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Freeport-McMoRan Copper & Gold Inc. (FCX)

Q1 2010 Earnings Call Transcript

April 21, 2010 10:00 am ET

Executives

Kathleen Quirk – EVP, CFO and Treasurer

Richard Adkerson – President and CEO

Mark Johnson – COO of Indonesian Operation

Jim Bob Moffett – Chairman

Dave Thornton – President of Climax Molybdenum

Analysts

Michael Gambardella – JP Morgan

Tony Rizzuto – Dahlman Rose

Kuni Chen – Banc of America/Merrill Lynch

David Gagliano – Credit Suisse

Sal Tharani – Goldman Sachs

Mark Liinamaa – Morgan Stanley

John Redstone – Desjardins

Charles Bradford – Affiliated Research

Lark Smith [ph] – Scotia Capital

Sanil Daptardar – Sentinel Investments

Justine Fisher – Goldman Sachs

Dave Katz – JP Morgan

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Copper & Gold first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer. (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, everyone. Welcome to the Freeport-McMoRan Copper & Gold first quarter 2010 earnings conference call. Our results are released earlier this morning and a copy of the press release is available on our website at fcx.com.

Our conference call today is being broadcast live on the internet and anyone may listen to the call by accessing our website home page and clicking on the webcast link for the call. We also have several slides to supplement our comments; those are also available on our webcast link at fcx.com. In addition to analysts and investors, the financial press has also 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 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. I want 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 Richard Adkerson, President and Chief Executive Officer; Jim Bob Moffett, our Chairman of the Board. I have got number of our senior operating team here today including Red Conger, Dave Thornton and Mark Johnson. I'll start by briefly summarizing our financial results and then turn the call over to Richard who will be going through our presentation materials. We will then open up the call for the Q&A.

Today, FCX reported first quarter 2010 net income applicable to common stock of $897 million, $2 per share as compared with net income of $43 million or $0.11 per share in the first quarter of 2009. Our 2010 first quarter results include losses on the early extinguishment of debt totaling $23 million to net income or $0.05 per share.

Our first quarter consolidated as copper sales of 960 million pounds were higher than the January 2010 estimate of 890 million pounds but below first quarter 2009 copper sales of 1 billion pounds. The favorable variance to the January 2010 estimate, however, reflects the timing of sales from our North American copper mines and the variance to the 2009 period reflects the anticipated lower copper ore grades at Grasberg resulting from our plan mine sequencing and lower sales from our South America mines in the first quarter as anticipated.

These lower sales were partly offset by sales from the Tenke Fungurume mine in Africa where we sold over 60 million pounds of copper in the first quarter. Our consolidated gold sales for the first quarter of 2010 totaled 478,000, that was slightly less than our previous estimate of 490,000 ounces and lower than the first quarter of 2009 sales of 545,000 ounces that reflects the lower ore grades at Grasberg resulting from the lower grade material that we are currently mining.

Our molybdenum sales of 17 million pounds in the first quarter of 2010 were significantly higher than last year's first quarter of 10 million pounds and higher than our estimate of 15 million pounds because of improved demand in the metallurgical and chemical sectors of the molybdenum markets.

Our first quarter results reflect improved pricing for all of our products, copper, gold and molybdenum. Our realized price for copper was $3.42 per pound in the first quarter that was almost double the price in the year-ago quarter. Our gold realization was 1110 per ounce in the first quarter 2010 that compared with $904 per ounce in first quarter of 2009 and our realized molybdenum price of $15.09 per pound in the first quarter of 2010 was over 30% higher than last year's first quarter.

Our consolidated unit net cash cost averaged $0.81 per pound in the first quarter of 2010. As anticipated, it was higher than the $0.66 per pound reported in the first quarter of 2009. As previously discussed, our higher unit cost in 2010 primarily reflect the anticipated lower copper volumes at Grasberg.

Our operating cash flows in the quarter very strong at 1.8 billion. This was significantly above our capital expenditures of $231 million. We took additional steps during the quarter to reduce debt. We paid – reduced our debt by $281 million in the – in the first quarter and then on April 1st, we redeemed another $1 billion in senior floating rate notes due 2015.

Going back to the first quarter of 2009, the last 15 months, we have repaid approximately $2.3 billion in debt and that results in interest savings of about $155 million per annum. After taking into account, the April 1st payment, our total debt approximated $5.1 billion and our consolidated cash position approximated $2.7 billion.

We separately announced today, a separate press release that our board has authorized an increase in our common stock dividend from an annual rate of $0.60 per share to a $0.20 per share, that's $0.30 per quarter to be paid with the next dividend scheduled in August of 2010.

At the end of March, we had $431 million common shares outstanding. On May 1, our 6¾mandatory convertible preferred stock will automatically convert into common stock assuming the minimum conversion rate, FCX would have approximately 470 million common shares outstanding after conversion. This will reduce our preferred dividends by about $194 million for the year or just under $50 million a quarter.

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

Richard Adkerson

Good morning, everyone. Our first slide on slide three has a picture of our annual report. We will have the wide mailing of this annual report go out later this week. And in it, we talk about the success we had in executing our operating plans in 2009, focus on our long-life assets, our significant reserves and mineral resources and our prospects for growing our business over time. The fact that our assets are geographically diverse, we have a strong financial position as Kathleen just outlined and we have a great management team that performed very, very well during 2009.

The first quarter 2010 highlights which Kathleen just reviewed those. On page four, when I look at these numbers a couple of things really jump out at me. First, we had a quarter of where we had more than 5% fewer volumes, lower volumes in copper production, 10% lower production of gold and that was driven by our mine plans, our sequencing at Grasberg. It is our operation performed very strongly in the first quarter of '10 as they did if first quarter of '09 but we did have lower volumes.

We had copper prices that were twice on average the realizations that we had a year ago, though realizations were up 20% and it shows how leveraged our business is to these commodity prices. Our revenues were up by two thirds and our earnings were up 20 times over the quarter, a year ago.

But focus on the costs, as copper prices have doubled, certain of our costs do go up as you know energy costs for example are higher. But our cost structure is very similar to what we had a year ago. Our net unit costs reflecting the benefits of the higher molybdenum prices and the higher gold prices even though we had lower gold volumes is in the same neighborhood as our costs were a year ago.

And the lower volumes did affect our unit costs in terms of the cost before by-product credits but, our commodity price realizations are so much stronger than the impact of the elements of our costs that are rising and our focus on efficiency of operations is yielding ongoing benefits. That when you put the pictures together, the realization from prices with a cost structure inherent in our business, you end up seeing why we have a business that is able to generate operating cash flows like we did in the first quarter, of 1.8 – $1.8 billion.

The cost structure is given in more detail on page five as we look at what happened in the first quarter, our unit cost was $0.81 net of by-product credits where it was $0.66 a year ago. And when we look at it by regions, particularly focusing on our operation in the Americas where we operate mines that are great mines but have lower grades than we do in Indonesia to have North America's unit cost be at $1.13 this quarter where they were $1.22 a year when we were in the depth of the downturn and to see the attractive cost structures we have in South America, even in Indonesia where we had lower volumes because of our mine sequencing which yield enough with $0.10 a pound. It is very again emphasizing the point of the relationship between our costs and our leveraged commodity prices.

The markets continue to be good. Copper market is strongly supported by China with the strength of its fundamental economy, continuing to be exhibitive. Copper imports continue to be strong speculation as some of those imports are going into warehouses and that might affect imports later in the year but when you get through all of it, the fact that the internal Chinese economy is so strong, the continuing growth in the standard of living. It is evidenced by consumer spending, automobiles, air conditioners and the like.

