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

Q4 2013 Earnings Call

January 22, 2014, 10:00 am ET

Executives

Kathleen Quirk - Chief Financial Officer, Executive Vice President, Treasurer

Richard Adkerson - Vice Chairman of the Board, President, Chief Executive Officer

Jim Flores - Vice Chairman of the Board; Chief Executive Officer and President of Freeport-McMoRan Oil & Gas, LLC

Jim Bob Moffett - Chairman of the Board

Analysts

Jorge Beristain - Deutsche Bank

David Gagliano - Barclays

Sal Tharani - Goldman Sachs

Michael Gambardella - JPMorgan

Oscar Cabrera - Bank of America Merrill Lynch

Curt Woodworth - Nomura

Joe Allman - JPMorgan

Adam Duarte - Omega

Joan Lappin - Gramercy Capital

John Tumazos - John Tumazos Very Independent Research

Paretosh Misra - Morgan Stanley

Brian Yu - Citi

Daniel Rohr - Morningstar

Operator

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

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

Kathleen Quirk

Thank you and good morning. Welcome to the Freeport-McMoRan Fourth Quarter 2013 Earnings Conference Call. Our results were released earlier this morning and a copy of the press release is available on our website at fcx.com.

Our call today is being broadcast live on the Internet and anyone may listen to the call by accessing our website homepage and clicking on the webcast link for the conference call. The slides are also available on our website. In addition to analysts and investors, the financial press has been invited to listen to today's call and a replay of the webcast will be available on our website later today.

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

On the call today are, Jim Bob Moffett, our Chairman of the Board, Richard Adkerson, Vice Chairman, President and CEO of FCX; Jim Flores, Vice Chairman, President and CEO of Freeport-McMoRan Oil & Gas and we have several other members of our team here with us today.

I will start by briefly summarizing the financial results and then turn the call over to Richard who will begin reviewing information included in our slide presentation. As usual, after the formal remarks, we will open up the call for questions and answers.

Today, FCX reported net income attributable to common stock of $707 million, or $0.68 per share for the fourth quarter 2013 and $2.7 billion, $2.64 per share for the year 2013, compared with $743 million or $0.78 per share for fourth quarter 2012 and $3 billion or $3.19 per share for the year 2012.

Our net income attributable to common stock for the fourth quarter 2013 included of $166 million or $0.15 per share as detailed in the press release, which included $73 million or $0.07 per share for unrealized losses oil and gas derivative contracts and $49 million or $0.05 per share associated with updated mine plans at Morenci that resulted in a loss in recoverable copper in leach stockpiles.

FCX's fourth quarter results reflect strong operating performance in both, the mining and gas businesses that we will be talking about. Our consolidated sales of over 1.1 billion pounds was 17% above last year's fourth quarter and reflected higher production throughout the global operations, and particularly at Grasberg, where copper sales were a little over 40% above last year's fourth quarter.

OIL and gas sales, 16.6 million barrels of oil equivalent. That was ahead of our forecast. Our fourth quarter average recorded copper price of $3.31 per pound was below the year ago quarterly average of $3.60 per pound and gold prices of $12.20 per ounce was 27% below the year ago quarter. Oil prices were strong in the quarter as Jim will be talking about, with Brent prices averaging $109 per barrel and average realizations by our oil and gas division of $94 per barrel before hedging impacts.

Operating cash flows of $2.3 billion in the quarter exceeded capital expenditures of $1.7 billion. We ended the year with total debt of $20.7 billion and our cash balance was approximately $2.0 billion. We have approximately 1.04 billion common shares currently outstanding.

And I will turn the call over to Richard who will be referring to the slides materials on our website.

Richard Adkerson

Good morning, everyone and for all of you on the East Coast, we are thinking about you facing that storm up there. I know its difficult. You all stack up some shorts and swimsuits and golf clubs and swim to us in Arizona, enjoy this weather in the 70s.

Looking back on 2013, when we went into the year and as we consummated oil and gas transactions, at first in May you heard us talking about execution and that is what was really the emphasis of our entire organization, it was on operational execution during the year. And the results have been strong. We had 12% increase in copper sales and we had growing volumes in all four regions that we are operating in. We had a positive and significant contribution from the oil and gas business. Jim will be talking about that.

We executed our plans to grow our volumes. We have three major projects that we had identified to increase our copper sales over a three year period by a billion pounds. We completed the second phase expansion at Tenke and that operation has operated very well. The Morenci mill expansion has progressed and nearing completion in 2014. We have initiated construction at the major project at Cerro Verde in Peru and it's progressing on schedule. In addition, the Grasberg underground development activities moved forward this year. despite the interruptions that we had during the year and we are preparing ourselves for the completion of the mining of the Grasberg pit. It's currently scheduled to be completed in 2016.

In the oil and gas area, the Lucius development project is progressing towards production. The understanding of the assets within the deepwater the PXP acquired during 2012, now its part of our portfolio, is progressing and we have got exciting new growth opportunities there. And then, with the renamed ultradeep play, we are calling the Inboard Lower Tertiary/Cretaceous opportunity, we have got exciting news there about a well we are currently drilling about what that means for our company going forward.

We continue to be focused on cost savings and discipline in spending capital. We have got our targeted debt reduction that remains in place. We are looking for ways to accelerate that. During the year we have, including the special dividend and our regular dividend and about 10% stock price increase during 2013 and attractive return to shareholders of 17% to $3.3 billion of common stock dividend including special dividend.

Our financial results reflects this strong operating performance virtually across the board. Our volumes and our mining business for copper were slightly above our guidance, well above the third quarter and fourth quarter of last year. Realizations of just over $3.30 are below the fourth quarter of the prior year but going into 2013, there was a lot of skepticism about where copper prices would be and markets appear to be stronger going into 2014 than they did going into 2013.

Our site cost for the fourth quarter, for the company consolidated was $1.16 a pound, reflecting strong volumes of both, copper and gold in Indonesia and that was well below our guidance and well below our recent historical performance.

There was really strong gold production. At Grasberg, we had access to higher grades and it did show what that mine provides to us. Our oil volumes, sales volumes were in line with our guidance and business performed very well.

I mentioned that today copper markets appear to be strengthening from where we were a year ago. During 2013, China went through a government change, a reorientation of its economy towards internal consumption with less emphasis on exports and infrastructure development and major spending on infrastructure continues as evidenced by the recent announcement by state grid to increase its capital spending and that has a major impact on copper consumption there, but consumer demand remains strong. Infrastructure investment in China is a major part of this marketplace.

In the U.S. demand has steadily improved, particularly in key sectors like residential construction, warehousing starts were up. Today's news about mortgage applications being up, we are seeing improvement in non-residential construction and the automobile industry continues to be very strong and important consumer [copper] as we talk to our downstream customers. We are hearing positive comments about the performance in 2013, and a degree of confidence about 2014.

In the copper business, we are seeing some recovery in Europe, the beginnings of it. Worldwide, the copper market remains very tight. Exchange stocks have dropped dramatically during the second half of 2013. Today they are lower than they have been in 15 months and a lack of strike of scrap is driving hard cathode consumption and that is being an important part of the marketplace, so we are seeing relatively positive near-term fundamentals for copper in world that has continuing economic uncertainties, but longer-term fundamentals remain particularly strong because of constraints on supply globally and the demand for copper throughout the world.

Turning to Slide 6, you can see our fourth quarter unit production cost that I referred to earlier. Across the board, we were lower than our plans for the fourth quarter, driven by cost control efforts Red Conger and his team are applying in the Americas.

