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

Sanford C. Bernstein 30th Annual Strategic Decisions Conference Call

May 28, 2014, 10:00 AM ET

Executives

Richard Adkerson - Vice Chairman, President and CEO

Analysts

Ignace Proot - Sanford C. Bernstein

Ignace Proot - Sanford C. Bernstein

Well, I think we can start. Well, thank you, good morning. My name is Ignace Proot, I’m the Senior Analyst, Metals and Mining, at Bernstein. One of the companies we are covering is Freeport. We’re very happy to have -- big attendance today I think and a stock which many people like to talk about, many people have lot of questions, is it really an interesting opportunity or should we have more concerns going forward I think.

We’re very happy to have Mr. Richard Adkerson with us. He is the Vice Chairman, President and CEO of Freeport. Prior to joining Freeport in 1989, he was Partner and Managing Director at Arthur Andersen. Welcome Richard.

Richard Adkerson

Thank you.

Ignace Proot - Sanford C. Bernstein

The way we’re going to do this like any session, we have a small presentation to give you an overview. Many of you are obviously familiar with the company, many of you are not, so to give you an overview of the assets, a bit of history, and then we’ll turn into Q&A where, feel free, you should have cards to write questions. We’re going to try to collect them. I’m sure you have many provocative questions, so we’ll try to address these.

But with this, Richard maybe you would like to start?

Richard Adkerson

Okay. Good. So I need to go up here to be able to change the slides. As Mr. Ignace and I were talking last night, we really want to leave time for the question-and-answer session since, as you say, there are a lot of questions to talk about Freeport, it seems like there always a lot of questions to talk about Freeport, but particularly now. So I’m going to go through these slides very quickly and there they are. I was trying to see where I had them.

Now, we are the world’s largest publicly traded copper producer. In fact, when you add up our total consolidated operations, we’re the largest copper producer in the world today. The strength of our company lies in our very large base of long-lived reserves of resources -- of reserves and then incremental resources. And so, as we look forward in what we believe will be long-term positive commodity markets, we have the chance to grow organically, internally without having to make acquisitions, without having to have success in Greenfield explorations which is what we hope we do.

Now, let’s see I’m getting this feedback. Can you hear me okay? I think I have this mike, I don’t know if we could turn this other --. Let’s see if that works. I guess we just live with it. So, okay and we acquired last year, June 1, oil and gas assets that added an incremental part to our business, no way of change in strategy of our focus on copper.

When you look at our assets across the mining and oil and gas business, you see businesses, really strong margins and cash flows. We have current growth in our set of assets with long-term growth and we have a great team that helps manage these assets.

This is our global footprint. Today, over half our business is in the U.S. with our oil and gas and mining assets. We have mines throughout the Southwest, nine mines in the U.S. We have three mines in South America, a growing mine in Africa, in the DRC, our Tenke Fungurume mine that we began development in 2008 and have now expanded it, as well as our cornerstone asset, which is the Grasberg mine in Papua in Indonesia.

This is a chart of the world’s leading copper producers by their equity in their assets, very positive about being in this position, very positive about copper markets. The reason for that is that copper is an essential asset for the world’s marketplace. It’s integral to general economic activity. Historically, it’s been the commodity that’s mostly closely correlated with industrial production in the developing world, in the developed world.

And since 2003, basically China has emerged through its growth as being a key consumer of commodities in general, but particularly copper. Today, it consumes 40% or more of the world’s copper. It’s been the source of growth. And China is in some ways a predictor of what is happening in other developing countries as we go forward. India, for example, which has a large population, uses less than 5% of the world’s copper.

So as country develops over time, the demand for copper is good. You can see this is a list of the biggest copper mines in the world. Just quickly go down that list and see when they were found. The thing that’s really supportive of copper prices is not only demand, but also supply support. Very rare to find major new copper mines. The existing mines today are ageing, grades are falling, the barriers to developing new mines from communities, host governments, environmental concerns and so forth.

So overall you have a commodity in copper that’s about as well situated as any commodities could be. This is a simple chart that Wood Mackenzie puts together. It’s looking at copper global growth over the next 10 years if you assume a modest 2.3% increase in global growth, you would see a need for almost 7.5 million tons of new copper supply. Existing mines will decline by 20% over that period of time and that will be made up by expansion, scrap, substitution and so forth. The markets will work, but it indicates a growing value for companies with copper production, copper reserves. Particularly ours, for example, that shows a shortfall of 11 million tons, the top 10 copper mines today produce less than 5 million tons just to put that in perspective.