The continued building of housing for people and infrastructure indicates how strong this is. Now, we do have a market of characterized by strength in China and weakness in the developed world and the U.S. and Japan and Europe. And elements in those economies continue to be weak, particularly in the construction side of the business.

But, but we are seeing the beginning of signs of improved demand for our products in the developed world. As we review what our customers are telling us about our business, important parts of that business continue to be weak but there are pockets where we are seeing improved demand for our, our products and as you will see, that's leading us to begin to change our strategy of where we had curtailment of our high cost production and now, we are taking steps to restore some of that production and invest more aggressively if growth for the future.

We start with Morenci, the flagship mine in North America, our traditional mine in the southwest copper district. We had been very aggressive in adjusting Morenci's operations in 2008 and 2009. Third quarter, 2008, I mean, if you remember, our unit cost of Morenci was approaching $2 a pound. This is a mine where we don't have the benefit of by-product credits. So we cut our mine rate in half. We shut our mill down, we reduced our employment and our equipment fleet and we pushed our cost down so that Morenci's unit coasts were at a level that would allow it to remain cash flow positive at very low copper prices.

Now, that we are seeing a more positive marketplace, we have begun to take steps to ramp up some of the curtailed production that we have. We have restarted our mill. We were already mining sulfide ore. This will allow us to process that ore and recover the copper from it and we will be increasing the mill rate to come to a rate of 50,000 tons per day by 2011.

We have cut our mine rate in half at Morenci from over a million short term, short tons to 500,000 short tons. So now, we are taking steps to ramp up the mining rate, to get that rate back up to 700,000 short tons a day and we are studying going forward. We are looking at increasing our performance at Morenci, which had been cut significantly by about 20% and we are very encouraged that we are being able to find good workers to come back into the work force.

We are mining to do additional stripping to expose the ore that we then can put on our lead stacks and process through our mill and this will have costs associated with that and because of the nature of the SXEW operations, some of the benefits of that increased mining rate won't be realized immediately but over time as we recover the copper from the lead stacks.

So you will see additional costs coming in at Morenci but when we look at the rate of return, that we will have from investing in that costs, with this kind of copper market, it is, it is very positive. And so we are looking at adding to the copper production from Morenci.

We had a project that we were beginning to invest in, in Arizona at the historical Miami mining district. We had deferred that project and now we are – we are investing if some new equipment using some of our existing equipment and that will allow us to recover some copper as we continue to deal with a reclamation activities in that area.

At Safford, the relatively new mine, that is very near Morenci, we had a project that we were pursuing to build a sulfur burner. We are now moving forward with that project. We had already spent some money on it. This will significantly reduce our need to buy sulfuric acid in the marketplace and give us a lot more flexibility as we go forward.

And Safford is a mine like many of our other mines that has very positive potential for further development with the sulfide ore body associated with the existing oxide operations and a major new ore body potential at Lone Star. So over time, as we will at our other North American mines, we will be looking to invest in increased production significantly at Safford in the Sulfur burn that give us lot of flexibility in doing that.

In South America, at our large mine in Peru, Cerro Verde, we are proceeding with a project to increase the mill rate there from a 108,000 tons per day to 120,000 tons per day, not a lot of capital, but it will allow us to achieve in the relatively near term incremental copper at a very low cash cost.

But this is a mine that has the resources, has the footprint, the resources available to provide for a major expansion and we are now engaged in the feasibility study to look at an expansion that would involve a major investment in new milling facilities with the potential to more than double its output. We will be completing that feasibility study by the end of this year and early next year, we would fully expect to go forward with the decision to do a major expansion project at Cerro Verde and Chile, at our El Abra mine, we are completing the mining and processing of an oxide ore resource that has been the basis for this operation for the past 15 years or so.

There is a significant sulfide resource and we have begun work before the downturn on a project to develop that sulfide resource through a leaching process called Sulfolix. We deferred that a year and now we are investing and going forward with that project. It in itself would allow extension of the mine life by more than 10 years with significant production and it requires some capital, $535 million for the initial phase to be completed in 2010.

But as we have been conducting core drilling in that area, we have expanded the resource available, the sulfide resource. And we see the potential for our major mill investment in – at El Abra and we are working cooperatively with our minority shareholder Codelco which has other mining operations in the area. We have begun a pre-feasibility study jointly with Codelco to look at how we got, might most efficiently consider this milling opportunity.

Again, it is a – it is a major opportunity for a mine three years ago that we were – we weren't aware that we would have this kind of opportunity. It is real exciting for us yet. In Indonesia, when we curtail capital, we didn't curtail capital for our ongoing investment in developing the underground resources in Indonesia because it is so critical to our, to our future, future operations and strategy.

This is one of the most significant undeveloped resources, anywhere in this industry, anywhere in the world, with average reserves of over 40 billion pounds of copper and 35 million ounces of gold. You have watched this expand the DOZ mine which was unusually targeted to be a 20, 25,000-ton per day mine and now it is operating at over 80,000 tons per day and it is, that's going forward.

We are developing the high grade (inaudible) mine, the Grasberg block cave which is the key to our future active depletion of the Grasberg pit which is currently scheduled for 2015. We are studying the possibility of extending that for some short period of time but the Grasberg resources will, will be there that will allow us to continue in a way that we didn't, we weren't planning for. So the relatively recent past to continue to operate Grasberg is a high volume low cost mine, we are seeing the production from underground resources ultimately reaching 240,000 tons per day for our operations there to give you just how significant that would be.

That will include initially the development of the Grasberg block cave, the continuation of the DOZ mine, which has significant life and the ultimate development of the deeper resources below the DOZ and adjacent to it, the Deep MLZ mine. All of that is really progressing well and all schedule.

In Africa, we have the exciting potential of dealing with the resources at this very large concession, more than 600 square mile concession and Tenke Fungurume in containing a progress of the DRC. Our initial project which was being completed around this time last year for the copper circuit is operating. And we just achieved the design copper production rates during the fourth quarter of 2009, and our copper circuit is operating is operating very well.

In the first quarter, we produced about 5 million pound of cobalt sold 3 million pounds, we are still working to get the cobalt circuit and the related SO2 plant operating if an efficient fashion and dealing with startup issues, at full rates for this initial stage the project we would have annual production of about 250 million pounds of copper in over 18 million pounds of cobalt with more than that in the early years.

We continue to do expiration drilling and exploration and development analysis for the resources to allow expansion beyond this initial project. We have a feasibility study that we are currently working on for the next phase of development there. And put this into context, we currently see the resources that are there available to us to reach a doubling of the current production outlook from the oxide resources, using an expansion of the basic system that we have now.

We will be approaching that in two steps in this feasibility study is looking at the first step of that development to optimize the current system and looking at various expansion opportunities to expand production up to a half of where we are right now. And then there will be subsequent oxide development.

Beyond that, we are seeing a sulfide resource and a mixed ore resource that would allow significant further developments that we would like to pursue aggressively that would allow this to become a world class mine. And we will be working diligently on our exploration and development analysis to see where we go.

We continue to have discussions with the government on the contract and revisitation process and we are – those discussions which have been going on now for a number of months continue to be positive. And we continue to have a strong belief that we will be able to reach an agreement that’s mutual agreement for both sides of this project is, so important to the country and we are committed to working with the country in a positive way and doing things in the right way.

You saw in the earlier financial and information that’s price of molybdenum has also increased. It reflects and improved marketplace, Chinese imports and a good outlook the same when we have for copper. We had adjusted our primary molybdenum production at Henderson aggressively in response to market conditions a year ago. That mine operated at roughly 60% of its capacity during most of 2009, we are now up to roughly 90% of the capacity at Henderson. And we are studying the restart of the really attractive project for reopening the Climax mine in Leadville, Colorado.

