlightthevaluesofouroilandgasassetsthroughapublicmarketvaluationandenableustoexpandthefinancingalternativesforouroilandgasoperationsonastandalonebasis.
Subjecttomarketconditions,thisalternativecouldpotentiallybecompletedinlate2015followingcompletionofanSECreviewoftherequiredregistrationstatement.Thefollowingreviewofourbusinessanditsoutlookwillevidencethatwehaveastrongportfolioofassetswithattractivenearer-termandlonger-termorganicgrowthoptions,adedicatedandhighlymotivatedmanagementteamandorganizationtoexecutetheseplansandaroadmapformanagingourassetsandfinancesaswedeliveronourstrategyofprovidinglong-termvaluesforourshareholders.
Now,turningtoourslides.OnSlide3wehaveapictureofournewannualreportfor2014.ThisreporttitledCore--ValueAtOurCoretalksaboutthesubstantialvalueinourassetstogrowingproductionandcashflowprofile,ourexposuretomarketswithfavorablefundamentals,ourfinancialstrength,thewaywemanageourbusinessinaresponsiblemannerforenvironment,communityandsocialaspects,andtheexperiencedmanagementteamthatwehave.
Inthefirstquarter,turningtoSlide4,thehighlightsarewesubstantiallyrampedupourMorenciexpansion.WehadrecordquarterlysalesatourTenkeFungurumeprojectfollowingthecompletionofourPhaseIIexpansionin2013.TheCerroVerdeconstructionprojectisontracktobecometheworld'slargestcopperconcentratorfacility.WeareenteringintothephasesofthehigheroregradesatGrasbergasweapproachcompletionofourmineplantocompleteminingintheOpenPit.Andwesetthestageforgrowth,asImentioned,inproductionwithdecliningfuturecapitalexpenditures.
Intheoilandgasbusiness,wehadpositivedrillingresults.AtourHolsteinDeepfacility,PowerNapintheVitobasinandattheKingproject--Kingwelltie-intotheMarlinfacility.Thissignificantlyexpandedourresourcebase.WeestablishednewproductionastheLuciusprojectcameonstream.
Dorado,Highlander,inouronshoredeepgasprojectcombinetheseadded--weareproducingat25barrelsofequivalenceadaybytheendofthequarter.Wehaveanenhancedinventoryoffinanciallyattractivedevelopmentprojects.AndasImentioned,weareadvancingplansforexternalfundingforexecutingthisplantodeveloptheseassets.
Kathleenreviewedthefinancialhighlightsforthequarterincomparisontothefirstquarterof2014.Of
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coursewearedealingwithlowercommodityprices,withcopperpricesbeingroughly12%lowerandoilprices0.5ofwhattheywereintheyear-agoquarter.Otherthanthat,ourbusinessfromafundamentalstandpointoperatedinanefficientandeffectiveway.
JustreturnedfromtheannualCESCOweekinSantiago,Chile--thatwaslastweek.Alotofcommentarythereaboutcoppermarkets.Whenyoustepbackandlookatwherewearerightnowin2015,thesurplusesthathadbeenprojectedforanumberofpastyearsarenotdevelopingastheywereestimated.
Projectshavebeendelayed.Productionhasbeeninterrupted.Andthemarkethasnotmovedintoalargesurplusposition.
ThefocusbyinvestorsandpeoplewhofollowtheindustryhasbeenonChinawithChina'slowergrowthrateanduncertaintiesaboutitseconomy.Itsbasehasgrownsignificantly,governmentisprovidingeconomicstimulus,andChina'sneedforcopperisgoingtocontinuetobesignificantandthekeyfactorintermsofnear-termpricemovements.
TheUS,asweevidence,weprovideover40%ofthedownstreamcopperfortheUSmarkets,growingatamoderaterate.EconomicstimulusisbeingappliedinEuropeandJapan,andweareseeingthebeginningsofgrowthinEuropeinourbusinessthere.Theindustrycontinuetofacethesesupply-sidechallenges.
Wearecognizant,asImentioned,ofthenear-termpriceuncertaintybutweremainveryoptimisticaboutthemidtermandlong-termfundamentalsofthisbusiness.AndourCompanyisreallypositionedtotakeadvantageofthatinaverysignificantway.
YoucanseeonSlide7ouroperatingresultsforourminingbusinessinthefirstquarter.Wecontinuetobefocusedoncostmanagement.Ourteam,andtheleadersofthatteamarehereintheroomwithmetoday,havedoneagreatjobinleadingourwholeorganizationtofocusoncost.
Wehadgoodcostperformanceinthequarter.Wecameinsignificantlylowerthanourowninternalplansforcostcontrol,andourconsolidatedunitcostguidanceof$1.64apoundwaslowerthantheguidancewehadlastquarter.Andyoucanseehowthatoperates--howthatwasreflectedinourregionaloperation.
OurgrowthinproductioninNorthAmericacamefromMorenci.WasalsoagoodperformanceatChino.InSouthAmericathedeclinereflectsthesaleoftheCandelariaprojectwhichproducedjustunder100millionpoundsinthefirstquarterof2014.Indonesiaisastrongerquarterthanthefirstquarterof2014whenweweredealingwiththeexportban.AndasImentioned,Africaoperatedwellandachievedrecordproductionforthequarter.
Lookingforwardthrough2015,wehavebeenworkingtogettothepointnowthatweareapproachingforseveralyearstobewell-positionedtotakeadvantageofwhatwewillachievethroughthecompletionofourexpansionproject,whatwewillachieveinIndonesiaatGrasbergasweenterintothefinalperiodofminingfromtheOpenPit.
Youcanseegrowingproductionvolumesduringthequarter,loweringunitcashcostsaswemoveforwardin2015,andlowercapitalcostaswegobeyond2015into2016.Thishasbeenourlong-termplanandnowweareachievingit.
AtCerraVerdewearejustterrificallyexcitedaboutwhattheprogressisbeingmadethere.Engineeringandmajorprocurementarecomplete.AsImentioned,whenwecompletethiswe'llbeprocessingthroughourconcentrate360,000tonsaday.Andthatwillbetheworld'slargest.
Theconstructionisonscheduleatthispoint.It's70%complete.Wearetargetinggettingitfinishedin
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late2015.AndasI'vesaid,theentireorganization,aswereviewthisinternally,isveryexcitedaboutwhatwearedoingthere.
ThiswayIhave600millionpoundsofcopperperannum.$4.6millionwasouroriginalestimate,andthat'swherewearetodayintermsoflookingatit.Soit'sgoodtoseethatweareprogressingonatimeschedulewesetwithinthecapitalbudgetthatweset.
InIndonesiawecontinuetobeengagedinactivediscussionswiththegovernmenttoamendourCOW.Thegovernmenthasexpressed--governmentofficialshaveexpressedarecognitionofourneedforcertaintyintermsofourfiscaltermsandouroperatingrights.Andweareworkingcooperativelywiththegovernmentonhowtoaccomplishthiswithinthegovernment'sregulatoryframework.
Alotofmutualbenefitsforus,ourCompanyandforthecountryofIndonesiawiththeoperationsinPapua.Wehavehadaverylong-termpositivepartnership.WeareworkinghardtosustainthatinanenvironmentofchangesingovernmentandexpectationsandaspirationsinIndonesia.
ButthisoperationistheeconomicengineforthedevelopmentinPapua,andthatissomethingthatweshareincommonwiththegovernmentofIndonesiaandwithourownCompany.ItprovidessignificantbenefitstotheIndonesianeconomy.Aswestandrightnow,allofourrightsunderourCOWcontinuetobeapplieduntilwereachamutuallyagreeableapproachtoamendingthat.Andthesenegotiationsaretakingplace.
WedohaveaMemorandumofUnderstandingthatwasextendedearlierthisyeartoJuly2015.AndaspartofthatMemorandumofUnderstandingwe'reworkingwithpartnerstoadvanceplansfortheexpansionofoursmelteroperations.We'refocusedintheGresikareaofeastJavawherewehavetheexistingsmelterthatwasdevelopedinthemid-1990s,whichisIndonesia'sonlysmelter.
Attheoperationsitself,wehavenowcompletedtheaccesstoourmassiveundergroundorebodies.WeexpectthatDMLZextensionoftheexistingDOZminetostartuplatethisyear.AndweareworkingtodeveloptheundergroundreservesthatliebelowtheGrasbergOpenPit,theGrasbergBlockCaveMine,whichisscheduledtobeginrampingupin2018.
Developmentcapitalofover$3billionhasbeenspent,$2.5billionnettoPTFreeportIndonesia.AndweexpectthatthatPTFI'sshareofthesecostswillaverage$600millionayearoverthenextfiveyears.Andthroughoutthisperiodwehavebeenabletosuccessfullycontinuewiththisundergrounddevelopment.
Beyondourexistingproducingasset,ourexpansionprojects,thetransitionofGrasbergtobeingafullyundergroundoperation,welooktothefutureforprojectswherewearenotcurrentlycommittingcapitaltoatthispoint,buttheywillprovidetheopportunityforlong-termgrowthforourCompany.TheyincludeaverylargesulfideresourceatourElAbramineinnorthernChile.Thisminewould--thisresourcewouldsupportamajorconcentratordevelopmentproject.
CurrentlyouroperationsatElAbrahavebeenSXEWoperationswithsignificantincrementalproductionthatwouldbeachievedwiththat.Atthispointwearestudyingoptionsforgettingwater,power,dealingwithtailingsandworkingwithourpartnerstodothisinaneffectiveway.
IntheUnitedStateswherewiththelowerenergycosthereandtheproductivityofAmericanworkers,wehavegreatopportunitiesforourfutureexpansionsatourminesinArizona.AtBaghdadthereisalargesulfideresourcethatwouldallowustomorethandoublemillcapacity,addsignificantamountsofcopper,andwearedoingtheinitialstepstolookatthatproject,includingtheacquisitionofwaterrights,whichisthekeyforthat,andtailingsdepositionareas.
AtourSaffordmine,whichisineasternArizonanearMorenci,wehaveadditionaloxideresourcesthat
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wouldextendtheexistingproductivefacilities.That'satanadjoiningorebodycalledLoneStarwhichisnearthereandhasoxidesthatcouldexpandthat,extendourinfrastructurebeyondthelifeoftheoxidesatSafford.AndthenatbothSaffordandLoneStarthere'sasignificantsulfideresourceforthefuture.
AtTenkeFungurume,besidestheoxideorewehavetheopportunityforfurtherexpansiontoproduceincrementalvolumesfromoxide.Thatisdependentongettingpower.Butthereisamassivehigh-grademixedoreandsulfideresourcethatweareconductingexplorationdrillinganddoingmetallurgicalstudiesthatwouldlookforhowwe--andlookingathowwewouldprocessthatovertime.
Withthatreportonourminingoperations,Jim,Iamgoingtoturnthepresentationovertoyoutotalkaboutoilandgasbusiness.
JimFlores (President-Freeport-McMoRanOil&Gas):
Right.Thankyou,Richard.Goodmorning,everyone.
OnPage13wetalkabouttheoilmarketcommentary.YoucanseetheWTIandBrentcurvesandHLScurveshereonthegraph.Themarketobviouslycontinuestobevolatileasitgoesthroughitspriceandmarketdiscoveryofwherealltheoilneedstogoandatwhatprice.
Weseeitascontinuingtobevolatile.Itwasdown50%inthebeginningofthefirstquarter.Itwasup20%attheendofthefirstquarter.Soaswebearthroughthatandassetsarerepriced,bothinaccountingbutalsointhemarketplace,wecontinuetofocusonouroperationsandcontinuetodogoodthingswiththedrillbitandfollowthroughwithouroperatingplan.
Wecontinuetoseetheoilmarketcleaningup,ifyouwill.TheContangocurveisalwaysapositiveeventforfutureoilpricesontheBrentside.Andwecontinuetoseetheoilmarketunderstraingoingforward,asdemandhasreallybeenthebigstoryhereinthefirstquarter,aswehaveseenalotofgasolinedemandhereintheUSandotherpartsoftheworldonthefinishedproductsidethatwethinkisgoingtocontinuetoincreaseasthesecurrentoilpricestakeholdinthemarketplace.
OnPage14,Iputtogetherjustachronologicalseriesofhighlightsfrom2013to2014,obviouslyforFreeportMcMoRanOil&Gas.WhenitwasformedasthecombinationbetweenPXPandMMRandacquiredbyFreeportin2013,theirbigadjustmentperiod,andthetotaloilandgasdivisionisabout174,000BOEperday.
Itwasabigincreasefrom2012.GetourhandsaroundalltheassetsandalsothecorporatestructureofFreeport.Itwasabigachievementforusin2013,andputusonagrowthpathtosayhowwearegoingtodevelopalltheseassetsandhavetherightpersonnel,rightequipment,rightoperatingplangoingforwardwasakeypartofit.
