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Executives

Kathleen Quirk - EVP, CFO & Treasurer

Richard Adkerson - President & CEO

Jim Bob Moffett - Chairman of the Board

Red Conger - President of Freeport-McMoRan Americas

Mark Johnson - President of Freeport-McMoRan Indonesia

Analysts

David Gagliano - Credit Suisse

Michael Gambardella - JPMorgan

Kuni Chen - BofA Merrill Lynch

Sal Tharani - Goldman Sachs

Gary Lampard - Canaccord

Brian Macarthur - UBS Securities

Lawrence Smith - Scotia Capital

Brian Yu - Citigroup

Jorge Beristain - Deutsche Bank

Tony Rizzuto - Dalhman Rose & Co.

Wayne Atwell - Casimir Capital

David Katz - JPMorgan

Brett Levy - Jeffries & Company

Freeport-McMoRan Copper & Gold Inc. (FCX) Q2 2010 Earnings Conference Call July 21, 2010 10:00 AM ET

Operator

Ladies gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Copper & Gold Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. (Operator Instruction). 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, good morning everyone. Welcome to the Freeport-McMoRan Copper & Gold second quarter 2010 earnings conference call. Our results 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 webcast, website homepage and clicking on the webcast link for the conference call.

We also have several slides to supplement our comments this morning and we’ll be referring to the slides during the call. The slides are also accessible using the webcast link on fcx.com. In addition to analysts and investors, the financial press has been invited to listen to today’s call and a replay of the webcast will be available on our website later today.

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

On the call today is Richard Adkerson, President and Chief Executive Officer, Jim Bob Moffett, Chairman of the Board, we also have several 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 referring to the materials in our slide presentation. After our formal remarks we will open up the call for questions.

Today FCX reported second quarter 2010 net income attributable to common stock of $649 million, $1.40 per share compared with net income of $588 million or $1.38 per share for the second quarter of 2009.

The results from the second quarter of 2010 included losses on the early establishment of debt totaling $42 million to net income which was $0.09 a share and we also had an unfavorable impact of our provisional pounds that were recorded at March at a higher price that resulted in $72 million impact or $0.15 per share decrease in net income in the second quarter.

Our consolidated sales for copper of 914 million pounds in the second quarter of 2010 were higher than our April estimates of 830 million pounds but as anticipated were lower than the second quarter of 2009 sales of 1.1 billion pounds.

The variance to our previous estimate primarily reflects favorable production performance in the Americas and Indonesia and the timing of shipment principally in North America. The variance to the 2009 period primarily reflects lower copper ore grades at Grasberg resulting from planned mine sequencing and anticipated lower sales from our South America mines which was partially offset by higher contribution from the Tenke Fungurume mine in Africa.

Our gold sales of 298,000 ounces during the quarter were higher than our estimate of 270,000 ounces but significantly lower than the second-quarter 2009 sales of

837,000 ounces. The favorable variance primarily reflects the timing of mine

sequencing at Grasberg.

Molybdenum sales totaled 16 million pounds in the second quarter periods. They were higher than our estimate of 15 million pounds in April because of improved demand in the chemicals sector during the quarter.

Our second quarter results reflect improved pricing for our products, all of our products copper, gold and molybdenum compared to the year ago period, realized price during the second quarter of $3.06 was about 38% higher than our price in the second quarter of 2009 at $2.22.

For gold, we have realized $1,234 per ounce in the second quarter compared to $932 per ounce in the second quarter of 2009 and molybdenum price averaged $18 a pound which was significantly higher than $10 per pound price in the year ago period. Our unit net cash cost on a consolidated basis average $0.97 per pound for the second quarter of 2010, that compared with $0.43 per pound for the second quarter of 2009, the higher unit cash cost primarily reflects anticipated lower gold and copper volumes at Grasberg and South America probably offset by higher by-product gold and molybdenum prices.

As operating cash flows in the second quarter totaled $1.1 billion, was significantly higher than our capital expenditures of just under $300 million and for the six months ended at June 30th, our operating cash flows totaled $2.9 billion and capital expenditures totaled $527 million.

During the second quarter we repaid a total $1.3 billion in debt that included the April redemption of our senior floating rate notes totaling $1 billion and we also made open market purchases of our public debt securities of just under $300 million.

Since the beginning of 2009 we repaid $2.6 billion in debt, this is just over third of our debt that was outstanding at that time and this has resulted in annual interest cost savings of over $170 million per year.

At the end of June, our total debt approximated $4.8 billion and our consolidated cash approximate $3 billion. And also during the second quarter our six and three quarter mandatory convertible preferred stock converted into 39 million shares of FCX common stock and our shares outstanding as of June 30th totaled 470 million shares.

As previously announced our board authorized an increase in our common stock dividend from $0.50 on annual basis to $1.20 per share and the first quarterly dividend at this new rate of $0.30 per quarter we paid on August 1st.

I would like to turn the call over to Richard now as he will be referring to our slide presentation.

Richard Adkerson

Thank you Kathleen, the first slide is on page three and it has the financial statistics that Kathleen just reviewed with you. There’s a couple of things I think when you look at this they become apparent about our company. And that is the significance of our exposure to the copper markets, which was where we want to be, because we feel so good about copper going forward, because of its essential need in the world economies and the challenges that the industry has in developing supplies and producing current production to meet those opportunities.

Here we have a quarter in the second quarter of where we had such a substantially lower amount of gold sales out of Grasberg, simply because of mine sequencing. We had well over 800,000 ounces last year, and under 300,000 ounces this year.

Our copper volumes were lower, and yet because of our copper prices we were able to generate comparable earnings that we did in the second quarter of last year. And that’s even more apparent when we look at the first half statistics where we had much lower copper sales last year. We had 1.4 million ounces last year in gold sales, and 765,000 ounces this year, 50% less copper volumes, and yet our earnings were more than double of what they were last year because of the copper price movement.

Our cost structure is something that we worked on very hard. We had to do that in the last part of 2008 when copper prices fell so dramatically. And now, as we’re taking steps of resuming curtailed production, we’re doing so in a way that preserves cost savings that we were able to achieve during that period of time, and during the quarter even with the significantly low gold credits we have out at Indonesia, we were able to finish the quarter with less than $1 net unit cost. This is consistent with what we had in it, in the first quarter and this unit number will vary as we go forward with different amounts of copper or gold prices and volumes and molybdenum prices but it’s, for our overall company with roughly 4 billion pounds of copper sales, they are attracted to be able to produce copper at a net cost of less than $1.

At the bottom of the slide you can see just how significant the issue in Indonesia was, last year we really benefited year-in-time when we really needed it because we were at the highest grade section, the Grasberg. Now we are sequencing in to lower grade section we’ll be moving back the high grade during the second half of the year. But we are pleased to see these financial results given those circumstances.

Copper markets, as I talk about marketing guides, the comment that came back to me in preparation for this earnings call was that the physical markets really are stronger than economic indicators in the United States. The issue of falling exchange stocks, an issue with scrap markets trucking and so forth, we see our order books filling more strongly than we have in some time, there’s still of course a lot of weakness in the US economy but overall the copper markets that we are seeing them underground day-to-day in the US, Northern Europe, to some extent in Korea and Japan are stronger than we’ve seen them in some time. And China which everyone is focused on the steps they have taken to control the growth in their economy and they try to deal with inflation continues to be strong.