This is a project that's going to get done. It is just a question of when we pull the trigger to do it. It is probably the most attractive molybdenum project in the world. Initial phase to that project would result in large scale production 30 million pounds a year. Attractive cost would also pound or so and have future growth opportunities that will allow us to consider over time expanding if maybe by as much as double the 30 million pounds.

It’s a project of where we spent some capital, we deferred it. It would take two summer construction periods to complete and we are evaluating when to we start with that construction.

Page 13, talks about the current projects under evaluation. Now, all of you have been reading about the supply issues affecting the copper business and they're significant. Faced with the growing demand for copper in China, the science of recovery and then ultimate recovery in the developed world, the worlds going to need copper and during this period of time, when we had to deal with the economic turmoil, projects have been deferred, the existing mines continue to age and deplete rate fall operating systems are aging.

The industry is faced with significant capital just to extend and maintain mine lives at some of the big mines around the world. Some of them like we are facing at Grasberg are looking at going underground. People investing in challenging projects these days to find to find or it can be developed and many of those projects have technological issues and community acceptance most government issues.

We’re also positive about our company is that we operating most of the major mining districts around the world. We have existing operations that have very substantial amounts of resources associated with current production. Based on our core drilling today, we have identified mineral resources that have contained copper of over 100 billion pounds, which is more than actually than our existing reserves.

And so we are – we are focused on planning on expanding these operations over time as the market needs them in North America. We are looking a shorter term basis at starting mining in our Chino mine in New Mexico, where we have suspended operations. We talked about further increases in Morenci mine rate. We acquire some additional land adjacent to our Sierrita mine in Arizona between this property and that give us some development opportunities there for that resource, perhaps jointly with Sierrita.

The Climax restore and then in North America, our major mines have significant sulfide resources that we are looking at many options to develop over time. We talked about South America, the expansions Cerro Verde and El Abra. We continue to explore in Chile and have contacts with industry participants about joint participations there. We talked about Tenke, which has exciting growth opportunities and Grasberg we continue to find resources associated with the Grasberg districts and do exploration outside of Grasberg.

We are significantly a stepping up our exploration budget this year. We have curtailed it somewhat really didn't slowdown our exploration effort but we had a lot of data that we accumulated in 2007, 2008, which we continue to evaluated. We added reserves last year we expect to continue to add reserves as we look to go forward. But we are increasing the exploration budget to in the range of $100 million or more. We will spend money on exploration whatever it makes sense.

Looking at 2010, we had a good first quarter. We are continuing to have a sales outlook up 3.8 million pounds of copper, 1.8 million ounces of gold, 62 million pounds of molybdenum. We work for opportunities to beat those numbers to move volumes forward. We have had success with than in the past. But for purposes of our guidance, we are continuing with that. Even with a doubling of the price of copper, higher gold prices, higher molybdenum prices and supply input cost with some lower volumes this year because of sequencing in Grasberg, we are forecasting a very attractive unit cost rate of $0.88 a pound really, really positive thing for our company.

At current outlooks for prices and cost we will generate $6 billion of operating cash flows with $1.7 billion of capital expenditures. Our sales profile going out through 2012 is presented on page 16, you can see growth of about 100 million pounds a year from the projects that we are announcing today that go from those three periods. We are going to be focused on these growth opportunities and we’ll be updating our analysis for that as we go forward.

Our goal sales to Grasberg strictly driven by the sequencing situation the resources, the same as just a question where we are in our mine sequence on our website with this denims to this slides, you have got some information on that so you can visually see how this work, we are also have a five year outlook. For prices to beyond 2012, we will turn to high levels built sales of Grasberg.

For the year, those of you familiar with Freeport know that quarter-to-quarter result vary depending on this sequencing issue. It’s not a negative it just a way our business operates. And we mind at the higher reaches of the Grasberg Deep which is now about a kilometer Deep, we have lower grades and who we are at the core as we were during 2009. Those units on anytime we draw circle around and calculate a unit cost, are going be affected by those volumes.

So you can see as we sequence start out of the high grade section during the first quarter, we will be at a lower grade section of Grasberg. You can really see that on the gold slide and charted to the upper right. In second quarter, for second quarter results we are going to have lower volumes, higher unit costs to that quarter. The key to it is to look at this situation over time and see just what an attractive story we have in terms of the volumes and cost in relation to the commodities that we are exposed.

Our unit cost for the year, are presented on Page 18 and if you go back and look at where we were going into the year. You can see that even though we have this high commodity price, our cost structure is being maintained. Our cost of $0.88 outlook now compares with $0.86 we had at the end of the first quarter. North America at 124 is the same as where we were at the end of the first quarter as in South American and Indonesia all are very consistent. And it’s in interesting compares and actually to go back and look at where we were last year and think about. Again, a year where we have so much high copper prices that are cost structure being maintained at such an attractive level.

Page 19 shows, EBITDA variations and operating cash flow variations over copper prices ranging from 250 to 350. This is based on the a $1,000 gold and $10 molybdenum average volumes for 2010, 2011 and over that range, our EBITDA ranges from approaching $6 million to over $8.5 billion and our operating cash flow rages from $3.7 million to $6.5 million, that’s $10 billion, $9.7 I can't read my own writing here, $9.7 for EBITDA at 350. So at 350 you are looking at almost $10 million of EBITDA and $6.5 million of operating cash flows.

Sensitivities are shown on Page 29. So you can adjust based on your own view of those factors, capital expenditures for 2010, 2011 in aggregate are up about $300 billion, we will continue to review those. $300 billion the 2010 is actually the same as original estimates some has been reallocated from a timing perspective. But we are going to be looking to spend more capital as we go forward.

We have over the past three years really significantly improved our balance sheet. It was three years ago that we completed Phelps Dodge transaction had over $17.5 billion of debt. Today, we have pro forma for activities we have debt reductions we took after the end of the quarter, about $5 billion of debt and $2.7 billion of cash. So our balance sheet is extraordinarily strong, you can see that on page 23, when you look at our debt maturities. We really have a minimal debt maturities going out through 2014. And we have been able to achieve what we wanted to do from a debt standpoint.

So what is that leave us, we’ve got a strong balance sheet, very strong liquidity position. Our cost to management is been effective and committed to maintaining that effectiveness. We are focused on investing in growth with our existing sets of assets and being alert to other opportunities that are out there in the industry. We have taken opportunities to reduce debt. This is now allowed our board with being announced today to double our dividend on our common shares. And with amount of cash that are generating that’s going to give very positive opportunities to invest in this business, very positive opportunities to enhance shareholder returns through common stock dividends and give us the opportunity consider executing on our share buyback program. That's a summary. So we are pleased now to turn the call over for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions) Your first question comes from the line of Michael Gambardella with JP Morgan.

Michael Gambardella – JP Morgan

Yes. Good morning, Richard and congratulations to you and Jim Bob and the entire team for another great quarter. And also thanks very much for action on the dividend I think that's a great signal to the marketplace. My question is really around the 10-K project and how far can you push production without a rail connection to the port?

Richard Adkerson

We can double production using our existing transportation system. That's producing copper cathode and actually the truck system has worked reasonably well much better than quite frankly expectations were. There are times we have delays at the borders but the system has worked reasonably well. And we think that, we see it working for doubling of where we are now.

Michael Gambardella – JP Morgan

So you have trucks on site right now for doubling the production?

Richard Adkerson

Well, we use contractors. And there is some Congo lease contractors and also some South African contractors. But the equipment of availability is there.