Whenwelookatourassetreviewin2014,wesawwhatassetsmightnotfitinthenextfiveyearsasfarasbuildingvalueovertime.TheywerevaluableatthetimebuttheywerenotgoingtobuildvalueovertimeandbemeaningfultoFreeport.
AndtheEagleFordshalefellintothatcategory.Weendedupsellingitfor$3.1million--$3.1billion,excuseme.Andwewereabletorotatethatabout$1.5billionofthatmoneyintosomesignificantassetsthatwillgrowovertimelikeHeidelberg,LuciusandourVitoproject,wewilltalkabout.
Thenwecontinuedtoacquireleasesandseismictoputourprojectsinthebestpossiblepositionofbringingforwardtheexemplaryresultswithoutfailure.Andbeingabletousethenewseismicandtheadditionalacreagetoaddtheresourcestoourexistinginfrastructure.
In2015westartedseeingresultsbearfruitwithourfirstproductionatLuciusdevelopment.Thatwasthe
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discoverythatwediscoveredin2009withAnadarkoanditcameonnettingusbetween20,000and25,000barrelsaday.
We'vesuccessfullydrilledwellsatHolsteinDeepandalsoatKing/Marlinareasaroundourexistinginfrastructurethathavevalidatedourseismicandbroughtbigresourcestobear.WewillshowyoutheHolsteinDeepprogressionofresourcesthatwehaveidentifiedtherewithadditionaldrilling.
ThenalsoonourVitoareas,thereareseveraljointprospects.WedrilledthefirstonethatRichardtalkedabout,PowerNap,thatwassuccessful.Sowe'reofftoagreatstartthere.
Andyougothrough,ontopofthat,theHighlanderdiscoverythatweannouncedin2014.Weputitonproductionherein2015andit'sproducingquitewelldowninlowerSt.MaryParish--orSt.MartinParish,excuseme,Louisiana.Andwelookforwardtotalkingaboutdevelopingthatfurthergoingforwardasgaspricesrebound.
Allinall,we'reontheedgeofabiggrowthspurtintheoilandgasbusiness.Andwiththe145projectsoutlinedonPage15thatallhaveIRRsgreaterthan20%atstrip,thedeepwaterGulfofMexico,thisisallbecauseit'sattachedtoexistinginfrastructureorhasinfrastructureplanthathas--isverycost-efficientintheVitoarea.Butthe)Canyon,GreenCanyonandMississippiCanyonistiedbacktoexistinginfrastructurethatweownorwehaveaninterestin.
IntheVitoarea,thereservesaresolargethatthereturnsaregoingtobeexcellentfromthestandpointofsizingthefacilitythatwe'regoingtobuildwiththeoperator,Shell,andbeinasituationtomaximizetheireconomicsinthatarea.Withthisdeepinventoryandsoforth,whatweneedtofocusistomanageourcashflow,manageourcapital,whetherinsideoroutsidegoingforwardtomakesurethatweachievethecorporate(deck)isFCX.
Inthefirstquarterof2015,FreeportMcMoRanhighlightsonPage16,we'vehadcontinuedsteadyproductionperformancefromCalifornia.We'vemassedourGulfofMexicogrowthstrategy,asIdescribed.Theinboardlowerterritory,besidetheHighlanderthere'ssignificantflowtestandproductionatHighlander.
We'vehadourfarthestgatewestwellasapotentialdiscovery.Wehavecompletionunderwaythatwehopetohavethatcompletedthissummer,andtheywilltalkfurtheraboutthat.Wehadabout$100millioninnet,alittlehedgingrealizations,thathelpbufferthevolatilepricesinthefirstquarter.
InourDeepwaterGulfofMexicoprogressreportspecificallyareabyarea,GreenCanyon,MississippiCanyonandVitoareaonPage17,youcanseethere'salotofbusyworkgoingon.Aswegothroughthisprocess,onethingIwanteverybodytounderstandisthatouroperationsplanandourbudgetarerisked.Andthatissimpleandeverybodydoesthat.Butasouroperationplanoutperformsourrisk,basicallywe'vehadanincredible2.5quartersofexcellentdrillingresultsandsoforth.Italsode-riskssomeofthecapital.
Andthatissomeoftheupsidemovementinourcapitalbudget,isstrictlybecausewellswereatriskthatat80%successarenow100%successandsoforth.Anditmaysoundsmall,butthenumbersarebig.Thatputsupsidepressureduetothesuccessalltheseprojects…
(Backgroundnoise)
JimFlores (President-Freeport-McMoRanOil&Gas):
…atallinthelasttwoquarters.
Youcangothroughthedetailhere.ThebigkeyhereIwanteverybodytofocusonbesidestheHolstein
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Deep,GreenCanyonareawherethegrossresourceswereinitially75millionbarrels,nowupto280millionbarrelsbecauseoftheadditionaldrilling.Andthenthebigcashflowwe'regoingtogetoutoftheDorado,KingandKOQVareabecauseofourseismictie-inandthesuccesswehavehadthere,isourVitoarea.
OurPowerNapdiscovery,whichistheoffsetdiscoverytoourVitoareaisaverysignificantdiscoveryforseveralreasons.Numberone,obviouslyit'salargecolumnofoilthatoverextends--sendsanicereservoirsize.Butontopofthat,ithasreallyhelpedusgainconfidenceinalltheadditionalprojects.AndthenextonewehavetodrillisDeepSleepthatwe'regoingtoimmediatelymovetoafterwefinishourpresentloggingoperationsatPowerNap.
Andthenextpage,onPage18youcanseetheoverallpictureofourassets.WewanttofocusonHolsteinDeeprightthereintheGreenCanyonareaandPowerNapasfarastwohighlightedassetsthatwehave.
OnPage19intheHolsteinfacility,ourHolsteinDeepdevelopment,youcanseewe'redrillingonthesouthwestside.YoucanseePhase1,it'scalledtheSubsea1,2and3.AndthenyoucanseethePhase2developmentwellsinthelighterblue,andevenalighterblueinthePhase3development.
Andifaswegoaroundfromtheinitialthreewelldevelopmentthatwehadplannedthatweregoingtoadd15,000barrelsadayin2016,thatisontrack.Andexpandingthedrillingresultscouldaddupto75,000barrelsadaytoFreeport-McMoRanby2020.Thisprojectcontinuestodrillout.It'saboveexpectations,andthereforeitsbudgethasbeenexpanded.
TheHolsteinDeepproductionprofileonPage20cangiverepresentativetotalkaboutcashflowsandtimingforyourmodelingpurposes.Butit'saverysignificantprojectfortheCompanygoingforward.
OnPage21isourVitoarea,thePowerNapdiscovery,theRegionalMiocenepicture.YoucanseeuponthetopleftcornerourVitodevelopmentdiscoverythatShelloperates.PowerNapjusttotheeastofthat,thetworeddots,that'sanotherdiscovery.ThesearenetDOEexposuretoFreeportMcMoRanOil&Gas.AndyoucanseejusttothesouthofPowerNapisourDeepSleep,(itwasa)verythickpartofthebasinwhichisinclineseparatedfromthePowerNapdiscovery.
AndthenwehaveourSunprojectdowntothesoutheast,whichisthe240millionbarrelnetprojectandtheSpitfire384millionbarrel.Allinall,IskippedRavioliandVitoNorth.They'resmaller,butit'sabout1billionbarrelsofoilnettotheCompany.
Andthisisthemostsignificantlong-termplaythattheCompanyhasonitsbookstoday.YoucanseetheextremelythickcolumnoftheL&4sands,upperandlowerfans,inourVitodiscoverywell.It'sagreatseismicsignature.Ittakesallovertheminibasin.
SowhenyoufliptoPage22,whenyoulookatourplangoingforwardforthenext10years,youcanseeproductiongrowingfromwhereitistoday,130,000,140,000barrelsadaytoover600,000barrelsaday.
Thekeyaboutthisslidethatwewantedtoputinhereistheestimatedreservereplaceratioforthenextfiveyears,137%,findingcostgoingforward,$26abarreland$21abarrelinthe10-yearmodel,isthatalltheseassetsareinhand,mostofthesehaveallbeendiscoveredorhavevalidationwithinthebasin,allofourgasassetsinHaynesville,MaddenandCretaceousthat'sgasrecoveredlaterinthisdecade.OurCaliforniaasset,MississippiCanyon,GreenCanyonandKeathleyCanyonandVitoarea,thereisnoadditionalexploration,there'snoadditionaloutsidebusinessacquisitionsinthismodel.Thisisallwithinhand.
Justfollowingourplaybook,wecanincreaseproductionatleastthreetimestoourCompanyontheoil
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side.Allwearearguingaboutrightnowinternallyandexternallyistiming,becausetheassetsarethere,theequipment'sthereandsoforth.Andthecoststructureisthere.
Whenyoulookatourfive-yearfindingcoststructureat$26abarrelandyoutakeouraverageLOEforecast,whichisabout$15abarrel,it's$18rightnow,it's$15goingforwardbecauseourfixedassetshavefixedcosts.Andwhenyouaddmorevolumestoityoudilutetheperbarrelcost.Soifyoutake$26and$15,it'sabout$41abarrel,andyouadd$5corporatecost,youareatabout$46abarrelall-incostsforoilandgasbusiness.
Ina$65to$70oilmarket,wemakealotofmoneyinthisbusiness.It'sverylowriskbecauseoftheriskwe'vetakenandthewaywe'vede-riskitwiththedrillbit.It'sverylowriskfromtheexecutionstandpointbecauseoftheequipmentandplatformsareinplace.Soweareveryexcitedaboutthat.AndwehavebeenworkingallinternallywitheveryonehereatFreeporttofigureoutthebestwaytofundtheseassetsgoingforward.
OnPage23,justwantedtohighlighttwodifferentwaystothinkaboutourbusiness.Numberone,thecurrentplanwhichisinourcorporateprojectionsof2015,2016and2017productionvolumesandEBITDAthat'sonthetopright.
Andthenifweareabletobringinadditionalfundingthatwouldacceleratethatbusinessandgetusuptoaproductionlevelthatwouldallowustobeself-fundinginamuchfasterlevel,themodelisinthelowerright-handcorner,whichisthegrowthplanassumingadditionalfunding.Andwhathappenshereisbecauseofallthewellswehavedrilledandsoforth,wearereallytalkingabouthowfastwehookthemup,howfastweputtheequipmentintobringthatproductionon,andsoforth.
Soforus,wearegoingtobeverystingyaboutitfromthestandpointoffunding.Welookedforfundingsourcesinthefirstquarter.Wefoundsomethatwereinterestedinparticipating,theywereveryexpensive.Andwelookedaroundthinkwefoundsomeothersthatmakealotmoresense.
Rightnow,thepublicsaleofpublicequitiesforaminorityinterestatFMOGissomethingthatweareworkingon.Andwearegoingtoprobablyhaveadecisiononthatherethisquartertowheremaybewecanfilethedocumentandgettheregistration,asRichardsaid,forthesummer,andlookatraisingsomemoneyinthefall,oraJVcarriedinterest,othermonetizations,and/ordivestitures.Anddivestituresarejust--theyhelppatchthehole,buttheydon'tsolvetheproblem.
TheIPalternativeforFreeportMcMoRanOil&GasonPage24providesthat,analternativewaytofundthebusiness.Butthekeythingwethinkitdoesishighlightsthestandalonevalueforoilandgasbusiness.ThereisabigdisconnectbetweenthevalueofouroilandgasbusinesswithinFreeport-McMoRantodayandthepublicmarketperceptionofstandaloneoilandgasbusinesses.
Wehavehadmoresuccessthananybodywiththedrillbitinthelasttwoyears.Andithascausedmorespendingbutitisnotgettingreflectedinourequity.SotheaspectofbeingabletogetthatvisibilityfortheFreeportshareholder,wethinkitisimportantpartofit.
FCXcertainlyplanstomaintaincontrolofthemajorityownershipofthebusiness,andthecasestudiesobviouslyFreeporthasdonethisbefore.TheFCXIPOwediditinPlainswithPlainsExploration,wespunitoutofPXT--PLX.AndthentheVastarIPOfromArcoin1994thatreallyfundedtheirdeepwaterdiscoverydevelopmentsin1994whendeepwaterwasfirstshowingupandwhichreallyisabigpartofBPsportfoliotoday.
Thetimingmight--asearlyaslate2015,orasmarketconditionsfavor.We'regoingtobepatientfromthatstandpoint.Andwewillcontinuetoassessotheralternativesandhaveotherdiscussioninotherareasandthencertaintyfromthatstandpoint.