This shows where our oil and gas operating assets are. Our focus for growth is in the Gulf of Mexico deepwater where our predecessor company, Plains, had made a major acquisition in the fall of 2012 of larger production facilities owned by BP and Shell that are significantly underutilized. This gives us the chance for growth from there.

We’ve recently announced the sale of the Eagle Ford oil shale asset in South Texas and we have significant production in California. It shows today that mining business represents roughly two-thirds of our EBITDA and you can see that more than 50% is in North America, which gives us good geographic diversification with good assets.

In the mining business, we’re growing our production from about a 4 billion pound level of copper sales to 5 billion pounds, that’s with three major projects. One is completed, one starting up, we have a major expansion at our mine near Arequipa in Peru called Cerro Verde, which is almost a $5 billion expansion and will be the largest concentrated mill facilities in the global mining industry.

And beyond that, we have over 100 billion pounds of proved and probable copper reserves meeting SEC definitions, that would be economic at $2 copper. We have an incremental 100 billion pounds of copper in resources associated with our existing mines economic at $2.20 copper.

The oil and gas business is growing because of projects being developed now. We have substantial productive capacity in these major facilities in the deepwater that we acquired from BP and Shell and that gives us a chance to focus exploration that can utilize the excess capacity. The big challenge in the deepwater is to have discoveries that are large enough to support the major development of new facilities. By having existing underutilized facilities would allow us to conduct exploitation, development, exploration, drilling to attractive targets that can then use the capacity that we have on these 100% owned facilities.

Just, we use – at Freeport, we don’t predict prices near term. We feel positive about long-term markets, restructure our business to operate effectively in varying prices, that’s one thing that this long history I have with the natural resource business has taught me. Things will happen that nobody expects. We’re not smart enough to anticipate them, nobody else is. We’re not traitors. Traitors run their business in a different way.

We have a long-term positive view about the commodities but recognize that we might have to deal with near-term experience. So we look at our cash flow generating capacity under varying prices. We make investment decisions not on any particular price, but in something that fits with our portfolio. And these slides just show how strong the cash flow capacity of our company is at varying commodity prices.

Here is our capital expenditure expectation. You can see mining projects falling off by 2016 as we complete our projects. We will be looking for additional investment. We are now looking for additional investment opportunities there. The oil and gas business has complementary growth within this timeframe, but the opportunity to add the growth in our business beyond 2016 as we tee up our next round of expansion projects in the mining business.

So the oil and gas opportunity is an incremental opportunity to our existing business and we’re excited about its current cash margins that it generates, but also its outlook for future growth. So this is the summary of our company and we can begin our discussions and if you have questions for more details, please write them down or call us.

Question-And-Answer Session

Ignace Proot - Sanford C. Bernstein

Thank you. So please feel free to write down your questions on the little cards, we’re going to collect them. I have a couple of questions to start, but I would like to really make sure we address your questions. So starting with obviously one of the controversies that I still hear talking with many investors is traditionally Freeport was actually a copper company, very long time ago you already owned oil and gas assets. Now, last year it was this PXP, MMR transaction, can you remind us about why Freeport -- it’s the right thing to enter again into that franchise?

Richard Adkerson

Yes. When I joined Freeport 25 years ago, two-thirds of our assets were oil and gas assets. It was an unusual company. We were the world’s second largest phosphate fertilizer producer. We had a big sulfur business. We had gold mines in -- a gold mine in Nevada. We had several small mines in Australia.

And the world was changed with the discovery of the Grasberg mine in 1988, that’s when I joined the company, right after that. Freeport has been in Indonesia since the early ‘70s, but this was an extraordinary mine. It is arguably the best in the history of the mining industry because of the very large volumes of minerals and the fact that within the minerals there is this high grades of both copper and gold. I mean typically there are byproducts, commonly are.

But gold is a byproduct for Grasberg (indiscernible) is the largest gold mine in the world in terms of production and reserves. So that turned our company upside down for the better. We then focused on developing it. We sold essentially our oil and gas producing assets. We ultimately sold the fertilizer business, split the company up and then emerged with FCX as a major copper/gold producer, as a single asset company.

