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

Q2 2009 Earnings Call

July 21, 2009 10:00 am ET

Executives

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

Richard C. Adkerson – President & Chief Executive Officer

James R. Moffett – Chairman

Analysts

Michael Gambardella – JPMorgan

Anthony B. Rizzuto – Dahlman Rose & Co.

Kuni Chen – Bank of America Securities

Jorge Beristain – Deutsche Bank Securities

John Tumazos – Very Independent Research, LLC

Charles Bradford – Affiliated Research Group, LLC

Terence S. Ortslan – TSO & Associates

Mark Liinamaa – Morgan Stanley

Wayne Atwell – Casimir Capital L.P.

Lawrence Smith – Scotia Capital

Jeff Cramer – UBS

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoran Copper & Gold second 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 and good morning everyone. Welcome to the Freeport-McMoRan Copper & Gold second quarter 2009 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 will 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, we’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 the risk factors described in our SEC filings.

On the call today are, Jim-Bob Moffett, Chairman of the Board; Richard Adkerson, our President and Chief Executive Officer. We’ve also got Dave Thornton and Red Conger with us today.

I will start by briefly summarizing our financial results and then turn the call over to Richard, who will be referring to the slide presentation material that’s on our website. We’ll then open the call for questions.

Today FCX reported second quarter 2009 net income attributable to common stock of $588 million, or $1.38 per share, compared with $947 million, or $2.25 per share for the second quarter of 2008.

For the six months period ended June 30, 2009, FCX reported net income attributable to common stock of $631 million, or $1.54 per share, compared with $2.1 billion, or $4.89 per share in the six-month 2008 period.

Our sales in the second quarter for copper were 1.1 billion pounds that was higher than last year’s second quarter sales of 942 million pounds, and our April 2009 estimate of 955 million pounds. The increase from the prior-year reflects the mining of a high-grade section in the Grasberg open pit partially offset by our reduced operating rates in North America. The favorable variance to our prior estimates reflects the accelerated mining of a high-grade section in the Grasberg open pit during the second quarter, which was previously planned for future periods.

For gold, we sold 837 (sic) [837,000] ounces during the quarter that was significantly higher than the 265,000 ounces sold in 2008 second quarter, again we were mining in a very high-grade section of the Grasberg pit, which enabled us to exceed our April 2009 estimates to 650,000 ounces.

The molybdenum sales of 16 million pounds in the second quarter were lower than last year’s level of 20 million pounds, but higher than our 2009 estimate of 11 million pounds. Our sales during the second quarter reflect increased sales to Europe and Asia compared with the first quarter levels and with our previous estimates.

Our recorded copper prices averaged $2.22 per pound in the second quarter that was a significant reduction from last year’s second quarter. Gold prices of $932 per ounce were slightly above $912 per ounce in the year ago period. We realized $10.11 per pound of molybdenum during the second quarter of 2009, significantly lower than last year’s level of just under $32 per pound.

The results reflect our strong performance really across all of our operations and particularly in the Grasberg mine where we operated at where all of our gold revenues offset all of the costs of production there.

Our unit costs on a consolidated basis averaged $0.43 per pound during the second quarter that was significantly lower than last year’s $1.25 per pound net of by-product credits.

The operating cash flows in the second quarter were significant at $1.2 billion. On a year-to-date basis that brings our operating cash flows to $896 million in the first six months of 2009 that was net of nearly $1 billion in working capital uses that we had earlier this year, primarily associated with the settlements on our provisionally priced prior year copper sales.

Capital expenditures during the quarter totaled $375 million, and year-to-date $894 million. Our spending is expected to decline in the second half, reflecting a substantial completion of our construction activities at the Tenke Fungurume project, which Richard is going to talk more about.

We ended the quarter in a strong financial position. Our total debt approximated $7.2 billion and our cash balance grew to $1.3 billion during the quarter. We had no amounts borrowed under our revolving credit facility at June 30.

We also announced separately today that we’re calling for redemption, our 6⅞% senior notes due 2014 those have a principal amount of $340 million and what that will allow us to do is to reduce our interest expense by roughly $23 million and reduce our debt levels and improve our financial flexibility.

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

Richard C. Adkerson

Thanks, Kathleen. Before I turn to the quarter, I’m going to take just a few minutes to review the recent events in Indonesia that you’ve been reading about in the paper.

Last Friday, on July 17, bombs were detonated at two hotels in Jakarta’s downtown business district. These hotels are used by international traveler and we had several people staying there. Fortunately they weren’t injured, however, two of our senior people who reside in Jakarta were at a business breakfast meeting and they were injured. They are now being treated are in stable condition. This is in the backdrop of a situation in Indonesia, where there has been a very peaceful environment for a number of years now. The President Yudhoyono has been credited for his actions against terrorists and he has indicated a very strong response to this recent event.

On July 8, there was a Presidential Election, the final results are going to announced later this week, but SBY is based on poles that are deemed to be accurate has won by a wide majority and he ran on a platform of anti-terrorism, anti-corruption, pro-business investment and has great support in Indonesia. At job site on the day of the election, we had a group of people attempt to block our road leading to our mine and they committed some vandalism, they weren’t successful with that. However, beginning on July 11, further down the road into lowlands. We had several days with an isolated incidence of shootings. Unfortunately one of our employees, a contract security personnel and an Indonesian policeman were killed in these attacks, several people were injured.

Yesterday, the Indonesian police, and we were very pleased with the response from the authorities, they brought an additional securities, undertook investigation, and then now in a very short period of time they announced that they have arrested 15 people and charged six of them with murder, and have indicated that one of those has admitted to being the sniper in these events and we appreciate really the quick and firm response of the Indonesian Authorities to this event.

We have been assured from the highest levels of Government in Indonesia that they are committed to provide safety for our people and for our operations. Throughout this period of time, our mine and mill and operations continued unaffected by this. We had some travel restrictions on the road, but we have been able to continue operations.