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Richard,backtoyoutotalkaboutthe2015outlook.
RichardAdkerson (ViceChairman,President,CEO):
Okay.Thanks,Jim.
Wewantedtogiveyouthisoverviewofourassetsandmakesurethatyoucouldsensewhatourdegreeofexcitementisaboutthescopeofourassetsoverbothourminingbusinessandouroilandgasbusiness.Iwanttotalkabouthowallthiscomestogetherfinanciallyforusaswemoveforwardwithourplansfordevelopingthem.
Firstofall,lookingattheneartermfor2015,wearelookingatsalesof4.2billionpoundsofcopper,1.3millionouncesofgold,95millionpoundsofthemolybdenum,and52.3millionbarrelsequivalentofoil,67%ofthatisoil.Theoperatingcashflowsthatwouldbegeneratedat$2.75copperwouldbe$4.4billion.We'rehighlyleveragedtocopperfortherestoftheyear,$0.10changesincopperis$250million.
Theunitcostisanattractive$1.53forcopper.AndasJimsaid,$19abarrelforoilforthisyear.Ourcapitalexpendituresreflecta$500millionadjustmentforoilandgasbusinessat$6.5billionaswemoveforward.
Andyoucanseeaswelookbeyond2015,thisisSlide26,thevolumesincreasesignificantly,aswetalkedaboutearlier,bothforcopper,gold,withsupportformolybdenumandouroilprojectwherewewillbepreparingforlonger-termgrowththroughourinvestmentactivitiesthere.Ourcoppersalesforthequarterwillbegrowing,asImentionedearlier,throughouttheyear.AndthatinformationispresentedonSlide27.
Our2015operatingestimatesforourunitcostforcoppershowstheeffectsofthehighervolumeswithcontinuedcostcontrols.Wearenowlookingatprojectionsof$1.53apoundconsolidatedforcopper.Andyoucanseehowoursalesaredividedbyregion.
TheEBITDAmodelsandcashflowmodelsthatwepresenteachquarterarepresentedonSlide29.Itisanaverageforthenext--for2016and2017.AverageEBITDAatvariouscopperpriceswithgoldat$1,200andoilat$70.Thisapproximatesthecurrentstripfor2016and2017.
YoucanseeEBITDArangingfrom$2.50copperat$8.6billionto$13.7billionat$3.50.Andoperatingcashflowsrangefrom$6.6billionat$2.50upto$10.3billionat$3.50.
ThesensitivitiesforourdifferentcommoditiesandcurrenciesarepresentedonSlide30foryouruse.OurcapitalexpenditureplansastheycurrentstandareshownonSlide31.Youcanseedecliningfrom$7.4billion(sic-seeSlide31"$7.2billion")lastyeartothenewestimateof$6.5billionthisyear,$5.6billionand$5.1billion.Andwe'regoingtobeevaluatingtheseaswegoforward,butthisiswhatourcurrentplanisaswestandnow.
Wearecommittedtomaintainingfinancialstrength,andwehaveastrongtrackrecordfordoingthat.Ourlargeresourcebasegivesusstrongcashflowsandwewillexercisecapitaldisciplineonhowweinvestforthefuture.
Wehavetakensignificantstepstoreducecostandcapitalexpenditures,increasingvolumes,decliningCapEx,that'sgoingtohelpourexistingcreditmetrics.Andweareadvancingplansforexternalfunds,asJimjusttalkedabout.
WehaveavailableliquidityunderourFCXrevolver.AndwehaveafacilityatCerroVerdethattogetherprovideus$4billionofavailabilityattheendofMarch.
Ourkeyprioritiesaswegoforwardistomaintainourfinancialstrength,manageouroperationsandour
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CapExtomaximizenear-termcashflowsinanuncertaincommoditymarket.Buttolookforwardtothisgreatsetofassetsthatwehaveforfuturegrowth,futurevaluecreation.Wearereallygoingtobefocusedonexecutingourplansforournear-termminingprojectsandouroilandgasinvestments,andtogeneratevaluesforourlargeresourcebase.
Beforeweturnthecalloverforquestions,JimBobishere.AndhehassomecommentstobemadeaboutourCompany'scultureandhowweareapproachingthecurrentenvironmentbasedonthesuccesseswehavehadovermanyyearsinthepast.JimBob?
JimBobMof fett (Chairman):
Thankyou,Richard.IfyoulookatSlide34,1981wasthemergerwithFreeportMineralsandMcMoRanOil&Gas.Thatstartedusinthepathunequaledinourindustry.
1988wehad(technicaldifficulties)theGrasbergand(inaudible)oilthrough229oilandsulfur.In1988,ifyouremember,wedidanIPOofFCX.AtthetimewehaddiscoveredGrasberg.
Weknewwehadadepositthatwassignificant,butwehadtorelyonourgeologicinstinctstoknowthatthiswasamajorfind.Andasyouknow,actualdrillingthatwedid,weendedupwiththelargestoilbodyintheworld.Copper,goldandsilver.
In1990wedevelopedtheGrasberg.Weprovedthatwehadtomanagethatbusinessbecausewehadadiscoveryinthebusinessasmanyas13,000feet,andwehadalready$6billion.Wetookitonourselvestodothat,usedeveryresourceinthepublicmarkets.There'sgoldbonds,silverbonds,andeverymeasuredtransactioninordertodothat.
Iremindeverybodythatwehavehadchallenges--goingtomarket,andwehavebeenveryresourcefulinordertodothatdeal.Thedealthatreallysetthetonefordealsinthe(inaudible)wasanefforttobringproductiononforourshareholders(toupto)100%ofwhattheyown,andweonlygaveupreservesinthefuture.
WhenFCXwasspunoffoftheparent,wehad$6billioninequityvalue.ThenwecomeuponthePhelpsDodgeacquisition.Notonlydidwecreatethelargestpubliclytraded(tropic)producer,butrememberwehadtheinstincts,the(inaudible),andrealizedthatthe(inaudible)wasthetipoftheiceberg.Andwithourgeologicinstinctswewereabletodrillthelowersulfidewherebywedoubled,imaginedoublingthereservesofthegreatPhelpsDodgeassetsthatweacquire.
SomyobservationsisthatIthinkeverybodyneedstoreflectonitbecausefrommytenureasCEOinthefirstpartofthishistory,andthenRichard'sCEOandthenJimcametoourteamin2013.Ifyoulookbackandyouremember(inaudible)theGrasberg,wedidn'thavethebenefitofseismic(inaudible),thewaywecanprofileoilandgasprospects.Didn'thavethebenefitofseismic.Andweprojectedthesulfidebelowthe(inaudible)orebodies.
Inthecaseoftheoilandgasbusiness,thetechnologybeingwhatitiswith3Dand40seismic.You'vegottheseoilbodiesthatareoutlined.Neverhadthatkindofinformation.
ButwhenyoulookatthediscoveriesthatJimhasreferredtoforinstance,thePowerNap(inaudible).Justoffsetthe(magnificent)discoverythatwasmadeatThunderhorse,onebasinover.
Sowetookitonourselvesfromthetimeweacquiredthe(inaudible)wesoldoffbothmajoroilandgaspropertiesintheEagleFordandwesoldofftheCandelaria.Raisedover$4billion.Sowehavedonewhatwesaidweintendedtodo.
Nowwehavetodoistotakeadvantageofthefactthatwehavethisgrowthprofile,whichhasbeenthe
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historyofourCompany.Andwehaveproventhatgeologicallyandengineering-wisewe'vebeenabletocompletemajorprojects.TheDeepwaterisachallenge.ButrememberweacquiredinthePXPacquisitiontheplatformsoutthere,thedeepwaterthreeplatforms.
Nowwiththepricedropfrom$150abarrel,youcanjustimaginethatwhenyouhaveamonopolyonthedeepwaterinthoseareasaroundtheBPplatforms.BPownedthoseassetsforseveralyears,andtheyhad--theydidn'tjusttake--throwdartsatthemapanddecidewherethey'regoingtoputthesebigfacilities.Hadtheirgeologicandengineeringteamslookingatthebestplacetoputtheseplatforms.
SoitwasinstinctlyforPXPtoacquirethesein2013.Buttodaywhenyoulookatthepricedropfromthe$100abarrelto$50abarrel,therewon'tbealotofthesekindofplatformsthatcanbejustified.
Alltheproductionisfoundaroundourplatforms,maybebypeoplewithMcMoRanOil&Gasorbythirdpartieswhocometoourfacilities.Sowegettheequityinthewellsthatwearedrilling.Petroleumfeesoffourplatform.Wehaveabout250,000barrelscapacity.
Whenyoucomparethatunderourfacility,whichwasofcoursethefirstonebuiltinthedeepwater,hadalotofleadtimebecauseithadtohavesomeengineering.Ittookabout10years,costabout$10billiontoputthatfacilityoutthere.Wehaveaboutthesamecapacityonthethreeplatformsthatwehave.
Sothis,asusual,wehavethehistoryof(inaudible)geologicandengineeringbigprojects.Soalthoughwehaveachallenge,justimaginetheresourcesthatwehave(inaudible).Wejustspent$20billionupgradingourmineralsfacility,andthatisstartingtoturnaroundthe(inaudible),asRichardpointedout,thatwe'regoingtoinvestinthesebigbucks.
WehavehadsomehiccupsinIndonesia.Andputa(S-fork)(inaudible)andthenitwasnotjustcopperbutallthemineralsasfarasacompleterestructuringofthemarginsinthemineralsbusiness.Butwehavebeenabletosustainthat.We'vehadlaborunionsituationsthere.
Nobodywas--hadmuchinterestwhencopperWas$1,butwhencopperwentup(inaudible)itwentonupto$3or$4theunionshavegotteninterestedinthemineralsbusiness.Sothatisjustpartofaworldwidephenomenon.
Butaswesaid,wefoundGrasbergwhencopperwaslessthan$1andgoldwasat$400anounce.Whenyoulookatwherewearetoday,it'sreally,asIsay,whenyou(inaudible)$20billioninmineralexpansionand(inaudible)startedtobenefitthat.WearejuststartingtoseethebenefitthismajorinvestmentwehavemadewiththePXPMMRacquisition.
IthinkourCompanycultureshowsthatwehavesuccessfullymanagesomeofthebiggestprojectsintheworld,bothinthemineralandoilandgasbusiness.Notonlytomanagethemfromatechnicalstandpoint,butmanagethemfromafinancialstandpoint.Sogiventhechancetodowhatwe'vedonewiththeassets,we'vealwaysproventhatweknowhowtomanagerisk,knowhowtomanagethe(technicaldifficulties)projects,nomatterhowremotetheyare,beingaleaderintheindustry.
Andwithwhatwehaveputtogether,withourassetbaseweareinapositionnowtoreallyshow(investors)ofwhatthemineralandoilandgastreasuretroveofassetsrepresent.Richard,Jim,andourstaffandourwholeteamhere,mineralandoilandgasexperts,justbuttonupthechinstrapbecauseit'sgoingtobequitearide.Thankyou.
RichardAdkerson (ViceChairman,President,CEO):
Thanks,JimBob.Andwearereadytoopenupthelinesforquestions.
QUESTIONS&ANSWERS
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Operator :
(OperatorInstructions)
TonyRizzutowithCowenandCompany.
T onyRizzuto (Analyst-CowenandCompany):
Thanksverymuch.Hi,everyone.Hey,Richard.I'vegotacouplequestionshere.Firstofall,IthinkmanypeopleonthislinetodayaresurprisedtoseetheincreaseinCapEx,especiallyafterthenearly85%dividendcutandobviouslyatatimewhenyouareburningalotofcash.
HaveyouexhaustedallopportunitiestocutcostsandCapExelsewhere?Andif2015isthebridgeyear,whynottakeonsomeadditionaldebthereinsteadofdilutingshareholderinterestfurther?
RichardAdkerson (ViceChairman,President,CEO):
That'saverycomplexquestion.AndIwilltellyou,wehavegonethroughanexerciseoflookingatourcapitalcostacrossourbusinessandcomingupwithaplanthatwebelievereflectstheobjectiveoflimitingcostinthecurrentenvironmentwhileprotectingourassetsandpositioningustotakeadvantageofthemoverthelongterm.Sowehaveclearlydonethis.Andwecanrespondtomoredetailsaboutthat,Tony.
Theissueoffundingmoredebtiswestartedwithastrongobjective,whichwecommunicatedwiththemarketfollowingboththeannouncementoftheoilandgasdealinDecember2012andtheclosingofthetransactioninmid-2013,wasthatweweregoingtobefocusedonreducingourdebtbecauseofourbeliefthatthenatureofourassetscanbestbemanagedandpositionedforgrowthwiththebalancesheetthat'sstrong.Wehaveastrongbalancesheet.