Struggled through the late ‘90s with the commodity markets and the political changes in Indonesia when the government shifted from Suharto to a new form of government, and then emerged in 2003 with the growth in the so-called commodity super-cycle where we ended up paying off of our debt, and we’re generating all this cash and basically operating like a MLP or a cash distribution company.

Took advantage of that asset in 2006 to negotiate a deal to acquire Phelps Dodge which was a global producer, a company 2.5 times our size, took advantage of the favorable financing markets our long-term positive view about copper and then started investing heavily in growth in that business. We’re still committed to that.

Managed our business effectively through the financial crisis of 2008/2009. But within our management team and our Board, we had a number of experienced people in the oil and gas business. There was a sister company that was once part of the Freeport-McMoRan group that we had spun-off called McMoRan Exploration.

Our Chairman and I were co-chairmen of that company. The Board looked at the company’s situation, all positive about copper, but one of the reason copper prices are so high in relation to its operating costs is the challenges from a time standpoint and other standpoint is developing resources. And the Board concluded that adding on this opportunity in the oil and gas business, we had known Plains, PXP previously, they’ve been a partner in McMoRan’s business.

So it wasn’t just a strategic decision to diversify into oil and gas. The Board saw an opportunity to take advantage of this particular situation. It was complicated because of the conflicts of interest of board members and management in McMoRan, so the negotiations were handled --.

Ignace Proot - Sanford C. Bernstein

Sorry to interrupt you, but many shareholders would even say that this may be not necessarily the transaction or the acquisition itself, but sometimes a little transparency around how did you went and the key question is would that happen again, what would you say to these --?

Richard Adkerson

This was a special situation that was complicated because of the co -- the relationship between McMoRan and Freeport. And so that made it different than a normal transaction. For example, as co-chairman of McMoRan and CEO of FCX, I was in a conflict position in terms of representing both shareholders.

So I had to withdraw from the negotiation. This cleared up those conflicts. So would this happen again like that? The answer is no, because we don’t have conflicting situations again. The deal was not – the deal was negotiated over a long period of time. During the middle of it, PXP made an acquisition. So it suspended. It wasn’t like it was something that was a foregone conclusion that would happen.

And we couldn’t talk about it to investors in a transparent way because of the circumstances that were unique to that transaction. But that you know we’re here today, you can – that’s an interesting case study of -- people have different views about it, but we’re here today, we’ve got a great set of assets, we are all focused on executing our business plans and looking forward and I’m very optimistic about what we have available.

Ignace Proot - Sanford C. Bernstein

So looking forward on the oil and gas piece, Richard, so there is obviously an important growth target there to increase the output? How important or could you tell us a little bit where does that growth come from, but also how important is the technical feasibility of the ultra-deep plays to realize that growth, is that a key element to it or is that a bonus?

Richard Adkerson

It’s more of an incremental bonus opportunity which could be very important. We have a clear path to grow in the deepwater, the Gulf of Mexico. And that comes about because of the success of the industry in that area and the special circumstances that let PXP to have the opportunity to acquire these underutilized facilities. This is from BP, which was dealing at that time with the aftermath of the Macondo incident.

And that has a lot to do with the fact these facilities were under-utilized. They are not old end-of-life facilities and it gave PXP an opportunity to acquire them. And that sets us up for the really straightforward opportunities for growth in the Gulf of Mexico. We have to execute and we got a team that can execute and it gives us a great chance for growth.

The legacy McMoRan Exploration program in dealing for these ultra-deep targets is a pioneering effort. This is drilling to reservoirs that have not been tested in the industry and which conventional wisdom was very skeptical about whether that could be successful because of their depths which have higher temperatures, higher pressures, about the ability to drill and complete wells in that environment and what kind of reservoir quality you have.

McMoRan, over time, through its efforts has met many of these challenges and established that successor is achievable. And now we have a very exciting new well that’s been drilled onshore following the analysis of the geological development that started in the shallow waters offshore but moving closer to the source targets of this particular reservoir and we drilled a well in an area we call Highlander, Lomond North well, which has had -- which through log analysis and core analysis shows very attractive sands with significant section to it.

