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

Q4 2008 Earnings Call

January 26, 2009 10:00 am ET

Executives

Kathleen L. Quirk – Executive Vice President & Chief Financial Officer

James R. Moffett – Chairman of the Board

Richard C. Adkerson – President & Chief Executive Officer

David Thornton – President of Climax Molybdenum

John Marsden – President of Mining Division

Mark Johnson – Chief Operating Officer of Indonesian Operations

Analysts

Michael Gambardella - J.P. Morgan

Jorge Beristain - Deutsche Bank Securities

Anthony Rizzuto - Dahlman Rose & Co.

Victor Flores - HSBC

Kuni Chen - Bank of America Securities/Merrill Lynch

[John Hill] – Cambrian Fund

John Tumazos - John Tumazos Very Independent Research

[Peter Bulkner] – Sansar Capital

John Redstone - Desjardins Securities

[Mark Leeanama] – Morgan Stanley

Brian Macarthur - UBS

David Gagliano - Credit Suisse

Justine Fisher - Goldman Sachs

[Dave Katz] – J.P. Morgan

Brett Levy - Jefferies & Company

[Wayne Atwell – Pontiss Management]

Steve Grisanti - Tricadia

[Sunil Gathader] – Sentinel Asset Management

[Raoul Aderol] - Marathon

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport McMoRan Copper and Gold fourth quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Miss Kathryn Quirk, Executive Vice President and Chief Financial Officer. Please go ahead, ma’am.

Kathleen L. Quirk

Thank you and good morning everyone. Welcome to the Freeport McMoRan Copper and Gold fourth quarter 2008 earnings conference call. Our earnings announcement was 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 we’ll also have several slides to supplement our comments this morning. The slides are accessible using the webcast link on our fcx.com website homepage.

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

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

On the call today are Jim-Bob Moffett, our Chairman of the Board; Richard Adkerson, President and Chief Executive Officer; and we also have our Senior Operations Team here, Mark Johnson, Red Conger, John Marsden and Dave Thornton.

I’ll start by briefly summarizing the financial results and then turn the call over to Richard who will refer to the slide presentation materials and review our operations and outlook. We’ll then open the call for questions.

Today FCX reported a fourth quarter 2008 net loss applicable to common stock of $13.9 billion, $36.78 per share. After adjusting for a number of special items that we had during the quarter which are detailed on Page 3 of the release, in total $14 billion, $36.84 per share, our fourth quarter 2008 adjusted net income totaled $23 million or $0.06 per share. This compared to the fourth quarter 2007 net income of $414 million, $1.05 per share.

During the fourth quarter of 2008, we completed our review of the carrying values of our inventories including the long-lived mill and leach stockpiles, our long-lived assets and goodwill and recorded after tax charges totaling $13.1 billion or $34.51 per share. This was to reduce the carrying values that related to the March, 2000 acquisition of Phelps Dodge. These are described on Page 13 of the release and Richard will go into more detail in the presentation. These charges do not impact cash flows.

During the quarter we also recorded adjustments to our provisionally priced copper sales that were priced at $2.89 at the end of September and those were subject to final pricing in future periods. Adjustments for these sales decreased our fourth quarter revenues by approximately

$745 million, which impacted our fourth quarter results by $343 million to our net loss, $0.91 per share.

With strong sales of copper and gold for the quarter, our sales for the fourth quarter totaled 1.2 billion pounds of copper; 462,000 ounces of gold; and we sold 12 million pounds of molybdenum during the quarter. For the year, we sold 4.1 billion pounds of copper; 1.3 million ounces of gold; and 71 million pounds of molybdenum.

Commodity prices declined dramatically during the fourth quarter. They averaged $3.61 for the first nine months of 2008, and declined to four year lows of $1.26 per pound in December. We experienced unprecedented volatility over the last few months. Copper was $1.38 at January 23, which was Friday.

Our recorded prices for the quarter averaged $1.55 per pound. These were approximately 50% lower than then fourth quarter of 2007. And operating cash flows were $3.4 billion for the year. This was net of $1.2 billion in working capital requirements.

Capital expenditures during the year totaled $2.7 billion, and we ended the year with $7.4 billion in debt and just under $900 million in cash. We had borrowings under our revolving credit facility at year-end of $150 million and net of letters of credit outstanding of $74 million had availability under the credit facilities of $1.3 billion. In December we announced revisions to our operating plans and today we’re announcing further revisions to those plans, which Richard will be reviewing.

Now I’d like to turn the call over to Richard who will be referring to the slide materials on our website.

Richard C. Adkerson

Good morning everyone. I’m going to cover our response to the market conditions operationally; how we’re taking steps to limit capital expenditures; to drive our costs of operations down so that we are cash flow positive even at low prices; and how we’re reducing costs overall.

I want to review with you to make sure everyone has an understanding of the write-offs that we’re reporting today. We talked about this in December during our last call. We completed our analysis based on year-end prices and the results are reported today. And then to look at our financial outlook and where we’re going as a company.

News every day is talking about markets. There’s not much to add. Business is weak. Because of the global economic situation, copper inventories have risen; not as much as they did in past periods of low prices. Stocks today represent about seven days of consumption. It’s been limited by supply disruptions, which continue to be a feature of the industry of significance. And copper will respond to global economic conditions and the continued development of infrastructure in China and elsewhere around the world.

Our business is supported by the strong gold price, which is over $800 and we’re producing significant amounts of gold at Grasberg. And that’s an important feature of our company and really part of the strategy that we had put in place when we combined Phelps Dodge with our business. After a rapid decline fairly early in the fourth quarter, the molybdenum prices have stabilized recently. This week we’re selling molybdenum at $9.30 a pound and we’ve adjusted our operations to be responsive to that situation.

Slide 4 talks about some of the issues that relate to the overall market situation. Obviously the market is affected by what’s gone on in the investment community with hedge funds and others withdrawing from investing in commodities. As I mentioned LME stocks are up 225,000 metric tons since the end of September and the market’s anticipating further increases in stocks, but it’s a big question of what goes on in the marketplace and obviously China is a key to that.

When we look at where our business is and what we’re doing to be responsive to these conditions, we continue to feel confident about the long run outlook for our commodities. Outside of the low prices, the industry has struggled. We had five years of very positive markets and during 2008, mine supply was virtually flat with 2007.

And in underlying all of this current economic downturn is the basic problem as the industry challenged to find new supplies of copper and the copper that is being produced from existing mines is being limited by falling grades and operational issues and other factors. We believe that this means this means that the resources that we have in our company, and even though we’ve written down the cost we have the same assets that we had; we haven’t walked away from any of our resources or any of our growth opportunities; points to a bright future for our company and these current market conditions will be supportive of the long run outlook for copper and molybdenum.

And in the long run, as China and the developing world continues to require infrastructure, as the global economies recover we’re going to be positioned to take advantage of that. Now we reported in December the steps that we took aggressively and quickly when the market turned on us late in the third quarter. We immediately, aggressively reduced costs in our capital spending. We have a goal of protecting the liquidity of our business. That’s the real key to us, to allow us to take advantage of what we believe is going to be a long term bright future for us.

And we’re doing it in a way that as I mentioned preserves our reserves and our resources and our growth opportunities so that we will be in a place where we can respond to a positive impact going forward. As a result of the steps that we’ve taken, we will have reduced volumes of copper sales and molybdenum sales in 2009, 2010 compared with where we were at the end of third quarter. Fourth quarter, by the way, was a record quarter for the combined companies in terms of copper production, 2008 was a record year.

But we were pushing to produce marginal pounds and to expand. Now we’re reducing marginal pounds and limiting production to drive our unit costs down to be responsive to the marketplace. And so we currently estimate that we’ll produce 9% less copper in 2009, 17% less in 2010 and less molybdenum; 25% less in ’09, 40% in ‘010. We’ll continue to monitor the marketplace and make adjustments in response to whatever the market brings to us to face.

As a result of the steps we’re taking we’re seeing a significant reduction in our unit site production and delivery costs compared with 2008, down by more than a quarter. We’ve reduced or eliminated 50% of our planned capital spending for ’09 by deferring development projects. We’ve canceled $650 million of equipment. And we’ve made reductions in all elements of our business, in our exploration, R&D and administrative costs. And as you recall we did suspend our dividends to protect our liquidity.