So, we are optimistic about copper markets, we think its is important for the future of this industry to think about having a price this strong today above $3 in the world in which we read about economic problems everyday in the media. So we continue to feel very, very positive about the outlook for copper, longer term has to be prepared for volatility but we like where our company is positioned in these marketplaces, we benefit from the high price of gold and molybdenum has similar characteristics. Copper is smaller market but the fact that we are the world’s largest producer of that product and we are the world’s lowest cost producer and have such growth opportunities, makes that a very attractive asset for our company.

Development projects, we targeted first quarter about how we were taking some steps to move forward with resuming production curtailed, the development activities that we had put in place at the end of 2008 at our flagship Morenci now here in Arizona, Red Conger and his team is working very effectively. They restarted the mill which we had shutdown, it averaged 28,000 tons per day in the second quarter. We are moving up towards the rate of 50,000 tons per day in 2011 and we are increasing the mine rate which we had basically cut in half.

The statistic here on the slide is in metric tons Morenci has typically talked about short tons in its operations and we are moving up from 500 short tons to 700,000 tons with our plan this is stripping additional ore, stripping to get additional ore has some effect on cost but with these price levels its very attractive, we are doing this in an organized, systematic way to control our cost but we do have the opportunity of further increasing our rates and we are studying that, and potentially moving forward that as the market wants.

In Arizona, here East of Phoenix at the historical Miami mining activity, we have now begun stripping to mine ore in connection with our reclamation activities, we are ramping that up, using some existing equipment and that will be generating revenues to help contribute to our business at our Safford mine near Morenci, we have resumed construction of a sulphur burner that had been deferred and this will have very positive benefits from cost standpoint and logistic standpoint of our company.

In South America in Peru at our Cerro Verde mine, we are now completing a project that involved expenditures about $50 million which will increase our current mill capacity from 108,000 tons per day to 120,000 tons per day. That will add 30 million pounds of copper at very low cost. The real story there at Cerro Verde though is the opportunity for major expansion. This is a mine that is situated so that a major expansion can be undertaken in a straight forward way, as always their power and water issues to deal with. We are working towards those and confident that with the resource we have there, the physical location and the foot print of the operations that we will be able to move forward.

The major expansion we are working on the feasibility study now that will be completed no later than the first half of next year. The size of that is a real question and water resources really will be the determinant of that. We think at least doubling of the current production is in the cards and we might a chance to increase substantially more than that as we deal with the water issues. Great resource there we continue to drill it, continue to find an ore that can be profitability processed.

In Chile, at our El Abra mine in Northern Chile, since the mid 90s or earlier the operations been mining oxide ore that is currently depleting we have a very significant sulphide resource, initially we are moving forward with a leaching project we call Sulfolix that would involve some changing in processing but it would extend the life of this mine about ten plus years making the world class producer continuing in it’s world class producer at 300 million pounds per year. And this involves capital of about $725 million through 2015.

But there is another page to this story, the sulphide resource has grown significantly since we combined our company with (Inaudible) and now we are studying about how potentially to take advantage of that resource through a milling expansion. One avenue we are pursuing is the possibility of a joint undertaking with Codelco in it’s nearby mine and we got a feasibility study looking whether we might do something jointly there from a mill standpoint of course in that location water is a major issue, but potentially we could build our own mill or do something in conjunction with Codelco, but that’s a very significant opportunity for us.

In Indonesia, in addition to the great Grasberg pit, which is now looking forward to completion of a pit mining we’re studying whether that’s going to be in 2015 or maybe two or three years longer than that. But we have these very significant underground reserves which, probably if you look at it within the industry is a most attractive development opportunity for a copper company in the world because of the significant reserves in its cost structure.

We have shown, since the early 80s, that we can Block Cave very effectively with this ore. Grasberg currently the DOZ mine is operating at a sustained rate of 80,000 tons per day. We’re developing a smaller high grade mine called the Big Gossan, but the future of this company lies in the Grasberg Block Cave, which is directly underneath the pit, it’s just an extension really of the ore body that we’ve been mining there since the early 1990s. The DOZ has significant expansion opportunities. Our current plans look for this to be a very large operation when we move totally underground with mill rates of 240,000 tons per day with attractive long-term volumes and cost structure.

In Africa, in the second quarter we sold 55 million pounds of copper and 4 million ounces of cobalt. We had an operating issue in April, and during May and June we operated higher rates than that average. At full rates the current operation generates 250 million pounds of copper annually and over 80 million pounds of cobalt more than that in the early years. Cobalt processing facilities has had startup problems involving the SO2 plant in the cobalt circuit and we have developed plans to address that which we think we will have dealt with by the end of this year.

The mill which was originally designed operated 8,000 tons per day is actually capable of operating at a higher rate and we don’t take advantage of that. We’re spending small amount of capital, about $20 million for mine equipment so that we can mine the high grade materials, take advantage of this excess mill capacity. We think we can get up to 10,000 tons per day at that in 2011, and so without really expanding the operations, we can increase our copper production from 250 million to 290 million pounds per year.

We continue with our exploration activities, we’ve been drilling oxide targets so far in 2010 which will provide the basis for further expansion and we are doing some deep drilling to get our arms better around the sulfide opportunity which is really a long-term opportunity there.

We got a number of feasibility studies going and we will be reporting on those, but they have the potential of increasing copper sales in the two to three, four or five hundred million pound per year range. We continue to work with the government, we’re operating under our contract and so we have a fiscal regime for paying taxes and royalties. We believe we have our closing in on the completion of these discussions about our contract review and we’re trying to work with the government to get a basis for dealing with some administrative issues that keep coming up there.

At Climax, they [do it] in this year and we are really taking steps so that we have the optionality of restarting the Climax project. It’s not in our budget numbers now. Our Board has not formerly approved the startup, but we are doing a significant amount of work this summer in Colorado so that we will be in a position of reaching that decision, watching the market. This project has a capacity of 30 million pounds per year. It could be expanded beyond that. We have about $500 million to spend and get it started. We’re spending $60 million $70 million this summer to position ourselves to make that decision so that we could be prepared to go in the second half of 2011.

Story of our company is reserves of copper that we have over 100 billion pounds accrued in probable reserves under SEC definitions. 100 billion pounds, long-term reserves that are there now as reserves, but beyond that we have done sufficient drilling around our existing ore bodies to be able to find resources that are not yet qualified as reserves but that has contained copper, a $2 copper that’s in excess of this 100 billion pound number by another 100 billion pounds plus.

Now what that gives us is the opportunity to really have significant growth without having to have success in our Greenfield exploration program without having to go out and make acquisitions in the marketplace which my opinion is going to become increasingly expensive and difficult to do because of the shortage in capital.

So we’ve got a number of projects that we review in the past that are on page 13 that are many in North America starting up the Chino mine in New Mexico further increasing Morenci, we acquired the Twin Buttes property that’s adjacent to Sierrita which gives us development opportunities there. We mentioned starting Climax, Morenci and other mines in North America. We know have significant sulfide resources. And we are studying the development of mills process those.

In South America, the expansion in Cerro Verde, there’s El Abra mill project are significant and Tenke, we mentioned debottling, the further oxide expansion, the ultimate sulfide development. And then at Grasberg, we continue to find where this will allow us to optimize and improve the economics of that operation.

When you add all those together on page 14, as we see the Grasberg open pit deplete the El Abra, oxide deposit deplete we have resources that we are working on right now to replace those to put in production.

