Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)

Q4 2012 Earnings Call

January 22, 2013 10:00 am ET

Executives

Kathleen L. Quirk – Executive Vice President, Chief Financial Officer and Treasurer

Richard C. Adkerson – President and Chief Executive Officer and Director-Freeport-McMoRan Copper & Gold Inc.

James R. Moffett – Chairman-Freeport-McMoRan, Co-Chairman, President and Chief Executive Officer-McMoRan Exploration Co.

Mark J. Johnson – Chief Operating Officer-Indonesian Operations

Analysts

Sal Tharani – Goldman Sachs

Anthony Rizzuto – Dahlman Rose & Co.

Brian T. MacArthur – UBS Securities Canada, Inc.

Paretosh Misra – Morgan Stanley

Oscar Cabrera – Bank of America Merrill Lynch

Jorge Beristain – Deutsche Bank Securities

John Tumazos – John Tumazos Very Independent Research, LLC

Tony Robson – BMO Capital Markets

Paul Massoud – Stifel Nicolaus & Company, Inc.

Wayne M. Cooperman – Cobalt Capital Management, Inc.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Copper & Gold Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session. (Operator instructions)

I would now like to turn the conference over to Ms. Kathleen Quirk, Executive Vice President and Chief Financial Officer. Please go ahead, ma’am.

Kathleen L. Quirk

Thank you. Good morning everyone and welcome to the Freeport-McMoRan Copper & Gold fourth quarter 2012 earnings conference call. Our results were released earlier this morning and a copy of the press release is available on our website at fcx.com.

Our conference call today is being broadcast live on the Internet, and anyone may listen to the call by accessing our website homepage and clicking on the webcast link for the conference call. We also have several slides to supplement our comments this morning, and we’ll be referring to the slides during the call. The slides are also accessible using the webcast link on fcx.com.

In addition to analysts and investors, the financial press has been invited to listen to today’s call, and a replay of the webcast will be available on our website later today.

Before we begin our comments today, we’d like to remind everyone that today’s press release and certain of our comments on this call include forward-looking statements. We’d like to refer everyone to the cautionary language included in our press release and presentation materials, and to the risk factors described in our SEC filings.

On the call today is Jim Bob Moffett, our Chairman of the Board; Richard Adkerson; President and Chief Executive Officer; Red Conger is here, Mark Johnson and David Thornton have also joined us this morning.

I’ll start by briefly summarizing the financial results, and then turn the call over to Richard who will review our recent performance and outlook. As usual, after our prepared remarks, we’ll open up the call for questions.

Today, FCX reported fourth quarter 2012 net income attributable to common stock of $743 million or $0.78 per share, compared with $640 million or $0.67 per share for the fourth quarter of 2011. Our fourth quarter 2012, net income included net credits totaling $40 million or $0.04 a share associated with adjustments to environmental obligations and related litigation reserves, a gain for insurance recoveries, partly offset by charges for new labor agreements in South America, and for costs associated with the pending transactions with Plains Exploration and McMoRan.

Our fourth quarter 2012 consolidated copper sales of 972 million pounds were higher than our estimates of 930 million pounds primarily reflecting higher production from our Americas operations. Fourth quarter 2012 consolidated gold sales of 254,000 ounces and molybdenum sales of 21 million pounds approximated our October 2012 estimates of 255,000 ounces and 20 million pounds of molybdenum.

Our fourth quarter 2012 consolidated copper and gold sales were higher than fourth quarter 2011 sales of 823 million pounds of copper and 133,000 ounces of gold, primarily reflecting the impact in the fourth quarter of 2011 of the labor disruptions at PT Freeport Indonesia. Operations have improved during 2012 at PT Freeport Indonesia. Our sales for the year 2012 of copper totaled 3.65 billion pounds, 1 million ounces of gold, and 83 million pounds of molybdenum that compared to 3.7 billion pounds of copper, 1.4 million ounces of gold, and 79 million pounds of molybdenum in the 2011 year.

As Richard will be discussing, we have got an outlook for growing production volumes in 2013 and beyond. Our realized copper price for the fourth quarter of 2012 was $3.60 that compared to a realized price of $3.42 per pound in the fourth quarter of 2011. Our gold realization averaged $1,681 per ounce in the fourth quarter of 2012 compared to $1,656 per ounce in the fourth quarter of 2011, and the molybdenum price in the fourth quarter of 2012 averaged $12.62 per pound compared with $15.08 per pound in the year ago quarter.

Our consolidated average unit net cash costs for the fourth quarter averaged a $1.54 per pound, it was slightly better than our estimates going into the quarter and lower than last years unit net cash cost of $1.57 per pound.

Our full year average unit net cash cost for 2012 was averaged $1.48 per pound, and again as we grow our production volumes we've got an outlook for declining unit cash costs in 2013 and beyond. The operating cash flows during the quarter totaled $1.3 billion, which included net working capital sources of $122 million, and for the year, we generated $3.8 billion of operating cash flows, and that was net of working capital use of $1.4 billion. Capital expenditures for the fourth quarter totaled $976 million bringing the annual capital expenditures to $3.5 billion in 2012. We ended the year with a cash position of $3.7 billion, which exceeded our total debt, which was $3.5 billion at year end 2012.

We also have included in the release, an update on our transactions that we announced on December 5, whereby FCX announced definitive agreements to acquire Plains Exploration & Production Company and McMoRan Exploration, the Plains per share consideration is equivalent to 0.6531 shares of FCX common stock and $25 in cash that works out to $3.4 billion in cash and 91 million shares of FCX common stock. The MMR per share consideration consist of $14.75 in cash, and 1.15 units of a royalty trust which will hold a 5% overriding royalty interest in future production from McMoRan’s ultra-deep exploration prospects.

The completion of the transaction is subject to receipt of the Plains and McMoRan shareholders’ approval, regulatory approvals, and other customary conditions.

In late December, the U.S. Federal Trade Commission granted early termination of the Hart-Scott-Rodino waiting period with respect to both transactions. We expect that the Plains and McMoRan shareholder meetings will be scheduled upon the effectiveness of the registrations filed with the SEC in late December, and we expect the transactions to close in the second quarter of 2013.

I’d now like to turn the call over to Richard, who will be referring to the slide presentation on our website.

Richard C. Adkerson

Thanks Kathleen. Good morning to everyone. I am going to start initially by focusing on our global mining business and on copper. 2012 was a year that was abnormal for us, and I want to try to explain why that occurred and what our outlook will be going forward beyond 2012. Later we will cover the transactions that Kathleen referred to that we announced on December 5, and respond to questions about those. After those transactions, I want to point out that 75% of our business will be represented by our global mining business and copper will continue to be the driver of our cash flows and profitability.

Looking at 2012, we executed on our efforts to grow production in North America and Africa, and I am going to come back to that, but we’re having success in executing our growth plans and we have the prospects for very significant growth in copper volumes. By 2015, our plans would result in higher volumes consolidated for our company of greater than 35% than the volumes we had in 2012. 2012 was significantly affected by unusually ore grades in Indonesia and some of that came about as a result of the strike that we had in 2011 and the effect on productivity.

Looking back, these are the lowest grades that we’ve had at Grasberg in 18 years. And we are looking to having higher grades in 2013 beginning near the end of the year, and beyond that, our profitability at Grasberg should be extraordinary. We’re continuing to advance financially attractive Brownfield development projects, the Phase II project at Tenke Fungurume in the Democratic Republic of Congo is substantially complete on time and on budget, which is a significant accomplishment in relation to our initial project.