Weareaninvestment-graderatedCompany,andwewanttotakeactionstoprotectthatinvestment-graderating.Webelievethat'simportantforthecreditmarkets,fortheequitymarkets,butalsohowwemanagesomeofourreclamationobligationswhereweareabletousecorporateguaranteesasaninvestment-graderatedCompany.
Soyoumixthisalltogether.Andourviewhasbeenthatweshouldtakestepsnottogrowdebt,buttopositionourselvestoreducedebtovertime.AndthenourBoardmadethedecisiontoreduceourdividendfornow.
Wehavereduceditin2008,asyourecall.Andasmarketsrecovered,weaggressivelyincreaseditasthemarketschanged.Myviewis,thatiswhatisgoingtohappeninthefuture.
Butweneededtotakeintoaccounttheuncertaintiesofthenear-termmarketconditions,positionourCompanyforfuturegrowthandfordeleveringourbalancesheetinyearsbeyond2016.Wedonothavecurrentplanstoissueequityfortheparentcompany.
We,asJimtalkedabout,thisissueofgettinghighlightsonthevalueofouroilandgasbusiness,theideaofpotentiallyissuingequityatthatlevel,wecouldseehasbenefitsbothintermsofhighlightingthosevaluesbutalsogivingustheopportunitytolookatabroaderrangeoffundingwithinthatentityasapublicentity.Sowecanseesomebenefitsforit.
Bythenatureofdoingthat,ittakestime.YouhavetofilearegistrationstatementwiththeSEC,gothroughareviewprocess.Andforustohavethatalternative,thatfilingwouldberequired.
Thatdoesn'tmeanthatwewouldbefullycommittedtodoingit.Thatwillbebasedonourviewofallthealternativeswehaveandhowthemarketsdevelopaswegoforward.We'regoingtohaveourfingersin
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themarketsinallplace,andwearegoingtoevaluateallalternatives,andtaketheactionsthatbestserveourshareholders.
T onyRizzuto (Analyst-CowenandCompany):
Okay.Again,justifIswitchgearsforamoment.Justproductionatacoupleplaces.First,atGrasbergtheproductionwas20%belowyourJanuaryguideorestimate,primarilyduetolowermoneyrates.I'mwondering--andyoukindofindicatedthatitimprovedthroughthequarter.Couldyoubringusup-to-datewhereyouwereatquarter'sendinrelationtocapacitythere?
RichardAdkerson (ViceChairman,President,CEO):
Yes.Oneofthethingstokeepinmindisthatwearerampingdowntheminingofwastethere.Infact,bytheendofthisyearwewillessentiallyhaveminedallofthewasteintheGrasbergpit.Thatisthematerialthatallowsustogettothebottomofthepit.Andaswegoforward,wewillbeminingoreandsomelow-gradematerialthatwearestockpilingtoprovidethroughputforourmillaswerampuptheGrasbergBlockCave.
Foryou,Tony,andthoseofushavewhohavebeenfollowingthisforalongtime,weneedtoadjustourviewofwhatminingratesaretherebecausethatisnotpartoftheIndonesiangovernmentissuesorthelaborunion.Thisisjustthenormalmineplan.
Now,wedidhaveaworkstoppagethatwasnotaunionactionduringthefirstquarter.Someofthelaborissueswithinourworkforcecontinuetobecomplicated,butthatdidnotlastlong.Andbytheendofthequarterwe'reessentiallyoperatingonanormalfashion.
Andsothathadanimpact,notonlyforaveryshortperiodtimewhenwehadaworkstoppage,butit'saffectedthe--someabsenteeismissues.It'saffectedsomeproductivityissues.We'vebeendealingwiththeselaborissuesnowsince2011.Butwenowarebacktoanormalfashion.
Wehavenegotiationswithourunionscomingupthisyear.Wehaveconfidencegoingintothat.Wehaveourunioncontractcompletedtwoyearsagoinarelativelystraightforwardfashion.Andwearebuildingpositive--morepositiverelationshipswiththeunion,butthereareotherissueswithinourworkforcethatwewillhavetocontinuetodealwith.
One,islookatwherewearewithourlong-termmineplaninthepitwithminingratesgoingdown.Andthenweareworkingwithsomeongoinglaborissuesthathadanimpactinthefirstquarterandwe'regoingtoworkhardtominimizethatimpactandwethinkwecangoingforwardinto2015inthelastthreequarters.
T onyRizzuto (Analyst-CowenandCompany):
Allright,Richard.Sostripratiosimproveasyougothroughtheyearshouldallowmorenormal--lesserrateofabsenteeismandsolowerunitcostthere.TheotherquestionIhadwasonCerroVerde.Andinthetext,talkedabouthigherrepairandmaintenanceexpenseandhigherminingcosts.Isthatallinpreparationfortheexpansionyouaredoingthere,orwhatisthatrelatedto?
RichardAdkerson (ViceChairman,President,CEO):
Redishere.Letmelethimrespondtothat.
T onyRizzuto (Analyst-CowenandCompany):
Sure,sure.Thanks.
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RichardAdkerson (ViceChairman,President,CEO):
Butjustanothercomment.Itisnotimprovingstriprates.It'sthefactthatwearenotminingwasteanymore.Imean,wearejustfollowingourplan.
T onyRizzuto (Analyst-CowenandCompany):
Okay.
RichardAdkerson (ViceChairman,President,CEO):
Weminedthewasteandnowwe'redowntowherewearegoingtobemining--essentiallyafterthisyear,orforthemillcurrently,andsomelow-gradematerialthatwearestockpilingtoprovidemillthroughputwhenwecompletemininginthepitandrampinguptheundergroundBlockCave.Allofthat--andthat,asIsaid,that'swhatwewouldbedoingunderanysetofcircumstances.
AndbeforeIturnitovertoRed,Iwantto--Kathleen'sgivingmeagoodnotetofollowupontheearlierconversationaboutdilution.Wehavetheabilitytofundtheplanthatyouseeunderourcurrentrevolver,whichwehave$4billionofavailabilityattheendofthequarter.Andunderthecurrentplan,nowwe'vegottodealwithcommodityprices,whatevertheywillbe.Higherpriceshelpsus,lowerpricescausesustorespondtothose.
Butwehavetheabilitytoborrowtemporarilyunderourcreditfacility.Andthenaswegetinto2016andgeneratecashflows,evenattoday'sprices,weseethatfacilitybecomingbackavailabletousinfullforce.Sowedon'thavetheneedtodo--wedon'thaveanabsoluterequirementdoexternalfinancingtoexecutetheplanthatyouseetoday.
T onyRizzuto (Analyst-CowenandCompany):
Understood.
RichardAdkerson (ViceChairman,President,CEO):
Wearefocusedonhowtotakeadvantageoftheseoilandgasassetstoprovidefundingforitsopportunitiesthat'sseparateandapartfromouroverallcorporatefinancialplan.
T onyRizzuto (Analyst-CowenandCompany):
Okay.Thanksforthat.
RichardAdkerson (ViceChairman,President,CEO):
Red?
RedConger (President-Americas):
Tony,justquickly,atCerroVerdewehavebroughtadditionaltrucksdownfromourotheroperations,10trucks,thisyear.ThatagainisoneofthestrengthsofourCompanywherewecandothatwithsupportfromtheotherminingoperationsandourgoodequipmentavailability.
Soweareadvancingtheminingthere,makingsurethatthatpitisingreatshapeandabletofeedthisnewbigconcentratorthatisbeingbuiltonschedule,asRichardpointedout.Sowehavetakensomeoftheminingequipmenttohelpwiththeconstructionofthestarterdamtemporarily,andagain,we'reabletodoallofthatandachieveour(facility).Itdidcauseavarianceinthefirstquarter.
T onyRizzuto (Analyst-CowenandCompany):
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Thanksforthecolor,Red.Iappreciateit.Richard,thankyou.
JimBobMof fett (Chairman):
Letmereiteratesomething.ThisisJimBobagain.
T onyRizzuto (Analyst-CowenandCompany):
Hi.JimBob.
JimBobMof fett (Chairman):
Ifyoulookatwherewearetodayafterhavingspent$20billiononexpandingourminerals,madeamajoracquisitioninoilandgas,duringtheyearwehavesold$4.5billionworthofassets(andItoldyou)wedid.Butwhatwehavetodo,thisyearwearepushingtherightbuttons.
AndIthink(inaudible)stoplooking(inaudible)tomakesurethatweareusingdebtequityaswehaveinthepast.Butmostimportantly,theabilityforanycompany,imagineacompanyofoursizetakingon$20billionofmineralexpansioninamajoracquisition.Thisisquiteatreasuretroveofassetsinourshareholders'hands.
Andwe'regoing(tobedoingthat)thisyear,andwelookforward,andusetheequityandthedebtasyousuggested.That'swhatwe'reintheprocessofdoing.
T onyRizzuto (Analyst-CowenandCompany):
Thankyou.Thankyou,JimBob.
RichardAdkerson (ViceChairman,President,CEO):
Thanks,Tony.
Operator :
JorgeBeristainwithDeutscheBank.
JorgeBeristain (Analyst-DeutscheBank):
Goodmorning,guys.MaybethisquestionisbestforKathleen.Butwherearewerightnowwiththecarryingvalueorthebookvalueofyouroilandgasassetsasofthislatestwrite-down?Andifyoucouldgivemeboththe100%bookvalueandthenthenettoFreeport?
KathleenQuirk(CFO):
Jorge,ifyoulookyoucanfindthatonourbalancesheet.We'vegotthatdetailedsoyoucanseewhatthebalanceswereattheendofthequartercomparedtowherewasatyearend.
Thefullcostaccountingruleswhichwehavetalkedaboutinthepastrequirethatweassesstheceilingeachquarter.Andit'simportanttokeepinmindthatthatisonlyusingprovedreserves.
AsJimtalkedaboutduringthecomments,wehavereallyexpandedourresources.Thosehaven'tbeenconvertedyetintoprovedreserves.AndSECrequirementsunderfullcostaccountingrequiresustousea12-monthtrailingaverageforoilandgasprices.
Sothat'swhyyousawthechargeinthefourthquarterandasubsequentchargeinthefirstquarter.Thetrailingnumberforoilisroughly$83.Sowecouldhave,ifoilpricesstaybelowthat,wecouldhave
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additionalchargesinthesecondandthirdquarteruntilthe12-monthtrailingaverageistruedup.
Butyoucanseehere,you'vegotonthebalancesheetwe'vegot$6.7billionintheoilandgasproperties.Andthatisthe,essentiallytheprovedreserves.Andthenadditional$9.7billionthat'snotinthefullcostceiling.Thatisnetofdepreciation.
JimFlores (President-Freeport-McMoRanOil&Gas):
Jorge,thisisJim.Justonanoperationalbasis,oilandgasareaslikeHolsteinDeep,ourVitobasin,ourHighlander,allthosearenotinourprovedcategoryyet.Andthat'showwecanmanageourfindingcostandourprovedreservesgrowthgoingforward.Wehaveahugepipelineofprojectsthatwillbecomeprovedthisyearandnextyearandthefollowingyearalreadyestablished.
JorgeBeristain (Analyst-DeutscheBank):
Right.I'mjusttryingtosortofgetoutaheadofwhatabookvaluecouldlooklikeforthisunitattimeofIPO.Andwehavejustrunaquicksensitivity.IfwejustholdBrentcrudeconstantoverthenextfourquartersandjustseewhatthetrailingfour-quarterhistoricallookslike,itlookslikeyoucouldstillbeinforaboutanother$3billionofwrite-downsin2Q,maybe$1.5billionin3Q,andthat'snotincludingthestuffyouareprovingup,asyouarementioningitisnotinyourbookvalueyet.ButIamjusttriedtogetanideaofifthosekindoforderofmagnitudesseemcorrecttoyouandwhatkindofbookvaluedoyouactuallyseehavingby4Qincludingtheputsandtakes?
RichardAdkerson (ViceChairman,President,CEO):
Jorge,thatlookshightous.IfweweretohavecalculatedourfullcostceilingtestattheendofMarchusingthecurrentstripprices,therewouldhavebeenapproximatelya$2billionincrementalhigherwrite-downattheendofMarch.TheSECruleswouldn'tallowustodothatbecausewehavetousethis12-monthaverage.Butifyouweretogoforwardandsaythestrippriceswillberealizedovertheforward,thenumberswouldbecloserto$2billionthanyour$3billion,$3.5billionnumber.
JorgeBeristain (Analyst-DeutscheBank):
Sure.That'sbecauseIwasusingspotheldconstantnottheforwardstrip.Thatishelpful.AndthentoJim'scommentearlier,couldyougiveusanorderofmagnitudeofwhatyouthinktheoffsetsthatcouldbecomingagainstthosefuturewrite-downswouldbebytheprovinguportheconversionofresourcestoreserves?
