Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)
Deutsche Bank 2014 Global Industrials and Basic Materials Conference
June 4, 2014 9:40 a.m. ET
Kathleen Quirk – EVP, CFO & Treasurer
Jorge Beristain - Deutsche Bank
Jorge Beristain - Deutsche Bank
Good morning everybody. I am Jorge Beristain, I am the metals and mining analyst for the Americas for Deutsche Bank. I am pleased to have with us this morning Kathleen Quirk, a veteran of Freeport-McMoRan, over 20 years at that company. I think we’ve had some potentially topical news out overnight, one never knows what comes out of Indonesia. But she is here to give her talk on the company and after that, we’ll open up to Q&A. So thanks very much, Kathleen.
Thank you, Jorge. Good morning everyone. It’s a pleasure to be here again at this conference. I believe we've been here for the five years that is still in existence and we’ve always enjoyed the Chicago venue.
I see here -- a lot of familiar faces here but for those of you who aren’t familiar with Freeport, we’re the world’s largest publicly traded copper producer. We’re also a significant producer of gold and oil and gas. Our assets are characterized by long-lived reserves and -- very large incremental resources, both in the mining and in oil and gas parts of our business.
We have a very high quality set of oil and gas assets. It’s been a year ago almost to the day that we acquired assets in the U.S. and we will go through those. But they’ve performed very, very well since the acquisition. We’re very pleased.
The business is characterized also by strong margins and cash flows both in oil and gas and mining. And we have an exciting growth profile – organic growth profile which we will be talking more about. We’ve got a lot of experience in our technical team - mining expertise, oil and gas expertise, strong experience in developing projects, strong experience in terms of responding to market conditions. We’ve got a track record of capital discipline, managing our balance sheet and our board and management team and all the way through the organization is very focused on creating shareholder value.
Our footprint is – as shown on this map, you can see in North America where we have a significant amount of our copper reserves and all of our producing oil and gas assets. So about a third of our copper reserves, we’ve got 7 producing copper mines in the U.S. and two primary molybdenum mines. We also have a very large production of oil and gas – principally oil in the U.S.
In South America, we operate both in Chile and in Peru. It’s about – it constitutes about another third of our copper reserves. We’re doing a big project there which I'll talk more about at Cerro Verde in Peru but we’re very excited about the growth outlook in South America.
At Grasberg which we will be talking more about, Jorge referred to it, very topical but it’s a world class asset, we’ve operated there since ‘70s and we’ve been very successful. It’s characterized by grades of copper and gold in the same ore body.
Tenke Fungurume is our newest asset. It’s located in Democratic Republic of Congo. It’s a relatively small part of our overall copper reserves and production but it represents lot of growth for us.
You can see here most of our cash flow is generated in the U.S., North America, a smaller part in South America, Indonesia, and Africa. About 70:30 between mining and oil gas.
This is real important in terms of our overall growth profile, both in mining and oil and gas. We’ve got very significant growth in copper going to 5 billion pounds and we’re on the way to get there. And we’ve got a growing production profile in established basins in the U.S.
We talked about the sales in May. This is part of our overall debt reduction plan and a re-focusing of our assets in the Gulf of Mexico. We announced a very large transaction to sell the Eagle Ford Shale to Encana for $3 billion. That’s expected to close at the end of June.
And we announced acquisitions, very strategic, Lucius and Heidelberg $1.4 billion in the deepwater Gulf of Mexico. These were value accretive transactions. We sold at attractive values and moderate [ph] attractive values and we will have proceeds to repay our debt.
This is a focused area in the Gulf of Mexico, and you can see how these assets fit in together. You can see Lucius here which is a development project that’s coming on later this year. You can see our facilities in Holstein and Marlin, Horn Mountain. We have a very exciting opportunity here in the Gulf of Mexico. That’s really where our oil and gas growth is going to be focused.
Talk a little bit about copper markets. We're very constructive and positive on the outlook for copper. China, which is about 40% of the world’s copper demand is, we believe, very healthy. It’s got diversity of demand both on the consumer side and on infrastructure side. You’ve probably been reading about the power grid there and need for continuing copper. So we're very positive long-term about the growth in China. The growth will be likely slower than it has been over the last several years but it's a very large base. And so we're optimistic about China.