At our major expansion at Cerro Verde mine in Peru, we’ve received approval of our environmental impact study, and we expect to begin construction in 2013, and we have begun construction of our expansion project at our flagship mine in Arizona, at Morenci. So, we are positioned for multi-year growth in copper volumes of significance.

When we look at the quarter, the quarter was one where we executed our plans. our consolidated volumes were slightly higher than we have given guidance for. Our unit net cash cost was 5% lower than our guidance. We achieved our targets for gold and molybdenum.

The cash cost, if we look at page six, it shows that in North America, we were right on line with what our guidance was going into the quarter. Red Conger, he and his team has done a great job in managing costs, achieving production volumes. Our unit cost were lower in South America, they were actually lower than anticipated in Indonesia, and in Africa, and overall at 154. Consolidated cost this year was lower than our guidance of 162. Our sales in North America, South America, and Africa, were higher than our outlook, as well as in Indonesia. But again, I want to come back to just why this was such an unusual year. And we want to focus on Grasberg as a reason for that.

We had very unusually low metal production in 2012, both compared with historical levels as you can see at the charts at the bottom for copper and gold and that resulted from lower grades in the Grasberg open pit.

This year we were mining at the upper reaches of that pit. We have included in our reference slides, schematics that we have shown for many years that show that. We are now beginning our final push backs for the open pit. We expect the pit to produce through 2016 and as we go forward beginning late in 2013 and 2014, our stripping requirements are going to drop dramatically and our volumes will increase and our profitability will increase.

We were also affected by slower than anticipated ramp-up of our underground DOZ mine, where panel repairs that we had following the inactivity relating to the strike are more extensive. We expect to get back to traditional levels. This mine has a capacity of roughly 80,000 tons per day. The current rate is 50,000 tons per day.

So because of mine sequencing, some adjustments because of geotechnical factors, we just had lower grades this year, and that resulted in having unit costs at Grasberg of $1.24, where we’ve been averaging $0.13. We will have lower costs next year as we move into higher grades by the end of the year. And then going in the period through the remaining life of the open pit, we should be down to where our gold revenues will fully fund – more than fully fund our operating cost. So that had a lot to do with why 2012 was an abnormal year for us.

Now, looking at copper markets; copper is not currently at its all-time highs that we experienced in 2011, but considering the global economic situation, there is no way to say anything other than current price is very strong. And in today's world, we're seeing in our business, some degree of improvements in markets in the United States, in the Middle East. China shows promise this year for renewed growth, as they spend – as China spends on infrastructure and take steps to improve its economy. Construction in the U.S. is growing.

Automobiles have been strong, and the outlook is for continued strength. There’s investments being made by power companies to invest in the grid. There's some short-term effect from the damage caused by hurricane Sandy, and overall in the U.S. our business and our customers are talking to us about an environment of not significant, but moderate growth. Europe, of course continues to be very weak. But in China, the market appears to be picking up from renewed investment in infrastructure.

The facts are that there are things that could cause variations in copper prices near-term because of inventory levels in China and there is always speculation about that. But underlying today's world is an improved outlook for the global economy based on where we were several months ago, and that should be good for our business. China of course remains the important demand driver. Global Exchange inventories remain relatively low. And underlying all this marketplace, which is in many ways unique for copper as a commodity is supply challenges.

We have talked for years about the impact on grades of aging mines, impacts on aging mechanical systems at mines developed in the past, the inferior quality of new development projects available to the industry. And around the world today, many companies are reducing capital and deferring projects and that should be supportive of the prices in the long run.

The strength of our company is the reserves and resources that we have available to us. Page 10 gives our report on our year-end reserves at the end of 2012 and we show proved and probable copper reserves based on mine plans at $2 a pound for copper of 116 billion pounds, and then our 3.42 billion pounds of molybdenum and 32.5 ounces for gold.

We’ve had significant increases in our reserves since the acquisition of Phelps Dodge in 2007, over 46 billion pounds of copper. You can see in the chart that our reserves are essentially divided equally between North America, South America and Indonesia, and those reserves give us the opportunity for near-term and longer-term growth.

And beyond the reserves that we have on page 11 is a significant aspect of our company is, mineralized material that contains copper, not yet meeting the standards to be reported as proved and probable reserves, but at $2.20 copper price, this contained copper is over 100 billion pounds of incremental copper. And these resources, half of those are located in North America.

We have these near-term projects that are progressing, that should give us this really significant near-term increase in volumes, but what this provides us is the long-term opportunity for development project beyond those, and we will – we have not lost our enthusiasm about copper markets or our enthusiasm about developing these resources, and these should create really significant values for our shareholders, because they are not currently valued in our stock, and to the extent, we can create cash flow projects out of them, all of that will come to our shareholders.

Now we did not have reserves this year, but we’ve continued an aggressive exploration program, and we have the potential for significant future increases in reserves. The exploration program is a matter of timing, it involves doing exploration drilling, metallurgical analysis, analysis of economic factors related to landholdings, availability of power and water and we continue to advance those. We have a tremendous opportunity with our El Abra property in Chile, where we have identified over the past five years a very large sulfide resource, and we are working to develop the feasibility of a major mill project there to supplement our current sulfide leaching project, our sulfide leaching projects. Other than that though we have both opportunities in the U.S. and in Africa with our Kisanfu, concession which is separate from Tenke Fungurume. But we are going to continue to target these with a view towards adding reserves, but more importantly we're looking for how we can advance these reserves and resources into projects.

Slide 13, shows the slide that we have been using for many years. It makes a couple of points, one of course Grasberg is there, it’s the mine with the largest copper reserves in the world. It also has more gold reserves than any mine in the world. Its production is down this year typically near the top of the copper production chart, but we know the years when these mines were discovered. A point here is very rare to find a world-class copper mine and mines when they are found produce for decades. You see it in the industry since, over the past 10 years companies have been spending significant money for exploration, it's noteworthy that relatively few successes that have come about through exploration.

Then while we have significant resources, the facts are it takes time to convert those resources into development projects and producing mines, and it’s just a nature of this business, I'll call it a double H short of the copper markets, that's the reason copper prices are high and are likely to remain strong because of that time, but with our company we have the opportunity through our near-term Brownfield development projects to add the significant volumes.

In North America at Morenci and beyond the current mill project that is now underway with construction, we have significant sulfide expansions that gives us a chance to look at our future large mill opportunity at Morenci. I'll mention El Abra, the Cerro Verde expansion is underway expected to begin construction in the next year.

Phase II at Tenke is complete, we have additional growth opportunities there with our oxide resource. There is a very significant mixed ore and sulfide resource for future expansion opportunities that we're doing exploration analysis, metallurgical work, processing work, and logistics work, to see how we could take advantage for and then Grasberg, beyond the open pit era, has decades of life in the underground that will result in it being a high volume low-cost operations for many years going forward.

Slide 15, shows the growth that we have on a consolidated basis, starting with 2012 we're looking for 20% growth in volumes next year, another 15% beyond 2014. And that should be sustainable; you can see that the chart at the top where this growth is coming from, it's from our global business. These Brownfield projects have significantly less risk and projects that are Greenfield in nature. The infrastructure development because you are operating in place already is much less, technology is proven. It results in efficient expenditure of capital, you get the benefits of scale as you expand and you understand the risk factor and they are just less significant. And that gives you higher returns of ground fill projects than other projects.