JimFlores (President-Freeport-McMoRanOil&Gas):
Theaspectthatisgoingtobefullyengineered,andit'sstrictlyafeelatthispoint,Jorge.Thatthedifferencesofhavingsomuchofitdiscoveredinthelasttwoyearsandnot--andhittheprovedcategory,thepricefunction,theactualoperatingfunction,andwepushoutcapitallikewe'vebeenpushingoutcapital,thatslowsdowntheprovedbookingprocess.
Sothere's--ifIcouldfigureoutexactlywhatcapitalwehaveexternalgoingforward,whattheaccelerationofthosedevelopmentswereandwhatpriceswere,Icouldansweryourquestionsalotcloserthanjustsayingit'sapositivetrend,Ithinkisthebestwaytotalkaboutitbecausetheinventoryisfull.It'sjustamatterofallthosefactorscomingtogetherandwhatactuallygetsbookedandwhatdoesn't.Buttheresourcesarethere.
RichardAdkerson (ViceChairman,President,CEO):
Yes.Jorge,I'msureyouunderstandthis.Butjusttobeclear,onceyouwritesomethingdown,even
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thoughpricesmaycomebackoryouhavefuturereserveadditions,youdon'twriteitbackupunderouraccountingsystem.Thebookvaluestaysthere.
Whathigherpricesorhigherreserveswoulddo,andit'simportanttonotethatreservesareafunctionofpricesaswell.Aspricesgohigher,economiclimitsextendandreservevolumesincrease.Lowerpricesputlimitsonhowmuchreservesyoucanaddataparticularpointintime.
Butthatcouldtendtooffsetthis$2billionnumberwearetalkingabout.Itwouldnotresultinawrite-upofpastwrite-downs.
JimFlores (President-Freeport-McMoRanOil&Gas):
Andyouaregoingtoseeour(T&A)rateontheoilandgasunitbecauseofthewrite-downsbemore(correlative)toourfindingcostgoingforward.Andwewillbeabletoaddreservesatthatfindingcost,whichwillbebeneficialorparwithourDD&Arateversuswhatit'sbeenattheendoflastyear,was$40-plusandit'sgoingtobeinthe$20sbecauseofthewrite-down,Iguess,goingforward.
JimBobMof fett (Chairman):
ThisisJimBob.Youshouldmakesurewe(inaudible).Whenwetalkresources,ifyoulookatthemapofVito,ifyoulookback(inaudible)theresourcesasyouseethere,bothdrilledandundrilled,theimportantpartofthatwouldbethenumbers(wehavebefore)usnowis,forinstance,inthecaseof(deephosting)allthosewellshavebeendrilled.Sothatnumberyouseegoingfrom75millionbarrelsto270millionbarrelshavelogged(inaudible)inthefaceof(inaudible).
Sohavetwokindofresourcesonthesemaps.Resourcesthathavebeendrilledandloggedandputinthebank,sotospeak,butwehaven'tbeenabletobecauseoftheso-calledrules.Haven'tbeenabletogetitseparated.Inotherwords,wehavea(inaudible)greencolorofalltheresourcesandaredsetofallreserves.Wehavealotoftheminthiscategoryrightnow.
JorgeBeristain (Analyst-DeutscheBank):
Fullyunderstood,andIappreciatetheextracolor.Andjustlastly,Jim,onPage22ofthePowerPointarethosetheprojectionsforthepotentialtriplingofyourproductionbasedontheassumptionthatyouareself-funded,oristhatassumingextracapitalcomesintotheCompany?
JimFlores (President-Freeport-McMoRanOil&Gas):
Thatisthelatter,assumingextracapitalcomesintotheCompany.Whatitdoes,ifitdoesn't,ifwejustself-funditourselvesataslowerpace,thatjustmeansit'saslowerslopeanditwouldextendthepeakoutbeyond2025.
Everythingjustshiftsforwardorintothefutureyearsataslowerpace.Wecouldaccelerateitwiththeadditionalfundingitcomesin.
JorgeBeristain (Analyst-DeutscheBank):
Gotit,thankyou.
RichardAdkerson (ViceChairman,President,CEO):
Listen,letmejustsaytoeveryone,theselowcostaccountingrulesarecomplicated.Andthey'relogicalincertainrespectsintoday'sworld.Ifyouhavequestions,callDavidJointandhewillanswerthemorhewillarrangeforourpeopletowalkyouthroughthem.Wewanttomakesureeverybodyunderstandswhatthisisandwhatitisn't.
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Operator :
BrianYuwithCiti.
BrianYu (Analyst-Citigroup):
Great,thanks.Firstquestionisontheoilandgas.OnPage23ofthepresentationwecanseetheimprovementEBITDAbetweenadditionalfundingversuswithoutadditionalfunding.ButifIincrease--ifIincorporatetheincreasedCapExfootnotes,underbothscenariosthenetnumberisaboutanegative$3.9billionunleveredfreecashflowfor2015and2017.InthecontextoftheimpressiveIRRsthatwerelaidoutonPage15ofthehandout,whenshouldtheenergybusinessstartgeneratingpositivefreecashflowonastandalonebasisunderthoseassumptions?
JimFlores (President-Freeport-McMoRanOil&Gas):
Itwouldbeat2017ata$74Brentoilpriceistheassumption.Ifit'snot--ifoil'snot$74in2017,itwouldbe2018and$74.Itisafunctionofpriceandalsotheproductionscheduling,Brian.
BrianYu (Analyst-Citigroup):
Okay.In2017thereisstillabouta$400millionshortfall.
JimFlores (President-Freeport-McMoRanOil&Gas):
Right,atthesepricesyouhaveto--
BrianYu (Analyst-Citigroup):
Okay.Well,IguessmaybeIcanansweryou,justbecausetheIRRsdolooksoimpressive.They'realothigherthanwhatwewouldtypicallyseefortheminingbusiness.AndI'mjusttryingtofigureoutwherethedisconnectisversustheprojectionsversusthemorebottoms-upindividualprojectanalysis.
JimFlores (President-Freeport-McMoRanOil&Gas):
Itisprobablyinthesnapshotofthethreeyearsfromastandpointoftheschedulingofwhen--whatprojectsarebeingfundedin2017thataffect2018,2019production.Soit'safunctionofpricesandalsoproductionsketchingoutthere.
AndwhenwesoldtheEagleFordandtookthatbigchunkofproductionoutofourproductionprofile,fillingthathole,wecandebatealongtimewhenwegetitdonebutthesoonerwefillitwithproductionandthenwehavetojusthavetoworryaboutprice,thesimplerourmodelwillbecome.Andtheonlywaytodothatistoscheduleourwellsbeinghookedupthatwe'vedrilledarereadyatafasterratewithoutsidefunding.
Sothatisthemodel.AndIunderstandyourfrustration.Butyoucanimaginetryingtoputtogetherastaticmodelforyouguyswithsomanymovingparts,dependingonwhatcapitaliscominginthedoor.
KathleenQuirk(CFO):
Theotherthingwehaveisthroughthisperiodyouseethrough2017,wehaveexistingrigcontractsthatwerecontractedforacoupleyearsback.Whatwe'reseeingiscostscomingdown.Andsowewillbeablepost2017todomorewithlesscost.Soyouwillseethecapitalexpenditurenumbersreflectinglongerterm,reflectinglowercostofrigsandservicecost,etcetera.
BrianYu (Analyst-Citigroup):
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Okay.Great,allright.Thankyou,appreciateit.
Operator :
DavidGaglianowithBMOcapital
DavidGagliano (Analyst-BMOCapitalMarkets):
Hi.Thanksfortakingmyquestions.Ihavetwoquestionsrelatedtothecapitalspendingissue,andmaybeyouhavearereadycoveredsomeofthis.ButIstilldon'tunderstand.Ontheoilandgasside.CapExwentupbyabout$1billion.Obviouslyvolumeswentuponly10%outin2017.
MyquestionisactuallytiedtoSlide22.Howmuchofthegrowthbetween2018and2020intheoilandgasonSlide22isnowcovered,orwhatever,bytheseupdatedcapitalspendingplans?AndhowmuchmoreCapExwouldbeneededtogettothe400millionbarrelsperdaytargetby2020?That'smyquestionontheoilandgasside.
Andthenonthecopperside,canyou--Imissedthis.Whatwerethemaindriversforthe$300millionincreaseincopperspendingsincethelastconferencecall?
RichardAdkerson (ViceChairman,President,CEO):
Let'ssee.Thesecondpartis--wedon'thave.Whatyoufocusingonthere,becausewehaven'treallychangedour--
KathleenQuirk(CFO):
Thecopperspendingin2015is$3.7billion.That'sasameaswhatitwasbefore.Actuallywe'vetakendownCapExin2016and2017byatotalof$300million.It's$300million.
(Crosstalk)
DavidGagliano (Analyst-BMOCapitalMarkets):
Wegotthatonebackwards.Sothatishelpful.Thatanswersthatone.Okay,andthenontheoilandgasside?
RichardAdkerson (ViceChairman,President,CEO):
Kathleen,keepgoing.
JimFlores (President-Freeport-McMoRanOil&Gas):
David,theswinghereisyou'vegottwotypesofcapital.You'vegotyourdrillingcapitalthatKathleenalludedto.Thecostsarecomingdownonthespreadrate.Ithinkwehave10%reductionthisyear,15%,20%andthe30%aswegetpast2017wewillbeabletoreducesomeofthedrillingcost,assumingthosecostscontinuetogodown.
Buttheotherbigthingisthetimingofthecompletionsandthecompletioncapital.That'sreallyourvariablecapitalinourbudget,ourdiscretionarycapital.SoIcan'temphasizeenoughtoyourquestionis,it'sgoingtobehowmuchwespendearlyenoughtogettheproductionresponsesoweself-fundedwithproductionversuscontinuingtobleedalongwithoutthecapital,withoutthecapearly.
Becauseifwearegoingtoslowourprogramdown,wecouldshowforthenext--intwoyearswecouldbetotallyself-fundingmid-2017basedonthe$75oilpriceandrampingupproductionandclosethegapthatBrianhighlighted.Orwecouldspendfouryearsataslowpacespendingalessamountofmoney
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andcontinuingtofundadeficittogettothesamepoint.
Andwehavethatflexibilityintheassets,andthat'sreallythequestionthatwehavebeenwrestlingwithhereatFreeport,iswhatisthebestthingfortheshareholders?That'swhyweareexploringtheexternaloptionoftheIPO,toacceleratethatbusinesssoitbecomesself-fundingfasterversusalongerdeficitspendataslowerburn.
DavidGagliano (Analyst-BMOCapitalMarkets):
Okay.Isthereawayjusttogiveanumberon2018to2020incrementalcapitalneededtogettothe400millionbarrels,oristhatjustnot--
JimFlores (President-Freeport-McMoRanOil&Gas):
Theincrementalcapitalisafunctionofwhat--youaretalkingaboutthebaseplantowhatwearetalkingabout?Thecurrentplanorthehigh-growthplanwithoutsidecapital?
DavidGagliano (Analyst-BMOCapitalMarkets):
I'mbasicallytalkaboutthechartonSlide22.Howmuchcapitaldoyouneedtogettothe400millionsbarrelsofoiladayby2020?
JimFlores (President-Freeport-McMoRanOil&Gas):
Thatwouldbe,fromthispointforward,itwouldbeasreflectedinthenumbershereonPage23.Itwouldbethe$3.8billionin2016and$3.5billionin2017ona(8H)basis.Andthendependingonwhat--it'sthedeltabetweenthatwouldbetheadditionalcapital.Wewouldproject2018through2020,it'dbeself-fundingthroughtheEBITDAgrowth.Idon'thavethatrightinfrontofme,theEBITDAgrowth--ortheEBITDAin2018to2020,butit'snotanegativenumber,itisapositive.
DavidGagliano (Analyst-BMOCapitalMarkets):
Okay.
JimFlores (President-Freeport-McMoRanOil&Gas):
We'llhavetogetthattoyou.
DavidGagliano (Analyst-BMOCapitalMarkets):
Allright.Thanks.
Operator :
CurtWoodworthwithNomura.
CurtWoodworth (Analyst-NomuraSecuritiesIntl):
Goodmorning.
RichardAdkerson (ViceChairman,President,CEO):
Goodmorning.
CurtWoodworth (Analyst-NomuraSecuritiesIntl):
Jim,IwonderedifyoucouldaddresswhattheincrementalCapExwouldbeunderthefundingscenario?It
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lookslikeyou'relookingforabout$1.5billionofincrementalspendin2016and2017.ThencanyoualsotalkaboutwhyusinganIPOwouldbemorepreferabletotrytostructureeitheraJVorapartnershiponaprojectbasis?