We’re a big supplier of copper rod in the U.S. We probably supply almost 50% of the rod in the U.S. We’ve seen those markets continue to improve. Demand has been good. Our customers are feeling more optimistic about the markets than they had couple years ago. We’re seeing recovery in Europe.
The cathode market remains tight and you’ve seen inventories decline. Scrap has been tight and we really think the market is very well supported by fundamentals, both supply and demand. And we will talk more about the supply side, because that's really key to copper.
This is a chart that will just give you a feel for projections going forward, and a lot of people look at this and say you're always projecting growth in demand. But this is a relatively modest amount of growth in demand over the next 10 year of 2.3%. This is a Wood Mackenzie estimate. The copper market would grow by about 26% or 7 million tons.
Over the same period, we have an issue in our industry, in the copper industry where you have mines that are naturally depleting. Ore grades are getting lower. You’ve got longer hauls. You’ve got more challenges to just stay even. And so over this period, the next 10 years, Wood Mackenzie estimates that existing mines will decline by 4 million tons. So you need 11 million tons shortfall to be made up by expansions and new projects. We all know how hard it is to expand. We all know how hard it is to identify new projects. There are very, very few opportunities to develop new copper projects.
And in 2013, just to give you a feel for this -- the top 10 mines in the world are less than 5 million tons. So we believe this is a very good market. We don't predict prices, we’re prepared to deal with whatever market conditions we have to deal with. We operate with the low-cost business, keep leverage the upside but we're very positive about the outlook for the business and our position in the market.
As I mentioned, the world-class discoveries of copper are rare. You hear about big oil and gas discoveries frequently but in copper, you rarely hear about a brand-new discovery. And if you quickly just look in the list of these mines, you can see how day-to-day are – Escondida is the world’s largest, that’s 1979, that’s actually one of the newer -- and so you go back some of these are in 1800s and early 1900s. So it really is underpinned -- we believe the market factors are underpinned by a real absence of the ability to bring on the supply.
At Freeport, we’re fortunate that we have a portfolio of mines that have scale. Our Grasberg mine in Indonesia, very large-scale operation. But the Morenci mine which we’re expanding now and bringing on new production there. This is a mine that’s been there for decades and decades and likely will be there for decades to come.
We're showing that mine get into a billion pounds of copper next year. Cerro Verde, with the expansion that we’re doing now will get to a billion pounds copper. El Abra has the potential to -- Tenke Fungurume has the potential to but where can you find a company that has five world-class opportunities like this to be billion pounds each, and we're very fortunate because these assets are hard to come by to have all of these within our portfolio, particularly in an environment where most of the major companies are looking for opportunities in copper for the reasons that I talked about earlier.
In addition to our copper reserves, we have big mineralized material. This is material that doesn't qualify for SEC proved reserve characterization but as we go forward and further define and bring those into the mine plan, which we have a track record of doing, that will be a pipeline for future reserve additions.
As you can see here, most of that, 50% of that is in the U.S. and that's really where our focus is on many incremental growth projects we have in the U.S. where we have the big footprint and opportunities to expand. We have benefits of cheaper energy costs in the U.S. Of course, water is an issue but it's also an issue in other places. We have a reliable workforce. So we're really excited about the opportunities in the U.S.
We also have growth opportunities elsewhere. I mentioned Tenke Fungurume. South America, we have a big opportunity at El Abra. So we’re very excited about this phase of growth that we’re going through now and then the next phase of growth which we’re currently studying.
The Cerro Verde expansion, this will be the largest knowing operation in the world, 360,000 tons a day. We started - these projects take a long time to get to the point where we are. We started working on this project really in the ’07, maybe a little bit sooner than that timeframe, right after the first expansion was completed in ’06. It's the project -- we found a lot more reserves there and so what we're doing is putting in infrastructure to bring the value of those reserves forward. It’s a straightforward project, we’re reproducing what we already have there. It’s in construction now. It's going well and expected to be completed in 2016. That’s going to add 600 million pounds of incremental copper. It’s a $4.6 billion project and we’re about $2 billion into it.
Morenci, which is our big mine in Arizona. Some people – I think Jorge had visited maybe both of these mines, but we’ve put in a new milling facility there to be able to process additional material that we’re mining. It’s a pretty straightforward project that is being commissioned now and that’s going to add 225 million pounds of copper. That one is substantially complete. The Tenke Fungurume expansion that we did last year is substantially complete. So the big focus is to get the Cerro Verde project completed on time and within the budget.