And today we’re announcing separately that we’re filing a prospectus supplement to give us the ability to do an at the market offering of common stock of up to $750 million. All of this again is designed to protect our liquidity going forward.

Kathleen reviewed our financial results. On Page 8 our year-end numbers came in in line, slightly better in terms of volumes than what we forecast in December at our update release at that time for copper and gold. Molybdenum was roughly the same. We continue to adjust our molybdenum business to reflect the marketplace.

Our loss reflects the write downs of goodwill and our impairment charges for our property, plant and equipment in our inventory, so it is a very large write-off which would be expected considering the fact that we had a recent write-up of the assets in connection with the Phelps Dodge transaction. And copper prices are half of what they were when we did our purchase price allocation which we just completed in the first quarter of 2008.

Taking out the special items, the write downs and other special items that are detailed in our press release, we essentially broke even for the quarter even though prices were low.

Phelps Dodge transaction, obviously the purchase was done in a totally different economic environment. We put together two companies. We created the opportunity to expand production and to grow the business. And that’s what we were focused on until mid-way in September. We’ve changed very quickly and have now been responding to that in the manner that I just talked about.

The change in commodity prices requires us under the accounting rules to one, look at goodwill. And when you look at our stock which was roughly $60 a share at the time of the acquisition, the decision to write-off the goodwill was clear cut. That was $6 billion in the write-off with no tax effect.

The copper price is less than half of what it was when we did the purchase price allocation. It was a $26 billion transaction but it resulted in the write-up after you took into account liabilities of $40 billion of assets, including the $6 billion of goodwill. So clearly that had to be written down and that’s what we did, just straightway in accordance with the accounting rules.

Having said that, we firmly believe that the Phelps Dodge transaction was a positive for FCX as we sit here today. We generated substantial cash flows during 2007 and 2008. This allowed us, along with the issuance of equity immediately following the transaction, to pay down a significant portion of the acquisition debt, $10 billion during 2007.

Our ongoing exploration which was a major focus of our strategy after the transaction has resulted in us adding to our reserves and also adding significantly to our mineral resources, pointing to a good future for our company. And matching up the Phelps Dodge assets with Grasberg, which we always recognize that Grasberg would be the foundation asset for our business during times like this, strategically continues to be attractive.

The merger was based on a longer term view that prices would be volatile and they have been. Certainly didn’t predict what the world is going through right now, but we knew there was risk associated with prices and we still feel positive about the set of assets that we have and the company we have going forward.

The impairment charges are listed on Page 10. We start off with looking at our inventories and our inventories are a bit unusual than many companies because of our leach stockpiles, which are longer term inventories. We had to write those down to lower cost to market, using year-end prices and the current outlook for prices. And that resulted in roughly $0.5 billion of after-tax write-off.

With the property, plant and equipment we had to look at the reserves that we had and the mineralized material. Using year-end prices and the outlook for prices, we had to follow really the same analysis that we did when we allocated purchase price. We had just done this, so there really wasn’t any controversy about how we would do it. We just used a different price situation and that resulted in $11 billion pre-tax and $6.6 billion after tax. And clearly the goodwill had to be written off considering the marketplace. So that’s how we came up with the numbers.

The prices are illustrated on the charts on Page 11. The blue lines show how we used prices in allocating cost at the time of the acquisition. At that time we closed the transaction, the price of copper was roughly in the $3 range. We used forward prices, working down to a long term price of $1.20 which is what we were using for our reserves at the time. For molybdenum the price was over $25 a pound and we worked down to an $8 price going out to 2011.

For the impairment assessment that we did as of the end of 2008, we used current prices for a three year period and then used $1.60 long term, which we’re using for our reserves now. And molybdenum was $8. So we followed the same analysis and that resulted in the charge that we had.

You all know its non-cash. This is just adjusting the carrying amounts that we have on our books. We have the same assets. This is not a case of a company that had to walk away from assets. We have the same mines, the same reserves, the same resources, the same future growth opportunities. So we followed the accounting rules and that’s the result. It doesn’t really affect the way we’re looking at our business or how we’re adjusting to it.

When you look at the Phelps Dodge transaction, we acquired $4 billion of cash that the company had at the time of the acquisition. Since then we’ve generated $7 billion of operating cash flows. The chart on the right shows the point I was making about the reserves. At 12/31/06 the proved and probable reserves under SEC standards for the Phelps Dodge assets was 55 billion pounds.

Two years later after significant amounts of production, higher levels of production for the two year period, our SEC reserves are up to 66 billion pounds. We’ve got mineralized material that’s contained, copper in excess of that. And you can see our molybdenum reserves have also increased by 25%. So we have been successful in doing what we set out to do in terms of building assets for this business.

During 2008, we more than replaced our production of both copper and molybdenum. You can see the reserve analysis that shows reserve additions for copper were three times the production and seven times the production for molybdenum. And over long periods of time, the combined companies have been able to through the exploration programs add to reserves despite producing very high volumes from mature mines. And this is what we’ve all been talking about, the ability to add reserves, add resources and identify growth from existing mines.

We have the new mine we’re developing at Tenke Fungurume in the Democratic Republic of Congo, but the bulk of this is mines that have been operating for some time. And the operations and the opportunities and reserves are spread throughout the world. On Page 14 you can see the split of our reserves between North America, South America and Indonesia. A good geographical split and also the significant additions that were being able to be made at all of our operations.

We increased the reserves at Tenke Fungurume over a third this year and longer range we continue to see the ability to add significant reserves for that. Page 15 shows the reserves that we have in terms of SEC reserves, based at $1.60 long term price of copper and mineralized materials which would be the source of additional reserve adds, over time, as we do further drilling; economic analysis; technology studies; land right; water issues; all the things that you have to do to prove the economic feasibility of reserves.

But it gives us a great opportunity that we have for our company to be responsive to the long term bright future that we see for the copper business. Update you where we stand with operating plan revisions that we talked about in December, we did as we indicated then review operating plans at each of our mines to develop the optimum low cost operating scenario going forward.

At December we said we did that in the scenario of $1.50 to $2 copper. When markets weakened, we updated that and we’ll continue to update it. This is not going to be a process that we did and it’s ending. We’re going to continue to work to try to drive our costs down and be responsive to the marketplace.

But at the present time we’ve come up with a plan to curtail high cost copper volumes. We’ve reduced our moly volumes in response to help balance the market. Taking steps to aggressively control costs; reducing inventories; deferring and eliminating capital; and reducing manpower levels in connection with scaling back operations.

The major step that we’ve taken with our new plan going into 2008 versus December was a further significant reduction of our operating rates at our flagship mine, Morenci in Arizona. The current plan calls for Morenci to be operating at roughly half of its capacity.

That involves a significant reduction in the costs from what we announced in December. At that point we announced we were scaling back Safford by 50%; suspending operations at Chino in New Mexico; reducing rates at Tyrone in New Mexico and deferring the previously announced expansion projects that we were pursuing.

This reduces manpower costs, costs across the board and it allows us to take these North American operations and put their costs down at a level that is on a cash flow positive at $1.25 copper. South America and Indonesia, we’ve similarly gone through processes of reducing costs. We deferred the sulfide project at El Abra in Chile.

Indonesia it’s going to be a good year for Grasberg because we began accessing the higher grade material late in 2008 and we’ll be there in 2009. That will give us 1 million ounces roughly more gold next year than we had in 2008. And you can see our copper sales estimates at the bottom of this chart for South America and Indonesia.

For molybdenum we adjust Henderson, our stand alone molybdenum mine in Colorado to be responsive to the marketplace. And we’ll continue to do that. It is a mine of where we can cut volumes there and maintain the unit cost structure because of the nature of its operations. Our current plan is to reduce it by 25% but that’s going to be subject to ongoing review.

We’re curtailing the moly circuit at Cerro Verde in Chile and in Peru. And of course we deferred the Climax restart as we previously announced.

Our sales profile is shown on Page 20; 2008 for copper, 4 billion pounds. Approximately we had anticipated going into the fourth quarter having copper sales of 4.3 billion pounds in 2009 and 4.6 in 2010. Our current plans are now 3.9 for ’09 and 3.8 for ‘010 as a result of our steps to drive our costs down.