Our operation in Africa is performing well and then having the higher grades in Indonesia, where our unit cost net of gold credits dropped to $0.21 per pound, resulting in this dollar $1.16 per pound. You can see how our sales from North America, South America, Indonesia and Africa were distributed during the fourth quarter.

We are releasing our preliminary reserve information for our mining business, proven and probable reserves of copper at the end of 2013 were 111 billion pounds of copper 31 million ounces of gold and 3 billion pounds of molybdenum.

Since the Phelps Dodge transaction, we have had very significant additions to reserves all 45 billion pounds of copper for example and continue to have opportunities to add reserves because of our very large resource base and ongoing exploration program. Our reserves or you can see we will distributed between the Americas and Indonesia and growing opportunity in Africa.

Beyond reserves on slide eight, we have, and the reserves are based on mine plans using a $2 copper price. We have mineralized material of significance associated with our existing ore bodies. So looking at our copper price of $2.20, you see well over 100 billion pounds of mineralized material that not yet qualifies as reserves. So it is incremental to our reserves. Half of that is in North America and our work goes on to see about moving the mineral resources into reserves and ultimately into development projects to generate cash flows. Huge asset for our company.

Our mines are distributed around the world. We have our flagship mine in Arizona at Morenci, the Cerro Verde project in Southern Peru, El Abra and Candelaria in South America and Tenke Fungurume, Grasberg that we have in a world with a very limited number world-class mines which we are looking at over billion pounds of copper per year. We have the opportunity of having five mines which is in that group and what's what our goal is, is to reach that.

I want to give you a report on Indonesia. Indonesia, for years, has been focused on looking at increasing processing of minerals within the country. In our 1991 contract of work which is the contract we are currently operating on, there was provisions in that contract which we committed to develop a copper smelter range the development of copper smelter within Indonesia under certain conditions and in response to that we followed through. We arranged with Japanese investors to build Indonesia's first smelter, its only copper smelter and refinery in the country and Mitsubishi operates it. PT Freeport Indonesia owns 25% of the equity and we supply copper concentrates to it. So that smelter is operating in Gresik.

Indonesia also exports in large volumes mineral ores across the national resource space that aren't processed in the country and that includes nickel, aluminum and tin and the country, in 2009, when it adopted a new mining law put five-year period on requiring that ores be processed within the country. Following the adoption of the law, there were a series of implementing regulations that moved forward and that export ban was ultimately extended to copper concentrates. The deadline for the ban was January 12 of this year.

Now our contract of work, which defines our rights and obligations in our relationships with the government has specific languages that gives PT FI the right to export concentrates. It also defines the taxes and other physical terms applicable to our operations and states explicitly that were not subject to tax or duties or fees that are subsequently imposed or approved by the government, expect as provided by the contract. As this deadline of January 12 approached, we were actively involved in discussions with the government as were other miners.

The final regulation that was adopted by the government exempted from the export ban copper concentrates that contained 15% copper which our concentrates will be well above 15% on our life of mine plans. At the same time, the government provided that exemption from the export ban for three years but in a new regulation that we did not anticipate that was a surprise to us that Ministry of Finance of the government imposed a duty on exporting minerals including copper concentrates and there is a progressive duty that's now in places. It's a regulation of the Ministry of Finance which states at 25% in 2014 and grows to 60% by 2016.

This is something that - there was conflict with our contracted work and where we are today is, we were gauged in discussions with representative government to discuss how this new export tax applies. The government is working on regulations, which has not been completed, so there is a degree of uncertainty on exactly what its intentions are for implementing this tax.

We of course so look at our contract and are of the view that it does not apply to us, but we are going to work with the government in a way to reach an agreement on it, to understand their position, make sure they understand ours. I will just point out that we have been operating in Indonesia since the early 1970s, we have never had a violation by either part of the contract and we are confident that we will find a way to [work] that will represent the interest of our shareholders and be responsive to government. That's where we stand. This is new. It just came out weekend before last. Regulations were up here until there is not specific clarity on this issue at this point.

Now, with Grasberg, as we have been dealing with this and as we go with the tragedy of the training facility issue earlier in the year, and as we reached an agreement with our labor union this fall that avoided a strike that was so disruptive to us in 2011 and 2012. We have really a substantial increase in the productivity and performance metrics in conjunction with also having available higher rate award to mine in process.

In the first half of 2013, for example, our mill operated at average of 157,000 tons. Today in the fourth quarter, we were over 200,000. Grades have improved of both copper and gold and that translated into lower unit net cost.

You can see how the performance improved over the year, and then as we look forward between 2013 and 2016, we are expecting the normal operations to complete mining the pit, we will have increasing amounts of both, copper and gold an extraordinary year in 2016 during the final phases of operating into pit.

Currently, we are adjusting our operations to continue in a full fashion, but focusing on maintenance activities in mining material that constraints the level of copper concentrates we are currently producing as we have discussions with the government for this export duty.

I mentioned that our brownfield development projects are progressing. The Tenke Fungurume project is complete. Cerro Verde is going well. We start construction there. Our team with our contractors are working well and at Morenci, we have 60% completed that project and we will be starting up next year to add 25 million pounds of copper all in a very high rate of return project.

We are continuing with our exploration program. Spending will be somewhat less this year and that's more of a nature just where our focus would be and what our plans are serving no less emphasis on exploration, but the slide on '13 shows where we will be spending money.

Our projects will be focused principally on brownfield opportunities and focused on our existing mines, but we do have a couple of exciting greenfield projects that we will also be pursuing.

With that, I will turn over the presentations to Jim Flores to talk about our oil and gas business.

Jim Flores

Thank you, Richard. Good morning, everyone. On Page 14, you have a slide of the Brent from 3 to present always overlaid with LLS or Louisiana Light Suite. The takeaway from this slide is that 90% Freeport copper and gold, oil and gas, revenues are derived from this current pricing of oil and the Brent and LLS.

We will show you where this provided tremendous margin for business, somewhere between $50 and $60 a barrel depending on base differentials and regional markers and that's what's fuelling our oil and gas development of the Gulf of Mexico, the Eagle Ford in California and also on Lower Cretaceous and the Lower Tertiary exploration play.

We see on from January 11, 2013 is that, the range has been $125 to $100 in there. So about $110 average. We have consistently maintained these prices in the oil for various reasons. A lot of oil demand is continuing to increase. The fourth quarter numbers are well over 93 million barrels as oil demand has continued to expand with all the easy money calls and we have had supply disruptions out of MENA area, Middle East and North Africa, and we have got production growth here in North America. So there is lot of misconceptions. The curve, going forward, always has a 20% discount and going forward in (inaudible). I think it has a lot to do with liquidity issues, for instance oil price discovery.

So we continue to maintain our budget process between $100 and $105 a barrel of Brent and going forward. based on the production struggles around the world, grow production from North America and also the aspect of consumption demand expanding around the world on a consistent basis that we continue to see accelerating this year. So we are very excited about our budget going forward based on the strong pricing background, I will mention that about third of our CapEx budget is discretionary. And early in the year, we can move a lot of things around to affect spending if the prices, there will be another way or something happens when our price margin erodes. So we are in a situation of real flexibility. Obviously that flexible erodes during the year but I want to make sure everybody understands that a third of the discretionary is real and something that we keep that flexibility very close in hand.

When we move to page 15, you will see what I talked about for our fourth quarter 2013 cash operating margin of almost $1 billion, $900 million at $56 a barrel. That compares with the third quarter margin of $64 a barrel. We had slightly higher prices but the big thing we had in the fourth quarter that stuck with us in the third quarter was refineries all turn around at the same time in the fourth quarter and we had large basis widening of about $10 a barrel which affected our margins, even though we had higher production.