We have a 50,000 acre area that we have under control for this well. We are in the process now of completing it for testing. To flow this well, you have to physically do all the completion for production and we expect to have it tested this summer and it will be an important event for our company in terms of that program and with success this will be a significant incremental opportunity for us to increase the value of the company.

Ignace Proot - Sanford C. Bernstein

So when investors think about Freeport, should investors still think about Freeport as primarily a copper play or is it really becoming a diversified mining company?

Richard Adkerson

Well, we are still -- you saw the size we’re on the copper business. And other than some smaller pure-play copper, we’re the company with the most leverage to the copper industry of the major companies. So in that sense, we’re still a company highly leveraged to copper markets in our success in the copper business.

We do -- we are more diversified in the sense of geographical diversification and that’s allowing us, for example, to be dealing with these complications in Indonesia today in a stronger basis than we otherwise would have been.

Ignace Proot - Sanford C. Bernstein

I just got a question on this that fits on the topic so, if you were to choose, would you rather be paid in pounds of copper or in barrels of oil?

Richard Adkerson

Many of you know me for years. I mean I’ve been talking with investors about Freeport for over 10 years now and you know just how optimistic I am about copper business. So our shareholders, including me, will be rewarded by what I believe is going to be a very favorable copper market.

I see the oil and gas business for Freeport as being an incremental opportunity to create value. So we’re definitely more of a copper company than an oil and gas company. The oil and gas business is a significant part of our business I think with good prospects.

Ignace Proot - Sanford C. Bernstein

In terms of the question here on the return on capital, how would you compare the return on capital of the oil and gas business versus the mining business?

Richard Adkerson

Well, with success we’re going to have great returns of capital on both -- with success we have great returns of capital in both. It’s a -- we had a discussion in my first one-on-one meeting this morning, this idea of return on capital prospectively depends on how you deal with future commodity prices and we literally don’t try to predict commodity prices.

We look at scenarios in prices and try to develop a portfolio of assets in the copper business that positions us to have success over time as markets develop, which we think will develop in a very positive way. It’s also structured in a way since we don’t hedge, we couldn’t really hedge our position in copper because the markets really aren’t there. So that if we have to adjust to periods of time of weakness, we can operationally adjust through -- adjusting our capital budgets and adjusting our portfolio of assets.

We have assets that kind of span the cost structure in the industry. Overall, with Grasberg operating normally, our average cost of, cash cost of producing a pound of copper is $1.50 or less. But we have so much higher production, lower production, and so we can adjust those. We manage price risk operationally, not through the financial markets.

And so the rates of return in my experience is and I’ve seen it with other companies whom I probably worked, companies that get this real rigid calculation of return on capital and so forth end up, I mean when I joined Freeport we used to have a price committee that would debate what prices we’re going to be.

And I’ve seen around our company that figures don't lie but liars figure, and so if you get yourself into a mode of having a strict formula for calculating rates of returns so forth, you are going to run into people forcing projects to meet those criteria. So we literally look at -- we do our reserves on a price basis because the SEC requires it, we use $2. And then when we look at investment projects rather for any of our business, we use a range of prices to see where we will be.

Ignace Proot - Sanford C. Bernstein

So if we were to rather than comparing or setting absolute targets comparing with the industry, so I just want to move a little bit to copper. So you are going to grow from 4 billion pounds to 5 billion pounds, roughly 25% of copper output. That’s not necessarily so much more than the industry overall. We see a lot of expansions that may be a little bit higher, but how do you see the quality of that growth and actually the return on capital regardless of where the copper price would be versus the average growth in the industry?

Richard Adkerson

You mentioned that last night, and I thought about it after we talked after our dinner last night. What I see as the real strength of our company from a grow standpoint is the risk profile of our growth. In this business, you can see it in projects here in the United States where great copper deposits are being held up by environmental or community issues like the Pebble Project in Alaska, the resolution project right now in our neighborhood in Arizona.

What we have is the opportunity to take our existing mining operations and because of the more favorable global markets for copper is to develop expansion projects that builds off of our existing footprint and infrastructure and in areas where you don’t face community opposition to the same extent you do when you’re building a new mine.

By nature, mines have big impacts on the land, they are big operations and they change the landscape. And in today’s world, with the environmental sensitivity that we all have by the way, you go to your kids’ classes and see what they are studying about environmental issues, you know people don’t want to see smokestacks, they don’t want to see new mines and that’s built into us and it’s true around the world.