JimFlores (President-Freeport-McMoRanOil&Gas):
Italldependsonwhatmarketisoutthereandsoforth.CurrentlythemarketthatweseeisamarketthathascapitalinitfromaJVbasis,buteverybody'sgotalotofprojectstodoandthere'snotalotofdiscretionarycapitalouttheresoit'sveryexpensive.Theprivateequitymarket'sveryexpensiveaswellbecausethey'rerecapingalotoftheirexistingbusinesses.
We'rejustlookingforthebestformofcapital.Imean,we'vegotafabulousgrowthprofileinourbusiness.We'vedrilledthewells,takentherisk.We'recertainlynotgoingtogivethemawayjustbecausewewanttoborrowalittlemoneyhere.That'snottheprerogative.
Wewanttomakesurewefindwefindthelowest,cheapestcostofcapitalandwiththebestbenefits.Andthebenefitswe'regettingthevisibilitytoallofourshareholderstowhatwehaveachievedandtheperformanceforoilandgasbusinessalongwithwhatwethinkisaninexpensiveformofequityforFreeportMcMoRanintheformofequityatFOMGmakessomesense.
Again,likeRichardsaid,wearestudyingit.Wehopetohave--gothroughthisprocess,butrightnowitlooksthemostfavorablebecausetheindustryjustissued$8billionofequityhereintoaprettydynamicenvironment.Rightnowthat'saveryviableentityforus.Andweareencouragedbyalotoftheinvestmentbankstopursueit.
JimBobMof fett (Chairman):
ThisisJimBobagain.Letme--Iwanttogoaheadand(inaudible)onthis.Thesethree(inaudible)thatwehadthatarepushinginyourdeepwater(inaudible)aregoingtobemagnets.Justimaginethoseasmagnets.
Aspeoplebuyleasesoutthere,includingourselves,wewillhaveacaptivemarketfortheleases.Weare(inaudible)withpeople.Theybuyleasesbecausethedifferencesisthelease(inaudible)iftheymadeadiscoveryandtheybuildtheirownfacility,beafive-yearperiod.Wehave250,000barrelsadaytopass(inaudible).
Sotoansweryourquestion,todaywemaymakeoneassessmentbuttheequityisrightaway.Thepartnershipsyoutalkaboutmaygeneratethemselves.Butmycommentagain,justthinkabouttheplatformasamagnets,becausethereisnootherfacility,nobodybuildingoutthere.Peoplehavetomakeadecision,dowanttogotoFreeport'splatformordoyouwanttowaitfiveyearstogetyourstuffonproduction?(Inaudible)
CurtWoodworth (Analyst-NomuraSecuritiesIntl):
Thanks,JimBob.AndthenRichard,justaquestiononIndonesia.CanyoucommentonhowthediscussionsaregoingwiththeMOU?Andspecificallywhattheplanwouldbeforthesell-downofPTFI?
AsIunderstand,Ithinkthenewmininglawrequiresanadditional19%to20%stakereductionwiththegovernmenthavingthefirstrighttoacquirethat.SoI'mjustcuriousonwherethatstands,andhowdothinkthatcouldberesolvedpotentially?
RichardAdkerson (ViceChairman,President,CEO):
ThatisoneofthepointsthatiscoveredintheMOU.Andthegovernmenthasregulationsthatapplyto
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differenttypesofminingarrangementstheyhavetoexistingminesandsoforth.
Intermsofourworkingwiththegovernmentandreconcilingourcontractofworkwhichrequiresnodivestituresandthegovernment'snewregulations,theMOUreflectsamutualagreementthatwewouldincreasethecurrent9.36%interestownedbythegovernmentto30%overtime.Andasyousaid,thewaythatthatwouldbeapproached,thatwouldbepartofthesetofpointsthatwewouldagreetoingettingtheextensionofourrightstooperateunderacceptablefiscaltermsisthatwouldthenbepursuedovertimeandsteps.
Theagreementisthatthatsalewouldbeatfairvalue.Andthefirststepwouldbeofferingittothegovernment.WehavetalkedabouthavingapieceofthatultimatelythroughalistingontheIndonesianstockexchange,andthegovernmentofficialshaveexpressedpositiveaspectsofthat.TheprovinceofPapuahasindicatedanaspirationtoownsomeinterest,andweworkedonsomefinancialstructurestoaccomplishthat.Allofthiswouldcomeintoplayaspartofreachingaresolutionofthelong-termoperatingrightsthatwehave,buttheMOUcoverstheextentofthefuturedivestiture.
CurtWoodworth (Analyst-NomuraSecuritiesIntl):
Okay,thankyou.
Operator :
OscarCabrerawithBankofAmericaMerrillLynch.
OscarCabrera(Analyst-BankofAmericaMerrillLynch):
Thankyou,operator.Goodmorning,everyone.JustRichard,wantedtogetbacktothe--andJim,Iwantedtogetbacktotheoilandgasquestionthatacouplepeopleasked.AndifImay,youincreaseyourCapExfrom15%to17%by$1.6billion.WiththatincreasingCapEx,willwegetto--again,Slide22hasapproximately225,000barrelsaday,whichmymathisabout82millionbarrelsayearofoilequivalent.Canweassumethatthat'safigurethatyou'relookingforin2018?
JimFlores (President-Freeport-McMoRanOil&Gas):
Underthegrowthplan,yes,withtheadditionalcapital.That'scorrect.
RichardAdkerson (ViceChairman,President,CEO):
Sothisisnotsomethingthatiscommittedtointhefuturegrowthplan.It'sanopportunityforus.Andwearegoingtobeassessingwhether--whatwehavegivenyouinourbudgetplansthat'spartofthepresentationiswherewearetodaywithourcapitalspendingplans.
Wehaveopportunities,providedwecangetcapitalthroughavarietyofsources.Curtmentionedthejointventureopportunitywithothercompanies.Whetherthereisfinancingatapropertylevel,whetherthereisfinancingavailableattheentitylevel.Andifweareable,Oscar,togetfundingonareasonablebasistopursuethegrowthplan,thechartthatyouarereferringtoiswhatwouldbeachievedunderthatplan.
Ifwearen'tableto--ifweconcludethatthecostofcapitalistooexpensive,thenwewillgiveyouguidanceastohowthatwouldworkoutunderourbaseplan.Andtheopportunitieswon'tgoaway.It'sliketheprojectswesuspendedin2008inourminingbusiness.
CerroVerdewasbeingpursuedbeforethat.Wesuspendedit.Itdidn'tgoaway,andnowwedevelopeditlater.Sowehaverightstotheseresourcesthatarelongterm.
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Andwewillbemanaginghowwespendmoney,howwefinancethatspendinginawaythatisresponsivetomarketconditions,andmarketconditionsarechangingaswespeak.Andsowearegoingtohaveourfingersonallthesesourcesoffinancing.Andwewillmakedecisions,andwewilladvisethemarketastowhattheconsequencesofthosedecisionswillbeaswegoforward.
OscarCabrera(Analyst-BankofAmericaMerrillLynch):
Okay.MaybeifIaskedthequestionthisway.OnSlide31youhaveoilandgasexpendituresin2015,2016and2017at$2.8billion,$2.9billionand$2.9billion.Thiscomparedtothelastpresentationis$1.6billionmore.
Soyou'representingin2017oilandgassalesof$63million--sorry,63millionbarrels.Sowiththeadditionalcapital,thatweincreasefromlasttimewetalkedintheconferencecalltonow,willthatgiveyouadditionalproductionofoilandgasin2018?
Iassumeso.AndI'mtryingtoassesswhat'sthelevel?IstheleveltheonethatyouareshowinginSlide22?AndIcanappreciatethatthere'sopportunities.
(Crosstalk)
JimFlores (President-Freeport-McMoRanOil&Gas):
Slide23,Oscar.Slide23,thatisthecurrentplanontopwiththecurrent--ourcurrentfundingthatreflectsonPage31reflectsthevolumesinthecurrentplan.ThisiswhatIwastalkingabout,ifwecontinuetoputoffthecompletionandhook-upandfacilitiesneededtoaddnewproductionaswedrillit,we'vealreadydrilleditinthelasttwoyears,thenwewillnotseeitshowupintheproductionnumbers.
Itwillbewhatisinthecurrentplan.Thatproductiondidn'tgoanywhere,likeRichardistalkingabout,anditwilltakelonger,yearsfourandfive,togetallthatproductionon.Onathree-yearoutlookyouwillmisssomeofthatproduction.Ifweraisetheadditionalfunds,andweareabletoputthewellsonthatwe'vealreadydrilledonatimelybasis,thenyouwillseethegraphsatthelowerportionwhereitgrowsfrom143to217andtheadditionalfundingrequired.
Andourvariablefundingthereisthecompletiondollarswhichaffectsthetiming.Andthatiswhen,IthinkitwasDavidorCurtorwhoever,wanted2018through2020,andwe'llgetityou,whereyoucanseethereflection.Basicallyinthecurrentplanwewouldhitthesame217afewyearsfurtheroutbecauseofthejustdelayedspendinginthatfunding.
OscarCabrera(Analyst-BankofAmericaMerrillLynch):
Okay,thankyou.Thenon--intermsoftheequityraise,orpotentialequityraise,Iamassumingbasedonyourcommentsthatthiswillbedoneattheoilandgasbusinesslevel.Howmuch,orhaveyouthoughtaboutuptowhatlevelFreeportMcMoRan,theholdingcompany,wouldbewillingtodiluteofitsholdingsintheoilandgasbusiness?
RichardAdkerson (ViceChairman,President,CEO):
Oscar,weareundersomerestrictionsunderthesecuritieslawsabouthowmuchwecantalkaboutdetailspriortofilingaregistrationstatementandgettingSECreview.Wecansaythis.Freeport-McMoRanOilandGaswouldretainasignificantmajorityinterestinthat,FCXwouldretainasignificantmajorityinterestinFreeportMcMoRanOil&Gas.
Andtheamountoftheofferingandthetermsofitwillbedependentonmarketconditionswhenwearereadytoenterthemarket.Andwecannotdothatforanumberofmonthsnowbecauseoftheprocedural
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requirementsofSECreview.
OscarCabrera(Analyst-BankofAmericaMerrillLynch):
Okay.Thenlastly,ifImay,justacommentandaquestion.ThecommentisjustIwantedtosaycongratulationstoRedCongerandteamfortheachievementsinCerroVerde.Andthathasbeenremarkableproject.
Andthenthequestion.YouhaveacommenthereonyourreleasetalkingabouttheMOUinGrasberg.Anditsaysnotermsofthis--theCOWotherthanthoserelatedtoexportduties,smelterbondandincreasedroyaltieswillbechanged.Canyouclarifythat?Isthegovernmentstilltryingtoincreaseroyaltiesorchangethebond?
RichardAdkerson (ViceChairman,President,CEO):
No.Letmeclarifythat.ThosewereagreedtolastsummerwhenwesignedtheoriginalMOU.Weagreedtoincreaseroyaltiestothecurrentroyaltiesunderthemininglaw.Andthereisnofurtheradjustmentstothat.
Wealsoagreedtoputupasuretybondof$115milliontodemonstrateourseriousnessaboutpursuingthesmelterdeal.Thereisnoadjustmenttothat.
Andthenweagreedtopayanexportdutyonaslidingscale.Allthatwasagreedtointhesummerof2014.AndnoneofthosetermswerechangedwhenweextendedtheMOUinJanuary.Andtheyarenot--we'renotbeingapproachedforfurtherchangesalongthoselines.
OscarCabrera(Analyst-BankofAmericaMerrillLynch):
Okay,great.Thanksverymuchforyouranswers.
JimBobMof fett (Chairman):
Oscar,thisisJimBob.Iwanttogiveyoualittle(inaudible)onquestionsyouaskedaboutthecapital(inaudible)productionrates.Andletmesetthesceneforyou.
Wehavethesetaxformsthatwekeeptalkingaboutthathavebeenbilled,$6billionworthaplatform.Sittingtherewaitingforproductiontobeincreasedbecausethey'reunusedcapacity.
Intheinterimtimebetween(inaudible)andwhatwehavedonetoday,we'venowdrilledwellsthataresittingtherewithhundredsoffeetof(pay)inthem,andit'saquestionofnotguessingwhat'sthereservesaregoingtobe,buttheresourcehasbeendrilledandsowehavetheplatformssittingthere.Wehavethewellssittingtherethataredrilled.