Then there is incremental new opportunities for us that are significant. We’ve identified incremental production of annual rates of up to 1.5 to 2 billion pounds a year from these operations in North America, South America and Africa that are incrementally new production that we have available.

We are using some of this cash flow. We are generating to increase our expiration spending. Most of that is focused on our existing ore bodies, we are doing some Greenfield projects that could materialize to be significant opportunities for us, but our primary focus is in this area of increasing our resources with our existing mines, qualifying those resources as reserves and identifying development projects out of the reserves.

Our 2010 outlook is similar to what we had laid out in the first quarter with 3.8 billion pounds of copper, 1.8 million ounces of gold. Molybdenum was up a million pounds to 63 million pounds, the cash cost at $0.86 is inline with what we had earlier. At these levels with $3 copper for the remaining six months, we would operating cash flows in excess of $5 billion and our capital expenditures that have been approved at our board at 1.7 billion. We are looking for otherwise to spend capital and we will update you with those as we move forward.

So we will have a very profitable business at these commodity price levels and strong cash flow generations. I want to report to you and Mark Johnson is here to respond to your questions but we’ve made a mine planning change at Grasberg. For those of you who followed us over the years, you’ll recall that this is a dynamic situation that occurs from time to time. We try to find ways of mining the open pit in ways that are safe, we try to advance metal forward, when we have opportunities to do that and that has been the story that we typically have.

As we going forward with our mining in the second quarter, we have revised our plans as a precautionary measure because some geotechnical issues related to South West corner of the mine, a pushback to 80s. It’s a relatively small but it’s a high grade section of ore that was scheduled to be mined at the end of this year and end of 2011. And as a result of these geotechnical analyses, we are going to differ mining this high grade section, our current plan calls for differing mining, so that we can go back to the upper reaches and come down and mine it in a way that ensures safety.

This current plan that we had results in a deferral of 130 million pounds of copper and 270,000 ounces net to our interest from the next five year period to the scheduled end of the pit life of 2015-2016. The ore is still there, will still get to the metal, it’s just a question of timing. The biggest defect, if you look on page 18, is going to be in 2011, where our guidance as it currently stands for 2011, gold is down 400,000 ounces.

We may find ways of getting this quicker and we’re working on that, but at the present time our plan calls for this to be the effect. Now with copper, the copper impact is being offset by other, it’s smaller, this is a section that has extraordinarily high gold rates, and it’s being offset by other operations that we have. So our copper guidance is really unchanged.

Page 19 shows the quarterly poorly metals sales projections versus the first quarter. We found ways of moving forward some of the copper production so that you see higher production projected for the third quarter coming out of the fourth quarter sales. And then in Grasberg you can see the step up. So if where we are is where mine sequencing takes us down to the higher rate section at the bottom of the mine. This plan results in page 20 with the sales profile that you see by region and consolidated unit cost of $0.86 a pound that’s a $3 copper, $1200 gold and $14 pound molybdenum for the remainder of 2010. So we are agreeing with that to retain our attractive cost structure. 21 shows our earnings, cash earnings capability of our company, at current copper prices and looking at $1,000 gold, $10 molybdenum in our mind plans for 2011, 2012, which includes this adjustment to our gold sale to Grasberg for 2011.

You can see at those commodity prices, we would have EBITDA of over $7 billion, operating cash flows of over $5 billion, the sensitivities of our sales products and certain of our costs are shown on page 22.

Our capital program as currently we have yet not made changes, we have all these studies that lead to the opportunities to spend capital in the future. But the capital spending currently is consistent with what we had laid out in the first quarter.

We continue to generate cash and we’ll continue to generate in Q2 to use that. Kathleen laid out some of the steps we took in the second quarter, and we ended the quarter with less than $5 billion of debt and our consolidated cash of 3 billion and some of that is tied up in subsidiaries and not available to the pair. But, we’ve got a very strong balance sheet and that is our goal, we’re going to keep our financial liquidity, have aggressive cost management, investing growth projects aboard and increased our dividend earlier and the board will continue to review our financial policy.

My perspective on where our company is right now is that given the world that we have and where we are that we have the right assets, this is the right time to have these assets because the commodities that we have are really essential to the world’s economy as we go forward.

Over the past three years we have developed the right financial asset so that now we have the financial capability of undertaking these great growth investments that we have, if something else comes up we have the ability to look at it, we also have the financial liquidity to be able to deal with volatility which is always a possibility for our industry, we’ve got really high quality assets, great operating team, everyday we work to make things better and we solve problems whether that’s dealing with our cost structure whether its dealing with expansion opportunities dealing with our situation or managing our business and countries like the DRC and Indonesia where we’ve such great success over the years.

So our business is well positioned in the industry that has a real strong outlook, because of the tight supply situation, the difficulties of developing new resources of copper, new production and maintaining production we see everyday that the issue is associated with mine planning or grade issues that come up from this industry.

In past labor problems are problems or problems with government taxation problems or environmental problems. All these things add up to having a tight industry and so having a company with the level of reserves and level of resources in production makes us feel very good about where we are today with Freeport-McMoRan Copper & Gold.

And with that operator we will open the line for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen we will now begin the question-and-answer session (Operator Instructions). One moment please for our first question. The first question comes from the line of David Gagliano with Credit Suisse

David Gagliano - Credit Suisse

Great, thanks for as usual very detailed presentation. Obviously you got a lot of additional projects currently under evaluation; you got Cerro Verde, concentrator, the Tenke expansion, the mill of El Abra, restarting Climax et cetera. So my question is based on what you know today, could you rank or prioritize those projects from most likely to move forward to relatively less likely to move forward based on what you know today.

Richard Adkerson

It’s more of a question of timing, I really believe all the projects that we’ve mentioned are likely will be done and it’s just a question of timing. One thing that we will be able to do, I mentioned just briefly this Chino operation in New Mexico, it was a very old mine, 100 year old mine that we curtail.

But we are taking the steps now and that will bring in 150 to 250 million pounds of copper about restarting this operation. In terms of major expansion projects in the copper business, Cerro Verde is a project that’s, the word Slam Dunk comes into me in my mind. But we live in a world where you don’t want to go that far out.

But it’s straight forward major project double or triple production there and that’s unless something really turns down in this world, that something we will be announcing within the year to go forward with. Climax is another project along those lines.

It would be the best molybdenum mine in the world. And in absence of some major change in the marketplace we would be prepared to go forward with it to production in 2012, 2011 depending on how far we go about this.

We are going to prudent about timing because we want to get ahead of the marketplace but given marketplace and those things will happen. And Tenke Fungurume is project that has the physical opportunities to expand beside the markets there we got a deal with some of these governmental issues that conditioned on our doing that.

We believe we can do that but it’s got the resource to go forward. What we want to do right now is work hard to be ready to pull the trigger on these things, not making the decision that you are totaling committed to do it in terms of specific timing but go forward.

I’m really excited about the mill prospectus in North America particular at Morenci. It’s a huge resource and to be able to build a mill there and to have a modern mill that could handle large volumes of ore, produce larger amount of copper is very exciting.

Three years ago we looked at El Abra and we thought we saw just oxide and Sulfolix and now we see the potential for a mill there. So we have to work on all the things that go in converting reserves to project and it involves permits, it involves water, power issues, personnel issues and so forth.

But what we see here is looking forward a whole string of these opportunities it gives us a chance to grow. Based on resources we already have in house.