So again I want to just go back and think about 2012, where we got these kind of growth opportunities going forward for copper. In gold, we expect to have 40% higher gold volumes in 2013 coming out of Grasberg than before. We expect our unit costs and this will be coming into play later in 2013 to be down by 10% next year to go from the 150 level to 135. And then assuming continuation of current cost levels, we’d see unit costs dropping in 2014, by say, another 20% to the $1.15, $1.20 level. That's consolidated basis heading towards £5 billion with that kind of unit cost levels just shows what a great business. And that translates into higher operating cash flows, current prices; we would expect our operating cash flows to increase a third next year and 60% over 2012 by 2014.

The details of our Brownfield expansion projects on the next set of slides beginning with Morenci, where we’re expanding our mill to 115,000 tons per day and our mining rate significantly to 900,000 tons. This is a $1.4 billion project at £225 million pounds and you can see the historical and perspective outlook from Morenci, which not too long ago was viewed as a end of life debt in asset, and now that generates significant current profits and significant growth going forward. Cerro Verde, we’re going to be tripling the output of our mill there, completion result in this being the largest concentrating million operations in the world, increase mining rates, more capital $4.4 billion, but significant incremental production of £600 million per year with Moly alone. With that at this stage, we are more than halfway through our engineering work online to commence construction in 2013 and complete it in 2016.

I mentioned the success for our Phase II project at Tenke, where we’re expanding our mill to 14,000 tons per day, increasing our mining rate adding Tenke’s capacity $850 million of capital cost to get a £150 million of incremental copper, we’re in effect complete with this project now, we have to – next year we’ll be building our second sulphur burner there to provide sulphur for operations and we’re already thinking about what our next expansion would be.

We’ve announced today an acquisition of a cobalt refinery by the Tenke Fungurume in mining partners. Cobalt is a very small market; we’re going to be producing a lot of cobalt. We were dealing with the issues of how to access that market in an efficient way. We needed to make an investment. We found this opportunity to purchase an existing facility and have acted on it. And this gives us an experienced management team and a direct access to end markets, similar in some ways to what (inaudible) did back many years ago in a way that they approach the molybdenum market with the investments that they made followed by Phelps Dodge, and that gives us an efficient access to downstream markets, and molybdenum this will do it for cobalt.

At Grasberg, we have made significant progress with the underground development and advancing this in an efficient way. It involves a significant amount of capital, but will be spent over a number of years. The Grasberg Block Cave will be prepared to start up in 2017; this is an extension of the current ore body we are mining in the pit. same ore body extending down where we will begin the mining in underground and we are also will be starting up expecting in 2015 an extension of our current DMLZ mine, which will have a capacity of 80,000 tons a day in 2021 and very attractive grade.

You can see that on the underground era that we will be mining an ore body that will give us significant metal volumes in relation to our historical metal volumes for both copper and gold. there’s an interesting reference slide that we’ve shown back in the back that shows our mine plant, and our share of metal production from 2013 to go forward. Let’s see, we don’t have a page number for that, in page 38, then you can see what we expect in 2013. And as we go forward in the years 2014 to 2016, this what attractive levels of copper volumes and gold volumes we will have as we complete mining to open pit with very limited stripping. There is a transition here in 2017, which is not a terrible year. It's much better than historically we were looking for as we will have the benefit of the DMLZ mine, some stockpiling material, and then from beyond that to 2017, 2021 back to metal and copper and gold that's consistent with historical levels for Grasberg.

So our outlook for 2013, on page 21 is 4.3 billion pounds of copper, 1.4 million ounces of gold as I said 40% high year, lower unit cash cost. This will come into play I'll show you a slight in the minute later in the year particularly in the fourth quarter, our unit cost will be higher in the first quarter and this shows you we average down to $1.35, how low they are going to be beyond that at $3.65 copper. Our modeled operating cash flows would be approximately $7 billion and we're looking at capital expenditures of $4.6 billion.

Page 22 shows us growing copper sales production profile. It shows growing gold sales based on the Grasberg mine plant and our molybdenum sales with taking into account our recently restored at Climax mine. Quarterly production that I referred to early is on page 23 showing that the first quarter this is like the old-dated Grasberg and we seem to have this every year, but we have a lower in the first quarter with a really strong second half of the year particularly in the fourth quarter you can see looking at over 500,000 ounces of gold sales in the fourth quarter based on our reaching to higher grade sections of the mine.

Our sales by region are shown on page 24, showing growth in North America, South America, recovery significantly in Indonesia and growth in Africa. And that will result in the unit cost improvement that I refer to earlier, this shows at the bottom of the page 2013 consolidated unit cost going from $1.48 to a projected $1.35, based on $3.65 copper, $1700 gold, $11 molybdenum and $12 cobalt. And as I said this will be very significantly by quarter and this shows a reconciliation of how we go on page 26, from $1.48 to $1.35. It also shows that if we had the 2014 Grasberg volumes, our cost would go down to $1.15 and that’s assuming today's cost levels stay the same.

27 shows the impact of growth on our business, the solid green and gold portions of the chart show what our averages are expected to be for 2013 and 2014 were ranging from $3 to $4 of copper prices are, EBITDA would range from $7 billion to $11 billion and cash flows from $5 billion to $8 billion. As I said roughly $7 billion at current copper prices for that period, then adding in our growth that would occur from our volumes in 2015 to 2016, you can see the very significant increases of roughly 50% with EBITDA ranging from $11 billion to $16 billion and operating cash flows from $8 billion to $11 billion. So the effective growth in the mining business is significant. The sensitivities to prices and certain input cost are included on page 28 for your information. Our exploration spending continues to be aggressive as we show on page 29 with our budget for 2013 of $235 million focusing on Brownfield opportunities around the world. We have some investments in Greenfield and if that’s successful that would be great, but our opportunities are really significant with our Brownfield expansions.

Capital expenditures on page 30 are projected for $4.6 billion for 2013. As we complete our major project during the next three years, those capital expenditures will be dropping. We’re working hard to come up with new projects to supplement those on a going forward basis to take advantage of our reserve and resource position. So that’s the summary of our existing global mining business and our opportunities in copper industry.

We announced on December 5 transactions to acquire Plains Exploration and McMoRan. The board’s decision to invest in these assets is explained in great detail in a filing we made with the SEC on From S4 right at the end of December and I will encourage you to spend some time looking at that document. It describe the process the Board followed in considering the deal and in negotiating the terms of the transaction because of the related party situation involving the three companies FCX at a special committee of independent and unaffiliated directors who consider this transaction and negotiated the terms.

The Boards’ decision was driven by its positive long-term global economic outlook. Our Board is real believers in the outlook for commodities, including the commodities in our mining business and the outlook for the oil and gas business. Board was faced with the situation that I referred to earlier about limited opportunities to invest in copper beyond our Brownfield expansions. Over the years, we’ve been tracking opportunities to invest outside the company in M&A transactions in the mining business and have not found opportunities that were attractive to us, and these transactions were provided with the opportunities to acquire high quality assets in the oil and gas industry, in the industry that our Board and management teams has had experience in, where we understand the risk and opportunities associated with that business. Near term cash flows of these assets are going to be driven by crude oil revenues and crude oil is a commodity that closely correlated to copper. So this is something that’s consistent with our view about the global economic outlook.