Michael Gambardella – JP Morgan

Okay. And when will you know or do you know right now, what the size of production could be if you had a rail connection?

Richard Adkerson

Well, over time – people have talked in the range of 400,000 tons, 50,000 tons but it’s really depend on what we see with our continuation of our drilling as we analyze development options. But clearly something that could get up to world class mines levels.

Michael Gambardella – JP Morgan

Would that require you or in most cases result in giving us some portion of the equity stake in the mind for that rail connection?

Richard Adkerson

No. I mean we are – it wouldn’t require. I mean we will always look for what's the best structure and so forth and what we might do, nothing is required. I mean it’s the rail connection, really – the optimal solution would be connecting with this railroad that's been built through Angola by the government of Angola supported by Chinese. There is a much – the connection within the country is really an old rail line that once was there and we'll be restoring it and it’s not the kind, it’s not significant project that you have in Angola. So it would something that we are talking with the government about it’s – somewhere down the road, it is not a near-term deal. But we are confident that could be, that could be built.

Michael Gambardella – JP Morgan

And one last question on Climax, I mean the guys at General Moly had announced that they're teaming up with the Chinese on getting the financing to start their mine in Nevada, how does that impact your, outlook on Climax restart?

Richard Adkerson

Well, we focused on overall market and we look at what’s going on in the marketplace. We are the world’s leading producer of molybdenum, lowest cost producer and we are going to protect our market share as we go forward.

Michael Gambardella – JP Morgan

Okay. Thanks a lot, Richard, and congratulations again.

Richard Adkerson

Thanks, Mike. I really appreciate your comments.

Operator

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

Tony Rizzuto – Dahlman Rose

Thank you very much. Hi, everybody.

Kathleen Quirk

Good morning.

Richard Adkerson

Hi, Tony.

Tony Rizzuto – Dahlman Rose

I’ve got a couple of questions. One is regards to El Abra and the other one is more strategic in nature. But the first one with El Abra, I notice that Diego Hernandez has joined up with Codelco and I’m wondering with Mr. Hernandez now as CEO, do you see Codelco perhaps being a little bit more aggressive in how they approach projects and maybe a little bit more willing to work with you as you indicated that you’re looking at this more significant expansion. That's my first question?

Richard Adkerson

All right. Tony, let me just answer that. I mean, Diego was a – Diego was guy, we know very well, got to be friends with him down in Chili and I’m pleased for him, he’ll do a great job for Codelco.

But we had worked, we had developed a relationship with Codelco under the existing management that was extraordinarily positive. There had been some history at El Abra, but I was just down in Cisco, met with Jose Pablo and his team and they were very positive about our work at El Abra, where they have a 49% interest.

They're enthusiastic about this joint project we’re undertaking and so, we couldn't have been more pleased with our relationship with Codelco as it stands now, and I’m sure it will be great under the new management team, the Minister of Mines is very positive about Freeport, about Freeport working the new Minister of Mines with Codelco. So all of that’s good.

Now Chile faces this significant reconstruction project from the damage caused by the earthquake and that’s affecting the finances for the whole country. We are looking at using some reserve funds about raising some money in the capital markets and they are talking about certain increases in taxes and royalties, broadly, at least for the mining industry. And realistically that’s going to have an impact on Codelco for some time and that, and we take it, provides opportunities for us to expand our relationships with.

So we are happy for Diego, but we were very pleased with our relationship with Codelco as it’s been recently.

Tony Rizzuto – Dahlman Rose

Excellent insight. And my other question, Richard is more strategic in nature. Obviously, you guys have done a lot of great things, you’ve got, you’re going to be net debt free by year-end according to our analysis. You’ve a 15% free cash yield. You've obviously got a number of excellent project, organic growth opportunity.

My concern is that your stock price is not reflecting this appropriately and there’s been a decoupling of the copper price – from the copper price. And I’m wondering, I’m not sure what this is due to. You know, we maybe do only to, I know there are observers out there that are concerned about China and the macro and think that the copper is trading too far away from marginal cost of production, the non-believers if you will.

But I’m wondering also is there a concern also that maybe people, some people are viewing your growth opportunities, as maybe not so much growth and that Freeport is maybe in more of a mature phase and is this part of what maybe going on. I mean, how, shouldn't we think about in addition to organic, should we think about the possibility, you kind of alluded to looking for other opportunities. Should we think about Freeport looking for external growth as well?

Richard Adkerson

Yeah. First part of your question, as you noted, there is a lot of skepticism about China, there has been since 2003, about China’s internal economy and bubbles in its property sector and just overall concerns about its ability management growth. They’ve done it very well. They internal economy is doing well. But there is a lot of questions about this issue about the relationship between imports and internal consumption.

So that's there, the U.S. continues and western world continues to be having this overhang of the economic downturn and issues like Greece and Goldman Sachs over the marketplace. So it’s just part of the world we live in, longer range we are very optimistic about China, about, alternately about the recovery in the developed world’s economy.

We like where our company has placed. We’ve got growth opportunities. We were focused on liquidity protection beginning in late 2008 and into 2009. Now we’re shifting gears a bit and we’re going to be working diligently on looking for opportunities within our existing sets of assets. We are always alert to other opportunities and overtime, we are going to as we got effectively over the years. We are going to show the marketplace. I mean, our issue is performance. I couldn’t be more pleased with the performance we have in running our business and we are going to do a great job in taking advantage of opportunities, where they come to us overtime.

Tony Rizzuto – Dahlman Rose

I appreciate that, Richard. And I certainly and certainly very pleased to see that you’re shifting more to the growth and CapEx, and hopefully the stock price will better reflect what you guys have achieved and are achieving? Thank you.

Richard Adkerson

Thanks, Tony.

Operator

Our next question comes from the line of Kuni Chen with Banc of America/Merrill Lynch.

Kuni Chen – Banc of America/Merrill Lynch

Hi. Good morning, everybody.

Richard Adkerson

Hello, Kuni.

Kuni Chen – Banc of America/Merrill Lynch

I guess just a question on the potential return of capital to shareholders. I guess can you just remind us on your comfort level with cash on the balance sheet and you know, as far as, certainly look at capital expending opportunities going forward, but what's your comfort range with cash and how is too much?

Richard Adkerson

Well, we have certain amount of cash that aren't available to us for corporate purposes. But beyond that, we don't see any real needs of maintaining substantial amount of cash within our company.

So we are going to be managing our cash position going forward by looking as we always do our forward view of cash flows, looking for opportunities for investment and then to the extent there is available cash, we will be talking with our board about what's the most appropriate way of returning that to shareholders.

Kuni Chen – Banc of America/Merrill Lynch

Okay.

Richard Adkerson

And…

Kuni Chen – Banc of America/Merrill Lynch

Okay.

Richard Adkerson

So one of the – one of the most positive things as we think about this issue of the global financial picture, is the availability of financing to us. We have the opportunity of talking with the financial market players, the banks we have traditional relationships with. Others are always trying to establish relationships and the availability of capital to our company right now is extraordinarily.

For example, we have been advised that, that we would have financial support to doing the financing, we did three years ago with the Phelps Dodge deal, rates are obviously very attractive today. But capital availability is really important feature for the marketplace and it’s available to us in a very significant way.

Kuni Chen – Banc of America/Merrill Lynch

Okay. Great. And can you, I know there's some existing share authorization, that’s still out there. Can you talk about whether there's a preference there between, potential buybacks or a special dividend?

Richard Adkerson

We’re just going to – we always just look at the marketplace and make decisions on that. We’ve done both in the past. They're both available to us and today we’ve been focused on looking at increasing the dividend, which we had eliminated and then now we've had two steps to increase. But these are issues we get the counsel of our board on, they're absolutely board decisions and we review it continually with them at every one of our meetings.