David Gagliano - Credit Suisse

Perfect, you mentioned Tenke just as a quick follow up and I’ll pass on to somebody else. I was wondering if you can give us an update, if there is one on the negotiations that you’ve been having with the DRC government.

Richard Adkerson

Well Tenke had a very important event that happened on June 30th, it was the country did, the Democratic Republic of Congo, it was the 50th year anniversary of their independence from Belgium, and that was a big deal for this country.

And the King of Belgium came to Kinshasa and there were a lot of big events. So the government has really been focused on that activity then. The recent conversations have been very positive about going forward.

And as I said, it’s a question of will we have a contract? We’re operating everyday under that contract, and we’re getting encouragement from a number of sources within government that our contracts not going to be significantly, they are not going to take a position of changing our contract.

Our position is, we’re not really negotiating we have a contract and we’re supporting that contract. We are working cooperatively with the government. We want to be responsive to issues they have. When you are going into it, it always will be a complicated place to operate, but you can see our numbers speak for themselves there.

Operator

Our next question comes from the line of Michael Gambardella with JPMorgan.

Michael Gambardella - JPMorgan

Good morning Richard, and Tim, Bob Kathleen. You guys have done a great job at showing us the great assets that you have, but I just wanted to say congratulations on the, and the entire management team on the fabulous job you did on costs, especially in North America, it’s just superb results. My question though is on your guidance for 2010 on production. You beat your guidance in both copper and gold in the second quarter by 10%, that’s pretty widened level on you, up to your guidance for this third quarter yet keeping the guidance for the full year, is that, is that just being very conservative or there’s something that’s changed in the mind plan?

Richard Adkerson

First of all thanks for the comments, just with Red and is operating management from North America and South America. And we look back on our own history and look at where we come with these operations. We’ve had six straight quarters now of meeting our targets and these are hard targets to meet with mines of the nature that we have in history and all of our guys are so fired up about the success we are having in dealing with costs, we got a lot of confidence after going through 2008, 2009 and we just got a great team and momentum is going, going very good.

One factor in this issue about guidance that you talked about is that we do have some lower volumes coming out of Grasberg because of this [eight east] situation. And so some of the better than expected performance out of the remainder of our operations is making up for that and Grasberg itself has outperformed its target from that, so some of that is an offset for that.

And then as you mentioned, as we look forward historically we have tried to be not overly optimistic, we’d rather under promise and over deliver on situations that’s been our history. So, we are going to work hard. And with this Grasberg mine plan, our team’s working on issues so that we can do better than the mine plan for [eight east] and we talked about but we want to make sure that the investment community knows an outlook that we were confident in.

Michael Gambardella - JPMorgan

Okay and then on Tenke you mentioned in the presentation that you could expand it or double it I guess from 250 to 500 and I assume that’s under current logistics where you are trucking the product out, is that correct?

Richard Adkerson

That is correct Mike. It is a logistics challenge, its costly because we are trucking this product in certain of our inputs by 3,000 kilometers but that system would handle the doubling of where we are now and we have studies going on then for the long range opportunities to build this up to a world class mine which would require rails and we are working with the government and there are some regional things going on with other countries. Historically, with rail systems there and we think that ultimately the country will get there.

Michael Gambardella - JPMorgan

If you had agreement with the government and you did find some rail connection out of Tenke could you just give us an idea of the scale of Tenke’s production? Would you be able to quadruple it or more?

Richard Adkerson

Yes from our current level that’s the range that we’ve talked about. We’ve talked about the ability to double with oxides and then double again in sulfides but that’s order of magnitude type of deal and we still have to do some core drilling and exploration analysis. We have some mix store that’s significant, say that will require some metallurgical work to deal with but that’s the order of magnitude opportunity that we see there.

Michael Gambardella - JPMorgan

And one last question just on the balance sheet and you have very conservative balance sheet, you paid down almost all of the Phelps Dodge debt in very short period of time and you have recently doubled the dividend. Even though you have a number of organic opportunities and you seem to be leaning away from the external, of course the organic is so attractive, you still have what looks to be a lot of excess cash or cash flow capability. Could you comment on the potential for share buyback?

Richard Adkerson

I think you just look at the tradition and the history of our company, our board has a tradition of being shareholder oriented and as we look forward we think, I think you see this cross business is everywhere now the businesses are being conservative with cash positions. But our tradition has been not to retain over excess amounts of cash, we really want to invest it, I mean that’s the best thing we can do for shareholders. But to the extent we have excess cash, our board’s tradition has been to return cash to the company, we pay strong regular dividends, we pay special dividends and have bought stock back in all those things are considered by our board at each one of its meetings.

Michael Gambardella - JPMorgan

Thanks Richard and congratulation again to you and the whole team.

Richard Adkerson

Thanks, Mike, we appreciate your comments and we share it with everyone.

Operator

Our next question comes from the line of Kuni Chen with Bank of America Merrill Lynch

Kuni Chen - BofA Merrill Lynch

Hi, good morning and good job in the quarter. I guess just first up on Tenke, can you remind us, my understanding previously was that the feasibility for Phase II would be around now can you just remind us on the timing there and what the milestones look like as far your discussion with the government. Does that need to move forward by the end of the year? What’s the point of time where you would look to commit capital to that?

Richard Adkerson

Well, we’ve been very clear with the government and it’s just common sense to say we are not going to commit the capital until we get all the issues related to our contract discussions and our ability to operate in a reasonable fashion behind us. In the mean time we have advanced the feasibility studies, we are looking at several alternatives. The feasibility studies are not going to be the time constraint for going forward. We are going to be prepared to go forward when these discussion with the government are completed in a mutually satisfactory way.

Kuni Chen - BofA Merrill Lynch

And then you addressed the feasibility Phase II after that.

Richard Adkerson

No, we will execute on expansion. We are dealing with the feasibility studies right now, we are working and we got several alternatives. And they are ramping up and then we got lot of data and things of that nature. It’s really the question you had about committing capital. So we are meeting all the requirements for our contracts in terms of doing the studies and so forth and we are not slowing down the study aspect of the work. In terms of saying we are going to start ordering equipment and doing construction and that’s what pending resolution of these discussions.

Kuni Chen - BofA Merrill Lynch

Okay, just one follow-up as far as your position on the US, investing on a larger truck fleets is something that you would consider as the way to further improve your costs, that is an attractive investment, or is there too much parked equipment at this time to consider going to larger size trucks?

Richard Adkerson

You’re talking about mining trucks?

Kuni Chen - BofA Merrill Lynch

Yes.

Richard Adkerson

Okay, because one of the issues that’s on all of our minds is there’s currently an issue with delivery trucks and that’s all, but with mining trucks that’s an interesting question. We are working right now, we had in round terms 100 haul trucks that were idled when we cut back. We’ve been using those, we’ve been using some of those in our restarted operations, we’re going to use some at Climax, we’ll use some at Chino, we sent some to South America, some to Indonesia.

And now we’re seeing some opportunities of reworking as we watch how the industry is changing its truck fleet situation from one manufacturer to another, we’re seeing some opportunities maybe of acquiring some used trucks and reworking them and that would give us capacity on an ongoing basis. So it’s a real dynamic thing. We have a large scale operation, its large part CAT 793 trucks. Some other operations they are going to different size trucks, different manufacturers, and that’s making some trucks that fit in particularly well with us available, and we’re moving to take advantage of that.