You can see the gold production which is essentially all from Grasberg. We’ll have two good gold years in ’09 and ‘010 and the molybdenum adjustments to Henderson and our byproduct production again in response to the marketplace.

An analysis of those changes in sales volumes is included on Page 21 and you can see the bulk of the changes in ’09 come from North America and then in ‘010 we begin to see reductions in South America as a result of the downswing in the oxide project at El Abra. And Page 22 shows our sales by region for 2008, 2009. Sales roughly distributed roughly equally in North America, South America and Indonesia with our molybdenum coming from North America and our gold coming from Indonesia.

Our unit cost data is updated from what we had presented to you in December on Page 23. I will note that we have increased the byproduct gold estimate here from $750 to $800 with the recent movements in gold. So as a result of that, Indonesia now the gold based on our current mine plans and production volumes and $800 goal, our gold revenues would offset all of our cash cost of operations at Grasberg. And you know this is something we achieved several years in the past, really important to us this year.

But we’ve taken down the unit cost for North America from what we were showing you in December of $1.33 a pound down to $1.17 as a result of the further steps we’ve taken in Morenci. On a combined basis, our consolidated costs for the year 2008 is $0.71 per pound after byproduct credits. And that’s down from $0.89 in December, so we’ve made some progress and we’re going to continue to work at this.

This is for the year. The quarterly amounts will be different from that. And our first quarter’s going to be a bit higher than this annual average for several reasons. Some of our cost steps, particularly in North America will be phased in. We have some higher costs that are carried over in the first quarter. We have some inventory effects. We wrote our work in process inventory down to $1.40 and so that inventory will come into our costs at $1.40.

Grasberg on a relative basis will produce more gold later in the year than in the first quarter, so our costs will be above the annual average in early in 2009 and then it’ll be offset with lower costs as we go through the year. Our costs by source of cost are shown are on Page 24. You can see energy represents about 20% of our costs; consolidated manpower’s 25%; materials and supplies are just over a third.

None of our costs are coming down, of course, with the decline in oil price, steel prices, sulfur prices and we are taking steps to aggressively take advantage of those. We gave our best estimate in giving the unit costs that I just reviewed with you. But that will be affected by cost trends as we go forward in 2009 and by our ability to take advantage of it as promptly as we have. But we’re really focused on this and committed to do this to help mitigate the decline in prices.

I mentioned we’re reducing costs across the board and with our exploration program where we’ve been spending aggressively, roughly $250 million in 2008. We’re currently budgeting

$75 million for ’09. That doesn’t mean we’re de-emphasizing exploration. We’ve done a lot of drilling over the two years, and our exploration team’s going to spend this time. We’re cutting back on drilling, but our exploration team’s going to be analyzing the information that we’ve gained, working into our long term mine plans and laying out our operating strategy as we go forward in the future with terms of adding reserves.

Page 26 shows our operating cash flows and EBITDA at a range of prices from $1.25 to $1.75. This is the average numbers for ’09 and ‘010. You can see at $1.50 the current price, we would have just under $3 billion of EBITDA, about $1.75 of operating cash flows and the variances at different levels. And this is at $800 gold, $9 molybdenum and excludes working capital changes.

We will have working capital uses of significance early in 2009. Part of this has to do with just the normal flow of payables and receivables, but also we have a special situation with the rapid drop in copper prices. We were provisionally paid at a higher price during 2008 than we will realize when these contracts are finalized and we’ll be having to write some checks back to our customers as a result of the settlements of those provisional contracts.

The variance sensitivities, the price changes for commodities is on Page 27. Each $0.10 change in copper is $260 million variance on operating cash flows. And you can see our other commodities that we’ve given you some information for your modeling purposes.

Page 28 shows that we are making adjustments to our capital expenditures. As we went through our year-end process, we updated where we believe we stand now. And we’re going to continue to review capital as we go forward in the year. We’re currently estimating $1.3 billion in ’09 and

$1 billion in ‘010. This includes capital to complete the first stage of development of the Tenke Fungurume project in Africa.

You see a good picture of where we stand right now on that on Page 29. We’ve made good progress during rainy season there in advancing the project. We expect to be commissioning it shortly and to reach commercial production during the second half of 2009. This was a project where it would have been very difficult to defer costs or pull back from it because of the nature of the project, where it is. We also had a commitment to the government to go forward with it. And we had spent a substantial amount of capital and the cash flows will be beneficial to us as we go forward.

We believe we can come in, we had estimated $1.75 billion in aggregate capital costs. We incurred $1.4 through the end of ’08. We expect to come in slightly below that. But this is really a good performance by our expansion team in terms of wrestling this project.

We are engaged in discussions with officials of the government on our contract review process. We have a contract that is enforceable that we see as fair to the government and to us. And we are possibly talking to the government about that and expect to have this resolved in the relatively near future. And we continue to work with the government on it.

Our capital also includes the progression of the underground development of our resources and reserves at Grasberg district. It’s important that we continue to do this because the pit will schedule to deplete in roughly 2015. Because of the time to access and develop the underground reserves so we can continue to have high volume production in the era past the depletion of the pit, we are continuing with that spending.

We have deferred spending on the Big Gossan mine and we are monitoring capital costs carefully, but we are progressing with our long term mine plan for Grasberg, which obviously this great mine is the cornerstone asset of our company.

From a financial perspective, it was fortuitous that we were able to reduce our debt so dramatically following the Phelps Dodge acquisition. We ended up at the end of the year with

$7.4 billion of debt and when you turn to Page 33 you can see that for a number of years looking forward we have relatively low amounts of, very low amounts of principal payments. So we’re not in the position of having to go to the market to refinance our debt during these difficult times. And that is a strong positive for our company.

From a financial policy standpoint, we are focused on maintaining a strong balance sheet, on protecting our liquidity during this time of low prices. We’re doing that and we have been able to do it. We’re aggressively managing our costs, limiting capital investments, and really working to contain all of our costs. We’re doing this, as I keep saying over and over, preserving our reserves; our resources; our growth opportunities for the future and our board works with us in reviewing our financial policy on an ongoing basis.

The company is well situated in a difficult marketplace with good assets, good people and we’ll manage our way through this and look forward to a bright future. With that, operator, we can turn the call over to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Gambardella - J.P. Morgan.

Michael Gambardella - J.P. Morgan

I’ve got a question on moly pricing. It looked like the moly pricing was around $25 realized in the quarter. Are you expecting that to drop down right to $9 in the first quarter?

Richard C. Adkerson

Well, it is right as we speak today the price is set at the end of the week for the next week, so this week it’s $9.30. And it’s really been at that level. You know, we were over – we were $32, $33 and then it went $27, $22, $18, $13, $10 on consecutive weeks. So it dropped rapidly during the fourth quarter and it’s essentially you end up with kind of a month’s lag before the average price catches up with you. So it’s – let’s see, Dave is here. Dave, it’s been down below $10 now for the past month?

David Thornton

Month, yes.

Richard C. Adkerson

For the past month.

Michael Gambardella - J.P. Morgan

And again on your cost assumptions for the company for ’09, you’re using a $9 moly price assumption, right?

Richard C. Adkerson

That’s correct. Used $8 for our reserves and for our impairment charges.

Operator

Your next question comes from Jorge Beristain - Deutsche Bank Securities.

Jorge Beristain - Deutsche Bank Securities

My question had to do with the filing to which you potentially open up to $750 million of more stock. If you could comment a little bit on the timing of that and what the principal uses would be. And the question I have received from clients is we assume that would all just be common stock as well.

Richard C. Adkerson

Yes. We announced today separately that under our shelf registration statement we filed a prospectus supplement. This works like a reverse stock buyback program. You sell into the marketplace and Jorge it’s designed with the goal of giving us an additional tool to preserve our liquidity. The details of the offering are going to be in the prospectus supplement and it is common stock.

Jorge Beristain - Deutsche Bank Securities

Any comments on the timing of when you would exercise that? And would it – are there already institutional buyers lined up for a size of offering like that?

Richard C. Adkerson

Well, it’s totally at our discretion and we will use judgment as to when the offering occurs and is sold into the marketplace. It’s an open market type transaction. Like I said, it’s like a reverse stock buyback program. And we feel with our liquidity that our company’s well suited for this type transaction.