So that's all been reversed. If you look at those operating margins here in January, we are back where LLS is straight right on top of Brent and you can see that on page 14 right at the end of that graph where LLS and Brent diverged and now with that, those two curves come together, we are looking at a $50 or $60 per Boe margin, going forward. Lou see the contribution in the pie chart being 47% out of the Gulf of Mexico, 30% out of the Eagle Ford and 21% out of California and Haynesville, that's about 2%. We have got (inaudible) in all these areas and we will take you through it as the details on the adjacent slides.

Before we do oil and gas operating summary, the operating margins on a per property basis, California $54 a barrel, Eagle Ford $63, the gas assets in Haynesville about $9.50 and the Gulf of Mexico assets $63.83, $55.95. This fits us in the best in class group of operating margin. I think this is what separates oil and gas business from best to worse, is what the operating margin, how much cash flow they are actually generating on per barrel sold. And we have a heavy gas oriented business. A gas oriented business with the low prices, these margins are much less and obviously with our 90% of our revenues coming from oil, we are in the preferred area of the highest margins in our group. You see our sales by region breakdowns. It is very consistent with the third quarter, California, Eagle Ford, Haynesville and the Gulf of Mexico.

Moving to slide 17. We have announced our preliminary SEC proved reserves of 4604 million barrels as of 12/31/13. By category, breakdown of the system this year, we have 34% PUDs, 53% PDPs and 13% PDNPs. By region, with Gulf of Mexico 37%, California with its large resource base again 40%, Eagle Ford 13% and Haynesville, you will notice 10%. And then by commodity ratio at 6:1, which is the old BTU conversion ratio, its not the pricing ratio, the 27:1 or whatever it is now, its 75% oil and 20% gas and 5% NGL.

I will mention here, there is a couple of notable exceptions to our proved reserve base. Our Phobos discovery that we made in the first quarter has not been the delineated to offset, so it does not need the proved reserve test, Lomond well cost structure South of Lucius, in Keathley Canyon, and also this highlander area at Lomond well that we are going to discuss here in a little bit is also (Inaudible) in year- end '13 reserves.

Those were the only two significant exploration wells that we are doing gas business conducted this year for our proved reserves categories of adding reserve. That would change here in 2014 with our exploration, we will expand in the deepwater with the arrival of drill ships and our business will be more normalized for us adding reserve as we (Inaudible).

Our Lucius development project is one of those areas, where as we continue to get closer to production, we are able to add reserve there. We have delineated [reservoir] and have more to do in the deeper Miocene reservoir.

Lucius is on schedule. We have had some pipeline delivery issues that our operator Anadarko has done a job at overcome to keep it on scheduled. It's cost little more money, but on top of that is surrounding area, when we put on the 80,000 barrels a day in the 450 million cubic feet of gas that the facility is going to process for process in the third quarter this year, so fingers crossed on that that the project continues to move along just as planned.

In our deepwater Gulf of Mexico update, a couple of key things here to take away that are going to be impactful to a couple of slides further along annual production. The reason we bought the facilities in Holstein, Marlin and Horn Mountain, were to have major development projects, to achieve the production rates of development projects. We had few platform modification of each one. That's a 60 to 90-day shut-in for each different facility.

In 2014, Marlin is going to be shut-in the third quarter. In 2015, Horn Mountain and Holstein will be shut-in, and when you shut-in 30,000 barrels a day for 90 days, it does affect your annual production rate and so forth. Maintaining the 2014 and 2015, even though we are growing, even though we are expanding our production base as a company, it's being muted by those shut-ins, 2014 with Marlin and 2015 with Holstein and Horn Mountain.

Everything we are finding there geologically are the new seismic imaging seismic we have shot all the new imaging, we are planning heavily resource laying opportunities on our leased on our leased block and so forth and the first area of development obviously is Holstein, where we have a platform, rig, being ready to drill our first in-field sidetrack well to start maximize our production there. Our guys have done a fantastic job of maintaining high production without any drilling activity or well intervention activity at Holstein, Marlin and Horn Mountain.

On the exploration front, like I said, we have exciting year coming up not only potentially Phobos delineation, but our Terra prospects. I think this is a Lucius look-a-like of 300 million to 500 million barrels in Keathley Canyon area where we have been drilling with one of our initial drillship showing up. We will probably prepare that well sometime in the second quarter and our copper project will sometime in the third quarter.

We will just see right about Holstein in the copper project is a project on an exploration opportunity we think is excellent as far as productivity, but we think it's imaged very well of seismic and that is a pure product of our new imaging and showing the real productivity and that was being masked by the old data, so very active year, but it's still ramp up from here in '14, '15, '16, and production rates is 16 when we really start hitting on all.

On Page 20, talking about the inboard lower tertiary, which normally is ultra-deep want to give the geologic number if it's fitting in with the rest of our projects. Our Lomond North well as you in the middle of that circle is the northernmost well that we drilled so far and search for the other good reservoirs here in lower tertiary protection activities.

Here today we found large structures and we found large sands and so forth, but we have got challenging reservoir quality for those sands. Velocities and probabilities in those things on the challenging side, still there is a lot of pressure, so we are in a process of overcoming those with some completions at Davy Jones and the Blackbeard and Lineham Creek later this year or early next year but Lomond is the first well that we drilled where we see excellent reservoir characteristics consistent with ferocities in the 20% range that are more aligned with what we see in Miocene type reservoirs and largely that reservoirs that have excellent flow capabilities and excellent production rates.

It also is very relative to the (inaudible) 50 miles to north of that original Louisiana. So we are 50 miles away to the South and on the northern edge of our area, and we found over 150 feet of pay. We are still in pay and still drilling operations of the well. We have another 1,000 feet to go to get down to TD in the Cretaceous and we are very excited about finally finding a reservoir that all the log indications and our core indications meets the criteria of a spectacular commercial well.

We are moving at light speed to get this well production equipment. We will test this well sometime this summer. We are actually going to harvest some equipment from the offshore operations and we have got all that in place. We have got 56,000 acres on the structure at Lomond. It's a very large structures. Its going to have a large reserve potential and we drilled a mid-depth well so there is a lot of up-depth acreage to this well as we pile up these sands in the Cretaceous and also in the Wilcox.

Now with the production test of Davy Jones #2, Lomond North and Blackbeard #2 this year and we have a large test number towards high quality prospects. You will continue to hear more and more on that with the production test at Lomond the rest of this year. Development of the low-cost source of natural gas, but a lot of liquid. So on a margin basis, we think this is somewhere between $20 and $30 barrel margin, significantly higher than what we have in the Haynesville and the Madden area. So it can be competitive with some more projects on returns.

So more on that in the Q&A. Richard, I am going to turn it back over to you to finish and summarizing our activity.

Richard Adkerson

All right. Thanks, Jim. We are going to talk about sales outlook. I want to point that this is our plan with our Indonesian operations operating in a normal fashion. We are currently working through this process of getting export permits and so forth. As we go forward that, if there are revisions to this, we will update you, but this based on a scenario of normal operations.

Our current sales outlook is consistent with our prior outlook of 4.4 billion pounds of copper, 1.7 million ounces of gold and 95 million pounds of molybdenum. We have increase our outlook for oil equivalents from 57 million barrels equivalent to 60.7. At $3.25 for copper this plan would generate in 2014 $9 billion of operating cash flows including working capital changes. We remain highly leveraged to the price copper and since change in copper 2014 means $370 million to us.