So if you look back, I think compared with industry and I’m not talking about any specific company, but if you look back at what Freeport has said it’s going to do, I think we have a great track record of doing what we say we are going to do, but as the industry as a whole over the past 10-plus years, the industry hasn’t performed up to the expectations of the consensus view of what analysts thought they could do because supply has fallen short.

Ignace Proot - Sanford C. Bernstein

But the push-backs sometimes that I hear on Cerro Verde and Morenci, obviously real Brownfield expansions, is that the grade is not necessarily, it’s not a 1% copper grade you have there, so what are the -- you mentioned maybe less risk, what are the other elements that you would say are really strength of these projects to offset, for example, the lower grades?

Richard Adkerson

Well, when you say lower grade, the existing production at Morenci and Cerro Verde are not 1% either. I mean, actually the grades of our expansion there are going to be consistent with our existing operations and at Morenci, for example, Morenci the U.S. Cavalry back in the 19th century discovered the outcropping of minerals at Morenci. I mean and this mine has been around for now 100-plus years,

the largest copper mine, flagship mine in the United States.

Phelps Dodge was a leader in the development of SX/EW processing and Morenci was, for a period of time, solely in SX/EW. What we’re finding is, after our acquisition -- the exciting -- and this came up during our due diligence, but the real exciting thing when we looked at Phelps Dodge was because that company had been so stressed by copper prices and low grades and so forth.

They have really not aggressively drilled out their ore bodies to understand what the opportunities would be in the new market world for copper as well as the new world for our corporation because having Grasberg as a backstop for the Phelps Dodge operations gave us a chance to be more aggressive with exploration and development than Phelps Dodge could have ever been.

And what as we -- looking back and seeing how much money we’ve spent on exploration which involves core drilling, that we are finding very substantial reserves that are sulfide reserves in our North American mines, which gives us opportunities to develop those and that involves a lot of capital.

This is one stage of Morenci’s growth but we are continuing to do analysis and there is an opportunity to have a super mill at Morenci involving lots of capital, still not high grades like Escondido or Grasberg, but in a marketplace that would be a economic project at copper prices $2 to $3.

Ignace Proot - Sanford C. Bernstein

We’ll move in a couple of minutes to Grasberg, several questions obviously related to it, but just a key challenge today in the copper industry is obviously the availability of and the access to water and electricity.

Richard Adkerson

Yes.

Ignace Proot - Sanford C. Bernstein

And that’s obviously in Chile a primary issue. How would you say for you as a company how important is that issue and again how do you see yourself position versus the industry overall?

Richard Adkerson

Well, I’m sure most of you saw the front page of Wall Street Journal article about, principally about Freeport, but about mining and water in Arizona that was just in the paper last week. So let's talk about that. Let’s start with energy first. I mean this new energy picture we have in the United States is fabulous. That’s come about through shale and natural gas production and shale oil production.

And it is significant for our business because 20% 25% of our costs are energy related. So as we look at resources in the U.S. versus resources in Chile which has a huge energy problem, the U.S. has a big advantage over it.

The energy in Chile is related to water because water in future in Chile is coming from the ocean. It’s got to be transported. That requires a lot of energy, and we either use desalinization plants which we just built one at our Candelaria mine or else use seawater for processing. But that’s a big issue for Chile. I mean you talk to companies operating in Chile they worry about the competitiveness in Chile.

Interestingly, labor is an advantage for the U.S. versus Chile. Overtime, wage rates in Chile have risen. Unions are very strong. We don’t have unions in the United States except for one small piece of an operation we have in New Mexico and that gives you a lot of flexibility from a labor standpoint to just for expansions and changes that you might have to make.

Just think about it, workers here in the United States live at home, they go to public schools, they own their own vehicles, they come to lunch – they come to work with a lunchbox. When you’re operating in the remote areas of northern Chile, often you have to provide housing, education, living facilities. And in Indonesia and Congo, you have to provide everything, everything, and that’s a huge cost that’s incrementally --.

Ignace Proot - Sanford C. Bernstein

But just going back to the water and energy challenge, you would say in the U.S. you are probably better positioned, how about, for example, Congo, (indiscernible)?