Jorge Beristain - Deutsche Bank Securities

Just on the unit cost guidance that have come down significantly even since your last December’s guidance, do you believe that based on what you know now with where energy costs seem to be leveling out and exchange rates, are there sensitivities of further downside to that guidance? Or do you believe now that having taken off the high costs of production that that’s a fairly solid number we should use in our modeling?

Richard C. Adkerson

Well, Jorge, the world has such volatility in prices and situation, the way I would suggest you look at this, this is our best estimate after doing a lot of work of where we stand right now. It’s our challenge to go out and achieve this plan. And we’re going to report to you how we do it. We’re going to be working real hard to do it. But we are going to be subject to the marketplace as to how these things develop.

If a lot of our energy costs just go straight through, 230 million gallons of diesel that we buy in the marketplace; in South America some of our electricity comes from diesel generation at the current time and that’s a fuel price adjustment where it’s very rapid. So things like this, you know, I just saw that sulfur looks to be priced attempt at zero where it was $600 a ton a year ago. And so this is a volatile marketplace.

We’re going to be subject to that volatility both in our sales revenues and in our costs, but we’re committed to – we recognize the importance of taking as maximum benefit as we can from this changing cost structure. So that’s where we are right now and we’ll report to you as we go forward.

James R. Moffett

This is Jim-Bob. Let me add to those two questions. The first question regarding the stock filing, remember when we made the great Grasberg discovery of the largest mineral body in the world. The second largest discovery we’ve made in minerals was during the Phelps Dodge transaction. We acquired multi-mineral, multinational reserves. The play in Africa could rival the Grasberg once we get it fully developed. So you can rest assure that although the filing for that stock has been done, give it to protect our liquidity, that these reserves in the ground are still worth exactly what they were at the time of the Phelps Dodge acquisition.

We now control the greatest mineral deposits in the world. All of the exploration we’ve done around the Phelps Dodge properties and continue to do at the Grasberg as you can see has more reserves than we’re producing. We added 300% of the copper that we’ve produced just this year. All of the ore bodies that we acquired in the Phelps Dodge transaction have sheets of ore that we knew were going to be present.

But the extent of those sheets, with the drilling we’ve done in the last 18 months has been overwhelming, not only in the amount of volume that exists below each of these pits but the fact that the grade in many cases has gone higher as we went below the existing pits, many intercepts over 1% copper. And as we said, we have brownfield exploration which is better than any greenfield exploration we could be doing.

And why is that so important? Because the infrastructure already exists at these pits that we’re fully delineating. So that could go on for years. And we’re talking some of these deposits are going to have 100 year reserve life. So you can rest assured that before we pull the trigger on selling any stock at these prices, they will be done only if we have to do it to protect our liquidity.

The second thing that is so important is that we’re now – we now and have been since we made this sale of stock acquisition, many people were concerned even though we had the greatest ore body in the world in Indonesia. Which this year we’ll have zero production costs because of being in this lease [long] ago. We have the multinational, multi-mineral company now which is the best minerals company that you could possibly have imagined.

And as the costs come down because of the third party costs, whether it’s Caterpillar equipment, diesel, we will work to get these costs on down. And we’re talking $0.70 now. We’re going to take it lower. So we’ve got all kinds of ways to get through these low prices so that the stock will be the last resort as far as us making a decision to dilute to shareholders ownership in this great mineral body. Remember that.

Operator

Your next question comes from Anthony Rizzuto - Dahlman Rose & Co.

Anthony Rizzuto - Dahlman Rose & Co.

Richard just the first to follow-up on Tenke Fungurume, I noticed that Anvil Mining was able to retain its original interest in the projects that it’s got in the DRC but it had to give up some things and I think had to make some additional cash payments and I think there’s been some other maybe social spending and maybe the government increases its involvement in some other aspects. I was wondering can you share with us, I know you’re pretty adamant about what you believe to be the case there, but could you give us a better idea as to timing and how this might be shifting at all, if any?

And does the copper market, being where it is, does that give you some additional negotiating leverage if you will?

Richard C. Adkerson

Well, the process is unfolding. Discussions are going on right now. And the government had formed a Council of Ministers to take the lead in their discussions with us. Tony, every – not every contract but the contracts the operators there operate under different contracts or under the mining code. And our situation is specific to the original contract that was signed in 1996, and then renegotiated over a two year period ending in 2005.

The country is suffering because of the impact of low copper and cobalt prices. It’s had a severe reduction in its mining activities and the country is under financial stress for many reasons. They also have difficult political issues going on there. So members of government would like to see more benefits coming earlier out of our project than the contract provides. Key government officials recognize that our contract is a valid one and are also appreciative of the fact that we’re living up to our commitments with our development, with our employment, and with bringing this project into production.

You know, I wouldn’t want to characterize it as leverage. It’s just the facts of the scenario – the economic scenario we’re dealing in. Our position has been clear. We want to be cooperative with the government. And I’m confident we’ll find a way forward that both the government and we’ll be happy with.

Anthony Rizzuto - Dahlman Rose & Co.

Richard, did I hear you say that key members think that your stance is a reasonable one?

Richard C. Adkerson

Yes. And you know we’ve had an ongoing education process with senior members throughout the government and their Parliament, and a number of people are very supportive of us and appreciative of the fact of what we’re doing there. It’s a great project. I mean, in a country where they’ve had lots of issues with artisanal miners, we’re doing a world class project that fits the standards of development and environmental management that you’d see anywhere else in the world. And it’s the first time you’ve seen that in a place like the DRC.

Anthony Rizzuto - Dahlman Rose & Co.

The other question I had was just along with that, the CapEx versus your December 3rd announcements on the CapEx being increased from that level of the $1.1 to the $1.3, is that primarily all due to Tenke? I may have missed that during your formal comments. I’m sorry.

Richard C. Adkerson

Well, it was just a function of our going through and completing our year-end review of costs and coming up with our best estimates. Our ’09 costs are up. It is principally at Tenke from the December estimate and our [tin] costs are down. But you know these capital cost estimates will be subject to further adjustments in review as we go through the year.

Operator

Your next question comes from Victor Flores – HSBC.

Victor Flores – HSBC

I have two questions. The first – and they’re both related to Tenke actually. Would it be possible to just walk us through the level of completion on the major infrastructure projects for the plant and the mine, and let us know when you think you’ll achieve mechanical completion? And how long you’ve budgeted for the commissioning phase?

Richard C. Adkerson

I’m going to ask John Marsden who manages our construction activities as part of his responsibilities to respond, Victor.

Victor Flores – HSBC

Thank you.

John Marsden

You know, we’ve obviously got a significant amount of construction and activity on the ground at Tenke and in the district. We’ve got a construction workforce of approximately 5,000 people. We’ve got a total workforce there in that district of close to 8,000. We’ve got a large number of contractors that are working on the project for us. As of early January, construction had advanced well. It’s a combination of work on the mine and the processing plant, which of course is the bulk of the work.

But also we’ve got infrastructure work that is going on which relates to roads, improving of roads, and access around the Katanga Region so that we can get supplies in and the logistics of getting materials and so on to the site. We’ve also got other ancillary activity related to infrastructure in the region to support the plant and the mine going forward. Our construction completion right now is in the low 80% range, but we are almost to the peak in manpower, just over the peak of manpower. And construction is continuing to advance well.

We’ll be entering commissioning for the plant, and this is the initial plant designed to produce 250 million pounds of copper per year when it gets to the full rate. And it will produce approximately 18 million pounds of cobalt per year. And we’re going to be entering commissioning activities in the second quarter. We will be commissioning different sections of the plant.

Obviously the front end of the plant end will be commissioned before the back end of the plant, so we’ll be commissioning the grinding portion of the plant and then making copper and then finally ramping up cobalt and other ancillary sections of the plant. We expect to reach commercial production rates in the second half of 2009.

Victor Flores – HSBC

If I could just ask a follow up regarding prices, you’ve given us some sensitivities for copper and gold on earnings and whatnot. Could you give us a sense of what you’re thinking about the cobalt price and what rough sensitivities there might be to changes in those prices?

Kathleen L. Quirk

Well, we’re using in our estimates that we’ve provided, $10 for cobalt. And John gave the number when we get to a full run rate of 18 million pounds. You can see what the sensitivities are based on $10 cobalt for 18 million pounds.