Now turning to the quarter. When you look at the totality of our operations, it would be difficult to imagine a better performance. I’m very, very proud of the way, the operating team responded to the plans that we established earlier this year, and across the company and North America, South America, Indonesia and in Africa we have performed very well.

Of course, we benefited by the fact that copper prices at today’s levels and in the second quarter are higher than most anticipated and that’s positive for our cash flows and our earnings. And we also benefit from the fact that based on our planned mining sequence. We were in a very high-grade section of the Grasberg mine, which will be in for some time now, which gave a strong volumes of both copper and gold in that benefited operations, but underlying all of that is the fact that we had good plans and we operated to meet those plans.

On page 4, Kathleen talked about our numbers, but when you look at the outlook that we gave at our last quarterly call, our copper volumes were 15% higher, gold volumes were 29% higher. That’s driven principally by the fact that we were able to optimize our access to the high-grade ore at Grasberg, some of its moving some volumes forward, but we always try to do that, as we operate while we meet our long-term objectives with our mine of maintaining stability in our long-term mine plan.

We have higher molybdenum sales some of this came from inventory but with demand out of China; we were able to sell more moly than we anticipate going into the quarter. Strong operating performance, we had initial copper sales out of Tenke. I’ll talk about that. We had not included any sales in the second quarter will be ramping up that operation to design capacity in the second half of the year.

Our revised sales outlook, we’re staying with our previous guidance for copper sales for the year, but we’re showing some increases in both copper and molybdenum for the year, and we’ll be trying to maximize opportunities to increase sales as we go forward.

Page 5 shows by region what our unit cash cost performance has been. Now for a company of combined taken into account gold and moly credits, our net unit cost was $0.43 pound for the second quarter and that’s a strong performance. It reflects the high volumes of copper; the high volumes of gold; the strong gold price in Indonesia where we had a credit of more than $0.50 a pound. But also in North America where we’ve seen the moly price dropped have a negative impact on unit cost, we’ve been able to offset that by taking advantage of lower input cost, but also adjusting our operations to be more efficient. And have an experience of a $1.12 per pound is very strong with also good performance in South America. That’s for the quarter.

On page 6 you can see the details of that, it reflects a 35% increase on a consolidated basis of our site production and delivery costs before by-product credits from the second quarter of last year to the second quarter of this year.

And on page seven, where we have the particular issue associated with these large low-grade deposits that we operate here. We had a particular focus on reducing high cost volumes, aggressively pursuing lower input costs, and aggressively seeing efficiencies and that really has resulted in a reduction of a third on the unit cash costs before by-product credits, which helps offset the loss of the molybdenum credits because of the price actions.

From a market standpoint, the recent upward movement in copper prices reflects some important fundamentals about this business that are going to be important for the long run. And that is the requirements for copper in China and the developing world. I mean that’s an important feature of our industry that’s become apparent in the 2000s and it’s going to be something that’s long-term. To build infrastructure, to expand economies requires copper. We are certainly seeing that in China, as China has been doing that. And it’s in the context of a very tight market. Exchange stocks have dropped dramatically, but inventories around the world today outside of accumulations of China apparently for their strategic reserves of copper, but inventories of consumers around the world are very, very tight and even in the United States where market conditions remain weak.

We have orders from customers when they do have requirements for copper that they aren’t able to fill from their inventories and so in the context of a weak environment in the U.S. and the western world, inventories are very low. The industry has and continues to face issues with new projects, maintaining supplies out of existing mines. So the supply situation for copper is very well situated for miners and all of this indicates very bright future in our view for copper and we are committed to being a very strong supplier of copper with great growth projects as we go forward.

In the moly markets, the price drops. We now had a period of destocking, demand from China has emerged for western molybdenum. There are Chinese mines that are relatively high cost. So they are buying molybdenum from the western world. The market remained tight. The prices picked up and we are adjusted our operations and prepared to be able to provide the moly that the market needs. Gold prices are strong, that’s a big benefit as I indicated for Grasberg for our overall company.

Page 9 shows our current outlook for sales and volumes. We are looking at roughly 4 billion pounds of copper. As we go forward in future years, of course we have planned, we had plans and we were operating to have substantially higher volumes, but we adjusted those plans as we went into 2009, in response to the lower prices, but this is our current outlook.

You can see in the gold sales chart, the impact of moving from the low-grade section of Grasberg to the higher-grade section as I said, we’ll remain there for sometime. And our molybdenum sales are reflection of the requirements of the marketplace.

On a quarterly basis, in terms of our plans, this looks to be our largest volume. Quarter for copper sales, we advanced some copper sales out of the second half of the year into this quarter for Grasberg, we will continue to try to find opportunities to do that as we go forward into the second half of the year. And you can see the impact on gold sales in the chart on the right hand side.

By region, as we look forward for sales and unit production costs for the year 2009. We are continuing to look at strong performance from a cost standpoint. Our consolidated unit cost net of by-product credits is anticipated to be $0.70 a pound, that’s at $900 gold and $8 molybdenum, which provide the credits. And so in North America, you can see that we’re looking at sub $1.20 a pound for our unit cost, roughly a $1.10 in South America and Indonesia for the year. We’re looking to see our gold revenues totally fund our operating costs for that operation.

Page 12, even though we’re spending less dollars on exploration, we’re not at all reducing our emphasis on exploration. The dollar reduction reflects the fact that we have curtailed some of our core hole drilling. We have done substantial amounts of drilling both in 2007 and 2008. And our exploration team is using the new data that was received from that drilling to evaluate opportunities to add to our reserves, and then to add to future development projects, which we see is being substantial as we go forward. So it’s a question of using the data that we have gained previously and limiting the amount of current expenditures on core hole drilling.

Page 13 shows just the strong cash flow generating capacity of our company. The chart at the top is EBITDA, at the bottom is operating cash flow, excluding working capital changes, but it takes into account cash taxes and cash interest. At $2.25 copper before working capital, we would be generating on an annual basis over $3.5 billion of operating cash flows. We did have some working capital requirements as previously reported in the first half of this year. And you see how that would vary depending on changes in the copper price.

On the next chart, we give a series of important input elements to the termination of cash flows both in terms of copper prices, molybdenum prices, gold prices, as well as certain important input costs. So that you’re getting some sense to how leveraged we are to these various factors. And of course, the biggest leverage factor for our company is a price of copper that where every $0.10 change means $260 million of cash flow variance for our company.

We have limited capital expenditures. Page 15 shows how we reduce CapEx from 2008 to now our current estimate for 2009 of $1.4 billion that includes our ability to reduce some of our sustaining capital. And in 2009 we had two projects, we’re pursuing that the completion of construction of the Tenke Fungurume project in Africa and construction is essentially complete on that project now. And in 2009, 2010 we’re continuing with CapEx for the underground development at Grasberg for the transition in the future and roughly 2015 from open pit operations to mining fully underground there with our very large undeveloped underground reserves.

In 2010, we have included the commencement of a project at El Abra in South America to develop sulfide ore body there. And we’re going to make a final decision on that this fall, but with copper prices being where they are, we’re very likely to go forward with that project. We had retained the ability to defer it, if we needed to do that.

In Africa, I want to report on the status of the Tenke Fungurume project. As I mentioned during the second quarter, we did commence copper production and we sold 36 million pounds, we produced 36 million pounds of copper and sold 26 million pounds. Copper circuit is complete. From a construction standpoint, we’re working through start-up issues now. We’ve completed and are commissioning the cobalt circuit and sulfuric acid plant is starting up as we speak now in the third quarter.

By sometimes in the second half of the year, we will be up to design capacity, and the aggregate annual production overtime for this 250 million pounds of copper and 18 million pounds of cobalt. We’re continuing to conduct exploration analysis and our expectations are that we’ll be adding major amounts of reserves to this project over the years and that there will be opportunities for a series of expansion opportunities to build this up to be a world class mining operation.

You can see just how rapid we made progress there with the pictures on the next series of charts. January 2006 that was after we had announced the Phelps Dodge acquisition in December, PDs Board had approved the project, which you can see there was nothing there except African landscape.

During the next year, there was some work done with limited amount of work principally earthworks that was completed during 2007. Early in 2008, we began construction in earnest and in a 15-month period constructed a world class mining operation that involves agitated leach processing, cobalt plant, acid plant, world class environmental management with lime tailings down et cetera now we have this construction completed.

You can see pictures of the processing facilities on page 20, we’re very pleased with the way this construction has gone. This is a largest investment in the DRC as I said, we are building into world-class standards just as we would build a project anywhere in the world. We’ve built the infrastructure there to support future expansion opportunities, we spent more money than we would have otherwise in doing that and also investing in social and community programs that have provide benefits to the local people and to the country and this is a region of the world that needs employment and needs the kind of support that we are providing.

The schematic of the Grasberg mine is mining operations and is shown on page 22, there’s further information that’s in our slides that we will have available to us for questions, but for those of you that follow us this is a traditional set of slides we’ve presented for Grasberg. Right now we are mining from the Grasberg open pit, as well as from the underground DOZ mine. The DOZ mine it’s been operating at better than 70 million tons a day, which makes it one of world’s if not the world’s largest block cave 1000 tons per day that makes it one of the world’s largest underground mining operations. The pit is scheduled to be operated until roughly 2015. And then we have substantial reserves from this same ore body that extends underground with the Grasberg block cave. We’ve constructed access to those reserves and when we are beginning mine development and overtime we have the Grasberg block cave, the Kucing Liar mine and further expansions of the DOZ mine that will allow this operation to be a very large low cap cost producer, large volume, low cost producer for decades to come.

Page 23 shows our debt structure and our maturities. Today, we are using some of the cash that we’ve made with the operations in copper prices to call $350 million of our 6⅞% bonds that were callable under their terms. Pro forma, that transaction you can see just how little debt requirements we have for a number of years, essentially the debt we have left is the $6 billion of high-yield bonds that we incurred in the Phelps Dodge transaction and we’ll be looking for opportunities if they’re available in the marketplace to further reduce our debt potentially.

At this time, we’re going to continue to maintain a strong balance sheet and liquidity position and we have one right now. We’re going to continue to aggressively manage cost. Some of the efficiencies in cost savings that we have are driven by lower input costs and they may change over time, but some of these efficiencies that we have are going to be sustainable. And so we’re going to have a better cost structure from the future because of the actions that we’ve been required to take now in response to lower prices.

We are limiting capital expenditures for the present time. We’re going to be prepared if market conditions warrant to go back to these projects and we’ve retained all the rights. We still have the ability to undertake all the projects we had that we were looking at a year ago. They’re still there, we’ve developed plans to re-institute those to upgrade or curtail its own production when market conditions warrant. So, near-term we’re going to continue to protect our liquidity as we preserve these large metal resources and growth opportunities. We review every Board meeting, Board’s financial policy, our company has a tradition of paying shareholder returns in the form of dividends and stock buybacks, and again at the appropriate time, I feel confident our Board will be back in executing that policy.

With that, we’ll be pleased to respond any questions that any of you might have.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Michael Gambardella of JPMorgan.

Michael Gambardella – JPMorgan

Yes. Good morning. And congratulations on a good quarter, and especially good results on the cost side even at the site. Two questions, one, on the buyback of the bonds, which I also liked very much. Could we anticipate restoration of the dividend in the short-term?

Richard C. Adkerson

All right. That is something that we will be reviewing with the Board, and here is sort of the context we’ll be looking at that. We have some very attractive investment opportunities for capital in our projects. And we’ll be balancing the amount of cash that we have being generated. Potential opportunities that we might have with the further debt reductions, although the structure that debt will provide some limitations to that. And then we have additional incremental cash that would be available to look for potential restoration to the dividend. So it’s a combination all three of those factors, a lot of it depends on how the world unfolds right now, its China is setting records with their imports, it’s been supportive prices. And we certainly hope that the western world’s economies recover, if they do, we’re going to be in the position of generating a lot of cash and we will be able to probably execute on all three of those objectives.

Michael Gambardella – JPMorgan

And the second question is regards to Tenke. What are the chances of getting a rail connection for Tenke?

Richard C. Adkerson

Well. I think ultimately that will happen. The rail connection, while there will be some restoration of some rail connections elsewhere, the primary one we are looking to would be a railroad connecting to the Angolan railroad to give us access to the port in Angola. And for sometime now the Chinese have been working in Angola to restore that railroad, and there is some plans to upgrade the railroad within the Congo. That will be necessary for us to achieve the kinds of expansion opportunities that we have with this ore body, because we are looking at growing it to be a very high volumes and the rail connection will be a necessary element for that to occur.

Michael Gambardella – JPMorgan

That’s really the optionality on Tenke, the rail connection?

Richard C. Adkerson

The optionality comes from the ore body of course and…

Michael Gambardella – JPMorgan

Right.

Richard C. Adkerson

And that…

Michael Gambardella – JPMorgan

I mean getting it out.

Richard C. Adkerson

But yeah, when you start talking about this being a 400,000, 500,000 ton copper production, you are looking at sulfide production and you’ll need the rail to do that. We are being successful with our trucking operations and getting product to market, of course we’ve used those trucks in those roads to bring in the, bringing the components to building construction project, but to get to be kind of mine we think this mine has opportunity to be that rail is going to be a key factor for it.

Michael Gambardella – JPMorgan

Thanks a lot, Richard.

Richard C. Adkerson

Okay, Mike. Thanks.

Operator

Your next question comes from the line of Tony Rizzuto of Dahlman Rose.

Anthony B. Rizzuto – Dahlman Rose & Co.

Thanks very much. Congrats, Richard and team on the excellent progress and results in the debt reduction and everything too. I’ve got a couple of questions here. The first one is, I wonder if you could share with us your current thoughts on restarts of copper output and with copper prices up near 250 per pound and the Chinese imports being very strong this year. Do we still need to see the rest of the world contribute to the global demand at this time, Richard?

Richard C. Adkerson

Well. Tony, in terms of returning to the expansion projects that we were pursuing, the answer is yes. We’re going to need to see recovery in the U.S. and the western world to warrant going back and going for the expansion opportunities. But Red Conger had his team here last week, we went through each of the mines and we are looking at opportunities that we may have to increase some volumes without spending expansion type capital. But as we’re learning and evaluating the experience we’ve had now for six months and operating under our new plans. We’re going to see some opportunities to have some incremental volumes. And we’ll be reporting on results of those as we develop and complete those plans. I think absent any real negative change, we’re highly likely to go forward with the Sulfolix project at El Abra. And we will the opportunities to look for the chances of adding some volumes from our other operations.

Anthony B. Rizzuto – Dahlman Rose & Co.

So we should think about it that you’re going to be able to certainly flex your production as you can doing in moly very well and continue to look at it from that point of view with copper as well.

Richard C. Adkerson

Exactly. We were focused on the long run about where we need to be with these operations. One of the things we found as is, we had expanded so quickly that now as we scaled backed production. We’ve gotten much more efficient with our workforce, our safety statistics are improved. And we’re learning some efficiencies that we can gain by having on average of more scaled workforce now. And so now we are just, we are going to take advantage of that and see how can we efficiently do things to optimize, call it more of an optimization of the ore bodies and so forth. And then with moly, with the Henderson mine, it’s a very efficient mine, and it would be a mine that Dave Thorn and his guys could scale backup. We have some moly inventory right now, but it’s a mine that’s more easily scalable upward than something if where we have to go out in a significant way and go out and add to our workforce like we would have to do if were to significantly scale up Morenci for example, but we got a good quarterly volumes and we are going to focus on the second half of the year, opportunities at Grasberg to advance volumes. We do that continually, we are going to look for optimization of our mines in North and South America, we are going to look to see Tenke ramp up to its design capacity and all the time we are going to be focused on our cost.

Anthony B. Rizzuto – Dahlman Rose & Co.

Excellent. Richard my second question, I just thumbing through here in the, on slide 28. And it looks like the PT-FI mine plan in 2013, it looks like it is a steeper, little bit steeper drop than in previous estimate. How comfortable are you with all the opportunities you have and the flexing of your various mining operations throughout the world and certainly the excellent potential Tenke that this decline at the Grasberg can more than be offset by these other opportunities?

Richard C. Adkerson

Well. The 2013 number that you are seeing actually reflects the positive news of our mine plan of moving some of those volumes forward. And last quarter, we were showing a drop off in 2011. And as part of our ongoing mine plans, we keep looking to try to adjust those in ways to accelerate metal and at the same time achieve that the safety factor in terms of geotechnical factors in the long-term mine plant. So you are seeing the results of a lot of work that we’ve been focused on and trying to deal with what was a significant drop off in 2011. Now we are working on 2012 and other numbers and the year is 2014, 2015 will be the last years of this operation will be very strong years because we will be mining much less waste, we’ll be down in the core of the ore body, so all of this as just part of our ongoing process of trying to accelerate volumes and improve the net present value of cash flows from this great ore body.

Anthony B. Rizzuto – Dahlman Rose & Co.

Excellent. That is correct. I mean I'm looking at 2011 and 2012 and you have raised those estimates there as well.

Richard C. Adkerson

Right.

Anthony B. Rizzuto – Dahlman Rose & Co.

All right, excellent. Thank you very much Richard.

Richard C. Adkerson

Okay.

Operator

Your next question comes from the line of Kuni Chen of Bank of America Securities.

Kuni Chen – Bank of America Securities

Hi, good day everybody.

Richard C. Adkerson

Hi, Kuni.

Kuni Chen – Bank of America Securities

Just hoping you could, we could dig into Tenke for a little bit. I think last quarter you guys said that the contract review process would be coming to a resolution nearer term. Just want to get an update there and see what’s new with that process?

Richard C. Adkerson

Kuni, the truth is I didn’t predict, that it would come, when it would come to completion, there were signs at the time of the last quarter that the government was moving towards that and nothing negative has happened since then, but during the summer months, there has been some changes within the government in Indonesia, and indication that there will be a further realignment of the Cabinet responsibilities and so forth. And as a practical matter, there has been a period of time that not much has happened from an overall government policy standpoint during these summer months. And we have really heard nothing for some time now about any activity related to the contract review. And I just want to remind everybody on the call that we have a contract. Our contract is a binding contract that has been renegotiated that is accepted by the government of the Congo as being a contract in force. And we are actually running our business and selling product under the terms of that contract, but there has been no, absolutely no recent commentary developments with respect to the contract review.

Kuni Chen – Bank of America Securities

Okay, great. And just as a follow-up. I don’t know if you had commented earlier in the call, perhaps I missed it, but as far as the copper sales outlook here is the second half sequentially it’s lower. Is that due to mine sequencing or is there another factor that’s driving the…

Richard C. Adkerson

It’s all.

Kuni Chen – Bank of America Securities

Excuse me.

Richard C. Adkerson

Grasberg and it reflects the fact that we were successful in taking some second half volumes and producing them in the second quarter. So this is our current outlook, we’re going to work to optimize that as we go forward, and overtime our team has been very successful in adding volumes, particularly when we’re in this high-grade section that we’re mining now.

Kuni Chen – Bank of America Securities

So you’re still in the same high grade in the second half or you move to what's sequence in the different part of the Grasberg mine?

Richard C. Adkerson

No. It’s been a real simplification to talk about being in high grade. We are in the bottom of the pit with substantial mining equipment. The pit is almost three kilometers across and over a kilometer deep. So we’re moving 700,000 tons a day of material. So it’s a very large operation and but we will continue in the second half quarter into 2010 and some in 2011 of mining in the lower reaches of this mine where the grades are very high.

Kuni Chen – Bank of America Securities

Great. Thanks a lot.

Operator

Your next question comes from the line of Jorge Beristain of Deutsche Bank.

Jorge Beristain – Deutsche Bank Securities

Good morning, Richard and everybody again. Congratulations on a strong quarter. My comment or my question was really more to do with the guidance page that you have on page 11 of our slide packet. The implied site production cost for the, if I'm reading this correctly for the full year, still stand at a $1.15 for site production and delivery unit costs on a consolidated basis?

Richard C. Adkerson

That’s correct, Jorge.

Jorge Beristain – Deutsche Bank Securities

Which would imply the second half to be roughly a $1.25 a pound for site production, if we just take the average of what you’ve already done in the first half versus your full year estimates, I just wanted to understand, is that, is there upside to that number in other words do you think that unit costs come in lower than that guidance or will this be a function of the fact that you are expecting lower copper sales going forward and therefore the, just the, there will be less dilution over less volumes?

Richard C. Adkerson

It’s more that second point that you just said. If you look back to page 10, we’re showing at Grasberg, a drop of roughly 200 million pounds sales for each quarter. So you have your denominator is going to be lower. There is also, energy cost assumptions that we made here that that has an impact, the price of energy has ticked up some in recent weeks. So we factored that in there. End of the day it will be, what it will end up being and we have a very attractive cost structure given the nature of our mines and where we were as late as third quarter of last year. So but in terms of calculating that number that factor that you mentioned of having the lower volumes out of Grasberg is the most important one of the factors.

Kathleen L. Quirk

For the year, the $0.70 average cash cost is similar to exactly what we reported at the end of the first quarter call, but it does reflect higher by-product credits from having more gold. We added 100,000 ounces of gold from Grasberg in 2009 and it also includes the factors Richard was talking about. We’ve seen some increases in our energy costs. We’ve also seen the impacts of the weakened U.S. dollar from earlier in the year and then we’ve also got slightly higher TC/RCs, which is the function of the price increase that was experienced. So the second half is expected to be higher than the first half, just as a function of volumes, but on average for the year, it’s very similar to what we reported in the first quarter.

Richard C. Adkerson

And Jorge, if you just go back to page five and compare 5 to 11, you can see that. In the second quarter, Grasberg the site production delivery cost was $0.93 and now we’re showing $1.11 for the year.

Jorge Beristain – Deutsche Bank Securities

Okay, great. And my second question was just related to Tenke from an accounting point of view, I gather right now you are still in the inventory accumulation phase with the production, but I would expect in the third quarter. We’ll start to see some actual sales volumes. If you could give us some kind of guidance as to what kind of sales volume do you expect to reflect and also what kind of implied unit costs you’re now seeing out there?

Richard C. Adkerson

We actually as I mentioned we had $26 million of sales.

Kathleen L. Quirk

Pounds.

Richard C. Adkerson

Pounds. 26 million pounds of sales in the second quarter. We do have still some start up costs that we are treating as sort of the inventory like cost, but by the second half of the year, all of our production costs will be flowing in. We will be up to design capacity. At design capacity and with $10 cobalt, we are looking at unit costs being less than $0.50 a pound.

Kathleen L. Quirk

For the year, we’re estimating sales of 100 million pounds from that operation.

Jorge Beristain – Deutsche Bank Securities

Great. And by the third quarter, you think you’ll start to reflect Tenke in your overall guidance for unit costs on a consolidated basis?

Richard C. Adkerson

Let me just say, we’ll do that. When we get to this design capacity that could be third quarter will be in the second half.

Jorge Beristain – Deutsche Bank Securities

Okay. Great. Thank you.

Operator

Your next question comes from the line of John Tumazos of John Tumazos Very Independent Research.

John Tumazos - Very Independent Research, LLC

Rich, congratulations on the good results. And sort of following up maybe on Mike’s initial question, how good the things have to be for share repurchases, higher exploration spending, maybe relaxing the cutoff grades at some of the lower-grade mines finishing Climax, finishing Tenke? In your initial remarks, you’d talked about the strength of Asia and the developing world. And how much further do you want to see the copper price advance to begin investing to prepare for that more aggressively?

Richard C. Adkerson

John, I think that it’s simply a question of when we see economic recovery. I’m going to say in the U.S. and the western world. It’s just that simple. It’s not so much a function of the copper price. At the price we have today, it would warrant a number of the actions you just mentioned, but that price is really driven by China and there is obviously risk in the Chinese situation depending on their buying patterns, et cetera. So it’s going to be a question of recovery on the economies in the U.S. and that’s talked about everyday in the newspapers and on cable TV. So that will be what will drive us.

John Tumazos - Very Independent Research, LLC

When you see the western world recovering, what do you guess your target dividend payout might be vis-à-vis the various good investment opportunities on several continents?

Richard C. Adkerson

I think the initial focus is going to be on investment, because we have such great opportunities to invest. They are not greenfield projects that has this enormous amount of capital in today’s world, but they are brownfield expansions and those will really be projects around the world. So we’ll do that and then as we’ve always done, you can just look at the history of Freeport organization, after we’ve determined what’s the appropriate allocation for capital. What the right financial structure of the balance sheet is, some of that capital might be financed by debt. Then we are going to be very aggressive in returning cash to shareholders. The Board will make that decision, but I’m confident that’s the policy, that’s what the Board will decide.

John Tumazos – Very Independent Research, LLC

Thank you.

Richard C. Adkerson

Thanks John.

Operator

Your next question comes from the line of Charles Bradford of Affiliated Research.

Charles Bradford – Affiliated Research Group, LLC

Hi, good morning.

Richard C. Adkerson

Hi…

Charles Bradford – Affiliated Research Group, LLC

Being primarily in equity guy, I have a question on the debt side. I mean clearly buying back the senior notes makes a lot of sense, but why not go after some of the higher rate notes for the following couple of years? Are there some covenants that inhibit, you buying back those securities was the premium too big or?

Richard C. Adkerson

Well. It’s just the structure of the notes. The notes we call back, number one, they were callable under their terms, the other notes aren’t callable yet. But the second point was these were some of our older notes that had more restrictive covenants than in our covenants, even in these weren’t very restrictive. So, but in terms of the relative covenant package in these notes versus others, these are good ones to get out of the way.

Charles Bradford – Affiliated Research Group, LLC

Good answer. Thank you very much.

Richard C. Adkerson

Okay, John. Thanks.

Operator

Your next question comes from the line of Terence Ortslan at TSO Associates.

Terence S. Ortslan – TSO & Associates

Good morning, Richard.

Richard C. Adkerson

Hi Terence.

Terence S. Ortslan – TSO & Associates

2010 you paid about $0.5 billion for El Abra and also for Grasberg underground. It assumes, again that third quarter this year or second half of this year you’re going to make a decision on El Abra, am I right?

Richard C. Adkerson

That’s correct.

Terence S. Ortslan – TSO & Associates

Okay. And from a [point] of your parameters for El Abra. The time that will take to develop the sulfides, and the scale we’re talking about is roughly what Richard?

Richard C. Adkerson

Yeah. The timing for the development of sulfide project is roughly two years. And if we make a decision later this fall, we have all the environmental permits in place we’ve dealt with our partners, we probably could start spending money as early as later this year. And it’s a very attractive project. The ore body has been defined and metallurgical work is done, it would add 300 million pounds plus copper for 10 years or 12 years to the project.

Kathleen L. Quirk

It replaces the oxide.

Richard C. Adkerson

The oxide that we’ve been mining. That’s been the traditional source of ore for this operation. We continue to drill at El Abra and continue in fact one of the things that’s happened over this past year with the drilling that I mentioned earlier is that our view of El Abra is changing. The ore body is larger than we had anticipated. There is more volumes and so that leads us in to longer-term studies about how we might expand that operation further with potentially a milling option. And so that is something that’s currently under study and its just one of the many opportunities we have with this company to think about even a bigger operation than the Sulfolix project conditions. And of course milling gives you much higher recovery rates than a sulfide leach project.

Terence S. Ortslan – TSO & Associates

And given the standard…

James R. Moffett

This is Jim-Bob. I might just jump in and just say that the description that you’d just given of El Abra pretty much goes across the board on our properties. As you’ve reported already, we’re spending lots of geologic time and mine planning time looking at the results of the big program that we instituted several years ago right after the merge of the two companies. And as I say in the El Abra description that we’ve just talked about can be really taken across the board on all of our properties. And the reason why that opportunity is there is because in lower time, copper price environments as you know, the big reason why people went to the oxide ores was because they could be leached and which for all of you, as all of you know me, you don’t have to have a mine that has to have a mill. You don’t have to pay smelter costs, et cetera, et cetera you just take the oxide ore and everybody knows on the call and for those who don’t, only difference between oxide ore and sulfide ore is the portion of the ore body that’s been eroded. And then basically, oxidized by erosion. So if you can just imagine these ore bodies and imagine an ore body that’s buried underground. The portion of the ore body that’s exposed to the atmosphere and from the groundwater leaching et cetera, et cetera to basically create this oxide piece, if you will, it’s kind of a, to use an illustration it’s kind of like a big peach that’s - they are starting to get overripe and you get these ripened areas on the outside of the peach and inside of the peach is still unaffected by the fact that it’s being reached by oxygen.

So we got big peaches sitting around to make a simple comparison for you. And if you look at the overripe part of the peach that's what we've taken and put into these leach pads because of the lower price of the copper. As copper prices go up, we can go into the good part of the peach, take that peach and go from a leach to a mill. And we’ve got some very big reserves across the Board, not just at El Abra, but at Cerro Verde, Morenci, Safford. And all of these projects that you’ve identified over the years that have been leached by use of oxide ore and our drilling across the board has shown that the big part of these ore bodies or the sulfide ore, and there's unbelievable opportunities for expanding the size of the pit at Morenci for instance, you’re going to basically end up with what as we’ve said the whole Morenci area, where you’ve had a series of pits through the year is going to become one big pit and some of that involves the same kind of oxide to sulfide ore identification. So we have years of those kinds of reserves available to us. And it’s really just a question of when we decide to put in the mills, to expand the mill, to go get that sulfide ore. But that’s really the and why we’ve said our brownfield type opportunities principally going from oxide to sulfide ore, are bigger than most greenfield projects around the world, and I’ve just been overall the new interpretation of all of those core hole drilling that we did and putting into big models. And you’ll be very impressed as we start to give these models to you like the slides you saw on the Grasberg. In this presentation where you see all of the potential both in the pit and underground are just the enlargement of pit. So that’s really the story of this company, right now is the big growth of ore and adding ore and replacing production over the number of years by bringing those kind of things into production.

Terence S. Ortslan – TSO & Associates

Thanks Jim-Bob. Thanks Richard.

James R. Moffett

Okay.

Richard C. Adkerson

Thanks Terry.

Operator

Your next question comes from the line of Mark Liinamaa of Morgan Stanley.

Mark Liinamaa – Morgan Stanley

Hello. Through the last few months, there has been all kinds of speculation about the China SRB, what they’re up to and what the impact of them pulling a little bit out of the market, they seem to done that or at least reports are and yet copper continues to hold up. Can you just comment a little bit if is that all about any of the supply/demand fundamentals you are seeing re-China demand and elsewhere in the world? Thanks.

Richard C. Adkerson

Thanks Mark. We are not the best source of information on that. We are not currently a major supplier of copper cathode or concentrates into China although, we recently entered into some new concentrate arrangements with the Chinese, but beyond potential buying for strategic reserves, I think you can just look at the performance of the Chinese economy and the recent reports of their G&P growth and their IP growth. The extent of their copper imports where they’ve set records now for a series of months clearly reflects something other than strategic reserve buying or the absence of scrap. They're physically consuming copper on infrastructure projects and to support their growing economy.

Mark Liinamaa – Morgan Stanley

All right, thanks. And is there anything to be read, if it all into the decision not to hedge any of the provisionally priced copper this quarter?

Richard C. Adkerson

No. Our Freeport traditional philosophy is not to hedge and even last quarter where we did lock in the open pound prices. We did not hedge any of our future production. The decision last quarter was not any kind of outlook about copper prices at all and we are not taking any outlook at the end of this quarter. It was simply a step that was part of our overall strategy of protecting liquidity. And as we looked at the situation at the end of the first quarter, we felt that was an appropriate incremental step to protect liquidity. Our liquidity position is much stronger now at the end of the second quarter. And so we concluded that it wasn’t the step that we would take at the end of the second quarter.

Mark Liinamaa – Morgan Stanley

Thanks. And good luck with continued progress.

Richard C. Adkerson

All right. Thanks a lot, Mark.

Operator

Your next question comes from the line of Wayne Atwell of Casimir Capital.

Wayne Atwell – Casimir Capital L.P.

Well, thank you. Once again congratulations on a great quarter and a good execution. You have a gold property near Grasberg, which if I’m not mistaken is somewhere between 4 and 6 million ounces. Why don’t you develop it or why don’t you joint venture it or sell it? Gold prices are fairly strong. It would take several years to bring it on. It seems like this would be an ideal time to start an initiative there?

Richard C. Adkerson

Well, Wayne we have. The Wabu project is a project that we’ve had a exploration over the years. We’ve done economic evaluation and because of the cost of infrastructure, as the indicated size of the opportunities there. We’ve concluded that it’s not economic for us. And from time-to-time, we have interest expressed in it. And we’ll followup on any opportunities that developed from it.

Wayne Atwell – Casimir Capital L.P.

So we want to see you put in production, but you might sell it or JV it?

Richard C. Adkerson

Yeah, that’s correct.

Wayne Atwell – Casimir Capital L.P.

Okay, thank you. And that what’s the ultimate size of Tenke, do you think how big could that property get and how big could be…

Richard C. Adkerson

It’s a very, very large concession area. 650 square miles roughly. There is mineralization indications throughout it. We’ve done enough drilling to support the current project that we’re constructing. We clearly see oxide ores that are available if not out of which in reserves, but are either in reserves or near reserves that would allow for a doubling of the current type project, roughly a doubling of the current project that we have. There might be an intermediate step of what we could optimize the current project and we are looking at that. But a longer range to get to the kinds of world-class status that we think is available to us. We need to do more drilling and exploration analysis, and our guys are working on that now. There is a core hole drilling indicates a very large sulfide deposit. There is some mixed ore that we need to decide how we’re going to technically process, but over the years, people involved in these projects have talked about 400,000 to 500,000 tons. It’s certainly those are not unreasonable expectations. It could be more, but it depends on the work we need to do there. We have another nearby exploration project called [Consanfu] that has a very large potential and attractive indication to mineralization as well. So if we’re able to get the right infrastructure, I feel confident that there will be major expansions in Freeport’s operations in the Congo looking up for a number of years.

Wayne Atwell – Casimir Capital L.P.

Right.

James R. Moffett

Richard, just to comment for Wayne. When we got into the Congo operation after the merger. There were 1500 core holes that had been drilled over the years, [as it just paying] and then drilled by the people for the years. We’ve added 1500 core holes to that database. So we doubled the amount of information, and that’s because the area is so wide, and so long. And most of the stuff we’ve done just going to the ore that’s visible by satellites you can, the vegetation anomaly and we’ve found that vegetation anomaly for miles. And so most of the stuff we’ve done is near surface drilling and just trying to confirm the ore that that can be reached right at the surface. This ore body goes underground and it brings same kind of holes as we followed it underground for a few areas, but there is huge potential for this thing to go underground. As I said about all of our projects and Richard just mentioned again, the ore that’s been looked at Tenke is oxide ore and the sulfide portion of this ore body is going to be bigger than the oxide ore for the very same reason that we talked about with the peach that’s got the ripe area and the unripe area. So we haven’t even started to drill deep enough to develop that, but that ore there for the 100 years or more and can provide all the expansions we need as we said we have to go to pit, more and more pits with deeper pits, but we also have to add mill. So, it’s unlimited at this point based on my observation and 3000 per holes or lot of core holes, but there is lot more to be done on following this thing underground.

Wayne Atwell – Casimir Capital L.P.

Great. Thank you.

Operator

Your next question…

Richard C. Adkerson

Well. We’re looking at those long-term opportunities, we’re going to focus in the near-term on getting this first project up and running, getting the business process set up to operate in a very difficult part of the world and optimizing what we spent this initial capital on.

Operator

Your next question comes from the line of Lawrence Smith of Scotia Capital.

Lawrence Smith – Scotia Capital

[Inaudible] on projects, one on Tenke, the very useful cost guidance that under $0.50 to $10 cobalt, under $0.50 is a big range, I mean, zero to 50 of $0.49. I am wondering what’s the impacted grade on that? I guess I kind of thought you would be mining higher-grade early on and cost would be lower. Is that sort of a reasonable cash cost until the first expansion? And then second question relates to Climax, I read through your quarterly quickly. I didn’t actually see any mention of Climax. I mean are you still planning on bringing that into production at some point. Or is there a chance I will just sit there and not go ahead? Thank you very much.

Richard C. Adkerson

Okay. With respect to the cost structure that we commented on with Tenke, that numbers that we gave you was a cost structure overtime based on current cost levels $10 cobalt and the design capacity to produce 250 million pounds of copper and 18 million pounds of cobalt. And obviously to the extent as we see with the Grasberg operations to the extent that we have periods of time where we have higher grade material available to us from more cobalt that is going to have the impact of own cost in any particular period. We expect to have the opportunity to have for example, higher cobalt grades early in the project. And to the extent, we have that that will have an impact on unit cost at any particular point in time. But what we were trying to give guidance on is what the overall the cost structure. This looks like in terms of the design capacity that we built the project to, it will vary period-by-period and this is what we have now.

Lawrence Smith – Scotia Capital

Great. Thank you. And on Climax?

Richard C. Adkerson

Oh, Climax, yeah. No question. I mean it’s a great project. We had spent capital; I mean the mill is there a lot of the building construction, all of that is in place and none of it’s going away. If the market responds, let me say when the market responds, let me say when the market responds, because I’m confident that the market is going to require Climax volumes at some point. When that market responds, we will go back and resume construction. We think we spend roughly $350 million and within 18 months. We are adding 30 million pounds of cobalt on a year, molybdenum and we’ve done enough drilling there. This is another theme of what Jim-Bob is talked about. We did additional core drilling. A Climax and we can see the opportunity to increase that production to twice the level of what the 30 million pounds are. So it’s still there. We own that land and fee. We are continuing to manage the historical water drainage off the mining site. And as I’ve said, we are certainly not walking away from that project in any sense.

Lawrence Smith – Scotia Capital

Great. Thank you very much.

Richard C. Adkerson

Okay, thanks.

Operator

Your final question comes from the line of Jeff Cramer of UBS.

Jeff Cramer – UBS

I'm in the big times now.

Richard C. Adkerson

All right.

Kathleen L. Quirk

Yes. Go ahead.

Jeff Cramer – UBS

I’m sorry. I don't know what that was. Good morning and congrats again on the quarter. Just wanted to followup on the bonds you guys are calling. Are there certain, I guess covenants within those that incentivize you a little bit more than others to call these?

Richard C. Adkerson

In the…

Kathleen L. Quirk

On the 6⅞% bonds.

Jeff Cramer – UBS

Yes.

Kathleen L. Quirk

These were issued prior to our transaction with Phelps Dodge. These were non-investment grade covenants. The notes were secured. And they did have some restrictions that don’t exist in our other securities. That was one of the factors that played into our decision to call it. The other factor was that these notes were callable, and we could take out the whole issue with the cash that we had. We do have some notes that are also callable that the floaters, which are $1 billion, those are doing in 2015, but those are callable now. And we’ll continue to look at all of our debt securities and see what make sense to retire as we go forward, but this 6⅞% was the one that really, from a first step standpoint make sense for us to go after.

Jeff Cramer – UBS

Okay. I guess then regarding expansion projects, the mine acquisitions are not on the drawing board or that’s not really any plants to divest properties either that I guess other than potentially, the property next to Grasberg?

Richard C. Adkerson

With respect to acquisitions, we have such great opportunities of investing in our own assets and growing volumes and adding to shareholder value without having to pay premium prices that you have to pay in making acquisitions. So we don’t have any strategy of looking for acquisitions. Now having said that, we’re constantly made aware of what’s going on in the industry and we will monitor it, and if an exceptional opportunities comes to us we could be in a position to do it, but that’s not our strategy. And in terms of divestitures, with the same way, we are always looking to see what would make sense with our portfolio of assets. We have good contacts within the industry and so fourth with people who are interested in participating on a joint venture basis with us, we have joint venture partners now in Grasberg and in our mines in North America, South America and in Africa, around the world people are looking for opportunities to add to copper exposure. So we are plugged into all of those things and we will go forward and see if anything makes sense from our view of create shareholder value.

Jeff Cramer – UBS

Great. Thank you very much.

Richard C. Adkerson

Thanks.

Operator

There are no further questions at this time.

Richard C. Adkerson

All right. Thanks everybody for participating. We look forward to continuing to report to you our results as we go into the second half of 2009.

Operator

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

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