Richard Adkerson

We’ve got lots of waters in Central Africa, so water is not an issue.

Ignace Proot - Sanford C. Bernstein

But you have to turn it into electricity.

Richard Adkerson

Well, the issue is electricity. I’ve really enjoyed getting to work in the Congo. It’s a country that just got such a sad history. We were talking earlier -- it’s got a population of Great Britain and $14 billion of GNP, $200 a person. For a country that has -- is rich in soil, is rich in natural resources, it has energy development opportunities across the Congo river that can have enough electricity theoretically for all of Africa, and that the country is in the shape that it is in.

And it’s been gratifying for us to come in there and make at the time the largest private investment in the history of the country. I mean we’ve did the original development, we’ve done expansions, we’ve had as many as 8,000 or 9,000 people working there, we’ve contributed to local communities by providing fresh water wells and the project is going well. It’s a great resource, could grow to be one of the world’s largest mines.

Ignace Proot - Sanford C. Bernstein

What is the -- because we’ve talked before about ultra-deep plays, for example, in energy which might be a potential one day, it’s Tenke Fungurume, is that an asset that you one day will develop and if so, what are the major concerns or constraints today to move ahead with Tenke?

Richard Adkerson

You said going to develop, we broke ground on the project in 2008. It was a very complicated initial project, cost more than we anticipated. We then did our recent expansion that we completed last year on budget, on time. We’re studying -- we’re doing exploratory drilling. We’re looking at metallurgy because it’s a complicated metallurgy there, it’s not the same size ore deposit that Cerro Verde or Grasberg is, it’s a sedimentary deposit.

We’re doing with oxide ores, it is a significant -- it looks like a huge sulfide resource, but a lot of mixed ores, so we got to deal with how do you process that. Logistics, I mean we’re shipping our copper cathodes and our cobalt products that we produce there 3,000 kilometers in 18-wheel trucks, starting in Central Africa and going all the way down to Durban, 3,000 kilometers.

We have about 600 to 800 trucks on road everyday and you just think about the map where those trucks go. So logistics, if we can get better rail facilities, it will make that operation much more profitable. Power is a big limitation right now. It affected us. You saw in the second half of last year there’s opportunities to develop power.

The World Bank is involved in projects for all the Sub-Saharan Africa to develop power. We are working with the government. We’ve restored hydropower facilities that had fallen apart after the Congo got its independence and we’re working to develop, that’s great for the community and great for us. That’s going to take time, that’s the biggest constraint.

And then overriding that, you’ve got political risks. You know about this country which is going through the horrors of the eastern part of the Congo that’s better today than it has been but it is a country with that kind of economy in this history that we have to monitor -- we have good support from the government, complicated sometimes, good support from the region.

Ignace Proot - Sanford C. Bernstein

So is that something to wrap up on Congo, is that something that once Cerro Verde gets completed, once you’re going underground fully in Grasberg that could be on the radar screen --?

Richard Adkerson

It’s on the radar screen before that. None of these things -- let me say this we’re pursuing every copper project that we have opportunities to pursue right now. So it’s not -- and we have the capital, we’re a strong company we’re going to get stronger because we’re going to reduce our debt through generating cash flows and paying debt down and selling assets. So we’re not going to be constrained by capital. We are not going to be – we’re going to be disciplined in how we spend capital, we’re going to be sensitive to the marketplace but we’re going to be looking for growth.

Ignace Proot - Sanford C. Bernstein

I think everyone wants to hear about Grasberg now. So we are -- obviously Grasberg today an important asset for you, it’s the world three copper asset globally and roughly I think around 20% 25% of your copper production is there. Today the asset is running at 50% for various reasons. Could you try and let’s say briefly give just a bit of context of the situation there and then we’ll talk about specifics of that today, but just bring us up to speed on how is the situation today really in getting there?

Richard Adkerson

It is a great asset and Freeport has been there operating since the early 1970s in Indonesia, it’s going through about as many changes as a country can go through when you look at that long history. A new mining law was passed in 2009 that did several things. But two of the main things it did was it replaced the long-standing contract of work system that Indonesia has had that we operate under with a licensing system for new projects.