Kuni Chen – Banc of America/Merrill Lynch

Okay. Great. And just one last one if I may, on Morenci with the ramp up there, I think that gets you back towards 80% of sort of pre-crisis production. If you are incrementally take that back to kind of full production, that's, that really just a labor issue to go back to 100%, if you could just flush out what would be needed there and the timing, that would be great?

Richard Adkerson

Yeah. It’s more like 70%, 75% rather than 80%, but yeah it’s not a complicated process. We have – it is equipment and people. We have available equipment and we were real pleased with our ability to ramp up in terms of hiring, we’re able to find a lot of people to work for us. So, it’s not a constraint; it’s a management issue, but it’s not a constraint in terms of stepping up. It’s a condition in the marketplace. And we’re staying, as I indicated a couple of occasions, we are studying the next steps beyond this one, I guess, it’s too starting the mill increasing mining rate.

Kuni Chen – Banc of America/Merrill Lynch

Thanks.

Operator

Our next question comes from the line of David Gagliano with Credit Suisse.

David Gagliano – Credit Suisse

Hi. Good morning. I was wondering if you could just remind us, again, what the total capital spending needs are for the underground development in Indonesia. That's my first question?

Richard Adkerson

The total expense over many years. We have now invested in building the infrastructure that allows us to get there. We’re beginning now to take the initial steps on mine development. We’re investing in our rail system for the first time. There’ll be a shaft development in the underground. Mark, why don't you make some comments on that and maybe Kathleen can talk about some of the detail.

Mark Johnson

Sure. This is a big year for us, as Richard stated, we’re ramping up our development rates in both the Grasberg block-cave and Deep MLZ, they're both going to come online almost simultaneously in 2016.

At the same time, we’re starting up the big (inaudible), we are finishing up the development of that and we’ll start production there at the end of this year, with our first stoke. So that's an exciting time for us, we have commissioned the shift, the ore flow system, we’re getting the base plant ready.

So we’re well positioned there, as Richard said, we’re in a period where this year we’re going to have about 45 kilometers drifting for underground development. That peaks out with the 2011 to 2013 timeframe, when we get up over 55 kilometers a year. And we feel very well positioned to achieve those targets.

Kathleen Quirk

Just in terms of the numbers and these are total numbers and we share with via 10-K [ph] and these are amounts that are spent over a long period of time. But for the Grasberg block cave, it’s just over $3 billion and the Deep MLZ, the initial capital is roughly $2 billion, the Kucing Liar is roughly $2.5 billion, we’ve also got some mill modifications. But we are looking at spending over the life of the mine in the aggregate ongoing throughout the life of the mine being around $500 million a year and our share of that being about $350 million a year for that underground development over the life of the mine.

David Gagliano – Credit Suisse

Okay. And then of the block-cave, the $3, $2.5 billion and are those, how much is of that has actually been spent at this point and how should we’d be thinking about that through Rio Tinto in over the next few years?

Kathleen Quirk

We’ve been spending at eclipse going back mainly on the common infrastructure, going back for several years now. But we’re stepping up now the expenditures on the Grasberg block-cave, and again, we’re going to be spending, our share of spending is going to be in $350, $400 million range for the next several years.

David Gagliano – Credit Suisse

That's the total CapEx for you, $350 to $400 million then, that's it?

Kathleen Quirk

Yeah. For our share…

David Gagliano – Credit Suisse

Okay.

Richard Adkerson

And Kuni, when I talked about this being a, David, I'm sorry.

David Gagliano – Credit Suisse

That's okay.

Richard Adkerson

David, we have this chart up on the wall and I just read the wrong number – wrong name, David, I’m sorry.

David Gagliano – Credit Suisse

That's fine.

Richard Adkerson

But, when I talk about this being an underground mine, compared with other undeveloped mines, it is really significantly different. Because we do have the mill and the infrastructure built for that. We have the town sight, the port system, all of the supporting infrastructure.

So it’s development really relates to just what Kathleen and Mark were talking about developing the underground mine as opposed to kind of what you’d be faced, if this was a mine, that would be, to standalone basis somewhere else in world.

David Gagliano – Credit Suisse

Okay. Perfect. Then just a quick follow-up, what was the cash cost of the 66 million pounds of copper that was sold from Tenke in the quarter?

Kathleen Quirk

We’re going to start reporting our cash cost once we get ramped up to the cobalt ramped up. But in the first quarter, our cash cost averaged just over $1.

David Gagliano – Credit Suisse

Okay.

Kathleen Quirk

And we are targeting getting to 52% [ph] or below once we get the cobalt issues resolved and the issues in the SO2 plant resolved. So we don't think the first quarter really was representative of what will be on a run rate basis. But that's what it was.

David Gagliano – Credit Suisse

Okay. Perfect. Thanks.

Richard Adkerson

Thanks, David.

Operator

Our next question comes from the line of Sal Tharani with Goldman Sachs.

Sal Tharani – Goldman Sachs

Good morning.

Richard Adkerson

Good morning.

Sal Tharani – Goldman Sachs

Can you hear me?

Richard Adkerson

Sure, Sal. Good morning.

Sal Tharani – Goldman Sachs

Good morning. And I want to ask you, you made a comment about some pockets of demand you’re seeing outside of China, particularly in the OECD economies. Can you elaborate where are you seeing and what are you looking at the moment?

Richard Adkerson

It’s more in the electrical side of the business, Sal, both here in the U.S. and in Europe. There's some pockets of – of parts of the economy, as you can see, automobile production is one thing that’s generating some business for people.

When we look at the residential, commercial construction business, it’s still weak but it’s more bottomed out. So you’ve got situations of where our downstream customers are not facing further declines in their business, they have very low inventories because the cost of copper and the financial situations. They're not carrying any inventory. So when they have pieces of their business that generate opportunities, we can see immediate demands for copper.

Sal Tharani – Goldman Sachs

Okay. And what size are you, will you be watching in terms of data where you feel more confident or comfortable to ramp up further on your projects?

Richard Adkerson

Well, copper is so correlated to overall economic output. In the develop world, it’s closely correlated to industrial production. And so as you see, as the same sort of thing you heard in the JP Morgan report, where they were seeing some improvements in the credit card business and the like.

All those things come together. So it will be a combination of industrial production, employment, business investment. And all those things and there's some positive signs with that, as they improved and then you’ll see demand for copper stepping up.

Sal Tharani – Goldman Sachs

Okay. And lastly, on the Tenke Fungurume resolution, any progress, anything new over there?

Richard Adkerson

We continue to have very positive discussions, we have not completed those discussions and so there is nothing more to report on than that. So, it’s something we are continuing to be committed to work with in a way that's beneficial to us in the country.

Sal Tharani – Goldman Sachs

Has the frequency of discussions increased since the last time?

Richard Adkerson

You know, it is an ongoing basis. So it’s, and the country is dealing with a number of issues now. There has been a government that was formed in the first quarter, we’ve structured the government. The people we work most directly with the mine’s minister and then the Prime Minister are still in their positions. We work with the government.

Just to emphasis we have a contract. We continue to work on that contract and get our business operating in the right way. We’re working on expansion, so none of this is holding us back at the present time. We do need to get this resolved. Is in our interest and the government's interest and we are both working to do that.

Sal Tharani – Goldman Sachs

Okay. Great. Thank you very much.

Operator

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

Mark Liinamaa – Morgan Stanley

Good morning, everybody.

Richard Adkerson

Hi, Mark.

Mark Liinamaa – Morgan Stanley

And I’m also interested a little bit of detail in the growth mainly in the America’s. Would you be able to comment at all about what the cash cost profile of the incremental expansions might look like?