Operator

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

Sal Tharani - Goldman Sachs

Just a quick question on Sulfolix project, I thought that you mentioned about an opportunity to do milling and concentrate over there since you’ve found larger reserves, does that mean that you’re going to do it instead of Sulfolix or Sulfolix will go ahead?

Richard Adkerson

Sulfolix is going ahead as planned. We have the infrastructure there; we have to make some changes. We had this dynamic pair that we’ve been using for the oxide, we’re changing it, but this would be the middle opportunity is incremental to the Sulfolix. Sulfolix is underway and will operate regardless the decision we make on the mill.

Sal Tharani - Goldman Sachs

And what would be the capacity of that concentrate to do with that, just an approximate idea, what you are talking about, what range are we talking about?

Richard Adkerson

Well, I mean, it’s really too early to say that but these concentrated mills are a project with this grades. There are standards that we’ll look at in the alternate, in the studies. Right now we are in kind of a pre-feasibility of study phase with that and this will, lot of this will depend on how we work through our potential opportunity to do something jointly with Codelco.

Kathleen Quirk

It would be a large scale mills Sal.

Richard Adkerson

Yes Sal, it’s like at Morenci, you don’t do a small mill for a large low grade deposit. It has to be a mill that has substantial capacity because you need the economies of fixed scale, to make something economic. Good news is we got the resource to even think about this.

Jim Bob Moffett

This is Jim Bob, let me just comment on the size of these sulfide deposits. It’s just come up and four or five questions here. Now just don’t forget that in Morenci which of course is a world class brand already, with the sulfide ore at Morenci could be under 5 billion pounds which is 2.5 billion pounds more than we have and it is rational and obviously the grade is going to be less, but with the money since you have that at Morenci, you’re still talking about something’s going to be over 0.5% of copper.

And of course you have the same size share already. That has the outside based on our exploration drilling of being a $5 billion ton ore body. So that’s again twice as big as the Grasberg. Obviously that’s a grade again with the copper and moly credits that will be over 0.5% copper. And probably in three billion-ton range which is again bigger than Grasberg in size terms. Once again it will be lower grade. But it’s based on the deep drilling we’re drilling there and could be up in the 0.5% copper.

So as we talk about these things, I just thought I would put it in perspective. We’ve already talked about the size of the size of the group at Tenke. But when you throw those kinds of numbers around, obviously as you said with the lower grades you obviously have the big mills. When we take the Grasberg at 2.5 billion and you take the potential of being able to quadruple order because of the size of that and then Morenci, Cerro Verde, El Abra talking about five world class properties that have tonnage.

We have got enough exploration and exploitation drilling done that those are not just numbers we throw around, those are nicely targets. So I hope that kind of puts a perspective around this of envelope of what we call Brownfield projects and they are really Greenfield type of size and we’ve got in our hip pocket to develop as the market allows us to.

Richard Adkerson

And Jim Bob mentioned something too currently there is just a miniscule Molybdenum component to Morenci as we go deeper and look at these mill opportunities, there is a more significant, much more significant Molybdenum possibility there. But these mill sizes, we are not talking about a standard, it’s 150 to 2,000 ton per day mill that would be needed to deal with ore bodies this size. Okay, operator next question?

Operator

Our next question comes from the line of Gary Lampard with Canaccord.

Gary Lampard - Canaccord

My question is on the transition to the Block Cave at Grasberg. Every now and again somebody asks you how your cost structure might change as you move from the open pit to the Block Cave. And I am wondering if you can update us on your current thinking?

Richard Adkerson

Yes, it’s a very, very attractive situation, is very dependent on the price of gold, as it has been in the pit. But a combination of price of gold and kind of price of diesel, because when you move underground, we are going to be addling like 140, 150 big haul trucks and maybe it’s more than that now, Mark. How many?

Mark Johnson

It’s 160

Richard Adkerson

160, because we don’t have the mine the waste that you do out of the pit and so various combination of gold prices and diesel prices, our unit costs have actually been lower underground than they have been in the pit. In broad terms, when we think about say gold at $800 and oil cost at say $70 - $80 a barrel, you end up with something in the net $0.40 range where the pit would have lowered its life then around $0.20, sometimes lower. But it’s within those ballparks, but it will vary significantly depending on the relationship with the price of gold and price of diesel.

Kathleen Quirk

At current gold prices, it will continue to be our lowest cost operation within our portfolio.

Gary Lampard - Canaccord

So that summarizes down to a slight increase if you think about $0.20 a pound of copper. Is that right?

Richard Adkerson

That’s right. Within the same range still you know in terms of the industry, one of the very lowest cost operations anywhere.

Gary Lampard - Canaccord

And presumably that’s all the mining cost, I mean there is probably some economies of scale as you go to 240,000 tons per day in the mill but that would be relative immaterial. And there are some issues that we’ll face overtime certain of ore bodies will have to have some additional process because of the nature of the ore. And so there will be some things. Initially though it’s going to be real similar to what we have now. It’s the same ore really that go deeper and then with the DOZ mine, over time we’ll have some additional processing. We’re talking now 2020 and beyond.

Jim Bob Moffett

When you talk about underground mining, and you have to remember the elevation I know everybody is aware of the fact that we have gravity working in our favor. We wouldn’t be talking about blockading, that’s why this thing, as we just pointed out, can have these kind of low cost numbers on the horizon, because when people talk about it rather because your have sometimes, a lot of new stuff is being looked at people are talking about deep underground mines. They are talking about mines where they can’t blockade; they’re going to have to have gravity working against them.

So the unbelievable geometry of this ore body at Grasberg where we ran up at the 13,000 elevation and built that open pit and we mine that open pit and yet at the mill level because you still have the advantage of going underneath the big ore body and as we said, you don’t have to move the waste. But not only do you not have to move the waste, you don’t have the hazards of the open pit that we’ve had at the Grasberg at (inaudible) season that had rainfall, with fog, et cetera, et cetera.

Fortunately there is no fog underground, there’s no rain underground. So not only are you getting rid of trucks, plus you are getting rid of a lot of hazards that you don’t have to deal with. And you have your own hazards underground with the blockade but for any of you that have been at Grasberg and been there during the heavy rainfalls that fall with those big trucks driving up and down, getting in and out of that open pit, so there’s a lot of things to consider. That’s why the cost structure always fools people think that underground mining will be more costly, with the terrain and the conditions, the weather conditions, has a huge impact versus the underground blockade.

Operator

Our next question comes from the line of Brian Macarthur with UBS Securities.

Brian Macarthur - UBS Securities

Good morning, two quick questions, first of all, I’m just trying to clarify on your sale profile over the next three years where you go from solely the production of 3.8 billion pounds, 4 billion pounds, what’s in there?

If I get it right, we have the small Cerro Verde expansion, Miami, Tenke at the 250 level going to 290, Morenci but no Chino, no Kentucky double expansion and obviously no big Cerro expansion. So effectively those four or five offset 100 million pound decline at Grasberg and the decline at El Abra, that’s sort of way it works in what you have there and all the other optionally going forward?

Richard Adkerson

Brain, that’s more than sort of, you’ve got it nailed.

Brian Macarthur - UBS Securities

Okay. Second question, just for accounting at, thank you it’s the cobalt credit now there has been some challenges in the cobalt plant and you have this little number that says by product credit which is the cobalt revenue and freight, can you just go through how much is freight how much of it is that?