We have huge amounts of reserves at Grasberg to take us out for decades through 2041. We’re currently mining in the open pit which you can see a picture of here that that will be expected to mine out in 2017 timeframe where we will start up the Grasberg Block Cave.
Over the last 10 years or so, we’ve been investing in all the infrastructure. All the spurs you see in tunnels to get to – to get access to these large high grade underground ore bodies and we’re on track with our underground development.
The deep MLZ mine which is on the right side of the page in the schematic is expected to be come on 2015 timeframe. And so as we look forward, most of the production in the Grasberg UG [ph] will come from underground where Freeport’s got a lot of experience in block cave mining. We have an existing block cave at DOZ that we’re operating very efficiently today. It's one of the world’s largest block cave mines currently. We also block cave in Colorado at our Henderson molybdenum mine. So we’ve got a lot of experience, lot confidence in these underground ore bodies and the economics of these projects are very very attractive.
Jorge mentioned the current status of PTFI. This is something we've been working on very actively and continue to work to resolve. For those of you who haven't followed it, Indonesia passed new regulations in January regarding exports, including copper concentrates. So since mid-January we haven't been able to export concentrates even though we have a contract that says we shouldn't have restrictions. So we've been working with the government to reach a resolution. It’s taken longer than we expected. It's not in any of our interest, not the government’s interest or our own interest for this to continue. Both parties are losing from us not being able to export. And so there's a lot of incentive both on our part and the government’s part to get us back to work. We feel that we’re making good progress and are expecting very soon to be able to begin exporting again.
Talk a little bit about our relationship with the government in Indonesia and our track record there, where we’ve had a long history there. We’ve been there since, I mentioned, the ‘60s. We started mining there in ‘70s. We've been a very important economic contributor to the economy both in the provincial level and on the national level where we are 90% of the regency’s GDP or more where we operate 40% of the province and almost 1% of the national GDP.
We employ over 30,000 people there. It's a very large asset, probably one of the world’s best mining assets. And we have a lot of confidence as we go forward that we’ll work this out with the government of Indonesia in a way that’s satisfactory for us, in a way that’s satisfactory for the country. There is a lot of benefits here for both companies, our shareholders and for the community and the government. So we’re currently working on this as well as the export situation. So we’re working not only on the export situation but also on the contract with new [ph] terms of the government initiated a couple years ago.
Talk a little bit about oil and gas. As I mentioned a year ago, we acquired oil and gas assets in the U.S., very high quality set of assets. They’ve performed very well. The production and the cash flows and margins have performed at or above what we expected going into the transaction. We’ve got assets in California which principally are onshore where we have a long track record – the predecessor company has a long track record of successful operations, strong margins, cash flows, stable production.
The Eagle Ford is an area I mentioned that where we’ve engaged in a sale transaction on which we expect to complete later this month. The Haynesville is a very large dry gas play. It doesn't generate a lot of margins and cash flows today but represents a lot of upside opportunities. We start to see strong gas markets again which we believe we have the potential to see.
But really the focus -- the growth as you look at the next several years is in the Gulf of Mexico Deepwater where PXD had acquired some facilities from BP and Shell, and the transaction before our deal closed, those assets have a very significant capacity. And what our focus really is to build up that infrastructure, and this is in established basins where we have a lot of opportunities to bring on new production at very attractive economics. So this is a solid business. Pictures of these big facilities, they’re operating you can see – you can see the capacity and the utilization on this chart, that's really an opportunity for us, because again these are in established basins. We can tie back production into these facilities at a very attractive cost and this is really where we see lot of impactful growth for the company.
Lucius is a project, we currently have just over 20% interest -- working interest in, it would increase to over 30% with the closing of Apache’s interests but this is a big project that Anadarko operates, it’s coming online later this year, very excited it’s going to bring in – it’s got 80,000 barrels a day of production capacity on a 100% basis. so this will be near-term growth in our oil volumes.
This Inboard Lower Tertiary/Cretaceous -- some of you may or may not be familiar with this but this is an area where our team -- our technical team has really been at the forefront on, not only in identifying these targets but also in developing the capabilities to be able to complete these opportunities.