Richard Adkerson

Well, the range of incremental expansions is real broad and so you can see in the numbers that we disclosed to you today are what the steps we are taking today involve. We talked about Morenci being in the range of $0.08 to $0.10 of incremental costs to do the stripping that's necessary to step up our mine rates there.

Mark Liinamaa Morgan Stanley

But from a cash cost to production basis, once it was in there, just looking at these number, you are currently running at about a 2 billion-pound run rate in the Americas, if you lump everything together and they're pretty close on a cash cost site delivery at about $1.15, if I am not mistaken. And so what would that $2 billion maybe look like five years out and what cash cost maybe is a better way to frame the question?

Richard Adkerson

Okay, Mark. You are asking me a real broad range question.

Mark Liinamaa – Morgan Stanley

Yeah, I realize that.

Richard Adkerson

I am going to give you a real broad range answer.

Mark Liinamaa Morgan Stanley

That's fair.

Richard Adkerson

Our – we look out at the major expansion projects, we think that those will come in with cash costs is consistent with our current cash cost levels.

Mark Liinamaa Morgan Stanley

Okay. That's important.

Richard Adkerson

And that's going to be there, where we do. The issue will be the amount of capital that's required to develop those because once you start talking about milling facilities for sulfide resources that's a lot of capital. But we would be looking at resources that should be able to be produced at attractive, attractive cash costs.

Jim Bob Moffett

Make a comment about the sulfide ore. We have talked a lot about the – South America and North America and these – remember they – we talked about it in one of our other calls and I made the example that if you look at this as a big pear sitting in the ground and that is part of the pear that's exposed is the oxide ore, which is really just a small part of the pear, it has gotten ripened by the exposure to the weathering et cetera. So you have got this big sulfide ore whether you talk about South America or North America, underneath all of these oxide ores you are going to have a substantial sulfide ore. That means you deepen the pit, you widen the pit, you mine the bridges in the pit especially Morenci to increase your production. As Richard said the most important thing is the capital outlay because the reason why the oxide ore of in mine, they were preference, especially the sulfide properties, by playing in the leach patch and laminating these necessities in (inaudible) and smelting, really put the oxide ores into their – in the prominence, we were talking about much lower copper prices.

So, I think it is – I think it goes without saying, that there is a huge amount of ore which we drilled up since we made the acquisition and as confirmed the sulfide ore had been mine by Phelps Dodge, by anybody because of the fact that when you are looking at your dollar, copper less or lot of people thought nice. They said copper was a long range price; all of that psychology has changed substantially. So I think in answer to the question, we just asked, if you got to put into perspective, the fact that sulfide ore is more expensive to mine not so much in the cash cost of production but when you look at the outlay of cash, to get yourself in the production, the mills are obviously more expensive at least that is to matter of fact but the amount of ore, we have been able to access is basically five, six seven times the amount of oxide ore that existed.

Mark Liinamaa Morgan Stanley

That's great and thanks for that, Jim Bob and as we think about, again this is a little broad, but from a 2 billion pounds, I guess, 2.5 billion pounds a reasonable expectation based on the projects you have outlined?

Kathleen Quirk

With increase in our production in Americas to that level.

Mark Liinamaa Morgan Stanley

Yes.

Kathleen Quirk

Yeah.

Richard Adkerson

You know, my reaction is to tell you yes but we are going to be, we are going to be studying to maximize what these resources are available to us. It is going to be an ongoing process of where we are going to continue to do analysis and work to decide where to go forward but the – the potential for significant growth is there and we believe the market is going to allow us to produce it. Go back to one thing I said earlier, the first major expansion opportunity that we have is going to be a Cerro Verde and we think a year from now, we will be, we will be, we will have completed our feasibility study and we will be preparing to more than double the production from that mine.

So that is the first, will be working in the meantime. We are going to do an incremental studies of how we can enhance our near-term production and look for opportunities to make these kind of major investments that Jim Bob and I have been talking with you about to have the significant kind of future increase that are available to us.

Kathleen Quirk

And the Cerro Verde alone would go a long way to what you are talking about, Mark. One other comment on the mineralized material, we reported 122 billion pounds of mineralized material, a lot of that is in North America, over 70 billion pounds of contained copper is in North America and sulfide material, that just back to the point that we are making about great opportunity that we have in North America on milling.

Mark Liinamaa Morgan Stanley

Thanks very much, everybody. Appreciate the answers.

Richard Adkerson

Thank, Mark.

Operator

Our next question comes from the line of John Redstone with Desjardins.

John Redstone Desjardins

Good morning everybody. Two questions, first off, you mentioned that it would take you two summers to bring the climax project on stream. Is there a reasonable chance that you may be able to do some work this or are we talking about summer 2011 at the earliest?

Richard Adkerson

Dave, Dave Thornton who runs our climax business.

Dave Thornton

Yes, John. We plan to do some work this summer. We have some pipeline part of work that we had planned to do when the weather permits that we would do this summer. So that was already in our plans to continue our construction efforts although at a minimum rate but we plan to do that as the weather permits this summer. So we are going to be active this summer.

John Redstone Desjardins

So you could be up and running in the second half of '11?

Richard Adkerson

Well, no. We are talking about that's unlikely this stage. So as we sit, look today, it's likely going to be beginning after the summer of 2012.

John Redstone Desjardins

Great. Got you. Thank you and then the second point, with reverse to the security situation at Grasberg, I know that you have done an awful lot of work on this and taken a lot of steps and we were hit – heard stories about Russian trained sniffer dogs that are quite honestly (inaudible) to me but as the situation stands today, do you feel that you have to take any further steps regarding securities or any particular body that you feel you need – local body that you need to sit down and talk to or as the situation stands today, are you happy with the security situation at Grasberg on an ongoing basis?

Richard Adkerson

First of all the dogs are American trained. Some of them are (inaudible) German Shepherds but they are just part of the process that we had to bring in resources to this. We had a sheering [ph] event in January. We've actually had two in the last six months. We had hoped that all the work that had been done last fall would have been in at this situation but we did have the other event in January but not since then. The Government has put resources on this. We recently entered into a memorandum of understanding with the security forces. We are – we are encouraged by their food organization and commitment to it. We have adopted with the advice of security consultants, procedures for transporting people and equipment on our road to say we are satisfied, we are not satisfied because the investigation into the perpetrators of this has not been completed or they have not been found. We are pleased with the enhanced security. Our people there have great morale. They feel good about it. We are not loosing people as a result of this but we are continuing to encourage the authorities to complete their investigation and get to the bottom of this and bring the people who are doing these terrible things for justice.

John Redstone Desjardins

Thank you.

Operator

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

Charles Bradford – Affiliated Research

Good morning. Could you give us guidance in the next few quarters, next few years on how much cobalt to be producing?

Richard Adkerson

We are producing. We actually produce cobalt at a good rate in the first quarter. We had roughly 5 million pounds of production. The quality of the cobalt, while it is marketable, it is not to the standards that we want it to be and we are getting some discount on that but we will. The way to look at it is that the life of the mine rate, design capacity is 18 million pounds a year. And during the early years we will produce 20 to 25 million pounds a year, but getting in '10 and '11.

Charles Bradford – Affiliated Research

Thank you.

Operator

Our next question comes from the line of Lark Smith [ph] with Scotia Capital.

Lark Smith – Scotia Capital

Good morning. The question on the sales profile into 2012, I notice 2012 you are talking about gold sales of 1.4 million ounces which presumably reflects slow rates of Grasberg. I am just wondering, copper sales around 4 million pounds, what would the composition of that be, like I assume that the gold grades are down at Grasberg, copper grades will be down. So with that kind of made up more North American production?