Operator

Your next question comes from Kuni Chen - Bank of America Securities/Merrill Lynch.

Kuni Chen - Bank of America Securities/Merrill Lynch

Just a follow-up on the earlier question on costs, as you look at your costs coming down towards the $0.70 level for ’09 can you just help frame that for us? Sort of what percent of the cost reductions would be taken out of marginal production versus declines in input costs?

Richard C. Adkerson

Well, it does reflect both. We start out by looking at the input costs and that cuts across all the operations from Grasberg to South America to North America. And then we as I said did a series of studies at each mine, looking over the next three-year period to see what would be the optimal way to maintain the costs at a low level. It’s very difficult to say what percent of the cost is which because it’s all integrated, Kuni. So I really can’t give you a percentage.

In some ways you can look at the reduction of the costs in North America from where we were in mid-December to the end of the year. And most of that had to do with adjusting of operations, but some of that was further reductions in energy costs.

Kuni Chen - Bank of America Securities/Merrill Lynch

On the provisionally priced copper in the fourth quarter, I think it was at $1.39, so basically if we assume that copper prices let’s say are flat at this level, then the working capital impact early on in the year would be neutral. Can you just elaborate on that?

Richard C. Adkerson

No, the working capital impact doesn’t really affect the open pounds directly at the end of the year. It had to do with the sales of copper at the time when the prices were much higher than $1.50. And the way our contracts work, at the time of shipment we provisionally bill our customers and get paid 90% generally, it varies some contract by contract, of that provisional price at that time.

So we actually get the cash in before the contract finalizes and then under the terms of the contract when it finalizes, there’s a settlement. We can either receive cash if the price goes up or we have to pay cash if the price goes down. We have the unusual situation right now of just how dramatically prices dropped. And so that’s what ends up being the amount of working capital change. It will be affected by where the price is at whatever level. But it won’t be offset by prices being at $1, $1.50.

Kuni Chen - Bank of America Securities/Merrill Lynch

I guess can you give us some sensitivities around what that working capital impact could be?

Kathleen L. Quirk

Just if you take the amounts that were fixed based on our 2008 sales that we adjusted in the fourth quarter, we expect that the working capital requirement as Richard described where we have to refund customers will be on the order of $600 million in 2009. And that’s related to those sales. And then we booked the sales at year-end at $1.39 and so we could have subsequent changes to those sales. But the $600 million relates to sales that were made earlier in 2008.

Operator

Your next question comes from [John Hill] – Cambrian Fund.

John Hill – Cambrian Fund

First question I wanted to ask was a lot of the actions that are being taken in North America really recall what happened at Phelps Dodge in 2001 and 2002. It’s a different situation in many ways and different asset balance and the rest, but what are we doing to protect those assets and make sure that we don’t fall into the same situation where there were so many restart difficulties on the other side?

Richard C. Adkerson

Well, the – you know it is a different situation, particularly with the significance of molybdenum even at $9 a pound. Operations like Sierrita and Bagdad, we’re continuing to operate those because they are profitable even at these – even though they’re low grade that with the combination of molybdenum they have that. And we are taking steps – Morenci was really the one that we really had to focus our attention on, because of its cost structure. We had pushed Morenci’s mine rate up to very high levels.

We were trying to get as much copper out of that operation as we could. And as you recall, John, the third quarter our costs were approaching $2 a pound there. But doing the third quarter when you are averaging $3.60 a pound you know it’s great margins to do that. So it was really Morenci, to a lesser extent Safford, that we really had to attack. We’ve done that. We’re doing it in ways that will allow us to ramp up when conditions change.

We’ve had significant manpower reductions, but we’re reducing manpowers in way to retain the skills that are the most needed for an ongoing basis. And so we – it will take some time because of the nature of SX/EW operations and getting things, increasing stacking rates and things of that nature. But we are spending significant efforts to guard ourselves against what you talked about.

We also benefit from the fact that in the past few years there’s been significant investments made in equipment and in facilities and so forth that puts us in a better position than historical operations were.

John Hill – Cambrian Fund

Just a quick follow-up on consumable and input costs and such, we all know how closely copper, moly and gold prices can detract to key inputs to mining, be it gas, diesel, coal, etc. What are the perspectives about looking forward and taking some steps to really lock in some of these prices? For example, buying an interest in a large Indonesian resource of coal or locking in a multi-year gas contract to protect some of those key inputs in the southwest United States and diesel fuel overall?

Richard C. Adkerson

Well, we’ll continue to look for opportunities of that nature. You’re right, you know, fundamentally this correlation works for us both on the upside and on the downside because a significant amount of our costs are correlated to commodity prices. But those – our first order of business, John, was in a very short period of time adjusting our capital plans and adjusting our operations. Now as we go forward into the world we’re going to be looking at a whole range of alternatives of what we might do.

James R. Moffett

John, this is Jim-Bob. Let me just tell you one other thing about the start up once these prices turn around so we can get back to work and command our facilities. One of the things that’s up that I didn’t have when they were ramping back up when they shut down, we’ve had this almost two years of new drilling. In Morenci and others, the [Dallas] Copper District Mines, we’ve done an extensive amount of drilling. At Morenci for instance we’ve been able to identify some copper grades at almost 1% that we’ll be focused on during this period of time.

We’re going to be getting ourselves from a stripping standpoint in shape to be able to hit those hard once we start ramping back up so we can feed higher grade materials to the facilities. That’s something that they’ve never done before. And I can tell you, when you see the actual cross-sections and the amount of ore that we’ve added in Morenci, for instance, and the grade of that, it will startle you.

Operator

Your next question comes from John Tumazos - John Tumazos Very Independent Research.

John Tumazos - John Tumazos Very Independent Research

Could you update us on your production planning compared to the December 3 call per the $1.50 to $2 copper price planning range you described at the beginning of last month? Prices have been toward the lower end of that range or slightly below. Specifically, are costs evolving lower than you thought almost two months ago? And what other variables interact with it? For example, would rising copper inventories cause you to take a more conservative view?

Richard C. Adkerson

Yes, John, it was obviously the marketplace effects our thinking, you know, and inventories are a reflection of the marketplace. So it was something that was built into it. But our principal focus was on the cost issue. As we – you’ll remember when we were giving our December update, the price weakened significantly during that very week. So we were working as we spoke then. And we went back and reviewed each one of our operations in light of a scenario in the range of $1.25 copper.

And that’s what we updated our analysis, we made some tweaks at some other operations. But the focus of the change was on Morenci. In December we were talking in broad terms of reducing Morenci’s operating rate by 25%. We ended up, after studying a number of alternatives, settling on the current plan that we have which involves a mine rate of 500,000 tons per day which is less than half of what we’ve been doing. And that was the main change in the plan.

And the real requirement for us there was to adjust Morenci’s operation so that the cost was pushed down to a level where you could live at $1.25 copper.

James R. Moffett

This is Jim-Bob. I might just add that I just saw that copper broke $1.60. I don’t know who’s buying out there that’s listening to us, but copper just broke $1.60. Talk about volatility.

Operator

Your next question comes from [Peter Bulkner] – Sansar Capital.

Peter Bulkner – Sansar Capital

First, when I look at your CapEx plan that you announced on the December 3 call of $1.1 billion versus today at $1.3, and then I see your exploration budget actually went down from

$100 million to $75 so the real delta’s about $225 million of incremental CapEx?

Richard C. Adkerson

No, no. The exploration cost is not part of CapEx.

Peter Bulkner – Sansar Capital

Okay. So just $200. Thanks for that clarification. So just the $200, could you just give me some indication as to where that’s incrementally being spent?

Richard C. Adkerson

Well, it’s principally Tenke. When we had our December announcement, we were going through our normal process of our year-end development of our plan. We have a long established schedule for coming up with our financial plans and we present them to our board for approval in its January meeting. And just as part of that process, we reviewed all elements of the cost and adjusted it. We adjusted 2009 up and 2010 down.

Peter Bulkner – Sansar Capital

So at the end of last year, at the end of 2008 you had $350 billion left based on the original estimate of total project costs, correct?

Richard C. Adkerson

Roughly yes. And we expect to be able to come in as we said somewhat below that estimate.