Mining companies in places in the developing world have required that companies give assurance about how the results of development projects are shared between the government and the company. The risk is, all the investments are upfront and then as time goes by and you are just generating the cash flows, you need protection to keep those cash flows being taken away from you and this has got to be more of an issue during the commodity booms when prices have gone up.

Now, our contract with Indonesia provides Indonesia with an extraordinarily fair deal. They get more than 50% of the profits at Grasberg through taxes, royalties and dividends. That’s more than we pay to any other country around the world. But politically this whole notion of resource nationalism is important there as it is in other countries.

The second thing that the new mining law, and I’m calling it new, of 2009 did is it had provisions that within five years of 2009, which was in January 2014 they prohibited exports of raw ores from Indonesia. Indonesia is a major global supplier of nickel ore and bauxite ore and that ore is just extracted from Indonesia, shipped to Japan and China and processed downstream.

We originally thought that copper concentrate would not be subject to this restriction. Much of the value, as much as 80%, 60% of the value of nickel and much more of that of bauxite is created downstream processing. We don’t export copper ores. We take ores and produce a product called copper concentrate, which is a marketable intermediate product that has a value of 90% to 95% of copper metal.

So those minerals were different, but Indonesia’s objective and they are encouraged by the Russians and by Glencore and others is to require in-country processing of nickel and bauxite so that they can capture more of the downstream value. Unfortunately, they extended that to copper concentrates, when the logic of doing that is questionable.

Then this ended up in an election year where the current president is not eligible to run because of term limits and it’s a very complicated election process and I’ll see the time is ticking down so we’re going to talk about that separately I mean but just let me say that it is a very complicated political question, because the export ban of nickel and bauxite targets a lot of small miners in Indonesia who cannot export and the idea of trying to structure something that would be logical but be perceived as the unfavorable for a company like Freeport in an election year is politically very difficult.

Ignace Proot - Sanford C. Bernstein

So how successful are you or actually even are you having these discussions with the Ministry of Finance that the copper downstream is fundamentally much less profitable as we’ve seen compared to other commodities and that actually that proposal is economically not justifiable at all?

Richard Adkerson

We have had those discussions not only with the Finance Ministry but with other ministries, including Energy and Mineral Resources, which primarily administers our contracts, but with Trade and Industry and their Investment Board. And after this restriction came out in January, by late January after having these discussions, we said if the government as a matter of company policy is insistent on building a new smelter and by the way we arranged for Indonesia’s only smelter to be built in 1990 in partnership with Mitsubishi and other Japanese investors.

It’s a world-class smelter, it’s very efficient, its production of copper cathode exceeds the amount of copper that’s used internally in the Indonesian economy. But since that time, the copper concentrate smelting industry has changed so much with all the development of capacity in Asia, China, lesser extent India, so that there is a -- today, the fees that smelter charge for processing copper concentrates are about the same as they were in the mid-1990s when this Gresik smelter was built and yet the cost of building a new smelter has tripled.

Ignace Proot - Sanford C. Bernstein

But would you in the current context --.

Richard Adkerson

Now, let me just -- one thing. What we told the government if this as a matter of policy for the government that a new smelter be built that we would take the lead in building one provided the government participate by using some of our taxed revenues as a financial incentive to do it so that’s where our position is.

Ignace Proot - Sanford C. Bernstein

And so the new smelters, some roughly 2 billion order of magnitude.

Richard Adkerson

Order of magnitude, 2.5 billion.

Ignace Proot - Sanford C. Bernstein

How would you -- would you ever build that without support?

Richard Adkerson

What we’ve told the government is that we would do it in a public/private partnership and that’s where the discussions are headed and the response in discussions was positive. The problem is we have not had been able to get a coordinated government position to deal with now. The government just named a new Coordinating Minister who oversees all these other – a Coordinating Minister for the economy, so he oversees finance, energy and mines, trade, industry, so forth.

He is not a politician, the rest were people in political parties. He is a, for the most part, he is a successful businessman who just had a session Wednesday in Jakarta for a briefing on this and is saying positive things about addressing this and he is a very capable man. I’ve known him for quite a while. His name is (indiscernible).

And so we’ve been close throughout this process to getting at least an temporary measure to allow us to resume exports and I believe that the new Coordinating Minister provides us an avenue of dealing with these issues and he’s indicating an objective of dealing with the overall contract situation in this current administration. The current administration’s term extends to early October.