Our unit cost would reflect some very driven lower volumes in the first quarter of 2014, is $1.45 per pound and $20 a barrel equivalents for oil that Jim just talked about. Current outlook for capital expenditures is $7.1 billion with just over $4 billion for mining and $3 billion for oil and gas.

We are looking on 22, where we have our quarterly sales outlook. This is the annual sales outlook. You can see going from 4.1 to 4.4 for copper and then moving up as we complete our development projects to 5 billion in 2015 and 5.7 in 2016. where we have the benefit of the expansion projects plus the extraordinary year in Indonesia as we near the ending the mining of the pit. You can see that in gold with a limited amount of gold with 3 million ounces of gold to our interest, that's net of the Rio Tinto participation in the joint venture in that year and you can see the annual oil and gas sales on equivalent basis and as Jim said, that is net of the maintenance tie-in, shut-ins of the deepwater rigs in 2014 and 2015. About 2016, we will be at an average of like over 220 a day and that with these kind of margins it generates very potential cash flows.

On a quarterly basis, as I mentioned on 23, we will be having lower copper sales in first quarter because of the grades in the Indonesia for mine planning purposes and also in South America, principally Candelaria, and you can see our quarterly outlook for all of our commodities in the third quarter is when the (Inaudible) shutdown occurs and that shows the lower oil and gas growing its production.

Page 24 shows our minerals, sales by region and shows increases in North America, which reflects the Morenci start up of this expansion project.

South America affected by some lower grades both, at Europe and Cerro Verde that's just mine sequencing issues and then Grasberg in Africa.

Unit production costs are shown on page 25. In 2014, you can see the continued strong performance affected by volumes across the board, but current plans for consolidated net unit cost, net of byproduct credits is a $1.45.

Page 26 is the models we present each quarter. This is updated to show an average of 2015 and 2016 cash flow and EBITDA generation and that's in the solid section, showing it in comparison with our outlook for 2014.

We can see for example, at 350 copper, we would be just under $9 billion here in 2014, but the average for the next two years would be over $12 billion, so that shows just the effects of our growing volumes and the strong margins in our business and you can see how that would fluctuate between $3 and $4. On the following side, we have our sensitivities to prices and also to certain costs, energy costs and currencies for purposes and investing your analysis.

Our updated capital expenditure slide is shown on Slide 28. We have talked about the $7 billion for 2014, and you can see how the outlook is for 2015, and new information that we are presented for the first time in 2016.

Jim made a point about our oil and gas capital spending. This is the opportunities that we have very positive report market conditions. There is a lot of flexibility as to how we manage that if market conditions change.

There are certain expenditures are discretionary. We also have the ability of bringing in partners, joint ventures and so forth, so we are going to manage as we have indicated over the past year, the oil and as spending to be consistent with the cash flow generated by that business.

The spending today reflects opportunity to increase volumes to pursue some new prospects that we have identified and take advantage of the resources that we have available to us.

We are committed firmly to the strong balance sheet management. We targeted, reducing debt to a level of approximately $12 billion to 2016, running our business with continuation of current commodity prices, because doing nothing else would get us close to that and our objective is going to be to manage our business safely, but to achieve the volumes and cost tartest that we have.

We anticipate the curve our business as we work through achieve the volumes call target we have all we had suspended continuing the curve of current common stock dividend $1.25 a share all and so this debt reduction target is clearly within our reach considering our large resource base in having discipline about the way we run our business and spend our capital.

We are continuing to view divestitures and other options that are available to us through joint ventures and potentially involving fee structures and that work is ongoing. We don't really have anything specific to report to you today on it other than the fact that we are all working very hard to do it and we are all committed to getting this debt to the level that we targeted and that remains a strong focus of our entire organization.

So we are Freeport, maximizing shareholder return and strong execution and management as we had a great track record of doing, focusing on shareholder returns and growth in a disciplined way to provide value for shareholders, protecting our dividend, protecting our balance sheet and paying our shareholders good dividend. That's the story that we been operating under for years and that's what we continue to be focused on as we go forward.

We appreciate your attention, and now we will be available for questions, if you might have.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Our first question will come from the line of Jorge Beristain with Deutsche Bank. Please go ahead.

Jorge Beristain - Deutsche Bank

Good morning, Richard Kathleen and Jim. I just wanted to dig deeper on this Indonesian tax situation. Could you quantify what exact export tax rate you are paying currently? What the incremental change would be, assuming that this law is effected on Grasberg, either in sort of gross dollar amount or in cents per pound?

And then could you comment about your drive to continue with the underground CapEx? What would be the point of proceeding with that if in the future you are going to facing progressively higher tax rate?

Richard Adkerson

That's okay. Okay, thank you, Jorge. We pay no export duties on copper concentrate shipments currently and we have never had that as part of operations. So this is a new duty that's in there. Now, we pay 35% income tax, which our contract provides for. Since the contract was signed, income tax rates have dropped in Indonesia and other companies currently pay 25%. We have a 10% tax withholding tax on distributions from PT-FI to FCX. There is payroll taxes. There is royalties under the contract and there is other types of payments. Overall, we have historically been one of Indonesia's largest income tax payers, many years the largest. We would estimate that we pay $15 billion in taxes, royalties, income taxes royalties and other taxes to the government over the life of the contract and under the contract we would be paying very large amounts going forward. So we are a major financial tax payer and contributor to the government of Indonesia, but not in the form of export duties on copper concentrate exports.

The announcement and regulations that have been adopted today, talk about a progressive royalty starting at 25% going to 60%, in steps through 2016 through the middle part of 2016 and then it talks about beyond that there would be a ban on exports. We don't know exactly how that would be applied because the regulations implemented have not been completed and we are waiting to see that, but if you were to apply those rates to the gross value of our concentrate exports, it's a very large amount that would be incremental to the very large payments we are already making to the government. And that is what we are engaged in discussions on with the fact that it's inconsistent with our contract of work and that the amounts would result in a very large amount going to the government. So those we have got to deal with.

On our underground development, based on our confidence that is supported by our track record of operating there over many years and dealing in a country that's gone through tremendous social, political changes and economic changes. We have confidence, we are going to work this out, so we are continuing with our underground development program, in fact, had a year with that 2013, because it's important so that we can make this transition from mining in the pit to mining underground.

That underground development is a extraordinarily attractive development opportunity for our company. When you stack it up against other projects around the world, given the high volumes with demand underground, we are looking at underground mines providing 240,000 tons a of ore to mill, which is just extraordinary. At a very low cost, at cost levels based on today's cost.

That would be comparable to open pit mining. It's just really important to us and with our confidence is being able to work with a government to resolve this matter, we are continuing with our development plans underground.

Jorge Beristain - Deutsche Bank

Thanks. If I could just clarify, so what's being talked about? Is this any rough numbers you do $3.3 billion of copper in Indonesia in 2014. The part does not process locally call it roughly half would be about $1.6 billion of revenue and then you pay roughly a 25% export duty. That's what they are asking for. On the copper con, and also would there be similar amounts on the gold as well?

Richard Adkerson

First of all, we are currently processing about 40% of our output from the Grasberg operations of PTFI at the Indonesian smelter, so that 40% will not be subject to any that is export duty acquired through international sales of copper concentrates, so will be 60%. We sell concentrate. It has both, copper and gold in it, so we don't sell copper concentrate and gold concentrate separately there, but we are waiting to see how these regulation would work and then how we can reach an understanding within the Indonesian government about how to reconcile this regulation with our contracted work and was the basis for us to go forward.