Richard Adkerson

We have. And this is a legacy Freeport disclosure, but if you will go back to slide 28, we have a five year plans for PCSI [ph].

Lark Smith – Scotia Capital

Okay.

Richard Adkerson

Okay. And it shows copper and gold grades, the copper and gold production. This issue about the variance of the grades and the material at the core of the Grasberg versus at higher elevations is more pronounced for gold than it is for copper.

Lark Smith – Scotia Capital

Okay.

Richard Adkerson

But that's just a function of the mineralization. It is such an incredible ore body, from a grade standpoint that when you are at the heart of it and this golden horse shoe that we have talked about for years, you get extraordinary grades for copper. But really, eye popping rates for gold. It is more pronounced in the variations as you can see on this slide on page 28.

Lark Smith – Scotia Capital

One more quick question if I could? I notice in the quarter composition of taxes, effectively all cash tax was very small deferred tax. Is that going to be kind of ongoing?

Richard Adkerson

The tax situation always depends on the relative contribution of taxable income in different areas. We report our consolidated tax but we pay tax by country. And so, when copper prices are low because we have corporate overhead and cost here, we pay very little U.S. tax but a lot of tax in Indonesia. With higher prices, we generate taxable income everywhere we operate. So that's what you are seeing as the consequence of that.

Lark Smith – Scotia Capital

Great. Thank you very much.

Jim Bob Moffett

Richard I might just add to the comment about the gold rates, we will go underground. Interestingly enough, we have discussed with you before, don't mind the waste material, the profile of the ore extraction will change significantly with underground. Because you are really basically taking the horse shoe and you are block caving that. So you don't take out the high walls and industry of mining that we've had to deal with the last 20 years. And the open-pit is significantly different. So surprising to say that when you see these gold rates going up and down, as we move from the open-pit is up to, iron ores to keep the symmetry. That's when it has the most impact on the gold rate. Once you get underground and get the block cave going, both underground operations will help to reach 240,000 pounds a day. You are going to have more predictable gold grades as you stay out of the waste material.

Richard Adkerson

Thanks, Jim Bob. I will point out to everyone when you get to annual reports, there will be a table that shows each one of our ore, underground ore bodies that will have the copper. It's in the 10-K as well. So you can go web and see it. But it has each one our underground ore bodies and it has the copper and gold grades for it. One of the things you will notice is in the cave ore body and some of that extends into the Grasberg block cave is that we have low recoveries of some ore that's affected by power [ph]. In fact we are only predicting right now 50% of recovery. So one of the opportunities that we have long range is to deal with the metallurgical analysis and processing of this ore and get more gold out of this ore than we currently can establish under the criteria for reporting proved and probable reserves. But there's a lot more detail on that in our supplemental disclosures in our 10-K.

Operator

Our next question comes from the line of Sanil Daptardar with Sentinel Investments.

Sanil Daptardar – Sentinel Investments

Thanks. Richard, to talk about restarting the climax mine, I think it might take about two summers for you to restart that, on that project. Are you not concerned that restarting that might put extra molybdenum into the market? Or do you think that the molybdenum strength is such, such strong, that it will not have an adverse impact on price?

Richard Adkerson

Well, that is the reason we suspended those construction. If we hadn't had that concern, we would have gone forward with it because the project is really a home run in today's molybdenum prices. But it is 30 million pounds in a market that's approaching 450 million pounds. So, that is the issue that we are monitoring because we do produce significant moly from our, as by-products from our copper mines. And so, as we get comfortable that the market can absorb this moly. That will be the trigger for us to go forward. But, sure we have that concern.

Sanil Daptardar – Sentinel Investments

Okay. The chart that you showed of moly 65 million pounds, roughly for 11/2012, does this does include Climax or it does not?

Richard Adkerson

It does not.

Sanil Daptardar – Sentinel Investments

Okay. So the climax might be in 2013 in that case?

Richard Adkerson

Well, as we talked about, if we were to begin construction in the summer of 2011, by the end of 2012, we would be producing moly from Climax.

Sanil Daptardar – Sentinel Investments

Okay. In the moly market from the beginning of the year till now, have you seen an acceleration or momentum, in terms of the moly demand or how will you characterize that market now?

Richard Adkerson

I can answer that but I have the expert here, Dave Thornton to comment on it.

Dave Thornton

Yes. We are seeing good demand growth in the molybdenum market. Primarily, if you compare it to last year, it is night and day last year. We were seeing U.S. steel utilization rates in the 40 to 50% range, first quarter of 2010. We are in the high 60 to 70% utilization rates. Auto sales are increasing in the U.S. and in China. That's a good demand source for steel and also some molybdenum outlets on autos. So we are signs of strength in metallurgical markets. We are also seeing improved strengths in our chemical markets for molybdenum, primarily as catalyst for desulphurization. So we are seeing sine signs of improvement, but not quite back to where we were in 2008.

Sanil Daptardar – Sentinel Investments

The increments are largely coming, broadly across (inaudible) or mainly from the developing markets.

Richard Adkerson

It would say, it's across, mainly driven by China but we are seeing some demand improvements in the West as well, US and Europe.

Sanil Daptardar – Sentinel Investments

Okay. On the copper side, you mentioned that you would be going underground, of course, by 2015 in Grasberg. Has it increase your production in the underground? Do you think that there might be an increase in the cost of underground, in the average cost of the Grasberg mine, currently have very low cost at Grasberg mine because of the by-product credits. But as you move more and more underground, is there a reasons for us to think that there might be a cost increase?

Richard Adkerson

No. It’s going to – it depends on a number of factors. If we look at the current cost structure of the industry, there would be some increase in costs but you would still have these high levels of production and in that case cost of less than $0.50 a pound. There have been times with varying energy costs when our models actually showed underground being cheaper because you use a lot less diesel, but if you look at current cost levels and we think about life of the mine on average for the pit being in the range of $0.30, say and a million plus pounds of copper at a $1,000 – well, at the open pit, it would be less than 25%, at a $1,000 plus gold which would be another factor that will determine it. You are still talking about cost in the range of 30, $0.35 a pound. So very attractive cost level.

Sanil Daptardar – Sentinel Investments

Okay.

Jim Bob Moffett

As we said while ago, remember when we talked going underground the cost is going up. We also, as Richard just said, you need a lot of less space of all these trucks that are no longer all the net raise the way because when we talked about the underground mining taking all of the owners and the gold grades don’t vary like they do in the open pit and therefore your by-product credit stage a more predictable so you have got less truck fleet which obviously which is the costs associated with cooperating all the trucks and you have – and you stay in category of ore bodies and you don't have to be with the rates. That's really we all said why because that doesn't vary principally and have the by-product, that would be different story.

Sanil Daptardar – Sentinel Investments

Okay. Thanks. Just one question. That would probably, I may have missed…

Richard Adkerson

One more factor on underground, it’s much more of a manufacturing like process.

Sanil Daptardar – Sentinel Investments

Okay.

Richard Adkerson

In other works it’s more of a repetition of the way you operated on day-to-day basis and because of that there's tremendous opportunities for technology to improve the cost structure underground. I have talked with Caterpillar and others there investing in that right now, other operators because the industry is going to be characterized as being much more heavily underground than it is today because of just where the resources are in the future. So we are going to be working and looking at ways of using technology, in think that's a great opportunity for managing costs as we go forward.

Sanil Daptardar – Sentinel Investments

Okay. Just a question on DRC, any updates on that from Democratic Republic of Congo, any further negotiations or it’s kind of put on a Blackburn?