The assets have current production that generates strong margins and cash flows. We anticipate following in a disciplined business plan to use the current cash flows of the oil and gas business that we’re acquiring to fund its exploration, development capital expenditures, those assets provide financially attractive near-term and long-term growth opportunities. It provides geographic diversification and exposure to other commodities. It also gives us enhanced exposure to exploration particularly in the McMoRan situation through its ultra-deep gas drilling program, but also with the Plains assets, particularly in the deepwater where they have multiple high-quality exploration targets.

In addition to this exposure to all market through McMoRan’s explorations, Plains position in the Haynesville Shale that will give the company an important position in the U.S. natural gas market for the long-term. It’s not driving current cash flows or economics, but that business potentially has various significant values to our shareholder, and it will give us a chance to achieve long-term returns to shareholders.

The combined companies have the management capabilities to execute a disciplined business plan. We’re going to be – we took advantage or taking advantage of low-cost debt financing to fund the cash portion of this transaction, and we’re going to be committed to a disciplined approach to delevering the debt that we’ll be taking home.

You can see on slide 32 at the bottom that, we’ll go from a mining company to a company of where mining represents roughly three quarters of our business from an EBITDA standpoint and oil and gas 25%, and we’ll go from a situation of where North America, the U.S. currently represents about 30% of our business to 50% of our business, credit rating agencies consider this positive in terms of maintaining our investment grade credit rating.

Slide 33 shows what our pro forma combined EBITDA and operating cash flows will be. The solid sections of these charts, the green and red sections present the combined 2013, 2014 outlook, and then the growth from both the mining business, and the oil and gas business is represented in the dotted lines above that. You can see this is similar to what we saw with just our mining business on a standalone basis. And one of the attractive things here is looking at the growth opportunities in oil and gas is complementary to the growth that we have in the mining business and gives us a chance to have significant growth.

Now slide 34 presents the way we are going to be focused in running our business. We're going to maintain a strong balance sheet and credit profile. We’ve had a long track record of doing this, generating values for shareholders, of managing our balance sheet in a disciplined way. As we talk, we are in the market right now with our bank deals, and as we talk with the banks and the credit rating agencies, everyone is positive about the way we managed the debt in the Phelps Dodge transaction in 2007 and how we dealt with the 2008, 2009 financial crisis. We're going to continue to do that.

We have developed assets at Grasberg, at Tenke Fungurume, in a very aggressive and disciplined way. We’ve taken advantage of opportunities provided by Phelps Dodge in 2007 to achieve asset in geographical diversity and then taking advantage of markets to develop assets to – that created significant values for our share holders. These assets will provide us an opportunity to enhance long-term returns for shareholders and that’s what we’re going to be focused on.

I’ll just point out our executive management teams have significant shareholders in FCX and we’re committed to creating values in those shares, but we’re going to be sensitive to risk, we’re going to do rigorous economic analysis for making investments. We’re going to protect our downside and get leveraged to the upside. We’re going to prioritize and rank opportunities to invest in those with the highest returns as we mange risk and we look at our overall portfolio. We’re going to limit the number of projects we look at. We’re going to be really committed to this deleveraging program.

We’ll begin the process with roughly $20 billion of gross debt, $16 billion of net debt, our plan will not be to come back to zero net debt as we are right now, but to reduce our debt to a targeted level. We’re thinking now of roughly $12 billion. After reaching that we would be back in a position to invest in our growth projects, but given continuation of attractive commodity prices, we would have excess cash that would allow us to return cash to shareholders through higher dividends and potentially stock buybacks.

In the mean time, we’re going to be continuing our current dividend rate at a $1.25 a share, and we’re going to be committed to this long-standing tradition of Freeport of maximizing value for shareholders and managing the risk of our business.

So with that, Jim Bob’s is here with me and our management team to respond to questions that you might have.

Question-and-Answer Session

Operator

Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions) Our first question will come from the line of Sal Tharani with Goldman Sachs.

Sal Tharani – Goldman Sachs

Good morning.

Richard C. Adkerson

Hello Sal.

Kathleen L. Quirk

Hi, Sal.

Sal Tharani – Goldman Sachs

Just quick question on the – couple of questions, first on the slide about the 2015 copper production. Does that include Morenci’s full production rate of 600 million pounds in there?

Kathleen L. Quirk

Yes, it does. Sal, we expect to get to full rates at Morenci in 2014.

Sal Tharani – Goldman Sachs

Okay. So you expect that to be – because I think you said that the growth will come in – by – the project will finish by 2016, but do you think it will be ready by 2014 in terms of production?

Kathleen L. Quirk

Morenci will be 2014, the Cerro Verde will be…

Sal Tharani – Goldman Sachs

I am sorry, I meant Cerro Verde. I am sorry.

Kathleen L. Quirk

Okay, It’s got some, Cerro Verde in 2015, but it reaches full production in 2016.

Sal Tharani – Goldman Sachs

Okay. And there is modest change in your CapEx outlook in between the major mining projects and other projects, a couple of hundred million dollars, anything particular to note here? The mix is different than what it was in Q3.

Kathleen L. Quirk

Yes, it’s slightly different. We had some carryover sustaining projects that we didn’t spend in 2012. Our CapEx in 2012 was slightly below what we thought we carried over some projects into 2013, but no material changes, just some slight timing variations.

Sal Tharani – Goldman Sachs

Okay, thank you very much.

Richard C. Adkerson

Thanks, Sal.

Operator

Our next question will come from the line of Tony with Dahlman Rose.

Anthony Rizzuto – Dahlman Rose & Co.

Hi all.

Richard C. Adkerson

Hi, Tony.

Anthony Rizzuto – Dahlman Rose & Co.

Hi, Richard. I’ve got a couple of questions here. I was wondering if you could update us a little bit with the contract of work review and just the process there and the timing again of the presidential election?

Richard C. Adkerson

Okay. The presidential election occurs in 2014, and the first round is midyear in 2014. this month begins the process also of electing a new governor in Papua. And so, Tony, 2013 and 2014 -- in 2013, a number of provincial elections will be held in Indonesia and the presidential and parliamentary elections will occur in 2014. We began a process in a formal way, a little over a year ago and talking with the government about getting our extension for our contract for those of you who don’t follow us that closely. We operate under contract of work in Indonesia, and we signed the most recent contract in 1991. It has a 30-year primary term, and the contract itself provides us the right to extend it for two ten-year periods through 2041, and we have to apply for that. The government cannot unreasonably withhold or delay granting that extension. Indonesia passed a new mining law and the country has undertaken review of all contract of works including ours, and what our discussions involved is a discussion around this review of contracts, obtaining the extension for our existing contract, and we are working cooperatively with the government to find ways of being responsive to certain of the aspirations of people and government and the population in Indonesia and protecting the interest of our shareholder by getting our extensions on a way that protects the values of our operations there.

Confident we will be able to get that. The election and political situation in Indonesia requires time to go through the process, and that's what we are doing now, and we have made what I feel is a good progress and I am confident that we will be able to resolve this on a way that our shareholders will be happy with and that the government of Indonesia will also find acceptable.

James R. Moffett

Let me add one thing for Tony. On a normal circumstance, if we didn't have this massive underground project underway, $15 billion project, some in the government would say that we should only ask an extension two years before our contract expires which will be 2019. But with that spending, as you’ve seen from our spending charts, $15 billion over the next number of years to get to full production with the underground. We went with the idea that you have to have certainty and the government agreed, so that's just another wrinkle that caused us to have to deal with this in a business way, and we’re getting support from the government.

But under normal circumstance, some in the government would say, you should wait two years before your contract expires, so that’s just a wrinkle that we need to be sure and point out.