Operator

Your next question will come from the line of David Gagliano with Barclays.

David Gagliano - Barclays

Thanks. Speaking with the Indonesia topic, obviously we know, indication negotiations can take a long time, so I have two questions. My first question is in the immediate term, very near-term, how long will Freeport be willing to go, so the timing without implementing more significant changes at the mine, I think you mentioned that you are using workers to I guess stripping maintenance et, cetera. How long will that last before perhaps more significant changes at the mine. That's my first question.

Richard Adkerson

Okay. Dave, it's a good question. The practical issue we face is there is limited amount of opportunities to produce copper concentrate story. Just because of the nature of the product and where we are. We are looking at alternatives for that's very it. There's a limited amount of opportunities. Copper concentrate story. The major project or product where we are were looking at alternatives for that all we are addressing mine plans to reduce concentrate production as we continue to mine.

We are looking at the plans of how to arrange shipments to smelter, we are looking at alternative storage opportunities are but as we go forward we would want to focus operations on continuing to produce from the block cave DOZ.

The nature of black cave were up and preserve the operation, so we will progressively be looking at ways of continuing to produce. There's a mill first on the block cave supplemented by the pit to shift to Grasberg. We will maximize storage opportunities and then if we are not successful in getting this done, we would be forced to scale back operations in the pit and suspend operations now.

Look, we are talking about getting this resolved and that will work to reduce in everyone's interest and so that's the crown communications we are having with the government. We have had a long history of really success upon investment for our shareholders but also Indonesia and that's what we are going to try to build on to resolve this issue.

David Gagliano - Barclays

Okay, thanks. And then my follow-up, which is related in the medium term. If there is no agreement or resolution, f what is Freeport's next medium term steps and what is the preference here? Presumably you know there would be a consideration given for a smelter and if so, could you also when you answer this question maybe give us a sense of some capital costs associated with building a smelter and things like that?

Jim Flores

We built a smelter in the mid-90s. It was on the order of, it was a world-class smelter, 300,000 tons of metal. One of the most efficient smelters in the world. At that time, its cost was in the order of $750 million. Since that time, the replacement cost for that smelter, we have had some third party experts analyzing this in conjunction with working with the government, the cost of building that has roughly tripled since the Gresik smelter was built. At the same time, TCs and RCs haven't risen. They are processing fees that smelters receive because of market dynamics. The expansion of smelter capacity in Asia, principally in China and how that capacity stacks up with available concentrates on a global basis. So you have got a situation where smelter construction cost has tripled and processing fees are in the range where they were back in mid-90s and so that makes the economic of building new smelter a challenge, and that's what we have got to talk with the government about.

David Gagliano - Barclays

Okay, and that's helpful on the smelter cost. Very helpful. And just in terms of the first part of that question, so what are Freeport's next steps? So what should we expect to hear from Freeport, assuming that there is no agreement reached? What will Freeport do next?

Jim Flores

Well, I don't want to speculate because I think we are going to reach an agreement. It obviously, as we have these discussions and particularly given the circumstances within Indonesia, with the upcoming elections and so forth, for us to speculate publicly, it would just be inappropriate right now. So we are going to keep the market informed. We are going to work as we have always done in a positive way. We are engaged everyday and we are going to work to find a solution. You have got to think through those scenarios but I think you can appreciate from my standpoint, it is just not appropriate for us to try to speculate on those sorts of negative outcomes.

David Gagliano - Barclays

Okay, understood. Thanks.

Jim Flores

All right. Thank you.

Operator

Your next question will come from the line of Sal Tharani with Goldman Sachs.

Sal Tharani - Goldman Sachs

Good afternoon.

Jim Flores

Hi, Sal.

Sal Tharani - Goldman Sachs

Hi, sorry, good morning t. I just wanted to ask a couple of questions on Indonesia. First is, you have increased your CapEx to $900 million a year from $800 million. That's about $500 million more for the next five years. I was just wondering, if there is anything that you are doing, or it is just the cost of escalation?

Jim Flores

A lot of that is surrounding, this is a project which is dynamic and we make adjustments as we go along. We do everything we can to save capital. Some of it is things like labor escalation and things of those nature. But there is nothing fundamentally changed about it.

Sal Tharani - Goldman Sachs

Okay, and Richard, knowing what you know from your contract of work, and (inaudible) it appears that it does protect you from any kind of changes in the mining law until at least 2020. I am wondering, would you be willing to take it to an international arbitration court if government forces the new law on you?

Richard Adkerson

Let me make two comments about your question, Sal. While the primary term of this contract does end in 2021, the contract itself provides for two tenure extension. Freeport reserves through 2041, on the basis of that contract provision, and the extensions are provided for an extension on the terms of the original contract. Now, I think most of you know that for over two years now we have engaged with the government as a reviewed contracts as a comparatives contract to the 2009 mining law, and we have indicated a willingness to sit down with the government and talk about some revisions that would be responsive to certain of the government's aspirations in a way that would protect the value of our shareholders, so that's the process that we have been going through.

The contract does provide that we do have the rights for international arbitration and that is a protection that we consider to be important for our contract. We have a strong are not to go to international arbitration and that is a feature that's available to us, but it's not something we see as an attractive course of action for this much more attractive course of action would be able to find a mutually agreeable resolution to it with the government.

Operator

Your next question will come from the line of Michael Gambardella with JPMorgan. Michael, your line is open.

Richard Adkerson

Mike, are you there?

Operator

Your line may be on mute.

Michael Gambardella - JPMorgan

I am here. Can you hear me.

Richard Adkerson

Mike, we can hear you.

Michael Gambardella - JPMorgan

Richard, how are you? Sorry about that.

Richard Adkerson

No problem.

Michael Gambardella - JPMorgan

…keep on harping on the Indonesian issue, but these respective people who were making these up proclamations of fully aware of the details of your contract award when they come out with these patients.

Richard Adkerson

Mike, Indonesia has changed so much. From the transition from the government in 1998 to the evolution of the country free and open democracy with the prepress and so forth, so like here in other places in the world, you know, there are people I know who are commenting on this who aren't familiar with the full facts and situation.

There are also people made comments for political purposes and that happens everywhere, so the point is we will engage in serious discussions with people. Press articles will be what press articles are and you have to read that with the understanding of the nature of the situation.

Michael Gambardella - JPMorgan

The Indonesian presidential election is in July this year?

Richard Adkerson

Well, no. there is initially a parliamentary election that occurs in the spring and the presidential election does initial around of the election is scheduled for mid-summer to July timeframe. Then if that doesn't decide the president, there would be a subsequent one-off election that would be later in (Inaudible).

Michael Gambardella - JPMorgan

Last question?

Richard Adkerson

The current President you know is not eligible to run because of term on it.

Michael Gambardella - JPMorgan

Got it. In terms of the 2021 and 2031 in your expenses that you [same] contract, but with early announcement on the 2021 expansion be basically the only reason why you would give any changes, any financial or operating changes now in your contract?

Richard Adkerson

Well, it would only be in connection with having a successful completion of the contract review process in getting an extension to our contract, so like we have done in other places in Indonesia over the years, as we listen to these things and we have some productive discussions about how could we get a resolution of this process? Get the contract review behind us, get our extensions, end up having some concessions that we would like from contract that the government could feel if they had achieved something of importance in representing the government and the people and we could have a way of successfully having a mutually agreeable outcome to this would but it would be in the context of getting all this behind us.