You are not giving good cobalt right now, and therefore if we get the cobalt problem, the guidance you have of by product credits might actually go up, can you just go through what actually in that calculation that help might unfold over the couple of years if we get the cobalt plant working?

Kathleen Quirk

First of all when you look at the cobalt price, the market price. We are not selling refined metal; we are selling a hydroxide product. The price structure is similar to like you would have concentrates in the copper industry.

So the price that we receive is a discount to the market price and generally it varies depending on what the price is, generally somewhere in 55% plus or minus range of that price.

Richard Adkerson

That’s not the discount. That’s the price that we will receive. So it’s like a two third, 70% of the selling prices what we realize.

Kathleen Quirk

And then on top of that, the realized price you have see in the press release reflects that number. And on top of that we have freight cost that we pay which is in the $2 pound of cobalt range.

The freight cost is currently is higher than it will be when we get similar issues resolved because we are shipping a product that has higher water content. And so that freight will come down and then we’ve also got our processing cost that are netted in that line item for the bought product credits.

Richard Adkerson

All the things over time that we expect is to realize better economics. We are putting in a new dryer system that by 2011 we will deal with this water content, long range we may process the material ourselves to metal and then we will get much more efficient when we deal with the process of the So2 plant.

Brian Macarthur - UBS Securities

Just to be clear when you say guidance of $12 a pound you are talking hydroxide or right, you are talking cobalt market that’s right, okay, thanks very much, that’s very helpful.

Operator

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

Lawrence Smith - Scotia Capital

Good morning, another question on Tenke cost structure. Looking at the release, it looks like you are talking about or 2011 cash cost of say $0.80 a pound at $12 cobalt, that’s higher than you previously talked about.

My recollection was last quarter you were talking about some of the run rate costing $0.50 a pound or $10 cobalt. What’s the difference and is that kind of, is the new cost structure expected to remain in place in perpetuity, thank you.

Richard Adkerson

We are going to work hard to get it back down. With these grades we are going to work to get the cost back to some of these previous estimates to get what this is just where we are right now.

There are some sulphuric acid costs that are higher than anticipated. Some of it has to do with the material that we are now planning on running through to get the higher throughput rates.

There is some transportation cost issues with that. Overall, transportation costs are higher than we anticipated. We are going to do some of this has to do with some government fees, we are having to pay not only just in the Congo but through some of the other country we are going through and we are working on dealing with that.

We got about I think it’s around $0.04 that we have identified that are has to do with some of the legal and administrative cost that facing us or the cause of the some of the issues we are facing not with the contract review but with an administration with the government and labor cost are bit higher. So we just had a session with our team.

We are focused on this but you are extremely right, this is where we are right now and again that’s the guidance we are giving but we are going to work to get the cost down. As the project expands and we get the benefits of scale, we deal with some of these cobalt issues and some of the other issues we would think that our cost would come down.

Operator

Our next question comes from the line of Brian Yu with Citigroup.

Brian Yu - Citigroup

Great, thanks. Good morning Richard and Kathleen and team. With your Indonesian guidance if I look at your back half production it looks like volumes are going to be up about 11% with your revised mine production numbers. It doesn’t look like costs are going down that much on unit basis. Anything changing there in the back half versus the first half?

Richard Adkerson

No, let’s get those unit cost because they will be coming down substantially at Grasberg, cost structures got there. If you look at the top line cost number before you get to the byproduct credits its really very attractive and nothing from a cost standpoint going on.

Brian Yu - Citigroup

So just looking at the full year, its look like on a site production delivery basis you are guiding to about 57 and thus far in the first half it’s averaged $1.58 so

Kathleen Quirk

Copper volumes are not significantly different where we if you look at the gold by product credit. We are well above. We will be $0.14 for this for the year and last time at this quarterly call we were estimating $0.25 for the average for the year.

So our costs are actually better in Indonesia than we had originally forecast, and that’s being driven by these higher gold credits. The copper volumes are actually down from our previous forecast for Indonesia, so that’s resulting in the higher site production and delivery costs, compared to where we were previously.

Richard Adkerson

Okay, so because of the mine plant changes when you look at Indonesia alone we’ve got lower volumes, that’s being offset by some higher volumes in our consolidated numbers, and that’s partially what’s driving what you are observing.

Brian Yu - Citigroup

And then that Climax, Richard I didn’t get what the total dollar spend that you see you are going to be doing over the summer, 6 to 7 or 60 to 70?

Richard Adkerson

Say ball park $60 million.

Brian Yu - Citigroup

Okay and is this money for your spending going to be part of the total CapEx of $700 million?

Richard Adkerson

Right, this is cost that going into the year we were planning, to be spending next summer, and we made the decision to go ahead and start doing some work this summer. For those of you, I think most of you know this is located right on the top of Freemont pass in the Colorado Rockies, and so, there’s a summer construction season that you have to take advantage of. And so what we really did is, we advanced some things we were planning on doing in the summer of 2011 to this year. And it’s in all of numbers, and it would be part of the $500 million cost to complete that we are disclosing.

Brian Yu - Citigroup

Alright, and then at Morenci I think you mentioned that as you go deeper the moly content does go up. Does this influence your decision on when you would want to go forward with Climax?

Richard Adkerson

No, the Climax decision will be earlier than this, we’re doing studies at Morenci now, it will be a major capital project, built to big mill and so forth. I just wanted, as Jim Bob referred to, it adds to the economics of looking at the expansion at Morenci but it won’t affect Climax.

Operator

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

Jorge Beristain - Deutsche Bank

Just quickly I was a little bit surprised on the Tenke coming in a little bit higher than the average I think we address some of the cobalt issues and the moisture and things like that. But you would sort of standby kind of $0.50 net cash cost range for that division. In 2011, regardless of if you do a second phase expansion is that kind of ballpark?

Richard Adkerson

No, our guidance is $0.80 at this point. We are going to work towards driving that down but when we look at a combination of our historical, the cost that we’ve been incurring as we now have been operating this, we began a year ago and ramped up copper. When we look at where we are actually spending, we have the issues that we’ll deal with some of the issues with cobalt but some of those will be with us for a while and we have these issues with the government plus some incremental sulphuric acid cost. Right now we are looking at the guidance of $0.80 for 2011; we can understand that we’re going to work to get it lower.

Jorge Beristain - Deutsche Bank

Right, and in terms of the change in the mine sequencing plant at Grasberg, is any of that related to the recent heavy rain season and some of the seismic activity out there?

Richard Adkerson

No. No, that really hasn’t affected us. We haven’t marked, as far as I know it’s just been normal rain even maybe a little less.

Richard Adkerson

Yeah, we’ve had normal rainfall this year both in the first and second quarter. We don’t have monsoon season like some of the rest of Indonesia. First quarter we’ve seen marginally higher rain, we saw that. It wasn’t substantially high. So the seismic activity that you’ve seen is often Northeast corner of PNG. It’s a long wait from us, not even felt out at site.

Jorge Beristain - Deutsche Bank

Okay. And just last quick question. Any impact from the Dodge Frank legislation that’s going through that’s requiring additional disclosures for companies dealing in the DRC. They named a bunch of minerals, copper one of them but any impact there that could relate to additional disclosure in doing business out there?

Richard Adkerson

No. The metals they are talking about are the ones that are being in line in small operations in the Eastern Congo at Congo, [Coltrane] in the other metals like that, it has no impact on us. And another thing the disclosure issues about payments you made to the government that’s in that deal. We are really modeled after the international effort to disclose payments of where are we complying with. So there is nothing in there that really affects us.