We've got a very exciting onshore opportunity at Highlander in South Louisiana. The completion is in progress on that one. We've had -- it had very good log results on the well and it’s got very favorable reservoir characteristics. So we're very excited about being able to prove a concept with production from this well and we have acreage in the area. So we’re very excited about this and you can see 2.5 billion barrels of oil equivalent of net resource potential.
You can see the growth on this slide. We have not updated our estimates at this point for the Indonesia situation. We -- this includes assuming a May start-up – we obviously haven’t achieved that yet, but we do expect to be back exporting in June and we will update the outlook as soon as we get information about the timing of the export resumption.
You can see here growth not only in copper but also in oil, and again this is all internally generated organic growth. I mentioned we have strong cash flows and margins. This is a chart you’ve seen us used before but this just demonstrates the cash flow generating capacity of our business. We show $3 to $4 copper, $105 Brent oil flat – Brent’s a bit higher than that today but you can see here we’re generating very strong EBITDA 13 billion to 18 billion within this price range and over $10.5 billion to $14 billion of EBITDA of operating cash flows and those are operating cash flows after taxes. Those are available to fund our growth and our ongoing sustaining CapEx.
You can see here the CapEx this year $7 billion, about $4 billion of that is from mining. We expect over the next couple of years as we complete the projects that are underway in mining that that's going to decline. In oil and gas, you see the ramp up in CapEx, a lot of that is attributable to the Deepwater where -- I mentioned where we’ve got some additional drilling to bring on new production. And so as you get beyond 2016 and into the 2017 to 2020 phase, you’re really going to start to see the benefits of that growth from this – from the floor production.
We are committed to our balance sheet. Since the acquisition last year, we have targeted a debt level within – by the end of ‘16 to get down to $12 billion. We’re going to do that with cash flows. We’re also going to continue to look for opportunities to accelerate that. We announced the transactions of the Eagle Ford and we’re also continuing to review our portfolio for potentially other divestitures. We’re very focused on it and committed to maintaining a strong balance sheet. And the reason for that really is because we do have a lot of opportunities within the company. We want to be strong -- financially strong, we want to be able to deal with the volatility. And we think with the leverage we have in our business, in our operating leverage, we think it makes sense to have a strong balance sheet and we’re very focused on getting our debt reduction achieved.
So in summary, we’ve got a very focused organization. Execution has been our mantra and I think you’ve seen and we’ve demonstrated that we’re executing the strategy. We’re going to continue to do that. We’re going to be raising the focus on our growth projects and getting those done efficiently and within our budgets. We’re very focused on new growth and identifying additional opportunities within our portfolio of assets that have good return and focused also on the Indonesian situation which again we feel positive about reaching a resolution there.
So that's really the story of Freeport and Jorge, we will be happy to take any questions.
Jorge Beristain - Deutsche Bank
Sure, okay. Is there any questions? All right. Well, maybe I will take the first question. Sorry, if you could just clarify – again I know that you guys are walking a fine line with the situation in Indonesia. But the news that came out overnight was that the companies had accepted the concept of paying an export tax. Is that something you guys could comment on?
Well, the regulations that came out in January as you know provided for a progressive export duty that started 25%, went 60%, something that just doesn't conform with our contract. And additionally it’s just not economic to do it. So we’ve been in discussions with the government on a variety of topics and they have indicated a willingness to reduce the tariff, the duty in exchange for some other things about commitments to smelter [inaudible]. So the deal is not done yet. We’re not in a position today to announce it but I can report that we are making progress. The government is actively working with us and others to get this resolved. We would expect any duty would be significantly reduced from what we published in January.
Jorge Beristain - Deutsche Bank
Okay. There is one back there.
Just any thoughts on the moly market, I mean we’ve rallied about $5, 100 million pounds for US mining materials and just your thoughts on the sustainability, I know there may be some delays in some projects but any thoughts you have there. Thank you.
Well, the physical market has been tight in moly. The demand side has been good both in the metallurgical side and the chemical side. As you probably know, we’re big on the chemical side but the market has been tight. Of course, as you know -- as you go out longer-term there is expected to be additional supply to come online but it looks like in the near term that supply is not there. And so as a result, you’ve seen the forces of supply and demand working prices move up. But longer-term we do believe there is substantial moly supply available to the market.