Anthony Rizzuto – Dahlman Rose & Co.

Has it changed in any way the dialog that you guys are having with the government there given the plans to acquire these energy companies?

Richard C. Adkerson

No, no.

James R. Moffett

I’m not even sure they are aware of it Tony.

Anthony Rizzuto – Dahlman Rose & Co.

Okay.

James R. Moffett

They are focused on our business.

Anthony Rizzuto – Dahlman Rose & Co.

Okay.

Mark J. Johnson

And I’ve had discussions with number of – they read the news releases in the papers and so forth, but it was like when we acquired Phelps Dodge, they were interested in it. We made the point that that gave us a lot more global resources that we could apply to bear in running our business. Of course, Indonesia is a significant oil producer, but it’s not a factor in our discussion.

Anthony Rizzuto – Dahlman Rose & Co.

Okay. And the other question I have is one on the copper market, Richard you made some comments that there is always uncertainty surrounding Chinese inventories and I was wondering if you did have any more specific thoughts on the level of bonded warehouse stocks there, and how you think this may potentially impact Chinese imports in 2013. Obviously Chinese imports have been so substantial to the market and just wondering any additional thoughts you may have there.

Richard C. Adkerson

Well, I wanted to comment on it because it is a factor. And I didn’t – well we see these emerging more positive views about the markets, and certainly today as I talk to people -- to our commercial people, to others involved in China, the view about China is more positive than it was say at LME week last fall. But well the copper market, Tony, as you know more better than anybody is a really pretty visible global market place, the one aspect that has less visibility is this issue about off-exchange inventories in China, and there are currently different views about the level of those inventories. Our people tend to believe that those inventories are not liquid like exchange inventories, but we have seen instances in the past of where the Chinese have adjusted buying patterns, and that’s the factor that could occur. When that happens, I’ve always looked underneath that to see what’s going on in the fundamental economy, because actions on buying patterns tend to be temporary and the underlying economy is really what’s going to drive the copper price long run, but I felt that I needed to mention that because those inventories are significant, and the question is, the degree of liquidity and how they come into play in affecting imports.

Anthony Rizzuto – Dahlman Rose & Co.

That’s great; I appreciate it Richard and Jim Bob too for your insight as well.

James R. Moffett

Tonly, on the double edge sort of copper prices that Rich was talking about, I think it’s important to bring up at this point, the extensive list of projects that are either being delayed or canceled in all of the mine basins, and of course this is because the commodity prices have gone up so rapidly, but unfortunately as these mines are developed, the cost of development whether you are talking about mining equipment, trucks, all the metal that is used to, the greenfield projects actually, all of you are aware that some of these costs have gone up double and triple, and people are just walking away from the projects, delaying them (indiscernible).

Extensive list, 30 to 40 of these, what does that mean? That means that those projects have been put into people’s long-term projections of supply demand for copper. those projects are not going to happen and that’s exactly why our Greenfield projects have been, it’s harder than the Brownfield.

And the Brownfield, as Richard said, we already have the existing infrastructure. so we have a whole way to look at cost, and have an idea of what it’s going to cost to make the expansions, but going into the Greenfield area, new country, new infrastructure maybe of lack of infrastructure. So those projects are not going to get finished that people were counting on for supply demand are going to have a huge impact on the price of Copper. So that’s why we on a long-term view, the copper has been very positive because of lack of new projects coming on will drive the price of copper higher, which benefits our very active program over the last six years since the -- six, seven years since the acquisition of Phelps Dodge.

Anthony Rizzuto – Dahlman Rose & Co.

Thanks, Jim Bob.

Operator

Our next question will come from the line of Brian MacArthur with UBS Securities.

Brian T. MacArthur – UBS Securities Canada, Inc.

Good morning. I have two questions, just on Grasberg, you’ve talked about getting back to full rates at DOZ later in the year. should we think of operating rate there sort of 200,000 tons per day versus 165,000, is that kind of a ballpark way to think about it or are we going to get all the way back the open-pit to call it 150,000 tons and then get sort of 70,000 tons out of the underground over the year?

Richard C. Adkerson

Brian, I’ll let Mark Johnson who is our Chief Operating Officer for Grasberg talk to you about that.

Mark J. Johnson

Brian, I think you’re referring to total mill rates and…

Brian T. MacArthur – UBS Securities Canada, Inc.

Yes.

Mark J. Johnson

And what we will be doing is what’s been discussed is that DOZ will get back up to 80,000 tons a day by the fourth quarter. We’re going through, as Rich described, a process of repairing some panels that were damaged. Those repairs will be done by the end of the third quarter and DOZ will be back at that 80,000 tons a day.

The total mill rate is variable. It’s very much driven by the material types that we get out of the Grasberg. Some of the material that we would be mining in 2013 is a bit harder. Total mill throughput drops as a result of that. But the mill is running at full production, we’re not cutting back on mill rates. We are essentially milling every ton we can. And we’ll average about 210,000 tons a day in 2013. Towards the end of the year, we will be into the very high-grade stock worth of Grasberg, that material is typically very good milling material also. We’ll get higher throughput, higher recovery, I think can’t grade. So this year things will just continue to get better from the first quarter all the way through the fourth quarter.

Brian T. MacArthur – UBS Securities Canada, Inc.

All right. Thank you, that’s very, very helpful. The other question, I just wanted to check, just for your guidance for cost on Tenke for the year, I mean I see they are coming down, but the copper production is going up. Are those costs before the OMG deal i.e. crediting at the 60% of the cobalt price, or is it post the OMG deal, where I assume you’ll ultimately credit default cobalt price that you realize?

Kathleen L. Quirk

The guidance that we’ve given Brian does not include the benefits of the higher cobalt price that we will receive.

The partnership that is acquiring the assets are the same partners that are in Tenke Fungurume, but Tenke Fungurume is not acquiring, Tenke Fungurume will continue to sell cobalt hydroxide at market, and then this joint venture will actually own the refinery. But in terms of the numbers that you’ve seen that includes continuing to sell cobalt the same way we have been in the past.

Brian T. MacArthur – UBS Securities Canada, Inc.

So will have like a new subsection in the financials showing that whole thing like you do for downstream copper, is that the way it is going to come out or is it going to be all embedded in the Tenke subfinancials, if I look at it that way?

Kathleen L. Quirk

It will probably be separate in terms of because of -- actually the Tenke operation doesn’t own a refinery. But we’ll make it, so that you understand the values that we are getting from the refinery.

Brian T. MacArthur – UBS Securities Canada, Inc.

Great. Thank you very much.

Operator

Our next question will come from the line of Paretosh Misra with Morgan Stanley.

Paretosh Misra – Morgan Stanley

Hi, guys, two questions on Grasberg. First, I thought the total mill rate in fourth quarter was sequentially down, it’s down also because of the harder or is that Mark just described?

Kathleen L. Quirk

Yes.

Richard C. Adkerson

That’ right.

Paretosh Misra – Morgan Stanley

Okay. And the second, your labor contract actually both Grasberg and Tenke expire this year, have you had any conversations yet with the labor unions?

Richard C. Adkerson

We have ongoing conversations with the unions, and it’s different situations in kind of all the places that we operate. In Africa, we’ve had very positive relationships and have not had any controversy over union situations. We had a very difficult situation, which was really our first time to encounter this in 2011 with the labor union and PTFI. We’ve made progress in working with the workforce, with the union workers, and non-union workers, staff, which was major problems for us at the beginning of the year and affected our operations and worker productivity.