Jim Bob Moffett

Let me make a couple of comments. This is Jim Bob. Talking about these negotiation with the government. As Richard said, we have got a democratic country. You have the parliament. You have the ministers. You have the president. This announcement we have just made, when I read that and say, we could be (inaudible) billions in taxes. We are interested in getting billions in taxes. The only solution is working smoothly with everybody involved with the smelter. What Richard is saying and what we are all thinking, we just have to look at the most practical. When you talk about why we are taking the 21 to 31, 31 to 41, the reason why that came up is because we would be spending $15 billion underground. Those things spending $15 billion underground without planning for the years that we have to have production and shareholders back. But just look at it this way, right now the parliament, just because of this announcement was just (inaudible) on Monday, they don't have the regulation. They understand the deal, a bit like our congress, honestly like Obama's healthcare. So there is a lot of questions being answered and they perceive these pieces of paper that they haven't even read yet because this was just announced on Monday. So that's why we are trying to be patient and let everybody have a chance to read the darn thing. The people who make stupid decisions, our callers wouldn't shutdown the United States government in that time. They wouldn't dare do that, would they? So just be patient with this. I bet over there it is 1984 and this isn't the first contract and that we are in lots of times we had to sit and wait for people to have a chance to understand things. So there is a resolution here and we have got the best copper mine in the world or mines in the world. We know how to build this project. So (inaudible) and in the new year.

The questions that you are asking are important but the answer is, since we just got this thing on Monday, let's not make an ObamaCare out of this thing. Just let everybody understand it and then we figure out what to do and will they.

Michael Gambardella - JPMorgan

Thank you very much,. Jim Bob.

Operator

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

Oscar Cabrera - Bank of America Merrill Lynch

Hi, thank you, operator. Good morning, everyone. First of all, I just want to congratulate you guys on meeting your objectives of strong execution in your operations. First question. Just changing the subject a bit and then coming back to Indonesia on the second one. Your oil and gas expectations for 2014 and '15 increased from your previous guidance during the last quarter as well as the expectation for capital expenditures. Can you just provide more color as to where are these increases coming from?

Jim Flores

Oscar, this is Jim. Good morning. There's two components of the increases in production. Number one, we retained the Gulf of Mexico assets. We did not sell them because of some productive events that happened there. We accelerated some of our pipe reserves, or are in the process of doing that in conjunction with Chevron's operation. So the present value changed dramatically and we are going to enjoy those productions. That's number one.

Number two, as we are scheduling work to be done in the Gulf of Mexico, the deepwater is long lead time project. We are finding more efficient ways to do things. We are finding ways to look at the facilities (inaudible) over the long term and the most reserves from our Horn Mountain facility instead of us drilling wells on the facility and then they were up to production and actually having a lower production for 2015.

We are doing subsea-only in the Horn Mountain versus the combination dry trees with a rig on the Horn Mountain structure and subsea. Therefore, we will have minimal supply interruption of the existing production.

At the same point in time, we will go ahead and get all in a high potential subsea tieback. Yes that cost more money initially, but the returns are higher and the production, consistency in growing from the business point of view is more consistent, so I would characterize it as the Gulf of Mexico, and fine-tuning our Gulf of Mexico model from a standpoint.

As I said about a third of this CapEx is discretionary or timing on those types of things, so if we ended up with say $20 erosion and oil prices, we can make a lot of adjustments here over a single-year period, but the share over a two-year period to line things at and we are committed to.

We have got a good margin business. We are committed to fine-tuning that, and while prices are high and demand worldwide, it's continuing to accelerate. We think that's a good opportunity for us to be aggressive with our development plans for our planning purpose, but we are positioned to always have a place change that if the market chose that.

Oscar Cabrera - Bank of America Merrill Lynch

Thanks, Jim. That's very helpful. Now, if I may, just going back to Indonesia, Richard, the existing operations include a smelter, refinery for copper, if not refinery for gold. As I understand the client that comes out of the smelter gets shipped out, so we process elsewhere would be progress back the applicable. If it in fact is applicable to all of the gold chip from Grasberg and then in your (Inaudible) they the replacement cost for the smelter. Are you including a gold refiner in that amount?

Richard Adkerson

Okay. Let me just make sure that the rest of the people on the call understand. Thanks for your comment about our operations in Grasberg.

Would PTFI our other operations that produce concentrates, sells the concentrate to PT Smelting, which is a jointly owned company in which PTFI has a 25% interest. That concentrate includes copper, gold and silver.

The PT Smelting's smelter and refinery, produces copper cathode from that concentrate, which is the basic product of pure copper that then goes to fabricators to produce wire and other copper projects.

There is a residual slime that has gold and silver in it and currently there is not a processing facility in Indonesia to process that and that since the construction of the PT Smelting facility, there has been shift to Japan for further processing.

We are still waiting to see how these regulations come out, but our expectation that that slime will be able to continue to be shipped without export duty at least for the next three years, so we think that that's going to be a restriction on PT Smelting's operations.

The feasibility study that we are working with would including slime processing facility, so we are looking at the cost of a project that would be $2 billion, $2.5 billion, plus working capital that would include a facility to process the slimes and recover the copper and gold in Indonesia.

Oscar Cabrera - Bank of America Merrill Lynch

Thanks very much, Rick.

Richard Adkerson

Thank you, Oscar.

Operator

Your next question will come from the line of Curt Woodworth with Nomura.

Curt Woodworth - Nomura

Hi. Good morning. Richard, I was wondering if you could just talk about how you are you arriving at the 40 million pounds per month for copper, so was that based on the tonnages associated with the expert licenses that you haven't been able to obtained that have been delayed?

reviewed with you on exploration but you have been able to obtain dividend believe this is just reflects what our mine plan shows. as we move more to do that

Richard Adkerson

It just reflects what our mine plan shows and then we wanted to give since we were giving the disclosures on a basis of not having any impact of this situation on our operations, we want to give you some sense of what we are talking about. So what we are looking at is based on our mine plans a plan of continuing to ship to PT smelting. This would be what would be affected for international shipments out of PT-FI.

Curt Woodworth - Nomura

Okay, and then the second question is, looking at your free cash flow guidance for the share after dividends, it's about roughly breakeven in terms of hitting your net debt target of $12 billion by 2016, it seems like some from of asset sales would be needed. Can you just comment on how active the company is at pursuing various

Richard Adkerson

From the start, we have seen this situation because of the capital spending at Cerro Verde and other places that this cash flow from normal operations was going to hit us in 2016. That's mining business adds, our oil and gas adds, considering the platform shut-ins and all of these projects ramping up. So 2016 and the very favorable operations in Indonesia in 2016, all of that adds up to 2016 being a hell of a year. So that's through normal operations were we could reach it.

Now beyond that, as I mentioned, our board challenges, we are challenging ourselves to find ways of advancing that and we are working very actively on the possibility of asset sales, potentially joint venture arrangements, potential transaction involving the MLP market in some way. So all those things are working and we are really focused on trying to advance the time when we get the targeted debt level reach.

Curt Woodworth - Nomura

Okay, great. Thanks.

Richard Adkerson

So we understand, and that has been the facts, just about the flow of capital and so forth about 2014, 2015, the cash flows are going to fund these projects that generate the volumes. Not only 2016, but those volumes go forward, way beyond 2016 and then we have additional growth opportunities in those really post-2016 years when the oil and gas growth really kicks in, the capital that Jim was talking about, having the opportunities now enhances that and then we are looking for the next round of expansion projects in the mining business.

Curt Woodworth - Nomura

Yes. Okay, thank you.