Operator

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

Tony Rizzuto - Dalhman Rose & Co.

I’ve got couple of questions here, first of all, when we’ve been out at in Peru at Cerro Verde. I guess the thing that really surprised me was to hear possibility of the tripling of the size of those operations there. Is it because you are so comfortable with the water availability, the electrical and power availability and you’ve got a workforce that’s located right there in Arequipa and all of those capabilities are reasons, along with the resource of course why you feel even more confident to talk about those kind of numbers today.

Richard Adkerson

Let me be clear. The resource, the mineral sources there, the ability to expand is there, the water resource is a question mark. And Red certainly if I go to it for a week, we feel real comfortable about our water resource, that’s more to do we feel real comfortable about our water resource, it would allow us to double. But that’s the limitation about whether we can go beyond that. Is it Red? Why don’t you comment?

Red Conger

Correct and Tony we’ve been very successful there, working with local community on additional reservoir capacity that was a big part of the first mill project that we built, we think we have opportunities to partner with the government and the community on additional projects like that in the future and it’s those kinds of things that we are working on and would open up a bigger window of production capacity for us there.

Tony Rizzuto - Dalhman Rose & Co.

So Red and Richard these discussions now are on going about the possibility of looking at further reservoir potential that type of thing.

Richard Adkerson

Yes I mean we are working on feasibility study information.

Red Conger

Right, we are doing the engineering, correct.

Tony Rizzuto - Dalhman Rose & Co.

Alright, excellent and then just a follow-up question on Tenke, Richard it sounded to me as if it has been long process in this whole review and you’ve got the existing contract and you continue to adhere to the parameters of that but you sounded much more comfortable on the margin. Is that a fair portrayal on how things are developing and the support that you are receiving?

Richard Adkerson

We’ve been with this over a two-year period. We’ve been very close on a couple of occasion during the period that we thought we were within a matter of days of having this completed for whatever reason government changes or other things have come in the way. I think throughout the period you can describe our situation has been consciously optimistic and sometimes maybe what you hear in the tone of my voice as what’s going on at a particular time we are talking. And right now the discussions have been very good. So we remain cautiously optimistic. As I said we are operating everyday we are going to work to get our cost down to improve our volumes and right now we are recapturing investment. Cash is coming out of this back to repay the advances that we’ve made over time, the key to going forward with developing is to its full potential which would be a great event for this country. It would be very positive for all the stakeholders involved and we keep saying that is getting these discussions out of the way.

Operator

Our next question comes from Wayne Atwell with Casimir Capital.

Wayne Atwell - Casimir Capital

I’m very impressed by your list of projects that you can develop. Do you have the staff? I mean this may sound like an impolite question do you have the staff because you are talking about expanding just about every project and it’s going to take a huge amount of engineering work.

Richard Adkerson

Yes, I’ll tell you we’ve got a great team and that was one of the great things about the combination of our two companies was being able to put these two groups together, and a lot of the young people. One of the great things Wayne has been fun to watch over time is seeing how our Indonesian national staff has developed. We actually have Indonesian nationals working in the DRC in South America, here is Phoenix. And so, all of that’s good. Now having said that, we’re going to be out looking for people this is very attractive place to work. We’re hiring people and will continue to do that, so we’ve got development, we’re very comfortable internally with what we do.

Two years ago the big issue at this very moment in time was dealing with outside equipment suppliers and contractors. And that’s going to be an issue going forward, is to the outside services, but I’m very comfortable for what we can develop and handle in house.

Wayne Atwell - Casimir Capital

You have a huge list of very attractive projects, but in the past the management’s been very excited about the rest of Indonesia. You have [Block A], which you’ve got a good handle on. But we’ve seen a number of huge potential projects that you could identify and develop in the rest of Indonesia. And I realize you had to pull in your exploration teams a few years ago when there was some reasons to do that. What’s the status of your exploration work in the rest of the country?

Jim Bob Moffett

Obviously, the big project you are talking about was identified early on. We went in and did the (inaudible) surveys. One of the things that the managements been able to do we did as you know and go project in [Walloon] to the North one of those big arrow mags, but we are still having but as you get to size of it to the point even with these go projects that we have, is you can justify a road as for North is we actually get to it.

Probably the biggest frustration we’ve had is that a big aero magnitude that you are remembering and come up with you about a hundred miles West of the Grasberg and that darn thing, the arrow mag, is just like the arrow mag at Grasberg, so we had some high hopes and there were some challenge driven down there that had seen some indicators as we covering to go and we got in there and we drilled what looked like the identical spot on the arrow mag that you have, a Grasberg type whole body and we had one or two days but we just couldn’t confirm the size of one.

So there’s a lot more work to be done in there because these arrow mags are so big. As you know, you don’t want to miss the sweet spot every time we had to go in there to try to really get going. We had some kind of security issue because of the passwords are commonly situated at that address.

So, you just have to stay tuned on that, we still have control of the acreage with (Inaudible) come open in particular is a prospect you remember, that we had hoped by now, we would have done enough drilling that if there was a Grasberg everybody after we see. We just haven’t been able to give an American, a continuous program but we haven’t brought a, goes over and reason for that is embarking, where we guess we don’t have any issues as far as camp and I don’t think I have people out there in the rural areas without the infrastructure to back them up that we do on the [inflation], we do it Block A.

So that’s why we’ve able so successful, we’ve stayed at the bottom of Grasberg East and getting the (inaudible) they are, the big guys and those kinds of things. But just stay tuned on that taking on that because (inaudible) is still after and looking at that you have somewhere could be another Grasberg the arrow mags will be there. We just haven’t been smarter enough, we’re lucky that the drills are in the right place.

Wayne Atwell - Casimir Capital

Okay, great. And just one quick follow-up in addition. I was just down there last week and another copper company is very concerned about water. They have drilled some wells and they have found water but it’s unbelievably dry down there as I don’t have to tell you and they were concerned about the local push back because without irrigation, people just can’t live down there. So you are pretty good about water, would you use wells or take it out of the river because they seem to feel there is a lot of risk that the locals might get pretty feisty if they weren’t handled correctly?

Red Conger

Yeah Wayne this is Red Conger, the water supply that we have at Cerro Verde now is renewable. It comes from reservoir system in the high mountains above the operation. In the expansion we did to build the current concentrator, the water resource that was created by building a new reservoir was split equally between the community and Cerro Verde. So the things that we have done had been in partnership with the farmers, with the community and we look forward to doing more of those kinds of development projects there in the future.

Richard Adkerson

What we are looking to do is not compete with the local community but do things that would be incrementally beneficial to the local community and provide for water for our operations.

Wayne Atwell - Casimir Capital

So you maybe could beef up your reservoir and then that would bring some water in any maybe share some more with them and then use it yourself?

Richard Adkerson

Yes I’ll build new reservoir. That’s one of the things we are looking at.

Wayne Atwell - Casimir Capital

Because it seems like it’s quite a distance maybe 50 or 100 kilometers to bring water in from a reservoir. Do I have that right or…

Richard Adkerson

Well, we take advantage of the natural drainage, so it flows by gravity naturally down the Rio Chile drainage.

Operator

Our next question comes from Peter (inaudible). Congratulations to the whole team on a great quarter. I’ve had the opportunity to meet a number of your operating personnel and I know they are best in class across the board, but especially to you Richard congratulations for doing such a great job turning the company over the last two years.