Ignace Proot - Sanford C. Bernstein

You’re employing 30,000 people there, you haven’t really done massive reductions so far. What is the next step to expect, what -- are you planning to do any reductions or what would be the catalyst to do so or not?

Richard Adkerson

Our workforce is over 30,000, maybe 40% or 40% to 50% are our employees, the rest are full-time contractors. We made a business decision, we made a business decision not to reduce employment or suspend capital projects during the course of these discussions because of our expectation that we will be allowed to resume exports.

While our concentrate sales are cut in half or maybe a little more than half, we continue to operate on a full-scale. In the open pit, we’re mining waste material and low-grade material. We’ve cut back some of our underground mining. We’re just limiting our production of copper concentrate to copper project we sell to meet how much we can put in storage and how much we can ship to address it.

Now that’s not sustainable. You can’t bear 100% of your costs and only have half of your revenues, but the business decision is this, cost reductions mean layoffs. We are over 90% of the economy in the region in Papua where we operate and so that would have a major negative impact in this community. We don’t want to have that kind of impact to our employees or the community and plus it’s a very socially sensitive area. So there would be uncertainties as to what would happen to that community to our reaction of significant layoffs.

And then with our capital projects where we are spending $600 million, $700 million a year to develop our underground resources to replace the production following the completion of mining from the open pit which we expect in 2016. There would be a economic cost to deferring those capital expenditures because there is a lot of general workers here but there is also technical workers that would be gone and then you’d have to remobilize and start back up.

So it's a business decision for us. The impacts are significant. In total, since the export ban in January, we’ve lost the operations has lost about $1 billion, about half of that’s for the government, about half of that’s for us. So it’s unnecessary, nobody is gaining from this, nobody gets any advantage by having us go through this and we keep trying to encourage the government to find us a way to get that story.

Ignace Proot - Sanford C. Bernstein

So what would need to happen for you to really, what will be a showstopper to really start to do the reductions which are difficult and --?

Richard Adkerson

I think there is two circumstances, one if we felt like there was no likelihood of reaching at least an interim solution if the government just said we’re going to stop considering this, wait till after the new government comes in next fall, then we’d be forced to act.

And secondly, would be a business decision that we just can’t continue to sustain this financial impact and obviously if we were to take these actions that would bring some pressure on the government so that’s a business decision.

Ignace Proot - Sanford C. Bernstein

We’re running towards the end. I have one last question for you. What are your personal, professional milestones you see the next few year or years and the company?

Richard Adkerson

I got one priority and that’s getting this Indonesian thing fixed. I mean --.

Ignace Proot - Sanford C. Bernstein

And beyond that?

Richard Adkerson

I’m just telling you it’s an everyday deal and it’s so important – one of the great things about our company is our company has some scope, certainly has a lot of scope in the nature of our work around the world, but it’s not so big that I can’t personally get involved in issues. So I got to tell you I am involved in this and I’ve been going to Indonesia for 25 years now.

Our Chairman has been involved in a longtime but -- you say what are our milestones, solidly Indonesia is priority number one. The second thing is to execute on our business. I should say another thing and we don’t talk with investors too much about this, but we had a horrible safety accident a year ago with Grasberg where this really unusual circumstance, it wasn’t really a mining accident but we had an undergone training facility and we lost 28 people.

And so safety is -- I would tell you safety even pre-emphasis at Grasberg but safety first then getting our situation with the government resolve, executing our business plan and our company has made a commitment to reduce our debt that we incurred in the –

Ignace Proot - Sanford C. Bernstein

For example the Cerro Verde start up in 2016, that’s something that you see as a personal milestone?

Richard Adkerson

Absolutely, I mean we got Tenke deal done. We’re starting to ramp up Morenci, Cerro Verde, Red Conger is there now and call me with a great report on it. We basically completed procurement. It’s a low risk big project, so getting that done --.

Ignace Proot - Sanford C. Bernstein

Okay.

Richard Adkerson

I know time is out.

Ignace Proot - Sanford C. Bernstein

Good luck with that. Thank you very much for attending.

Richard Adkerson

Thank you.

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Source: Freeport-McMoRan Copper & Gold (FCX) at Sanford C. Bernstein 30th Annual Strategic Decisions Conference (Transcript)
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