Peter Bulkner – Sansar Capital

I’m just trying to understand what your thought process was in December versus today’s, and since it’s mostly Tenke you – because the amount that you’re adding to the budget represents almost all of what remains on Tenke. So has there been something specific there that’s caused you to make such a dramatic change in your CapEx plans for 2009?

Richard C. Adkerson

No. It wasn’t all Tenke and no I mean it’s nothing dramatic. It’s just an update of our planning process.

Kathleen L. Quirk

And some of it on Tenke, you know, we did come in at $2.7 billion for 2008 capital spending. Some of the situation on Tenke is that money that we’re funding in 2009 was in our plan for 2008, so some of it is timing on Tenke. But when we did the December estimate we looked at trying to cut some costs on the Tenke project. We still think we’ll come in slightly below the

$1.75 billion that we had previously estimated, but we don’t think we’ll be able to come in as low as what we thought we could in December. So we’ve increased it slightly, and some of it’s timing from 2008.

Peter Bulkner – Sansar Capital

Obviously since Phelps Dodge closed, there’s been a lot of drill activity and in the fourth quarter you were talking about 144 billion copper equivalent pounds, up from 64 when you closed the deal. In terms of the asset impairments, the 10 or 6 before or after tax, how does the exploration and development activity play into that? Do you get any credit for that? Was that part of the process or was it really just based on the purchase accounting adjustment that you made at the time the deal closed?

Richard C. Adkerson

We essentially based the impairment test on proved and probable reserves.

Peter Bulkner – Sansar Capital

But most recent or at the time of the deal closing?

Richard C. Adkerson

No, the most recent was at year-end. So our proved reserves were up and that had an impact. It’s a – the process you go through is first of all you look at your carrying amounts. And then you look at your undiscounted cash flows used in the price scenarios that I laid out and essentially using your proved and probable reserves. And when that undiscounted amount is less than your book value, then you have to use a present value calculation to come up with the amount of the write-off.

Some of those reserves that we identified will be produced in years in the future so when you discount it, it has an impact but it’s just what we did. It was a – so we did use the reserves but the resources were only used for the some small portion of the costs.

Peter Bulkner – Sansar Capital

And just on Page 11 of your slide presentation, you have very, very steeply backward dated copper when the deal was done and now it’s positively sloped. And it actually have the crossover point of 2012. I guess I’m trying to understand the very, very large impairment when you have some fairly long-dated assets and you’re really only talking about the real change. Obviously there’s the discounting impact in terms of time, but from 2012 on you actually have a benefit versus what you were modeling previously. I mean, is the cost side also – did that play a role in some of these impairments?

Richard C. Adkerson

Yes, because it had to reflect the current costs. But you kind of brushed off something that’s a big number. When you said the discounting impact is there, I mean that’s really significant. You look at that wedge for those years, that is a major factor in determining what the writedown was. Actually we played this writedown as I like to say right down the center of the fairway. We didn’t try to maximize it. We didn’t try to minimize it.

The instructions that I gave to our people and in working with our outside auditors, I said we know we have a writedown because prices went from $3 to less than $1.50. Let’s calculate it as accounting rules say calculate it. We have established a process very recently with how we allocated the purchase price. We didn’t try to tilt this thing one way or the other. We just did it and we’ve done it now. The assets are still there. We followed the accounting rules and now we’re going to go forward.

Peter Bulkner – Sansar Capital

Just in terms of Jim-Bob’s comments regarding the shelf registration and the stock sales really being a last resort, I just wanted to sort of go back and make sure I understood that correctly.

Richard C. Adkerson

Let me say this. We can’t – because of the SEC registration rules, we can’t really talk much about that on this call. You have to go to the prospectus summary and that will set out the details on the offering. And we really can’t because of SEC legal requirements can’t comment on it at this call.

James R. Moffett

Let me add something to the changing conversation. We were talking about the write up of reserves since we had all the exploration. Some of the issue at Tenke are that we’ve done a lot of drilling. You just sit down and look 30 miles out your window. We’ve drilled a bunch of core holes over a 30 mile area that is by service geology we could see the ore body was extending. But the drilling that we did was done on a wide spacing area. What does that mean?

You have to have a certain spacing requirement and then you have to get reserves into a probable, a possible. So what we’ve added at Tenke is a lot of mineralized material which is on one of the charts that were shown. And we can’t use those reserves, the so-called mineralized reserves in the accounting calculations that Richard and the accountants were doing to try to look at the impairment charges. Those can only be brought into proved reserves and probable reserves as we increase the density, which we will do.

Richard C. Adkerson

And Peter, Kathleen just sent me a note to remind me that a lot of our reserve additions were at Cerro Verde and Cerro Verde wasn’t written down. So these writedowns were done on a mine-by-mine basis.

Operator

Your next question comes from John Redstone - Desjardins Securities.

John Redstone - Desjardins Securities

Looking out to 2010, if and I stress if we have a substantial increase in market conditions between now and the end of the year, how easy, how quickly would it be for you to significantly increase your planned level of production for 2010 given the decisions that are already in place today?

Richard C. Adkerson

Well, there are certain things we could do that would add volumes, but there are steps we are taking now that will have a time lag. And as we looked at these alternatives, different production rates at Morenci, we looked at those as to what would be your flexibility in returning operations. But we have equipment, I think we have 100 parked trucks in our operations today. You know, we have to look over our shoulders in terms of workforce because this time last year our biggest challenge was finding a workforce to allow us to expand like we were.

So there will be, John, some lag. But we are doing this with a view for how could we ramp up as quickly as we can. And we’ll – you know, this is something that we’re going to be talking about every quarter for where the market is, how we’re responding to it, what our plans are going forward.

John Redstone - Desjardins Securities

So it’s not beyond the realm of possibility that you might be able to do over 4 billion pounds next year? Am I right in assuming that or is it just too late?

Richard C. Adkerson

Yes. Yes. And you know beyond that, we have sitting in the wings a very attractive expansion project at Cerro Verde. We have the [sulfalix] project at El Abra that we’ve suspended for right now. But we would start – you know, that project has had its environmental studies done and had its plans. You know, we’d kick it off and you know, if it’s a year delay it’s just a year behind where we were. The Climax mine and you know if aluminum prices recover and our costs with higher input costs was in the $3.50 a pound range, within 12 to 18 months we could be producing at that facility.

So we have these expansion projects that are still there, that can be reignited when the market justifies it.

Operator

Your next question comes from [Mark Leeanama] – Morgan Stanley.

Mark Leeanama – Morgan Stanley

Could you comment your $1.30 site production delivery cost in North America, $1.17 on a net basis? Can you give an idea of where you think that sits on the cost curve next year?

Richard C. Adkerson

I just don’t know, Mark. You know costs have changed so much, companies – when we read what we read around the industry and I see people are making changes, but a lot of those changes aren’t exactly transparent right now as to what the effects are going to be on costs and so forth. So I – you know, we’ve really done this with the focus of saying like I said, at $1.25 copper how can we run our business in the right way?

Mark Leeanama – Morgan Stanley

And maybe as a bit of an extension to that, the $1.60 long term copper price you used in coming up with your asset value, can you give any idea as to the process you used at arriving at that level?

Richard C. Adkerson

It wasn’t scientific. I mean, we actually go through a process every year that we do sort of in the mid-year timeframe of thinking about what are we going to use for our reserve determinations because reserve estimates in the mining business require a lot of work. You’ve got to come up with mine plants and so forth. And we had settled in on this $1.60 price mid-year 2008. It happens to match up pretty well with the forward prices so we felt comfortable in using it. But there’s nothing that has a lot of analytical basis other than that around it.

Mark Leeanama – Morgan Stanley

Any idea what depreciation costs would look like given your operating plans as they stand today?

Kathleen L. Quirk

Yes, we – with the impairments we’ll have lower depreciation going forward than what we had in 2008. And there’s a footnote on one of the slides that describes what the numbers are. But we’re estimating for 2009 $1 billion in depreciation, which is roughly $800 million less than 2008. It’s on Slide 10.

Operator

Your next question comes from Brian Macarthur – UBS.

Brian Macarthur – UBS

Just following up, I think in December when we talked about the outflow to cash on the first quarter there was sort of a number of $750 million which included provisional pricing and deferred taxes. And now we’re talking about a working capital change this year of $600 million. Is the $600 equivalent to the $750 or is it just $600 plus the deferred taxes that have to be – accrued taxes that have to be in the first quarter adds up to the $750? I guess what I’m after is the actual working capital outflow here in the near term.

Kathleen L. Quirk

Right. The estimate in December was $750 million for the year and that was net change in working capital and that’s comparable to the $600 million that we’re currently estimating in 2009. The previous estimate was based on $1.75 copper and this one’s on $1.50. We have pluses and minuses in various areas, Brian. We’re working very hard to release cash from the balance sheet through working capital by using existing materials and supplies when we can, but we do have these provisional payment items.

We do have some tax requirements for working capital, so net net we expect $600 million in 2009. Most of that will be in the first part of the year.

Brian Macarthur – UBS

Second question relates and I know I guess you can’t talk about it too much because of the prospectus, but there was a in your 8-K a talk about under the covenants moving $715 million I believe from the third quarter to fourth quarter for EBITDA calculation. Can I just confirm for when we’re doing a roll in four quarters, and I gather that’s for provisional pricing, you add that back to the fourth quarter number but you would still in the third quarter then still have the provisional pricing of $2.82 would still be affecting EBITDA for the third quarter. Is that how it works when I’m rolling averages?

Kathleen L. Quirk

Brian, if you look at your, if you’re doing a four by quarter, reduce the third quarter EBITDA by 715 and add it back to the fourth quarter.

Brian Macarthur – UBS

So if you roll out to the fourth quarter next year, that 715 is just going to keep it up rolling that period for the third quarter is covered still by the first part of that quarter that had high copper prices effectively.

Kathleen L. Quirk

Yes, so when you get into the third quarter of next year, the effect of the 12 months is that you have a normal looking 12 months rather than having the distorted fourth quarter with a large provisional pricing adjustment in it.

Brian Macarthur – UBS

Right. But then going forward if we had a horrible situation, copper at $0.60 we’re still going to have to weight provisional pricing then going forward. Is that right?

Kathleen L. Quirk

That’s right. Yes, 2009 calendar year is not affected by this amendment.

Brian Macarthur – UBS

I know we’ve been through this 100 times but just any ballpark tax rate for next year? I know it depends on where you make money, 45 is as good as anything else or?

Kathleen L. Quirk

Well, there’s some discussion in our supplemental pages in the back, Brian, where we talk about tax rates. And the tax rates as you know were calculated based on the statutory rates in our international operations and in the U.S. And you can’t use U.S. losses against our foreign income. So it’ll be highly sensitive to prices but at $1.50 copper we’re estimating an effective tax rate of 75% in 2009, and that’s because at $1.50 we would have tax losses in the U.S. that you can’t – you know we continue to pay our taxes in Indonesia based on our 35% rate.

But there’s a footnote scribed in the tax section in the supplemental pages.

Operator

Your next question comes from David Gagliano - Credit Suisse.

David Gagliano - Credit Suisse

Related to the change in permanent probable reserves in ’08 how much of the 12.8 billion pound net increase was due to the change in the copper price from about $1.20 to $1.60?

Richard C. Adkerson

Very, very small because it also reflected higher costs in there. This is really the results of our drilling activity, Dave.

Operator

Your next question comes from Justine Fisher - Goldman Sachs.

Justine Fisher - Goldman Sachs

My first question is just on the leverage covenant adjustment, did you guys disclose the fee if any that you guys have to pay for getting that adjustment to be made?

Kathleen L. Quirk

No, but it was a [One A C] that we paid a work fee to the bank group.

Justine Fisher - Goldman Sachs

I know that I guess based on even consensus estimates on Bloomberg for 2009, EBITDA which now we’re sort of over the 17 adjustments, so based on those consensus estimates you guys don’t come close to having to worry about the covenant. But is there a reason why you didn’t just try and waive the covenant for all of ’09 so that you wouldn’t even have to worry about bumping up against the five times?

Kathleen L. Quirk

Well, the amendment that we did was really a technical amendment to deal with the issue of distortion in the fourth quarter. And you can see we give sensitivities on EBITDA in our presentation on Slide 26.

Justine Fisher - Goldman Sachs

So basically you guys just didn’t think that it was necessary to go back and have that much more involved discussion based on your sensitivity calculation you wouldn’t really need to renegotiate that?

Richard C. Adkerson

Justine, you know to renegotiate something like that could have a major impact on the pricing of our credit facility.

Justine Fisher - Goldman Sachs

Yes. Yes. That’s why I’m asking. I mean it’s a big step and companies are doing it extensively now but only if you really think you’re going to have to worry about it.

Richard C. Adkerson

That’s right. You’d only do that if you had to do it. I mean this was – we had just an unusual distortion because of the way this provisional pricing worked. Our banks were very supportive. They understood it and we were able to handle it in kind of a normal course of business. But we did not see a need to enter into kind of the complicated discussions that other companies are having to do with credit facilities.

Justine Fisher - Goldman Sachs

And then another question on cash outflow, you guys pay the dividend to minority interests that shows up on the cash flow statement and it looks like it was pretty small during the fourth quarter and my guess is that’s because it’s based on copper prices, so given the decline it wasn’t a large payout. Is there any ballpark for what that number might be in 2009? I guess there’s a footnote in the presentation as to the number of pounds that that dividend to minority interests might be based on. But is there a ballpark at various copper prices that you guys can give for that cash outflow?

Kathleen L. Quirk

It’s based on the cash flow that we generate in the foreign subsidiaries, principally from Grasberg and from Cerro Verde. And so it is affected by prices and it will also be affected by the operating performance at those operations. In 2009 and again this is based on the $1.50 copper case, we would have minority interest distribution something on the order of $125 million.

Justine Fisher - Goldman Sachs

For the total year?

Kathleen L. Quirk

Yes.

Justine Fisher - Goldman Sachs

And then the last question is just about the Henderson mine and the operating costs. Richard I know you mentioned that you guys are able to reduce production there without really increasing the unit costs. And I’m not quite clear on what the situation there is in operations there that allows you to do that. Can you just clarify that a little bit, please?

Richard C. Adkerson

I’ll tell you, I’m going to let Dave Thornton who runs that business answer your question.

Justine Fisher - Goldman Sachs

Okay.

David Thornton

That’s an underground operation there versus in copper primarily the open pit. And what we’re doing there is we’ve got the blockades set up for a higher grade and we’re just slowing down the pull rate of the ore out of the columns, so we’ve reduced some staffing levels up there and we reduced 25%. So really our operating costs up there haven’t changed dramatically because the mining costs are pretty set.

Operator

Your next question comes from [Dave Katz] – J.P. Morgan.

Dave Katz – J.P. Morgan

On the cash flow item that was described as decrease in global reclamation or remediation trust for $430 million –

Kathleen L. Quirk

Dave, could you repeat your question?

Richard C. Adkerson

Yes, we couldn’t understand your question, Dave.

Dave Katz – J.P. Morgan

I was hoping that you could go into a little more detail on the cash flow item that was titled,

“Decrease in Global Reclamation or Remediation Trust”?

Kathleen L. Quirk

Yes, we had some trusts for reclamation that were established prior to the acquisitions which allowed us to fund reclamation costs, our ongoing reclamation costs out of that fund. This was cash we had that was available to do – to fund reclamation costs, and so we’ve taken the cash out of that fund to reimburse us for the reclamation spending that we’ve had over the last couple of years.

Dave Katz – J.P. Morgan

And are there any expectations of further outflows in 2009?

Kathleen L. Quirk

Yes. We have ongoing outflows for our environmental costs.

Dave Katz – J.P. Morgan

Then with regard to the EBITDA for the covenant calculation, would it be possible to get the covenant EBITDA for the last on a quarterly basis for the last four quarters?

Kathleen L. Quirk

Why don’t you call us and we can talk you through that?

Dave Katz – J.P. Morgan

Sounds great.

Richard C. Adkerson

Yes, that’s just available from our quarterly financial statements that we went through.

Operator

Your next question comes from Brett Levy - Jefferies & Company.

Brett Levy - Jefferies & Company

As you guys look at the working capital adjustments that you’re talking about from the first quarter, particularly and I’ll follow it up with kind of a little bit more specificity, can you break down the items? I mean, some of it is going to be from provisional pricing, some of it is going to be other working capital. If you could just sort of give a rough sense as to the size of that and what the key elements are, that would be great.

Kathleen L. Quirk

In terms as to where it’s coming from in the first part of the year, it’s essentially all related to this provisional pricing.

Brett Levy - Jefferies & Company

And what is the anticipated size?

Kathleen L. Quirk

The total is $600 million and we have some things that are going positive and negative, but the provisional pricing impact is roughly $600 million. And then we’ve got some things going, pluses and minuses, that offset.

Brett Levy - Jefferies & Company

And then as I look at, I think you had mentioned in terms of EBITDA impact and I was unclear as to whether or not that was third quarter of ’09 or 2008, a minus 17 and a plus 15. Is that ’08 and ’09? And then also as it relates to provisional pricing, can you guys talk about what you anticipate the EBITDA impact would be in Q1 and Q2 of ’09?

Kathleen L. Quirk

Okay. The $715 million is just a reclassification between the third quarter and fourth quarter of ’08. It has no impact on the quarterly periods or the calendar year of 2009.

Brett Levy - Jefferies & Company

That’s what I thought.

Kathleen L. Quirk

Then we reported our fourth quarter of December 31 open pounds and there’s some details in our press release on Page 14 and 15, but we recorded our sales of copper at $1.39 per pound and each $0.05 change would have an approximate $16 million affect on our net income.

Brett Levy - Jefferies & Company

And then how does that break down by quarter?

Kathleen L. Quirk

Most of that – you know, we market to market every period, so at the end of March we would have reflected any pounds that remain open in our first quarter.

Operator

Your next question comes from [Wayne Atwell – Pontiss Management].

Wayne Atwell – Pontiss Management

Can you give us an estimate of the capital costs to go underground at Grasberg? I think your target is 2015. What’s it going to cost you between now and then to complete that?

Richard C. Adkerson

All right, Mark Johnson is here. I’ll let him speak to that, but Wayne let me also say that when we file our 10-K as we have been doing every year, there’s going to be a lot of detailed information that will be included there.

Mark Johnson

Yes, Wayne, our costs for the as we said [bulk] cave development has been ongoing. Our costs going forward from here on is right at $3 billion. Obviously a lot of that was priced out. That’s a recent estimate so we’ll continue to watch how the input costs will influence our estimate on that on that development.

Richard C. Adkerson

That’s spread out. That’s not – all of that cost is not incurred between now and 2015. It’s spread out.

Mark Johnson

That’s right. It goes up to 2021 as we get up to full production.

Richard C. Adkerson

So we’re talking about going from ’09 to 2021 and the aggregate costs for that period is

$3 billion. The numbers – let’s give some numbers for what we’ll be spending.

Kathleen L. Quirk

Yes. In 2009 we have roughly $200 million for underground development at Grasberg and in 2010 roughly $300 million. Probably a similar amount in 2011. That will be roughly $250, $300 million kind of the numbers that we spend.

Mark Johnson

Yes, 2009 it’s right around $90 million and then it ramps up to close to $300.

Wayne Atwell – Pontiss Management

I know you’re not looking to spend more money on capital spending, but if I’m not mistaken you have a gold property near Grasberg, Wabu which the last I heard it had 4 to 6 million ounces of gold. Gold is one of the few commodities that people are excited about. Have you given any thought to developing that and maybe bringing on a partner where they put up much if not all the capital to bring that into production?

Richard C. Adkerson

Well, we continue to study the situation at Wabu. From time to time we have interest in it from others and we’ll continue to see if that opportunity develops. But we have nothing to report today on it, Wayne.

Wayne Atwell – Pontiss Management

Is this a good idea or is it just something that’s pretty far on the back burner?

Richard C. Adkerson

Well, right now we’ve been focused on our current imperative of dealing with how we adjust our capital programs and our operations to the new cost structure. But as I answered to John on his question, as we go forward we’re going to be looking at all alternatives.

Operator

Your next question comes from Steve Grisanti – Tricadia.

Steve Grisanti – Tricadia

Just continuing on the provisional pricing working capital swings, so I’m just trying to bridge out the $745 million that you reduced your fourth quarter sales by and then also the additional

$600 million you’re going to take, so in other words your income statement took a $745 million hit on the top line, but because that’s provisionally priced and I believe as of your September update you said that that wasn’t going to hit until the early year, that cash outflow hasn’t actually happened yet. Is that fair or is it really just the $745 to the $600 net?

Kathleen L. Quirk

Some of it has happened and some of it has not happened. That’s correct. So for earnings purposes, we mark them to market and we settle with the customers under the terms of the contract. Some of those provisional pricing adjustments have been settled for cash purposes and some of them haven’t. And that’s what the $600 million is related to, is the cash piece.

Steve Grisanti – Tricadia

But in order of magnitude it’s not the $745 plus $600, it’s just the $600?

Kathleen L. Quirk

No. Right.

Steve Grisanti – Tricadia

Can I ask what was your revolver bill [booty] as of your last checking with your bank group? So you know we know it’s $150 million at 12/31. Just kind of curious as to what that updated number is.

Kathleen L. Quirk

Right. The borrowings as of Friday were $300 million.

Operator

Your next question comes from [Sunil Gathader] – Sentinel Asset Management.

Sunil Gathader – Sentinel Asset Management

On the [inaudible] side, the reserves which were valued down the impairment? Has you valued down because of the commodity price [inaudible]? Can you revalue up or if you have to revalue up to what level would you do that?

Richard C. Adkerson

No. Under the accounting rules, once you write these costs down, it establishes a new cost basis going forward.

Sunil Gathader – Sentinel Asset Management

After the market has been completely dependent on the economic recovery, but when you look out today particularly if you look at the market, China is going to be the long term driver for copper recovery. Currently are you seeing any sign of China buying into the copper market or do you think that it’s completely plateaued right now and they are not doing anything?

Richard C. Adkerson

They’re clearly doing something. I mean, you know their growth rates are down but the fourth quarter GNP was in the range of 7%. And so 7% growth that involves copper use and they’re investing in infrastructure. They’ve had announced plans to continue to invest. They have the resources to do it. And I’m confident that they will continue to do it. The question is what is the impact of the global economy on their export business, their commercial real estate situation, but clearly China is going to be the key factor near term in terms of copper markets. And they’re doing activities within their country that’s going to consume copper.

Sunil Gathader – Sentinel Asset Management

On the CapEx that you talked about $1.6 billion 2009, how much of that is the maintenance CapEx?

Richard C. Adkerson

Back on Slide – you can see that, $600 million but it’s indicated on the slide on capital expenditures, Slide 28.

Operator

Your last question comes from [Raoul Aderol] – Marathon.

Raoul Aderol – Marathon

Two quick questions, one is you’ve guided toward the $3 billion of EBITDA number for the copper prices $1.50 and on operating cash before working capital adjustments like $1.6 billion. Could you help me bridge the gap between the two numbers as to what is the rest of the cash expense?

Richard C. Adkerson

Taxes and interest.

Raoul Aderol – Marathon

So there’s almost $1 billion of taxes in that number, I guess.

Kathleen L. Quirk

We have roughly $600 million of interest.

Richard C. Adkerson

That’s a little over $7 billion of debt at a cost of about 7.5%.

Raoul Aderol – Marathon

And it does have the dividends in that, right, for the preferred?

Kathleen L. Quirk

No, those come out of financing activities. So after operating cash flows, we have investing activities which includes capital expenditures and then the preferred dividends are in financing activities.

Richard C. Adkerson

Due to the fact the GAAP basis cash flow statement.

Raoul Aderol – Marathon

In terms of the cash number for the quarter, how much of that cash is sitting in U.S. and how much of that cash is either outside of U.S. or is in some ways a minority share?

Kathleen L. Quirk

That’s also in our press release. It’s on Page 15. We had $872 million of consolidated cash at year-end, $112 million at domestic in the U.S. and international total was $750 million. So net of minority interest share and taxes, withholding taxes, if it was distributed, it’s roughly

$450 million.

Richard C. Adkerson

Thank you for your questions and we appreciate everybody’s interest. If you have follow-up, you know to contact us and we’ll be responsive. We will be reporting to you on a current basis on our progress in executing these plans that we laid out today.

Operator

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

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Source: Freeport-McMoRan Copper & Gold Inc. Q4 2008 Earnings Call Transcript
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