Operator

Your next question will come from the line of Joe Allman with JPMorgan.

Joe Allman - JPMorgan

Thank you. Just a couple of quick question. Jim Flores, could you just clarify what you said about the Lower Tertiary/Cretaceous play? I think you mentioned there, you experienced some challenging reservoir quality. On which projects did you experience that challenging reservoirs? And then you also mentioned excellent reservoir quality. I think you were talking about one of the Lomond North, just clarify that please?

Jim Flores

No, Joe, our Lomond North well, Highlander has the excellent comparable rocks through traditional South Louisiana production at any depth. To find it at 28,000 feet, 29,000 feet under this pressure is truly spectacular. So we are holding all hulas and so forth toward a production test this summer and we will show you what 20% of rocks can do.

The other reservoirs that we found today have less ferocity but they were all set at a higher pressure that I talked about and they are going to be more challenging to produce. We have been very forthright with all investors and so forth. So we are trying to get to the core of this play. The exploratory drill that we have, eight points of control now and our wells, the latest well, this Lomond well is by far the best reservoir that we found to-date and that trend, I expect, to continue, now that we know what to look for and what to find but Lomond, by itself, will support the entire deep expectations of the play from what we see right now and also be a spectacular return for our royalty trust investors as well.

Joe Allman - JPMorgan

So, Jim, are you less optimistic about Davy Jones and Blackbeard than you were before based on reservoir quality?

Jim Flores

There is no optimism here. There is nothing but realism, Joe, and its going to be what its going to be, from a standpoint. But just given the comparison towards what we found and how we are improving the operations, and this is what our shareholders pay us for, is to make sure they were always improving and moving the needle towards higher quality margins, higher quality reservoirs and this has been a quantum leap in this lower tertiary protection play then I think we will be surprise with the people as it unfolds with all the data and the production test this summer.

Joe Allman - JPMorgan

Okay. Great. Then Jim you also mentioned $20 to $30 per barrel cash margin, so we specifically referring to the Lomond North and highlander and could you give me the calculation, quick calculation on that.

Jim Bob Moffett

Well, from a gas standpoint gas condensate, but if you are talking about 20 barrels per (Inaudible) that will get you pretty close when we have talked about LLS prices as the volume we are talking about.

You can get some pretty high margins there. That's kind of traditional gas condensate margins, you are seeing, in the Permian sand and central Oklahoma area and also north Louisiana, when you are talking about condensate-rich play, but you are talking about higher 50-plus million a day wells, you are talking about high volumes and great returns for our shareholders.

Joe Allman - JPMorgan

Great. Then just give us the update on the Gulf of Mexico asset…

Jim Bob Moffett

We first started and definitely because of the acceleration of a recompletion and higher price reserves at this point in time we are going to keep it going forward.

Operator

Your next question will come from the line of Adam Duarte with Omega.

Adam Duarte - Omega

Good morning, guys. I have two questions. One is, what are the next steps of Lineham creek? Secondly given your heavy completion schedule in the second half of this year on the ultra-deep stuff. Now, when do you see first distribution to the royalty trust units?

Richard Adkerson

On Lineham Creek, Adam, Chevron is the operator and we are. Chevron is developing its completion plan and we will be coming out with ASCs and so forth, I would expect Lineham Creek, because of Chevron is the first well of this debt with Chevron has completed in this trend taking their time and so forth.

There may be first half of '15 before we had a completion at Lineham Creek. That's why the Lomond North, Davy Jones 2, Blackbeard West completion this year will be more significant to the distribution of the royalty trust and we think we will be able to make distributions four to six months of commercial production.

Operator

Your next question will come from the line of Joan Lappin with Gramercy Capital.

Joan Lappin - Gramercy Capital

Okay. Plane about to take off to Kennedy, so I will ask my questions as long as I can, so as far as Davy 2, can we get more color. I may have missed some going to security, but I don't I doubt it and what is your timetable for $60,188? Any implications that would have for [Treasure Island]?

Richard Adkerson

We are in the process of completing Davy Jones number 2 right now and the West Blackbeard, while you referenced would be the subsequent on operation on a completion for that.

Assuming the Davy Jones operation goes as planned, we should be completed with Davy Jones in the second quarter be moving along to the West Blackbeard completion, which would be our third quarter completion there.

Joan Lappin - Gramercy Capital

Okay. Can you give us more color on what exactly you are doing? Why you think this is going to be different than Davy 1. I know, Davy wasn't completely wasn't stayed all the way to the bottom this well is, et, cetera et, cetera, so would you give us more information, so you can send that.

Richard Adkerson

Right. It's hard to more information on what we are doing differently. Now, we hope the reservoir performs differently and the relationship between the drilling fluids and the reservoir as they will become the impediment that we think happened to Davy Jones 1 as well as we are operating at a much better environment with twice the whole size and more standardized equipment.

We have drilled a lot of wells here since we drilled Davy Jones 1, we heard a lot of things. There were some things we still don't know. The one thing on the Davy Jones 2 that it was the deepest wells [stratigraphicly] we drilled today and that was before we had the sophisticated logging tools. We don't have as much diagnostic information as we like here on the Lomond well on cores and logs and so forth, but drilling the Lomond well and having have a lot of closed sands in the Cretaceous and also the well cost itself on most of our completion process. You are going to get our best efforts. There is no guarantees or expectations of change other than we are going to try as hard as we can.

Joan Lappin - Gramercy Capital

Okay, so the timetable is second quarter, then, for any kind of testing, or what?

Richard Adkerson

If everything goes as planned, that's correct. Its all subject to change in weather and operational challenges.

Joan Lappin - Gramercy Capital

Okay. Now, as far as what you know so for from Lomond North, do you plan to be buying more or being active again in the next presales or have you got everything on your plate as you want?

Richard Adkerson

We would never comment on that, Joan, as part of strategic reason and so forth and what we are going to do or not do. We are going to react appropriately to create value for you as our shareholder and everyone else and we have a tremendous acreage right here at Lomond that has a lot of drilling to do and a fantastic reservoir. So its getting a lot of attention here early on.

Joan Lappin - Gramercy Capital

Okay, would it be fair for us to assume that as far as the shallow water is concerned, there will be no drilling in the future and that it will all be onshore?

Richard Adkerson

I wouldn't make that assumption, Joan. I really wouldn't and probably we need to move on to some other questions at this point in time. So stay in touch. Appreciate it.

Operator

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

John Tumazos - John Tumazos Very Independent Research

Thank you for the presentation and good results. On your slide 34, the long term Grasberg profile, in 2017 you forecast 900 million pounds of copper and a million ounces of gold. Presumably, that's after the open pit mining has concluded. Do you expect to produce that from the Block Cave in 2017 or will part of it be from the IOZ separately and from stockpiled open pit ores carrying over? It's quite remarkable that you are avoiding a bigger down dip.

Richard Adkerson

Yes. John, you are remembering past year is where we did show a much bigger down dip. One thing that's happened, our continuing exploration delineation, the IOZ was the older mines. It went to the DOZ, the deep ore zone. All this is a continuation of block caving that started really back in early 80s. We have all an extension of the DOZ, causes the deep MLZ which we are targeting to drill around in 2015 and that mine's early years had some very good grades of copper and gold. So that has really helped us mitigate the impact of the transition from the pit to the Grasberg Block Cave which lies underneath the pit which we can't start mining until we get out of the pit because of substrata. So that will ramp up but won't provide much in the way that 2017 will include DOZ March, even if there is a deep MLZ and some stockpiles from the pit that we will have.