Andthequestionmarkis,howmuchmoneydoyouspend,what'sacostofthecapitaltogettheoilfromthewellsontotheplatformthatisalreadybeenbuilt,andalreadyinourcostbecausewepaidforitintheacquisition.Andwe'regeniusesaroundheredoingextraordinarythings.ButMissionImpossibleistosay,whatistherightdecisionsittingheretoday?
Becausethat'sgoingtodependonwhatthepricingofoildoes.(Technicaldifficulties)copperdoes.Butsoyouunderstandthedifferencebetweentheriskfactor.Theplatformsarebuilt,thewellsaredrilled.Itjustaquestion,whendowehookthemup.
OscarCabrera(Analyst-BankofAmericaMerrillLynch):
Yes,sir.Understood.It'sjustcomingfromdoingabout15yearsofminingresearch,oilandgasisnewand
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wearejustlearningaboutthisrisk.Anditlooksfromadistance,itlookslikethatoilandgasanddeepwaterisalotmoreriskierthanonshore.That'swhywe'retryingtoestablishtheparameterstogiveyoutherightvalueforthoseassets.Butthankyouforyourcomments.
JimBobMof fett (Chairman):
It'sagoodthingyou'vegotagoodteacher.JimBob'sthebestteacherinoilandgasthatyoueverheardof.
OscarCabrera(Analyst-BankofAmericaMerrillLynch):
Thankyou.
RichardAdkerson (ViceChairman,President,CEO):
Thanks,Oscar.
Operator :
BrianMacArthurwithUBS.
BrianMacArthur (Analyst-UBS):
Goodmorning.Myquestionisgoingtobeoncapital,too.ButIjustwanttogobacktotheGrasbergcapital.You'vecutthefive-yearforecast,yoursharefrom$700millionto$600million.Butthenyoumakeacommentthatthereisanadditional$300millionayearforthenextfiveyearsforundergroundorehandling,etcetera.Myfirstquestiononthat,isthatallyoursordoesRioTintofundsomeofthat?
KathleenQuirk(CFO):
RioTintodoesfundsomeofthat,Brian.Thepercentagevaries,dependingontheirshareproduction.Andthatisnothingnew.Thosenumberswerealwaysinourplan.
YouseeintheCapExschedulethatwereducesomeoftheCapExin2016and2017.Thatisrelatedtotimingofsomeofthoseexpendituresthatwehavepushedout.Butthosecapitalexpendituresformillmodificationandpowerupgradeshavealwaysbeenpartofourplan.
BrianMacArthur (Analyst-UBS):
Right.Sothat'swhatIthought.Butthenitisfairlyback-endloaded.Soalotofthatspendingwouldbe,ifI'mtryingtolookatthingsoutin2018,there'llbemuchhighernumbersoutin2018asyouspentinsteadof$600millionayearyou'dbespendingcloserto$1billionayearayear?ShouldIthinkofitthatway?
KathleenQuirk(CFO):
Yes.Wedo--weareplanningwhenweneedtodothesemillmodificationsand(highlight)handlingandpowerupgrades.Andwearegoingtodoitprudentlyandwithaneyeontryingtomatchitupwithwhenweultimatelyneedit.Butyes,wewillhavesomeofthoseexpenditureswillbehigherinthe2018,2019timeframe.
BrianMacArthur (Analyst-UBS):
Doyouneed,fortheforecastyouaregivingusforthoseyears,2019to2021,becausetheproductionfigureshavemovedaroundalittlebit.Doyouneedtodothattogettothosenumbersthatyouaretalkingabout,i.e.ifyoudon'tdothis,willproductionbelowerbecauseofsomecomplexmetallurgyorsomething?Ordoyouneedtodotheseforsurejusttogettothoseforecastlevels?
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KathleenQuirk(CFO):
Yes.Weneedtodothem.Andwhatweneedtodoisreflectedinourlong-rangeplans.
RichardAdkerson (ViceChairman,President,CEO):
Butsomeofthishasbeenadjustedbecausethecompletionofthepitwasoriginallysupposedtooccurattheendof2016.Andithasbeenextended.The(powerright)processingdoesnotaffectalloftheneworethatwewillhavefromtheunderground.It'sneededforcertainoftheGrasbergBlockCaveore.WeneeditlongrangefortheKucingLiarorebody,whichhashighpyritecontent.
Soaswelookatissuesofcoppermarketsandphysicalactivities,weadjustsomeofthosethingsthroughourmineplanning.It'sinourinteresttodeferthesecostsuntiltheyareabsolutelyneeded.Andsothat'swhatwearegoingthroughrightnow.Andthatissomeoftheadjustmentsthatyouareseeing.
Buttheimportantnewsisthattheplannedcapitalexpendituresforthisprojectreallyaren'tchanging.Aswegoforwardourplanisbeingshowntobetherightplan.Andaswegoforward,wegetsome--changingeconomicsgivesussomechangingcostestimatesbecauseoftheeffectsofworldwideglobalenergycostandthelowercostofsteelandthingslikethat.Sowehavesomeimpact,notahugeimpact,fromcurrencychanges.So--butthebasicplanhasnotchanged,whatwe'regoingtodo.
Alittlebitofchangetowhenwearegoingtodoit.Andsomeaffectontheabsoluteamountofthecostbecauseofthechangingglobalcommodityprices.
BrianMacArthur (Analyst-UBS):
Great.Thankyouverymuchforthatcolor.That'shelpful.
JimBobMof fett (Chairman):
ThisisJimBobagain.LetmeaddresssomethingthatOscarjustsaid.We'vegotthesebulletsflyingaroundhere.Oscarsaidthedeepwaterandtheonshore.GivesmeachancetotalkabouttheHighlanderwellforjustaminute.
TheHighlanderwell,whichwehaven'ttalkedaboutmuchinthedetail,(inaudible)hasgottentheappropriatesituationwithbigstructuresandgoodreservoir.The(inaudible)issayingthatweperforated28,503,isthelargestwellthathasbeencompletedsinceMobileBay.
MobileBay,asyoumayremember,wasa47pcffield,andwassuchabigpartoftheExxonMobiltransactionatthetimethatthemergerwasmadethere.Buttheputthe(inaudible).
Basedontheperformanceofthiswell,well'sbeenflowingnowforalmostthreemonths.Buttheshut-in'sat19,500poundsofpressure,whichisthehighestshut-inpressureeverrecordedinanonshorewell.Thestructure,nowthatwehavebeenflowingthewellforthreemonths,was(inaudible)calculation.
Thiswellhashadnodrawdown.Wetesteditashighas75millionaday.Andtheybelieveitcanproduceas(technicaldifficulties)standardrates100millionaday.ThisisjustliketheMobileBaywells.
Thereasonwhythat'simportantistheMobileBaywasrecompletedabout10yearsago.(inaudible)flowthesewells,andsomeofthewellsareproducingover250Bcfandprojectedtoproduceto400Bcf.
Soweappeartohaveareservoirthat'ssimilartotheMobileBayreservoirthatthesestructurescoveranywherefrom30,000to60,000(inaudible).Wehavespentfiveyearsbecomingexpertsindeepdrilling--inthedeeppotential.
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Thisholetrendssome200mileswide,aswe'vebeenopenedupbythis(inaudible).Pricesofnaturalgasaredownalittlesoexpectthe(inaudible).Butwhenyouhavepeoplecomeintotheseexportterminals,ifyouhavesomeliquidprojects,they'regoingtohaveto500millionto700millioncubicfeetofgasaday.
And(technicaldifficulties)becauseofthelapinexplorationforgasbecauseeverybody'sbeenworriedaboutthegaspriceandthenfocusingonoilexploration,whentheylookupandseethatthey'vegottohave500millionto700millioncubicfeetofgasaday,I'mremindedofthetimewhenwedrilledthediscoveryof1.25millionin1981andoffset(inaudible).
Theleasewasownedby(inaudible)andAmocoandtheywerehavingtoprovideacontractbuttheyhadtheFloridaGasfor$300millionadayandtheywerehavingtopayfor--theywerehavingto(inaudible)$0.35anMcf.
Thewellwedrilledtooffsetitwasderegulatednaturalgas.Wesoldthegasfor$9anMcf.Thisshouldtellyouthatthemarginshaveafunnywayofturningonyou.Andwhenpeoplemakethesecommitmentstobeabletodelivergas(inaudible)exportgasorLNG.Andyoustartlookingfor500millionto700millioncubicfeetofgasaday,youbetterknowyournumber'sright.
Operator :
OrestWowkodawwithScotiabank.
OrestWowkodaw(Analyst-Scotiabank):
Hi.Thankyou.Goodmorning.Thanksfortakingmyquestion.AgaincomingbacktothequestionsaroundtheCapEx.IthinkalotofusarestillhavingtroubleunderstandingwhattherationaleisforincreasingyourbasecaseCapExfortheoilandgasbusinessby$1.6billionoverthenextthreeyearswhentheincrementalimpacttoyourproductionoverthatsametimeframeisrelativelynegligible.Thankyou.
JimFlores (President-Freeport-McMoRanOil&Gas):
Again,Orest,it'stiming.Theaspectofdelayingthecompletions.WeincreasetheCapExforacoupleofreasons.Let'stalkaboutthatfirstoff.
ThediscoveriesatPowerNap,theadditionaldrillingthere,theaccelerationof--offsetexploitationprojectionslikeDeepSleepbytheoperatorthatobviouslywe'regoingtoparticipateinbecauseofthelow-risknatureofitandthederiskingbythePowerNapwell.Alsowhenwedrillourexploratorywells,like(FarEscapeWest)weriskthemat25%success.Whentheyaresuccessful,wehavetocompletethem.Wehavetoaddcapitalinforthat.
We'vealsotaken--wearegoingtotakeadeliveryofanadditionaldrillshipcalledtheRowanRelentlesshereinthelatethirdquartertodrillsomedevelopmentwellsaroundtheHornMountainareatofurthermakeouroperationouttheremoreefficient.Wehavetoshutthose--we'regoingtohaveshutthatplatforminforthefacilitymodifications.
Thosetypesofthingsaremakingouroperationmoreefficientandmakingourreservereplacementmoreachievableandbuildingourbusinessoverthelongterm.Youarenotseeingitinthefirstthreeyearswithdynamicproductiongrowthbecausewe'redelayingalotofthecompletiondollarsforthoseprojectsbecauseofbudgetconcerns.
SothewholeexerciseonPage23thateverybodyisstrugglingwithisthatifwewouldspendthemoneytocompletethewellsearlierthanwhatweplannedinourcurrentplan,andwehadthecapitaltodoit,wewouldseethoseproductionadjustmentsin2017asperthebottompartofPage23versusthecurrent
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planwehaveonthetoppartofthepage.
It'sstrictlyaproductiontimingissue.Andwearegoingtogetback.David,doyouallhavesomeinformationon2018,2019,and2020whenyou'llseetherestoftheproductionprofile?Soifwehavetheadditionalcapitalwe'reabletoacceleratethosehook-ups.Notthedrilling,nottheriskandsoforthofdrillingwells.
It'sstrictlyhookingthemupandthecapitalinvolvedthere.Thenyou'llseetheproductionresponsewithinthethree-yearperiod.Butunderthecurrentplanthatwehave,that'sundertheprudentfinanceplanofallocatingcapital,reducingourCapExCompany-wide,we'retakingamoremeasuredapproachandbringingthecapitalforward.
IftheContangocurveiscorrect,andweareina$70oilmarketinacoupleofyears,it'sgoingtobemuchmorebeneficialtodelaythatproductioncomingonbecauseofpricegoingforward.That'swherethemagicofit.Doesthathelpclearitup?
OrestWowkodaw(Analyst-Scotiabank):
Itdoestosomeextent.Butperhaps,canyouquantifythis$1.6billion?Howmuchincrementalproductiondoesthatgiveyou,say,in2018versusthreemonthsago,thethreemonthsagoforecast?
JimFlores (President-Freeport-McMoRanOil&Gas):
Itwouldgiveyouanother30,000barrelsaday.
RichardAdkerson (ViceChairman,President,CEO):
Butthatisnothistoricallyforyou.Let'stakethesuccesswehavehadintheVitobasinareaasanexample.WeacquiredaninterestinthisareathatShellhasbeenworkingonadevelopmentplan.
TogetherwithShellwedrilledthisPowerNapwellthathashadtremendousamountofnewinformationaboutthegeologyinthatarea,andit'saverybestpositivewell.Itisleadingusnowtolooktodevelop--todrillanotherexploitationexpirationtypewellcalledDeepSleepwhichwewillprovideussignificantnewinformationwhichhasbeenderiskedsignificantlyandhasthechanceofidentifyingahugestructurethere.
TheinformationthatwegetfromPowerNapandDeepSleepcouldchangethewholeideaabouthowtodevelopthatVitobasinarea.Inbestcasefordevelopingthat,that'sgoingtotakeanumberofyearsbecausethisisacasewherewehavetoputinnewproductionfacilities.It'snottyingbacktotheseexistingproducingfacilities.