Richard Adkerson

No. It’s not only Blackburn and you must have missed some of the earlier conversations because we have address t it on a couple of occasions. We continue to have positive conversations with the represented governments. There's a lot of issues going on within the country, they are restructured their government but we are engaged in ongoing discussions which we believe will result in a successful resolution at least for us and for us and for the country.

Sanil Daptardar – Sentinel Investments

And the time frame you think.

Richard Adkerson

I am encouraged about where we are today. But I have been very –haven't been able to predict time frames on this process and I am not going to do it today.

Sanil Daptardar – Sentinel Investments

Thanks, Richard. Thanks all of you.

Richard Adkerson

Appreciate it. Appreciate your comment and again I will emphasize we are operating under our contract every day. We are working to produce copper efficiently. We are doing. We are working to improve our cobalt circuit, making progress. We have got hundreds of trucks tracking back and forth between the port carrying copper down and supplies back. And so we are operating as we speak and we are investing in our next expansion project.

Operator

Our next question comes from the line of Justine Fisher with Goldman Sachs.

Justine Fisher – Goldman Sachs

Good morning.

Kathleen Quirk

Morning.

Richard Adkerson

Good morning, Justine.

Justine Fisher – Goldman Sachs

I did have a question on the U.S. costs. I know that the projections that you guys talked about in the press release that are net of moly by-products, et cetera, but they still seem a little bit higher than what they were before and I'm assuming that because you are restarting some of the higher costs capacity. So before we take into account the by-product credits, can we expect costs in the U.S. to go back up to what they were, let's say, in '08 which was a closer to $2 a pound as opposed to the low $1 a pound level?

Richard Adkerson

No. The answer is no. We are not going to let the cost go up to $2. In 2009, Justine, our North costs net of by-product credit was $1.111. In our first – in our fourth quarter conference call, we had given the 2010 estimate of $1.23. We are updating that to a $1.24 today. So even though we are talking about spending some fourth quarter conference call, we had given the 2010 estimate of $1.23. We are updating that to $1.24 today. So even though we are talking about spending some additional money, we are going to keep our unit cost down. We are seeing because as I mentioned because of the mining more material and stripping at Morenci that it will add some costs. We are showing cost before by-product credits of a $1.50. Three months ago, we said it would be $1.45. So basically, there, that reflects the decisions we are making today. So there is some change to it but it is not any kind of radical with different cost structure that we have talked about.

Justine Fisher – Goldman Sachs

Okay. So it will be more in the midpoint but it certainly won't go back up to those level even if you bring back the higher cost.

Richard Adkerson

It is not really a midpoint. I mean, we were close to $2. We are talking about $1.24 now but the time we are talking about close to $2, we were looking at copper at $1.50 a pound and lot of people thought it was going lower. Today, we got copper at $3.50 a pound, something we think it will go lower and higher but my point is these changes we are seeing in our cost are proportionately much, much lower than the changes we are seeing in the realizations of our products. And so our profitability is expanding by an amazing level.

Justine Fisher – Goldman Sachs

Okay. Thanks. And then just one more, Kathleen, obviously you guys have brought that down to around $5 billion after the takeout of the floaters. And I am wondering if there's any other color that Moody's has given you guys as to what you might do in order to work on an investment grade rating. I know they're reducing total debt has been something. I mean, is there anything besides waiting, is there any other benchmark that you set out?

Kathleen Quirk

No, I think you can read the report and see what things that they been looking at that we have ongoing dialogue with Moody's and we're going to continue to do what we think makes sense for our balance sheet and ultimately that, we believe it should give us an investment grade rating but we will let them complete their analysis.

Justine Fisher – Goldman Sachs

Okay. Great. Thanks so much. I appreciate it.

Richard Adkerson

Thank you, Justine.

Operator

Our next question comes from the line of Dave Katz with JP Morgan.

Dave Katz – JP Morgan

Hi. I was curious when looking at the capital expenditure expectations for the year with the $1.7 billion for the full year that we have the $230 million in the first quarter, that implies a larger than that – a larger balance in each of the following three quarters. What, what way do you expect that to flow through, do you expect it to be roughly equal or towards the end of the year.

Richard Adkerson

You know, it will vary depending on when we, when we get things done. This is the cash expenditure. So equipment is being ordered, things are being done and so it's not a smooth situation you are talking about. Activities have varied as a replacement equipment for Morenci in building an underground shaft and railroad system in Indonesia. So it’s across the board.

Kathleen Quirk

As we look at it right now, as we show it evenly distributed within the three quarters but in the case that when we are ramping up capital, it usually does get delayed so in a quarter to quarter but hasn't right now the planning purposes, it's pretty evenly distributed.

Dave Katz – JP Morgan

Okay and then – I apologize, I missed this early in the call but in the past, there have been discussions between Freeport and Indonesian Government about the sales back to the Indonesian Government of the 9.36% stake of Grasberg. When we last spoke on the conference call prior to this one, you indicated that really nothing had happened recently with regard to that proposed sale. However, since then there has been best stories indicate in the government expect to could take place this year. I was hoping that you could provide an update on that?

Richard Adkerson

Let me just clarify a couple of points. We have a contract of work, which under its terms does not require us to divest of any of our interest in PTFI. There were provisions in the contract to that effect when it was signed in 1991, but under its terms those have fallen away. So there's no requirement.

The Indonesia government has asked us to voluntarily consider offering, this interest that you refer to just under 10% Indonesian interest. That was several years ago, the Central Government so as indicated that it if is not interesting in buying incremental shares they currently owned just under 10%. We have – their discussions you refer to again with the Province of Papua, which has an interest in buying those shares. And we see some potential strategic benefits of working to achieve that.

So that pop ones have a share ownership interest, we provide significant support that community already through various programs. And we are committed to continuing to do that. There are some structural issues associated with accomplishing that and we are continuing to address those in a very corporative and positive way, it’s really too early to say. When this might happen or has it might happen, but it would in a way that would not be detrimental to FCX shareholders. And it would be something that we believe if we are successful in doing this under that structure.

We are talking about that it could have some positive strategic benefits in terms of our relationships with the Province of Papua with the people of Papua.

Dave Katz – JP Morgan

Okay. And then finally, coming back to Kathleen's earlier comment about Moody’s in the past has indicated, they would like to see a little bit less concentration Freeport and Indonesia. Do you think that the sale of that 9.36% stake would further about ability to appear less concentrated?

Richard Adkerson

No. That I wouldn’t affect that analysis of all, as we discussed with Moody’s when they raise that issue several years ago. We then helped through the Phelps Dodge deal, significantly reduced the concentration of this company. Indonesia because now it’s 30 to 40% of our businesses before where was a 100%. So we do have this geographical diversification now but Indonesia important part of business is that corner stone asset.

The financial communities, this view of Indonesia as you may know has really improved. So Indonesia's economies perform well. It is have the stock market during this downturn has been the second best performing stock market in the world. And the country is committed to improving its investment climate.

So over time, we think that the first of all the world's view Indonesia has improved and will continue to improve at some point we will be able to demonstrate to Moody’s that we are indeed an investment grade rating company as the rest of the world seems to view us.

Dave Katz – JP Morgan

Okay. Thank you very much.

Operator

We have reached the allotted time for questions and answers. I will turn the call back over to management for any closing remark.

Richard Adkerson

Thanks, everyone for participating and we look forward to reporting on our progress as we go forward in 2010.

Operator

Ladies and gentlemen, this does conclude today’s conference call. Thank you all for participating. You may now disconnect.

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Source: Freeport-McMoRan Copper & Gold Inc. Q1 2010 Earnings Call Transcript
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