John Tumazos - John Tumazos Very Independent Research

Thank you, and if I can ask you a second question. On the slide 33, the oil and gas hedging, those are puts and swaps. So there is nothing that caps the upside or is there?

Jim Flores

John, the swaps do. That's obviously a fixed contract. But the puts do not.

Kathleen Quirk

And swaps are just on the natural gas.

Jim Flores

The natural gas, John.

John Tumazos - John Tumazos Very Independent Research

Thank you.

Jim Flores

Okay. Thank you, John.

Operator

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

Paretosh Misra - Morgan Stanley

Hi, everyone. A question on the Gresik smelter. What is the maximum amount of copper concentrate that people can send to that smelter? Particularly, is there any rule that limits the amount that your competitor can send to that smelter?

Richard Adkerson

Well, you know the sales of concentrate to that smelter are like they are under the rest of the global industry. They are on the basis of a sales contracts. So the smelter has a capacity of about 1.2 million tons of concentrate. Currently we supply about 90% of that, I believe, and so going forward it depends on how those contracts play out. There is no regulations that govern that. That's strictly commercial negotiations between, PTFI and PT Smelting. We are part owner in PT Smelting and the other Indonesian copper producer has been providing some concentrates there, but there's nothing that legally gives anybody rights or roadblocks providing that. It's strictly driven by the smelter's capacity and its [existing].

Paretosh Misra - Morgan Stanley

Understood. Have you already informed your customers that you might not be able to supply copper concentrate?

Richard Adkerson

Well, we have active communications with our customers. Several things are going on in the smelting business right now, think about the sound from the storm, so we have always been able to work cooperatively with our with our customers with the timing of shipments and so forth we don't have a real short-term issue of problems to deal with.

Paretosh Misra - Morgan Stanley

Thanks. One question for Jim, actually I was hoping you could provide fourth quarter production rate at Marlin, Horn Mountain and Holstein?

Jim Bob Moffett

Fourth quarter production added more than that in Holstein.

Richard Adkerson

I will tell you what, why don't you just follow up with David on that?

Jim Bob Moffett

Yes.

Operator

Your next question will come from the line of Brian Yu with Citi.

Brian Yu - Citi

Thank you. Good morning. I have got a couple of questions. First is, Richards, just for clarification, so in terms of delays in the export, is that having impact now and if not, when could it start impact if you don't get your resolution.

Richard Adkerson

Well, it's having an impact now in essence that because of these new regulation and the fact that the full regulatory team has not been finished and communicated. We are currently not exporting.

We had some ships that loaded early in January that had permit to carry it open 2013, so we have had shipments. On that basis, we have shipments to PT Smelting. We have timed everything to give us some working room here as we deal with this issue, so over time, the ultimate event that would start requiring to do more significant scale backs would be not having space to store the concentrate that we produce.

Brian Yu - Citi

Got it. Second question on different topic is [somewhere] gas business in terms of cost guidance for 2014. You know, it has gone up to $20 per BOE, and I was wondering if you guys would give us a breakdown, maybe by the four regions. Is there any particular one that's for the increase or is this more of the greater output from California inherently is good margins, but also higher costs.

Richard Adkerson

No, Brian. It's a good catch. I mean, I am not to bring that up. Our actual costs are $17 barrel, but when you shut-in Marlin, which is 30,000 a day for 90 days. It has a dramatic effect on the over all. It kicks our overall company-wide cost up to $20 a barrel.

Next year, we think our cost is going to be somewhere in the $18 barrel. Again, that is absorbing shut-in at Holstein, which is about 16,000 barrels a day or Horn Mountain, which is another 14,000 barrels a day, so that gives you the artificial inflation to our cost, the $20 barrel for this year and $18 barrel next year and you will see our cost go down towards $15 a barrel in 2016 just because we won't be suffering those shut-ins. So, there is no movement cost other than those shut-ins. I appreciate you brining that up.

Brian Yu - Citi

Okay. It should be tracking at 17 in the first half and then increase in Fungurume. The (Inaudible). Is that shut-in?

Richard Adkerson

Yes. Then that's going to change as dependent - we are planning a nine day shut-in, if weather goes our way and things happen where we should know it's a couple of weeks earlier, that all has a dramatic there. So we hope that's a number that its an outside number.

Brian Yu - Citi

All right. Thank you.

Operator

Our final question will come from the line of Daniel Rohr with Morningstar.

Daniel Rohr - Morningstar

Thanks a lot. Richard, I was hoping you could update us on your current thoughts regarding medium term Chinese copper demand? You touched on briefly in your introductory remarks, the changing composition of Chinese GDP. Curious as to what you think that means for Chinese copper demand growth over the next five years?

Richard Adkerson

So we continue to be very optimistic about China. In the global copper markets are tight, in China you can see that with premiums that are paid with falling exchange stocks around the world, just how dramatically they fall. In China you do have this copper that's in the bonded warehouses that are off-exchanges. So depending on how that goes, depending on how these financing deals go, but when you look at the performance of the economy in China, even though there's some slowdown, the size of the economy is growing to the extent that the somewhat lower percentages still translate into very substantial amounts of copper demand. So we are optimistic about it. We are also realistic to know that there could be changes depending on how the manage the inventories, how these financing transactions work and just how their whole activities go but we are optimistic about it. And as I said, I think in general, that market is much more optimistic about it than they were a year ago.

Daniel Rohr - Morningstar

So do you see the main growth drivers from an end-use perspective shifting over the next several years or is still going to be mainly infrastructure, mainly construction providing that incremental demand?

Richard Adkerson

It's clearly shifting. I mean China's automobile production is way up. I mean, way up. The things for consumers. air conditioners and the like are up. But at the same time, for that, China has going to have to continue to develop infrastructure to deal with the underdeveloped large population they have on the interior. So China has the financial resources to do that. So it will be a combination of increasingly important internal consumer base economy as well as continued infrastructure development.

Daniel Rohr - Morningstar

Thanks for your thoughts on that. I appreciate it.

Jim Bob Moffett

I have few comments on exploration. It's Jim Bob. We hear of some of these increases in our CapEx because we have more opportunities that we have been seeing over deepwater (inaudible) that we acquired. A lot of work has been done on those deepwater platforms. The substrate has not been explored. It hadn't even focused on it. So we are finding prospects on those deepwater platforms that are out there. And the prospects that we see as a result of this will cause cost inflation. Opens up to whole (inaudible), and it won't change the impact to the Lomond well. The Lomond well has been drilled onshore between the Tuscaloosa trend and Baton Rouge and we have wells to drill on the coast. The entire 100 mile square area (inaudible). And when you think about our exploration, in the minerals business, our exploration is all brown field because we have got big ore bodies that have not been drilled and as part of the deal. So when you look at that and we have a few green field (inaudible), intercepts. So our story is so big, based on current production but remember, we have a big production and we also have a big growth story and as we have the best prospects in the minerals business. The best place to find ore is underneath. They are the best cost base in deepwater, the best site to find ore, gas, oil and gas, and that's becoming true. The Lomond well, had (Inaudible) recent trend is right to understand that we saw in deepwater. We are able to (Inaudible) getting started, so that's why I wanted to comment on the flexible grade, but our exploration is doing well. Thank you.

Richard Adkerson

All right Thanks, Jim Bob. Thanks to everyone for participating in our call. We will be keeping you informed as all of these things progress. I would just echo what Jim Bob said.

We got a great company, great team here, great assets, great growth opportunities and we look forward to (Inaudible) diligently to create values for you, our shareholders. Thanks very much.

Operator

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

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