We still have the issues to deal with, and we are working to achieve that. In our discussions with the union today, both sides have expressed a view of working to avoid a strike, but that is something that we'll have to deal with. In Indonesia, by law, contacts only last for two years. And so that's something that we'll have to deal with the labor issues or have become a issue throughout Indonesia today. And the government is concerned about it and we're working our way through that, but that's something that we’re just going to have to report to you as we go along.

And I'm glad that you asked the question, because as Mark was responding to Brian, I think this is important to keep in mind, that these opportunities are what the ore body gives us, and we're going to have to work to achieve relationship with our unions to be able to take advantage of them in the way that the ore body provides us.

Paretosh Misra – Morgan Stanley

These are being incremental color. Thanks.

Richard C. Adkerson

Okay.

Operator

Our next question will come from the line of Oscar Cabrera with Bank of America Merrill Lynch.

Oscar Cabrera – Bank of America Merrill Lynch

Hi, good morning, everyone.

Richard C. Adkerson

Good morning, Oscar.

Oscar Cabrera – Bank of America Merrill Lynch

Good morning, Richard. So, focusing on Grasberg points one more time, interested in the capital expenditures that you have over the next five years and beyond. On a 100% basis, you’re spending $5.5 billion about half of that for the next five years. When do you spend the balance and which was that? Is that part of the underground development towards 2020 or those at all?

Richard C. Adkerson

Actually it is – that’s the nature of underground development is that, you have a continuing expenditure of capital as you advance the block caving operation. So unlike a big open pit in mill facilities, you have a one-time finance flow to capital and then you just have maintenance capital as you go forward.

With underground development, there is ongoing expenditures to advance the block cave and that’s going to be part of our capital as we go forward. And I think, Kathleen, you have a comment, she is looking at…

Kathleen L. Quirk

No, I think that’s right. And we’ve given what we expect to average, some years will be higher than the average, some years lower than the average. But as Richard said, it’s a long-term development plan, so it’s not any one-year where you’ve got all the expenditures. It occurs over the course of a long-term development of the asset.

Oscar Cabrera – Bank of America Merrill Lynch

I’m sorry that sustaining capital of about $500 million would be ongoing, that is what I’m trying to get at?

Richard C. Adkerson

Yeah, that’s right. And what you call a sustaining capital or investing capital is, that’s the nature of underground investment. Jim Bob referred this earlier, this is a big number for Indonesia and particularly for Papua. I mean you’re talking maybe $15 billion investment in a country that’s looking to get investments. We have a workforce of 23,000 people there including employees and contractors. We are more than 90% of the economy of the Mimika region where we are located two and a half and two-thirds of the economy of Papua which is really important to the government of Indonesia. We support businesses and infrastructure development and so forth. So as you think about this labor issues and these contract issues, that’s the context of where we’re operating. It’s important for our shareholders to support for Indonesia.

Oscar Cabrera – Bank of America Merrill Lynch

Yeah. Absolutely.

James R. Moffett

This is Jim Bob. Let me add a couple of things. There is a standoff here when you go underground. You have to continue to spend these big dollars to advance the underground or you have to remember is, remember the follows that we’ve worked with (inaudible) on those transactions (inaudible) referenced that. When you are in the open pitch of your mining ore, which you’re mining waste transition this year we’re up at the very top of the pit where we actually stream – platform of the open pit when you go in the underground, because of the Block Caving messages that you don’t deal with the waste. Your ore basically – it’s been altered by dry gases when the ore body is put in place.

The reason why Block Caving (inaudible) when you are Block Caving, it doesn’t cave or drop. So you go from a huge open pit operation where you expose to the elements for current pit charge operating 24 hours a day. When you go underground or your mining is the ore itself, because that’s why Block Caving weren’t (inaudible) important for people to understand. That’s why your operating cost don’t go up. When you go underground some people have the feeling, Oil Company more especially go underground but you don’t spend on waste. And remember, when you hold this waste you have to separate the waste, and you have to keep repeating it back, because you can’t get the angle of the pit to how you have the pit falls sale on you. So all that waste that we’ve been dealing with since we started the open pit disappears, because you’re underground and your very law changing over. I hope that’s understandable.

Oscar Cabrera – Bank of America Merrill Lynch

Thank you, Jim Bob. That leads to me nice into second part of my question. So you are expecting cost at Grasberg to decline to about a $1.15 a pound. I was wondering if you can put into context what you expect for 2014, 2015 and as you replete the open pit, because without any stripping and in the higher gold production, because those can’t really low, but then more importantly how did you expect it…?

Richard C. Adkerson

Let me just make sure, I’d say something, that $1.15 was consolidated, not at Grasberg.

Oscar Cabrera – Bank of America Merrill Lynch

Yeah.

Richard C. Adkerson

The $1.15 going from a $1.48, $1.35 to I’d say, $1.15, $1.20 is consolidated. In that context, Grasberg goes back to being as I said, a situation of where – let’s say beginning in the fourth quarter of next year and through the life of the open pit, where the gold revenues were totally fund and perhaps more than fund the operating costs.

So Grasberg costs will go to zero or below, which is what we’ve had in some years in the past. But for years, we’ve been talking about the situation as we get to the end of the open pit, where you’re stripping drops off dramatically. You’re down in the lower elevations of the pit where the higher grades are. We’ll be retiring equipment and reducing workforce and cost will go down and volumes will go up, and that's a good direction to go in.

Oscar Cabrera – Bank of America Merrill Lynch

And that’s…

James R. Moffett

And that's important to use as the reference slides. If you look at the reference slides that shows where we're going to getting the oil in the year 2013, you see we start up at the very top of the pit, at the extreme limits of the push-backs. By the time we hit to the bottom of the pit, (inaudible) and that's a good indication, because that's basically once you’re going to be mining when you get underground. So if you can take what you have at the end of 2013, and imagine as you go and stay in that ring of gold at the bottom of the pit, which is really – which are going to be block-cave and once you learn, as averages says it's just a precursor of what's going to come in terms of the gold grades and the copper grades and that's what make the Grasberg, the King of the Mines.

Oscar Cabrera – Bank of America Merrill Lynch

Absolutely, I'm sorry Richard, I misspoke, but I’m just interested in hearing you what the cost in Grasberg you expect one of the mine goes completely underground. So you have 2013, $0.68 a pound?

Kathleen L. Quirk

Oscar, as we approach at the end of the life of the pit, we’ll be in a net credit position in terms of, as I said the gold revenues will more than offset the total cost of production, as we get into the underground era and get ramped up. We expect the unit net cash cost net of credit at current gold prices to be below $0.30 a pound.

Oscar Cabrera – Bank of America Merrill Lynch

Right, well thank you very much.

Richard C. Adkerson

That's based on today’s input cost levels and everything else. So below $0.30 a pound driven by what happens to input cost in – those are large part correlated to copper prices and gold prices. So it’s still world-class in every respect.

Oscar Cabrera – Bank of America Merrill Lynch

Yeah, absolutely. Thank you very much.

Richard C. Adkerson

Okay, Oscar. Thank you.

Operator

Our next question will come from the line of Jorge Beristain with Deutsche Bank.

Jorge Beristain – Deutsche Bank Securities

Good morning, everybody. My question was just following up on the update that you have for your resource estimates, what you referred to as your mineralized material, I did notice that you recently upped the cutoff grade for copper prices to be $2.20 per pound, historically you used a quarter about $2 per pound cutoff, but we have not seen an incremental increase in the resource there. And I was just wondering if you could comment as to, is that because you are now expecting slightly higher operating costs for those potential mineralized resources. And at what point do you think we’re going to start seeing additive or conversion of those mineralized materials to actually proven and probable as this has been a theme you’ve been talking about for few years? Thank you.