Andsothishassimilaritiestomakingdecisionsformajorminedevelopment.Youfirsthavetounderstandthegeology.Youhavetodevelopa--youhavetocomeupwithadevelopmentplanforit.
Thatdevelopmentplantakesanumberofyearstoputinplace.SotheincrementthathasbeenaddedtocapitalexpendituresbecauseofsuccessatPowerNapinVitobasinareaisgoingtoleadustospendsomemorecapitaltounderstandwhatwehave,howitshouldbedeveloped,andmakedecisionsondevelopment.Andsothatproductionisnotgoingtocomeonstreamforanumberofyears.
JimFlores (President-Freeport-McMoRanOil&Gas):
That'sillustratedonPage22.In2019iswhenVitoareastartsproducing.In2020itstartsgoingveryfast.ToillustrateexactlywhatRichardjustsaid.
RichardAdkerson (ViceChairman,President,CEO):
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Westilldon'tknowbecausewhenwedrillthisDeepSleepwellthatmayprovideussomenewinsightsastohowtodevelopthiswholearea.It'ssomethingthatisunfolding.Ittakestime.Itisnotgoingtobeaquestion,likesomeofthehook-upsthatJimwastalkingabout,couldhaveproductionconsequencesmuchquicker.Butthisisamajor,majordevelopmentprojectthatcouldbeoneofthebiggestprojectsintheentiredeepwaterGulfofMexico.
JimFlores (President-Freeport-McMoRanOil&Gas):
It'snet1billionbarrelsfortheCompany.
OrestWowkodaw(Analyst-Scotiabank):
Okay.Thankyouverymuch.AndjustonemorequestiononCapEx.HowmuchincrementalCapExshouldweassumewillbespentonthesmelterinIndonesia,whichIassumewasnotinyourguidancehere?
RichardAdkerson (ViceChairman,President,CEO):
No,itisnotsomethingwherecapitalwillbespentofsignificanceuntilpost2016becauseofthepermittingtimeandsoforthwiththat.Inordertogiveyouasenseofthat,tothinkofthesmelterprojectbecausewehavecomeupwithanapproachofexpanding,notnecessarilyexpanding,makingabolt-ontypeadditiontoourexistingsmelteratGresikwithourpartner,Mitsubishi,beinganexpenditureontheorderof$2billionwithworkingcapitalorsomethingmaybesomethingslightlymorethanthat.
Soourplanswouldbetoobtainproject-typefinancingforamajorityofthosecosts.Andthentherewouldbetheunderlyingequitythatwouldbefundedbyapartnershipstructurewhichwewouldhavethemajorpartof.Butwewouldhaveotherpartnerscomingin,andwe'renegotiatingthat.Ourshareofthatproject'scostswouldbeaportionoftheunderlyingequityfortheprojectfinancingforamajorityofthatcostandthatconstructionatbestwouldbestartedinlate2016orearly2017.
OrestWowkodaw(Analyst-Scotiabank):
AndRiowouldberesponsiblefortheirproportionateshareofthataswell?
RichardAdkerson (ViceChairman,President,CEO):
Rio,andI'msureeverybodyonthecallknowsthatRioisourpartnernow.AndtheirinterestinGrasbergstepsupto40%both2021.TheywouldhaveanInterestinseeingthatwecomeupwithanarrangementwiththegovernmentforextendingbeyond2021.Weareindiscussions.
WehaveagreatpartnershipwithRio,Andwearetalkingwiththemabouthowbesttoproceed.Wedon'thaveanagreementonthatnow,butIamconfidentwewillgetonethatwillbegoodforallofus.
OrestWowkodaw(Analyst-Scotiabank):
Okay,butitsoundlikeyouaresuggestingthatweshouldnotassumethatRioisplanningtofund40%ofit.OramImisunderstanding?
RichardAdkerson (ViceChairman,President,CEO):
Well,there's--Mitsubishiisapotentialpartner.There'sotherpotentialpartnersoutthere.Youshouldn'tassumethatwearegoingtofund60%ofit.
We'reatthestagerightnowworkingwithaJapaneseconstructionfirmontheconstructioncontract.Weareworkingwiththelandowner,whichisanadjacentfertilizeroperationwherewehaveanadditionaldealwithonlandownershiprightsandsulfuricacidofftake.We'reworkingthroughpermitting.
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There'salotofworktobegoingforward.Let'sgobacktoyouroriginalquestionaboutcapitalspending.Wearenotlookingat$2billionofcapitalcomingtoFreeport.We'relookingatasmalleramountcominginoveryearsinthefuture.Andwewillupdateyouaswegoforwardingettingthedetailsandstructureofthisprojectcompleted.
OrestWowkodaw(Analyst-Scotiabank):
Great.
JimBobMof fett (Chairman):
Letmebesurethatyouunderstand.Ifyouchangeinyourexportthattookplacelastyearand(technicaldifficulties)giving.
Wasn'tjustforthe(cracker).Itwasforcracker,aluminum,(inaudible),etcetera.Whatthismeans,justsoyouaddtoRichard'scomments,thesmelter(issitting)inJapantoday.Butthisexport(technicaldifficulties)thattheyimposed(inaudible)meansthatyoucan'ttakeitoverfromIndonesiaandputitinaJapanesesmelterwithoutpayingabigexporttax.
ThatmeanstheJapanesearesittingtherewiththeirsmeltersandnofeed.Thisisnotjustaproblemfortheexporter,theminer.Thisisaproblemthat'scausedacompleterestructuringofthemarket.
Inotherwords,tomakeitsimple,everybodyassumesthatthesesmeltershavebeentherefor100yearsinJapanandotherplacesaregoingtohavefeed.AndIndonesiasays,we'renotgoingtoletyouexportwithoutahugetax,whichisnot(inaudible)theword.
That'swhythesenegotiationsaresointerwoven.Ifyou--sothesesmeltersdon'thaveaslamdunk(inaudible)wearejustgoingtoturnoureyesawayfromthese.They'vegotahugeproblem(inaudible)nomineralsandyetithasthedownstreampartofthebusiness.
That'swhyit'ssohardrightnowtosaywhoisgoingtofundwhatbecausethisisnotjustoneguy'spartnerinthehotfire.Everybody'sgotthesameproblem.It'sacompleterestructuringofhowthebusinessisdonebetweentheconcentrateandthesmelter.
OrestWowkodaw(Analyst-Scotiabank):
Thankyouforthecolor.
Operator :
ParetoshMisrafromMorganStanley.
ParetoshMisra(Analyst-MorganStanley):
Thankyou.IhadtwoquestionsonGrasberg.
Oneis--basedonyourconversationwiththegovernmentsofar,doyougetthesensethatthey'reopentorenewyourcontractsoonerthan2019aslongasthereisanagreementonotherissueslikedivestmentandetcetera?
RichardAdkerson (ViceChairman,President,CEO):
Yes.That'sourmutualobjective.Andweareworkingtowardsthat.Andtheissueis,andwe'reworkingonthathappeningthisyear,soonerthisyearthanlater.Andthegovernmentofficialswe'reworkingonrecognizethataswell.
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ParetoshMisra(Analyst-MorganStanley):
Gotit.OutofthetotalCapExthisyear,howmuchareyouspendingatGrasberg,includingsustainedCapEx?
RichardAdkerson (ViceChairman,President,CEO):
Let'ssee.Around$600million.
KathleenQuirk(CFO):
Theundergroundcapitalisinthe$800millionrange.Andsustainingisinthe$200millionrange.
ParetoshMisra(Analyst-MorganStanley):
Gotit.Actually,justonelastone.Iknowyou'vegiveninthepastsomesortofguidanceforthecashcostatGrasbergwhenyoubuildcompletelyunderground.Canyoujustreminduswhatthatnumberis?
KathleenQuirk(CFO):
Theguidancewe'vegivenisbasedongettingthefullcapacity.Sointheearlieryearsaswe'rerampingup,itwillbehigher.Atcurrenttotalprices,wecontinuetoexpectthatGrasbergundergroundwillbethelowestcostinourportfolio.Certainlylessthan$0.50apound.
Sowearenotseeinghugechangesintheopenpitcostversusundergroundbecauseofthenatureofundergroundminingandtheabsenceofstripping.We'vegotaverygoodcoststructure.Largescale,it'llbesimilartothetrackrecordyouhaveseenwithGrasbergovertheyears.
RichardAdkerson (ViceChairman,President,CEO):
Withallofthisnoisethatwe'vehadtodealwithforthepastseveralyears,noneofusherelosesightofjustwhatafabulousorebodythisis.It'sreallyspecialintermsofthecoppergradesandgoldgradesthatyouhaveavailabletous.
Theabilitytooperatelarge-scaleblockcavingoperationsisspectacular.Wearemovingtowardshavinga250,000-tonperdayconcentratormillfilledtotallybyundergroundoperations.Thatisuniqueinthisindustry.
Andwehaveshownthatwecanoperateblockcavescales.Freeporthasbeenblockcavingtheresincetheearly1980sinourDOZmineanditspredecessorsatshallowerelevationshavehadyearsofsuccessfuloperations.Wehavethekindofore,thekindofhostrockthatallowsustooperateattrulyworld-leadingscaletogettothishigh-gradeore.Andtheratesofreturnonthisprojectarespectacular.
JimBobMof fett (Chairman):
ThisisJimBobagain.Lookingatthedeposit,ifyoujustthinkaboutitthisway.We'vebeenoperatinginanopenpit.Inanopenpityouhavetomineboth(technicaldifficulties)orebecauseyoucan'tjustmakeastraightholejustoutofapipeintheground.
Whenyougetintoblockcaving,the(inaudible)rocksthatsurroundyouroreisallverysubstantial.It'smetamorphicrock.Andwhenyoustarttoblockcave,allyou(inaudible)isgetyourorethatfallsoutofthisblockcave.Youdon'thavetodealwithallthewaste.
Soimaginebeingupinthatopenpitinthefogand300inchesofrainwithallthesetrucksrunningaroundversushavingtojustsitthereandscratchthebottomofthisblockcaveandhavetheonlythingthatfallsdownisore.Sothenetofwastethatyouhavetofirstblastandthentruckoutofthereandfind
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aplacetoputithasbeenanenormouspartofawholeopenpitmine.
That'sbecauseyouhadtobuildthepitwallbeforeyoureallysaidyoudidn'texceedtheangleof(repose).Andwhenyoulookupthatyearsfromnowwhenyougointhatundergroundmine,ifyoulookupyou'regoingtoseeabigsilothatgoesup.Allthathasbeentheorethat'sbeen(altered)byvolcanic(technicaldifficulties).
That'swhyyouhavethechange.Itsoundslikegoingunderground.Peoplehistoricallythoughtundergroundwasmoreexpensive.Withthesizeofthisorebodyandthepurityoftheore,nothavingtominethatwastechangesthewholeimpressionofhowmanytrucksyouneed,howmanypeopleyouneed.Brutremember,you'reoperatingunderground.Itdoesn'trainunderground,believeitornot.There'sno(inaudible)underground.
RichardAdkerson (ViceChairman,President,CEO):
Fortheindustryasawhole,undergroundminingisalotmoreexpensive.That'sauniquecharacteristicofthisGrasbergorebodyisthatweareabletominesuchlargevolumesofhigh-gradeoreandreducethatunitcostdownto,dependingondieselfuelandsoforth,thelevelsthatare--andthepriceofgold,levelsthatareconsistentwithourhistoricalprice/costlevelsthere.It'sagreatasset,
Listen,weappreciateeverybody'sparticipationin--Ithink--arecord-settinglengthofaconferencecall.Butwehadalottotalkabouttoday.Wewantedtomakesurethatinthecontextofthesecommoditymarketsandthechangesinourplansthatyouunderstoodwhatourassetsarethatwehavetoworkwith,whatoptionswehavetodo,howwe'reapproachingit.Wearegoingtohave,asIsaid,ourfingersonallaspectsofthemarketsforcommodities,themarketsforcapitalthatareavailabletous.Andwe'regoingtofindtherightalternativetogoforwardandachieveourstrategicobjectives,creatingvalueoutoftheseassets.
JimBobMof fett (Chairman):
Thereasonwehadtoomuchtotalkaboutiswehadsomanygreatproperties.
RichardAdkerson (ViceChairman,President,CEO):
Allrighteveryone.Thanks,andfollow-upquestions,Davidisavailabletobethepointguy.Andwewillgetpeopletoaskthemforyou.
Operator :
Ladiesandgentlemen,thatconcludesourcallfortoday.Thankyouforyourparticipation.Youmaynotdisconnect.
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