My question is probably not a big surprising and I think Mike was alluding to it earlier but I think to say that you have a strong balance sheet and ample liquidity in cash flow maybe understates the issue. At the pace of the first half of 2010 you are going to be showing that cash on the balance sheet by the end of the year and I understand that you want to be conservative.

But my question is this, in a more normal or stable environment, macro environment, what do you think is an appropriate level of leverage on the balance sheet? And how do you think about like the special one time dividend to re-lever the balance sheet versus an expanded share repurchase?

Richard Adkerson

Those are issues that our boards consider Peter and no question the times that we are in and the uncertainties and so forth lead to different sorts of analysis and you would be if you are in different times. We have an issue just from a cold blooded economic analysis of debt levels in that we don’t get tax benefits for debt like some other companies would and that has to do with the fact that we pay such large taxes in our overseas operations particularly Indonesia which has no need for debt because of where it is. There’s all this big discussion right now about the foreign tax credit and so forth, Freeport is in the mirror image of what a lot of US companies are where they have low foreign taxes and high US taxes. We have higher foreign taxes than we do in the US.

So one of the issues about leverage that you business school students would normally look at is the tax deductibility of interest and we only get about 15% of our interest and that’s deductible. That’s just one factor that goes into it. In terms of what we will be comfortable with, you can almost go back to the point Phelps-Dodge transaction, the way we structured what we paid for. At that time we were comfortable with having $6 billion to $7 billion of long term debt which is more than what we have now. So we could be comfortable with more debt than what we have now. It’s a question that the board is going to be talking about, it’s their decision and they will look at, as I said we all want to invest. I mean that’s the first thing we want to do and then we look at things like the regular dividends, special dividend and as Mike mentioned stock buybacks.

Wayne Atwell - Casimir Capital

And I guess as a quick follow up, I mean if you look at the current price deck of metals, and just to make the assumption which I know isn’t anybody’s base case, but if you think it hangs around sort of plus or minus 10 % or wherever you are today, you guys should be generating close to $4 billion of free cash flow even with the dividend, maybe a little bit below that in that type of environment.

And as you’ve alluded to or as you pointed out very clearly you’ve got as much as six world class mines that you could be sitting on, if you fully get them out. To get there, I guess I have two questions. What kind of volume would you be looking at? And would that require spending all of that cash flow, just with the right numbers or would you still have surplus cash flow? It seems to me I can’t get the numbers to add up. It seems to me like you’re still accumulating cash on the balance sheet given the timing of these projects.

Richard Adkerson

No question. And we have access to credit now that’s comparable to what we had before the downturn. So, we have a lot of financial flexibility, we’d be very comfortable in financing these projects using some debt. They’re going to be over periods of time, but as we look here right now you’re going to see a company that will have the opportunity of returning significant cash to shareholders as we invest in growth.

Wayne Atwell - Casimir Capital

And outside of the internal CapEx programs, share repurchases and changes to the dividend are there any other uses of cash that the company and the board are evaluating, or is it all on the table?

Richard Adkerson

No, it’s all on the table. If you notice in our financial statements, we do spend money on reclamation activities, but there is one other things we’re really committed to is going on behind the scenes. We don’t talk about it at earnings conference calls as we’ve got a very act of program solving problems. We’ve been settling these issues, reaching conclusions, spending money in advance to get problems behind us. But that’s just all normal course of business.

Operator

Our next question comes from the line of David Katz with JPMorgan.

David Katz - JPMorgan

Hi, I just wanted to come back to the question which were asked earlier about the Tenke Fungurume costs, specifically looking at the site production delivery costs at the first half of the year, was at $1.32. And then if you take the average it would imply that second half of the year at $1.47 and I’m just curious why it’s going up?

Richard Adkerson

It’s just a combination of the factors that I mentioned earlier, the fact that as we…

Kathleen Quirk

You talked about site production and delivery costs?

David Katz - JPMorgan

Yes I am.

Richard Adkerson

Before Bob brought the credits you know. It’s, the issues related to some incremental transportation cost as we step up some production, we’re having some higher sulphuric acid, we are having some higher employee cost and as we are also having some costs dealing with legal administrative issues in dealing with certain things that we have to face with the government. So it’s the combination of all of those factors.

Operator

Our final question comes from the line of Brett Levy with Jefferies & Company.

Brett Levy - Jeffries & Company

Hey guys, one is sort of a global kind of issue obviously we are hearing rumblings of the Australian super-tax, any of your venues whether it is Indonesia, or the Congo, whether sort of thinking about something similar as far as the people on the ground that you are talking to are saying and then also I wasn’t clear, I wanted to just clarify based on all the ramp ups you had, do you have a 2011 CapEx estimate?

Richard Adkerson

Yes, it’s on the slide.

Brett Levy - Jeffries & Company

Is that the 1-7?

Richard Adkerson

Yes.

Kathleen Quirk

But that doesn’t include the potential additional investments that we are considering but that’s based on our current plan, slide 23. If that’s consistent with the volume projections that we’ve got, so it’s an apples-and-apples.

Richard Adkerson

Right. Brett we only add into our next slide, slide 23, projects that have been formally approved by board. All these things that we are considering are not in there neither the cost nor the volumes. So when a project gets approved it goes into those numbers. Now with respect to taxes I think there are some real important things here to focus on. In Indonesia we had a contract of work, we’ve had two since mid 60s when this company started there and that sets for the life of the contract that taxes in royalties that are payable and that’s never been changed.

And today in Indonesia their corporate income tax is actually 30% and we pay a tax of 35%. So whatever Indonesia decides to do from a policy standpoint and by the way Indonesia as a country has done very well. And they are talking about decreasing taxes to encourage business.

But our situation is fixed there. In Chile we and other members of the copper industry have recently been engaged in discussions with the government about a revision to their royalty payments to an affect advanced on royalty payments, so that they would get some funds to deal with the aftermath of the earthquake and Tsunami that fell apart for political reasons. And right now our situation in Chile is fixed by our agreements that we have there. In Peru, South America had very attractive tax regimes and royalty regimes compared with world standards. And that’s one of the reasons Chile improved have just done so well. We use them as examples in other parts of the world that if you do have attractive taxes and royalties you encourage investment. So Peru, there has been some steps to have what they call voluntary payments that we’ve been involved with.

We constantly have discussions with them about tax issues but the whole industry ICMM organization and our Chair was very concerned about what Australia was doing, we’ve seen this case in other countries like Mongolia which has had difficulties in getting contracts approved in the DRC, they have indicated they are moving towards the new mining coal there, that would provide for higher taxes for new projects. It wouldn’t affect our projects because we have an existing contract. So this whole issue of resource nationalism is worldwide and it is another one of those factors that’s going to make it more difficult from an economic standpoint to justify new investment in copper mining operations, that along with environmental concerns and the fact that resources are underground, cost structure et cetera, et cetera, et cetera. So yes it’s an issue.

Richard Adkerson

Well, we have answered all the call. It has been a long call. We appreciate, we have a large number of people still online and we appreciate your interest in our company. Look forward to reporting the rest of the year and as always if you have questions be sure you’ll call David Joint and he will get you connected with the right people in our company. Thanks a lot.

Operator

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

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Source: Freeport-McMoRan Copper & Gold Inc. Q2 2010 Earnings Conference Call
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