Kathleen L. Quirk

Jorge, on the first part of the question, we used the same pricing this year that we used last year on our reserves, it was $2 and on the mineralized material $2.20, so that’s consistent with what you have seen in the prior year.

Richard C. Adkerson

And years too, I mean it has been more than just past year.

Kathleen L. Quirk

Yeah.

Richard C. Adkerson

And then Jorge, that slide that we showed for the near-term reserve additions potentially can come from with a big element from El Abra and others, that’s doing exactly what you’re talking about, that’s looking at those resources and doing the work that it takes to get it to reserves and essentially what that requires is feasibility study. We have to be able to demonstrate that we can come up. We know the resources are there, they have been identified through our drilling, core drilling, and now the process of converting them to reserves required that you look at the mine plant, access to power, and water which is critical. In Northern Chile of course, this size of processing facilities, the cost, how you deal with metallurgy and processing and all of those factors and those are major things that require time to work on. So that’s really…

James R. Moffett

It’s Jim Bob. Most important thing in the metallurgical area is that we have scarcity of data, mineralized versus resources means what kind of spacing, do you have on your drilling? And in some of these metallurgical areas it’s just a matter, going out and drilling, increasing our spacing, and we go ahead, we may have drilled those that are a mile apart, and we just have to project what those, what’s in between those, as we go in, start to close in the degree, that’s how you turn mineralized into resources, and then into proved reserves and it’s a vast area. As you might have imagined with the amount of money we spend, last seven years to add this, $43 billion and that’s definitely sensitive mineralized because we just didn’t have the spacing. So that’s a definition, which you need to fill in there as how much drilling do you have to get enough data to really be call it mineralized versus resource.

Jorge Beristain – Deutsche Bank Securities

Sorry, I didn’t misread the difference here. Your mineralized material is at 2.20 cut off and your PNP is at $2. And just another question Richard, maybe on the comment that you made on, earlier in the call about your target for net debt under the combined PXP MMR deal, you said now that you might be targeting to get net debt down to about $12 billion, and at that point, we’ll be in a position to either spend on growth buyback stock and/or raise dividends. could you just flesh that out a little bit more wide to slightly higher level, is that in response perhaps to shareholder pressure to return cash to shareholders sooner or what’s driving the thought process there?

Richard C. Adkerson

Okay. You’re right, it is net debt and with the continuation of current commodity prices, we should reach that target level in a relatively near-term, roughly 2.5, 3 years or so. So we should be down to that in a relatively short period of time, assuming continuation of current commodity levels, price levels, and what that allows to do is kind of all three of which, you’ve talked about, continue to invest, have the excess cash to shareholders, kind of be in the situation we’ve been in recent years. We got down to zero debt.

Kathleen L. Quirk

Net debt.

Richard C. Adkerson

Net debt at FCX, not because that was necessarily a financial strategy to get there. It happened in fact when we finished the Phelps Dodge deal, Jorge you may recall that we were talking about having long-term debt of roughly $7 billion at FCX going forward. but after 2008-2009, we had gotten to be very conservative, because of the risk there about managing cash and when the markets came back quicker and stronger than people anticipated. The copper prices start rising by the second quarter of 2009, we used that cash then to reduce debt, and so it was more of a circumstance of those times as opposed to the financial strategy, we like many of our shareholders have expressed to us believe that we should maintain an appropriate amount of leverage to leverage our balance sheet for our equity returnings, $12 billion would be less than one times EBITDA and so that’s kind of that we’re thinking about doing right now. And that said getting down to zero net debt was more of a circumstance of the situation as opposed to a financial objective that we were pursuing.

Jorge Beristain – Deutsche Bank Securities

Got it, thank you very much.

Richard C. Adkerson

And one other thing Jorge, I want to go back to this issue of this $2 and $2.20, I’ll make sure everybody understand, that is not our projection of prices. It’s not our view of any kind of long-term price of copper. It’s what we have to do just to comply with SEC reserve determinations and we’ve used this, it’s not something that easily changeable because you’ll have to – if you change the price you have to develop new mine plants and so forth, we actually as a company don’t have a long-term price projection. We consider a scenario of different prices when we look at investment opportunities, as I said before we want to manage downside risk, get exposure to what we believe is going to be a very positive future for commodities, and in that way we can make money and protect our down side risk.

Jorge Beristain – Deutsche Bank Securities

Great, thank you.

Richard C. Adkerson

Okay. Thanks.

Operator

Our next question will come from the line of John Tumazos, with John Tumazos Very Independent Research.

John Tumazos – John Tumazos Very Independent Research, LLC

Thank you, I wanted to congratulate you on the good operations at Grasberg and permit in Peru and completing the expansion smoothly at Tenke. Other companies have had tougher times in some of those countries? I'm trying to understand what would be normal in the new Freeport. And I'm trying to not think of it in terms of the old company, because you're adding oil and gas, and I'm not doubling, but significantly increasing the mining. In the current year 2013, you are sustaining capital is a $1.8 billion, and you are saying that that will fall to $1.4 billion next year, and $1 billion in 2015. And in 2015, the total capital before oil and gas would be $3 billion. What's causing the bulge in sustaining capital this year? What will depreciation be when the capital programs are done in 2015? And what will the – is it possible 2016 will be a down year for CapEx?

Kathleen L. Quirk

John this is Kathleen, we've been spending on sustaining cap to CapEx, something on the order of $1.2 billion to $1.5 billion, and as we've shown quickly during the '08, '09 financial crisis, we have some flexibility with those projections. The bump in 2013 reflects some of the timing issues that carried over from 2012 to 2013. We are investing an equipment to assure reliability. We're investing in trucks and shovels as we’ll expanding our mining rates, and so we do have some projects that we don't have every single year.

Richard C. Adkerson

And this issue about getting to the end of the mine life at Grasberg where we’re going to be as I said, cutting back on equipment and so forth our sustaining capital at Grasberg will be dropping dramatically as we go forward. So let's see Kathleen is looking at this depreciation number.

Kathleen L. Quirk

Yeah, we're expecting depreciation for 2013 to be somewhat higher than 2012 were roughly $1.5 billion in 2013 versus approximately $1.2 billion in 2012. And then as we get these projects online depreciation will get up to roughly $2.2 billion in the 2015 time period, and that's just the business that we have today. Of course, we’ll have pro forma results, which will include, we'll have purchase price allocation associated with those assets. So we'll update our guidance on that as we go forward.

John Tumazos – John Tumazos Very Independent Research, LLC

Will the $3 billion mining CapEx or total CapEx rate you are projecting for 2015 be something that we should think of as normal level given that the depreciation is up to $2.2 billion and there always be some projects?

Richard C. Adkerson

No, no. That’s simply where we are now with our plans. We don’t include CapEx in our outlook unless the projects have been approved. We are going to work hard as we talked about earlier to find new projects in our mining business to spend capital only because we think that is the way they create long-term value for our shareholders.

So it’s a practical matter. It’s going to take time to get these projects to the point of where we can get them authorized. We are going to be responsive to the market conditions as we go forward, but we hope to find ways to spend capital, but this thing that we talked about earlier, they are just constraints on how quickly you can spend it, because we had to do these feasibility studies and other factors. But there is not really a normal aspect to this. We are going to be very return oriented to see where can we spend capital and get strong returns for the shareholders.