[5 billion], you have just by taking production marginally up, is that something you can do quickly here or –
We can do it at the margins, and we’ve done some of that – but in terms of making longer-term decisions about bringing up things on a longer-term basis I think it will be more of a wait and see. But we can do things around the regimen [ph].
Jorge Beristain - Deutsche Bank
All right. Maybe I will take another one here. Just your recent oil and gas reshuffling, it was pretty interesting and it really sets you guys up in the Gulf of Mexico and raises the relative importance of that asset. How should we think about California relative to the Gulf of Mexico? California seems to be a steady cash flow business; Gulf needs cash flow to build the next generation, as you said, to use that infrastructure, and is California now something that you would also see as a longer-term asset that you want to keep in your portfolio, or does Freeport ultimately want to kind of morph into it almost like a pure Gulf of Mexico player?
Well, in terms of the growth, you’re right, I mean that’s where we see the opportunity is in the Gulf of Mexico, we already have infrastructure there. And so the economics and our returns in that area are very, very good relative to what we could do elsewhere in the oil and gas business. California, you’re right. You hit the nail on the head. It is – has been a steady cash flow producer. It’s a good asset, doesn’t have [ph] the growth but has solid cash flows. And so we'll continue to evaluate whether it makes sense to keep that as a way to fund ongoing growth in the Deepwater, or whether it makes sense to monetize that in some fashion and we will do what makes the most financial sense. But in terms of how you think about Freeport and the growth in the oil and gas business, the Gulf is really where we see the growth coming from and we’ve got the infrastructure, we’ve got the leasehold position, and so that's really where we see the returns coming from in that area.
Last week, I think Richard at the Bernstein conference and he just talked about sort of opportunity at Morenci and he sounded like there may be potential for even incremental expansion which I hadn’t really heard about before, can you talk about that, how that compares to Cerro and Tenke expansions later on?
Well, it’s interesting that all the mines in the U.S., Morenci, Bagdad, Sierrita, we’ve got another mine that’s not operating today, that’s [indiscernible]. All of those mines have incremental expansion opportunities. And so the process that will go into now is to take those opportunities and evaluate those relative to other things and pick those projects that we think have the best risk reward opportunity. In the U.S. we benefit as I mentioned from the good energy situation but Tenke is the same thing. So we will continue to look at Tenke, we will continue to look at maximizing that resource. We’re continuing to drill there, it’s going to be a very large long-term opportunity for us but it’s going to take time to develop. The things we’re working on the near-term, we look at – what we do in the U.S., we’ve got this big project in El Abra that we’re looking at as well.
So what we want to do is bring forward the next phase of growth in the copper business, then this will take some time, but what we want to do is identify like we did previously, we had Tenke, Morenci and Cerro Verde. We want to find the next two or three projects that are going to move the needle for us and go after those. We don't try to do everything all at once. We want to do -- get the things and have the best impact, the best risk reward and do those well.
The major projects mining for 2016, I think was like 1.2 billion or 1.4 billion, Cerro comes off, I think that’s Grasberg underground, or what else is in there? I know Grasberg underground is a big piece but thinking through that number a little bit, what would – how do you break that down?
Yes, the biggest piece of this – you’re talking about where we show the mining CapEx – we’re spending about -- on a sustaining basis, we’re spending about $1.5 billion or so on sustaining CapEx in mining and then above that, we have projects. The biggest one – that’s in our numbers that’s not related to Cerro Verde or Morenci in the Grasberg underground. In aggregate, on average we’re spending about $900 million a year on – and that includes Rio Tinto’s share. That’s something that -- if we had to, we could defer, it’s not something that we want to defer. It has really good economics. So we don't want to defer it but that's something if we don't get to a resolution, we would look to defer.
Jorge Beristain - Deutsche Bank
[indiscernible] 1980, like how many years you spent –
Well, that’s the five-year average. Over time, over the life of the underground, we are going to be -- the underground is different, we [expanded] every year constant but it will come down from that $900 million level. But we are going to be spending significant capital every year on the underground. And it’s a self funding thing.
Jorge Beristain - Deutsche Bank
Unfortunately, we’re going to have to cut it off there. We are out of our time limit. Thanks very much Kathleen.
Thank you. Thanks Jorge.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!