Richard C. Adkerson

And John, there is not going to be a – this is not a question of having an old Freeport and new Freeport. This is going to be the long-term tradition of Freeport going forward in terms of the way we run this business and allocate capital and be disciplined about the way we do things. So this is not any kind of transformation, transaction that’s going to change the traditions that have been part of this company for the long period of time.

Operator

Our next question will come from the line of Tony Robson with BMO Capital Markets.

Tony Robson – BMO Capital Markets

Good morning and thank you for taking my questions. First question I think to Kathleen, tax rate for the quarter were a bit lower than I had expected, it was about 28%. Any guidance for 2013 tax rates before the oil impact? And the follow-up question is on the oil, I guess to Richard or to Jim Bob. Feedback I’ve had from Freeport shareholders has been that the full acquisition was not controversial. Given the relative size of the deals and that feedback you may have had similar or almost, any thoughts on opening up that sort of – those mergers to Freeport shareholders to vote? Thank you.

Kathleen L. Quirk

Tony, hi, this is Kathleen. on the first part of your question, regarding taxes, effective rate in this quarter was 29% and for the year, it was 32%. They were some adjustments in the fourth quarter as we looked at the overall average for the year. As we get improved income relative to the size of the company, the improved contribution from Indonesia which has our highest tax rate, we expect tax rates to – effective rates to increase during 2013. We’ve got some disclosure on that in the back of the press release, but currently projecting 34% to 35% for effective tax rate before the transactions in 2013.

Tony Robson – BMO Capital Markets

All right. Thank you.

Richard C. Adkerson

What’s the question?

Kathleen L. Quirk

He asked about the shareholder vote for FCX.

Richard C. Adkerson

For FCX? I’m sorry, Tony, I was looking at something else. You asked about shareholder for FCX. There will be shareholder votes for McMoRan and for Plains. For FCX, there is no shareholder vote. The requirements for shareholders vote are set by the New York Stock Exchange and we operate under Delaware law and the number of shares to be issued in this transaction to Plains is, that doesn’t exceed those levels requiring a shareholder vote and when shareholders votes aren’t required, I’m told by the lawyers virtually never held because buyers would not be willing to accept the condition in terms of agreeing to sell a business generally not in this case on the basis having some sort of voluntary shareholder vote.

Tony Robson – BMO Capital Markets

Thank you.

Operator

Our next question will come from the line of Paul Massoud with Stifel Nicolaus.

Paul Massoud – Stifel Nicolaus & Company, Inc.

Good morning and thanks for taking my call. My question, I guess my question is about your hedging policy, I mean obviously you guys don’t hedge comparable. Now that oil and gas assets that you’re going to be buying, do you have some hedges and so I was just curious if after the deal closes that you’ll be continuing the hedging policy that’s in place at Plains or if those hedges roll off and sort of purchase the oil and gas the same way you approach copper.

Richard C. Adkerson

Okay, well, just to comment about it, Paul as you noted, we have had a tradition of not hedging in our mining business. We manage our price risk by the way we structure our portfolio of assets and respond at different pricing market conditions. Many of our input costs in the mining business are highly correlated to the price of copper. So if price goes down the input cost go down, and so forth.

Hedging is more common among in the oil and gas business. We’re independent producers. Plains had made a significant acquisition of assets from BP earlier, well in 2012 and had adopted a business strategy of delevering the debt that it took in connection with that acquisition and the hedges that they put in place were supportive of that deleveraging strategy and that will carry over to our own deleveraging strategy because their production volumes have a strong history of production and now by having prices assured at attractive levels will be able to have degree of assurance for our own policy of reaching these targeted debt levels that I mentioned earlier.

Whoever will go beyond that is something that we’re going to talk about and consider as we go forward. And that will be part of our review of the strategy of how we invest in oil and gas business, but that is not yet…

James R. Moffett

This is Jim Bob. Let me just add, the 21% of our cost as you’ll see from the charts is energy related. So by having the oil and gas hedges that give us good price for oil and gas is the hedge, our energy cost that we have across the board in our mining business.

Richard C. Adkerson

Okay, thanks Paul.

Paul Massoud – Stifel Nicolaus & Company, Inc.

Thanks a lot.

Operator

Our final question will come from the line of Wayne Cooperman with Cobalt Capital.

Wayne M. Cooperman – Cobalt Capital Management, Inc.

Hey, guys.

Richard C. Adkerson

Hello, Wayne.

Wayne M. Cooperman – Cobalt Capital Management, Inc.

Hey, sorry if this is repeated, I apologize. Would you guys entertain more energy acquisitions at the right price if you saw stuff you liked and b) I think you said this, but assuming the MMR ends up being very successful and you really prove out the ultra-deep. Could you see separating the oil and gas assets again because they would have a much different cost to capital than the copper and gold company?

Richard C. Adkerson

Well, Wayne this investment that we’ll be making in oil and gas business gives us a platform for looking for growth opportunities across a broader range of assets. And so we’re going to be, first of all, I want to say, we are going to be disciplined about it, our business plan of delevering and where we commit capital. But it will give us an opportunity to consider where to invest for the highest returns. There is not a plan to make acquisitions either in the oil and gas business or in the mining business, but we’re going to be cognizant of opportunities across the set of assets that we will have and we will make decisions based on our assessments of those opportunities and the discipline factor. And we are focused on achieving success in the investments in McMoRan, the investments in Plains, where there is significant growth opportunities that complement what we have in our mining business and that’s what we’re focused on as supposed to any kind of long-term strategy about future restructurings of the company.

Wayne M. Cooperman – Cobalt Capital Management, Inc.

All right, thanks.

James R. Moffett

Wait, this is Jim Bob, wait a minute, I will just add to that. When you talk about what we are going to do, I have been Chairman in this company now for over 30 years and CEO for 20 years, Richard have been CEO for 10 years, so you have got 30 years of management that you’re seeing and nothing is going to change about this dialog what we do. What we try to do is to be the best management team and for that matter in the corporate, and we think we’ve done a pretty good job on average and our employees also have a well documented record. So what we’re going to be doing is, to use cash flow and resources that you are saying in the pro forma. And looking at, how do we and does that regionally or globally because with these acquisitions, we’ll now leapfrog, we’re bigger than (inaudible), we’re bigger than (inaudible), we’re bigger than Anadarko, we’re bigger than Apache, (inaudible) is the only company that’s slightly large in here.

So we’ve got a resource even now which is basically a major resource, which you can complete with the majors more or less. But what that means is we want to take this Board and the management, Richard, myself and many of the employees, we are going to be looking at the best opportunity to grow our assets. And what we do with the capital, would have been, the prices of the commodities are, we’re committed to having the size of products that Richard talked about, we’re committed to do Rich, I and the shareholders. So nothing changed about this company obviously. 30 years of management, this guaranteed continued management of the company.

This Board has a solid record. We acquired Phelps Dodge and we’ve shown inside into that and we’re taking a company that was 150 year old company, and tripped in the reserves that they had, the timely acquisition to our exploration expertise. So what everybody needs to remember is, the authority is that you’ve with the management.

Now this is Jim Bob and our great Board of Directors made decisions that yield same kind of returns you’ve had in the past.

Richard C. Adkerson

All right. well, thanks to everyone for participating in our call and we’re available for follow-up to the extent you would like to follow-up.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Freeport-McMoRan Copper & Gold's CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts