Freeport-McMoRan's (FCX) CEO Richard Adkerson on Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: Freeport-McMoRan Inc. (FCX)

Freeport-McMoRan Inc. (NYSE:FCX)

Q2 2014 Results Earnings Conference Call

July 23, 2014 10:00 AM ET

Executives

Kathleen Quirk - Executive Vice President and CFO

Jim Bob Moffett - Chairman

Richard Adkerson - President and CEO

Jim Flores - President and CEO, Freeport-McMoRan Oil & Gas

Analysts

Jorge Beristain - Deutsche Bank

Michael Gambardella - JPMorgan

Sal Tharani - Goldman Sachs

Tony Rizzuto - Cowen & Company

Ralph Profiti - Credit Suisse

Oscar Cabrera - Bank of America

Joan Lappin - Gramercy Capital

John Tumazos - John Tumazos Very Independent Research

Paretosh Misra - Morgan Stanley

Brian MacArthur - UBS

Brian Yu - Citi

Mitesh Thakkar - FBR Capital Market

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan 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 Instructions)

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

Kathleen Quirk

Thank you and good morning. Welcome to the Freeport-McMoRan second quarter 2014 earnings conference call. Our results were released earlier this morning and a copy of the press release and slides for today's call are available on our website at fcx.com.

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

Before we begin our comments, we would like to remind everyone that today's press release and certain of our comments on this call include forward-looking statements and actual results may differ materially.

I’d like to refer everyone to the cautionary language included in our press release and presentation materials, and to the risk factors described in our Form 10-K and subsequent SEC filings.

On the call today are, Jim Bob Moffett, our Chairman of the Board; Richard Adkerson, President and Chief Executive Officer; Jim Flores, President and Chief Executive Officer of Freeport-McMoRan Oil & Gas and we have got other senior members of our team here with us today.

I will start by briefly summarizing our financial results and then turn the call over to Richard who will review our recent performance and outlook.

Today, FCX reported net income attributable to common stock of $482 million or $0.46 per share for the second quarter of 2014. The next income attributable to common stock during the second quarter 2014, included charges totaling $130 million or $0.12 per share comprised of $58 million for environmental obligations and related litigation charges, $58 million for deferred taxes recorded in connection with the reduction of goodwill associated with the sale of the Eagle Ford during the quarter and $4 million for net non-cash mark-to-market losses on oil and gas derivative contract.

The second quarter results, we reported strong operating performance in Americas and Africa mining operations and from our oil and gas business. The results also reflected the impacts of reduced productions and sales from Indonesia associated with export restrictions imposed in mid-January.

Consolidated second quarter copper sales of 968 million pounds were above a year ago quarter reflecting growth in North America. The gold sales of 159,000 ounces were below the year ago quarter.

Our copper and gold sales volume were below our April 2014 estimates, primarily as a result of the deferral of exports from Indonesia, which reduced copper and gold sales by approximately 150 million pounds of copper and 240,000 ounces of gold during the second quarter. As indicated in our press release, we expect to complete an agreement with the Indonesian government immediately which would enable export to resume immediately.

The second quarter sales of oil and natural gas totaled 16 million barrels of oil equivalent that included the Eagle Ford reserve through the June 19th despite of the sales that exceeded our April estimates by 5% primarily as a result of higher production from Eagle Ford and the deepwater Gulf of Mexico.

Our second quarter average realized copper price of $3.16 per pound, approximated the year ago quarterly average of $3.17. Gold prices of $1296 per ounces were slightly below the year ago quarter of 1,322 per ounce.

Oil prices remained strong during the quarter, with Brent prices averaging $110 per barrel and the average realization by Freeport-McMoRan oil and gas was $100 per barrel before the hedging impact.

Operating cash flows generated during the quarter totaled $1.4 billion, that was net of $400 million for working capital uses and changes in other tax payments during the quarter, and our capital expenditures totaled $2 billion during the quarter.

As previously reported, we completed the sale of the Eagle Ford field during the second quarter for growth proceeds of $3.1 billion before purchase price adjustments and also completed the acquisition of additional assets in the deepwater Gulf of Mexico for $900 million. Combine the transactions provided $1.8 billion of after-tax net proceeds before purchase price adjustment.

We ended the quarter with total debt of $20.3 billion and consolidated cash of $1.5 billion. We also reported today that we redeemed $1.7 billion of face amount of our senior notes and that was called for redemption last month that transaction has been completed.

Now I’d like to turn the call over to Richard who will be referring to the slide materials.

Richard Adkerson

Good morning, everyone. As Kathleen talked about results for the second quarter reflects strong performance from our mining operations in the Americas and Africa, and from our oil and gas business. It does reflect the impact of the restricted sales from Indonesia, because of this export situation and I will be talking more about that. Our outlook at the first quarter earning release was based on assumption of resuming production in the May and the export restrictions lasted throughout the quarter.

We did make good progress on our growth projects. At Morenci, we are commissioning of our new mill started in May and we are in ramp up process for that. The major construction project at Cerro Verde is progressing well towards the 2016 start-up.

Jim, will be talking about the Lucius development, the operator Anadarko expects first oil in the second half of this year and the Highlander project, onshore in South Louisiana is advancing towards completion activity is also in the second half of this year.

We completed the sale of the Eagle Ford asset and the acquisition of the deepwater Gulf of Mexico interest that enhanced our position for the focus area of our growth in oil and gas business for the future. We are actively in the process of pursuing additional asset sales transactions, all part of our goal of targeting a major debt reduction by 2016 -- by the end of 2016.

As a matter of information, we have changed the name of our company to Freeport-McMoRan from Freeport-McMoRan Copper & Gold to reflect expanded scope of our business. Our ticker symbol remains FCX.

The financial highlights that Kathleen reviewed are included on page four. The major difference from the data that we presented to you earlier has to do with the Indonesian restricted production situation. Otherwise, our operations performed in accordance with our previous guidance.

The current status of where we are at PT Freeport Indonesia is that since January -- mid-January that regulations were adopted -- dated January 11th. We have not had authorization to export copper concentrate.

In those regulations, the Indonesian government provided for a process to export concentrates, but they enacted a prohibitively large export duty, which is still in the regulations, but it is, we understands in the process export duty is -- in the process of being reduced.

The impact of this is that we have had deferred sales of 150 million pounds of copper and 240,000 ounces of gold. I used the term deferred because the resources are still there available for our production and sale in the future.

We also have a sizable level of inventory of copper concentrates at our site available for shipment. Year-to-date, these deferrals have accumulated 275 million pounds of copper and 380,000 ounces of gold.

We have been working with the Government of Indonesia for roughly two and half years now to try to reach a common ground on dealing with our long-term contract situation. Our ability to continue our operations post 2021.

That’s a key date, because our current contract award signed in 1991 had a 30-year initial term and it provided for our having the rights to two 10-year extensions to 2041. Those extensions require approval by the Government of Indonesia. The contract provides, though, that the government cannot unreasonably withhold or delay these applications. On the basis of that contract we report reserves through 2041.

The complications that we face is that in 2009 the Government passed a new mining law that transitioned Indonesia’s dealings with miners from a contract of work system, which is what we have to a licensing system.

The licensing system provides in general terms, that holders of licenses are subject to prevailing laws and regulations, and so you don’t have assurance of fiscal terms that we and another contract of work holders. The law provides the contract of works will be honored to their terms.

And our discussions have been dealing with finding away that acceptable for us in terms of protecting our shareholders interest and finding a way that the government officials in Indonesia can feel comfortable with in terms of their view, their responsibilities under the government’s laws and regulations.

Our initial objective in recent discussions with the government has been to find the way forward of getting exports approve and returning to normal operations. The financial consequences of not being able to export are significant.

Where we are because we have an interest in a smelter that we arranged to be built in Indonesia in the mid 1990 is we have the ability to ship copper concentrate to this smelter owned by a company called PT Smelting, which we own 25% and our partner Mitsubishi owns the majority interest and operate. We can ship there and so as a result, we can ship about half the level of normal sales of concentrates that we have the capacity to produce and we have been flexing our operations to deal with that.

We have not made major reductions to our cost structure today, because that has potentially long-term implications to our operations and potential for disruptions in the local community and with our workforce.

As a result of that the reduced margins amounts that we’ve earned from our operations there have amounted to an aggregate of $1.4 billion and next year roughly half and half by Freeport and Government of Indonesia.

So we are working diligently to first find the way forward to resume export and normal operations, and doing that in a way that protects our position for the ongoing discussions about the arrangements for us to be able to continue operations beyond 2021 on acceptable basis.

Over the past two months, we have month and a half, we have been working with the government on a Memorandum of Understanding. We believe that we have reached an agreement with the government officials we’ve been working with on the terms of that MoU. It is yet to be signed.

Indonesia had a Presidential election on July the 9th and the results of that vote were only announced on July the 22nd. The elections during the first half of the year for the President, for the parliament earlier have been a distracting issue in terms of our ability to reach this agreement with the government.

But we believe we have reached agreement on the terms of MoU. Under that MoU, which, as I said, has not yet been signed but we expect to be signed shortly. We have -- we would agree to provide for payment of an export duty over the next three years 2014, ’15 and ‘16. But that significantly reduce rates from the regulations that were adopted in January.

In addition, we would provide $115 million assurance bond for the development of new smelter capacity in Indonesia and we’ve indicated a willingness to meet the government’s objective of developing this smelter capacity subject to further negotiations and those negotiations involve -- include having an agreement on acceptable terms for continuing our operations beyond 2021.

We’re talking with the government and providing financial incentives because building a new smelter in today’s world is financially uneconomic. We are also looking at involving strategic partners in the process, and so there is work to be done on this smelter issue that require further work but we did -- we are making this deposit of insurance bond, which would be release as progress on the smelters is achieved.

The new mining loan related regulations provided for increased royalties. We currently pay a royalty of 3.5% for copper. The mining laws regulations right raised that 4%, we pay 1% on gold and the new mining law is 3.75%.

As an accommodation to the government to achieve this MoU allowing us to resume exports, we've agreed to -- upon signing of MoU to pay the new royalty rates. Now, all of these issues are things that we've done that represent prudent steps in building good relationships with the Government of Indonesia, which we have had over the 40 years of operations there and building the basis, a bridge for our continuing good relationships for the long-term.

It's a situation that we've had a lot of experience with not only in Indonesia but around the world in terms of trying to find ways of protecting our interest of our shareholders, at the same time trying to meet the aspirations of the government officials and so that is the basis for this concessions that we’ve agreed to making this MoU.

We are -- have agreed with the government that upon signed MoU we will commence immediate negotiations for amendments of our CAL on items that we will be addressing, including importantly the ability to continue operating beyond 2021 on the basis of assurance of legal and fiscal terms to support the significant investments in developing our underground resources.

Our current outlook numbers, if you see in our release are based on resumption of exports in August, any delays in obtaining these approvals result in monthly deferrals additional 50 million pounds of copper and 80,000 ounces of gold.

If for whatever reason this falls apart, we don’t expected to, we think we have a way forward with these things then we would take steps to adjust our cost structure and reduce our CapEx, because it is not sustainable to go forward on the basis that we've been operating on since January.

Slide six, I won’t just refer to in general, it talks about our long-term positive relationship in Indonesia. As you know this has been a fabulous asset for Freeport and for Indonesian, the workers and the local community. It’s world class. It’s been very profitable.

We made investments of significance during very risky times in the copper markets and risky times in Indonesia and Papua and we have all benefited over the last 10 years as copper prices, gold prices are risen so much and we got a huge reserve base to go forward for many years in the future.

We've been there for over 40 years, contributed over $60 billion to the country's G&P. We represented over 90% of the economy in the area that we operate in and a significant contributed to Indonesia's national GDP, 30,000 workers. We developed already the company's only copper smelter, which has capacity that exceeds Indonesia’s national copper consumption, very significant investments today with $15 billion program to develop our underground resources.

We contribute significantly to the local community, including the voluntary contribution of 1% of our revenues to the Freeport partnership fund. And so we’ve done a lot of things and you can see the government benefits from taxes, royalties and dividends, notice, bulk of that is trough taxes, which we have a fixed rate on.

And the government gets more than 50% of the financial benefit. So there is a lot of reasons, incentives for the government to work with us and we’re going to work with the government to established, rebuild and maintain our long-term goodwill and partnership going forward. We’ll be available to answer questions on this.

Turning to copper markets, first half of 2014 has been in some ways a mix bag, going into the year, there were lot of questions about the China's economy and growth rates and how that we are going to maintain that.

They had this unusual situation of apparently fraudulent activity at a port in China that spooked the market for awhile and some elements of China has been strong than people anticipated, but on balance, on balance China have had solid demand and has shaken off some of the earlier issues of the year and remains key to the marketplace.

In the rest of the world, there has been a degree of general economic recovery. Again that has been spotty with the mix data we’ve had here in the U.S. Europe, we seeing our business in Europe, gradual strengthening, of course, there are lot of geopolitical uncertainties going around the world today that could have economic consequences.

But having looked at that to see the level of copper prices that we have today, I think demonstrates the long-term strength of the copper markets. Prices continue to be supported by supply side challenges which we’ve talked about for so many years.

Exchange inventories are extraordinarily low levels. There is limited scrap availability, consumer stocks are low and the industry continues to struggle to maintain production levels from aging mines and to advance expansion projects.

There's a significant deferral of major projects around the world as companies look to cut capital, focus on return to shareholders, the supply side issue will continue to be a major supported back for the marketplace and we’re very excited about the copper markets and where we stand in that market with our large and growing level of production and our very large resource base that will give us future growth opportunities.

The projected market surpluses that people reporting to are now appeared to be much lower levels than anticipated. So, we are -- we remain very positive on long-term fundamental of the marketplace.

Turning to our business, these slide, specifically the slide on page eight demonstrates that we have performed well, you can see in relation to our first quarter results, strong performance in North America, South America, Indonesia reflects the issues that I just spoke about and an Africa where we have had relatively good reliability of our power sources improves there, we really performed very well. So our businesses are doing well. You can see the results from a volume standpoint at bottom of the chart.

With are projects we undertook three projects to expand our copper volumes by roughly a $1 billion pounds a year. Last year, we brought the Tenke project online and did that in a very effective way and that expanded operations performing well.

We achieved another milestone in this quarter by executing the growth project with the start-up at Morenci and that is a significant high return project that will add 225 million pounds of copper per annum and Morenci is a resource that we are looking for future long-term significant growth.

We benefit with these projects by bringing talent from our global operations to supplement the work done by contractors, every project has it challenges. You see that throughout the industry but when you working with it, it’s easy look at these numbers and see how we do it, but it’s a lot of difficult work in getting the job done. We are very optimistic about our footprint of our business in United States, about our ability to repeat what we've done at Morenci at other site, go get Morenci and other sites.

Cerro Verde is huge project, when its completed this will be the largest concentrator milling operation in the world with 360,000 tons day. Our team is totally focused. It's a project that is have less risk than many other expansion projects because of the footprint what we have done in the past, we completed -- virtually completed engineering procurement.

Now we are focused on managing this very large scale construction project. None of these are without challenges and Cerro Verde has its, but it's really going well and we see a clear line of site start-up late 2015.

And despite all of the issues in constraining production at Grasberg, we continue to make good progress in our underground development and this is important terms of our being able to execute our mine plan of completing mining in the pit which will likely now extent until the first quarter or so early 2017.

The Deep MLZ mine, the extension of our current producing field design, it was targeted start-up in second half of 2015 and this just represents a continuation of block caving that PT Freeport Indonesia started in the early 1980.

So these projects are going well. What we are looking to is a portfolio of world scale mines that spend low with great growth opportunities, there -- just a handful of mines today that produce a billion pounds of copper per year.

We have Grasberg in that category, Morenci will reach that, Cerro Verde will reach that, Tenke Fungurume has the resources availability to ultimately reach it and we are looking at expanding our El Abra mine with sulfide resources that we put in that category. So we go right about having this portfolio of asset with potentially five world-class operations.

We are really pleased with Jim and his teams doing in oil and gas business and now he will give us some comment on it.

Jim Flores

Thank you, Rich, and good morning, everyone. The oil and gas business continues to click alone quite nicely that with strong crude market, I think everybody has paid attention to the political unrest around the world and it’s helped (indiscernible) not the near-term but the long-term tail of the crude oil market and so, it helps our transaction business but also for standpoint our realizations continued to hold up very well mainly in the Gulf of Mexico.

When we talk about sale of 60 million barrels, 5% above our investment and Kathleen said as, due to strong performance in the Gulf of Mexico and also our Eagle Ford with a $58 barrel margin and 50% of that comes from the Gulf of Mexico $73 BOE margins.

The results today do include our Eagle Ford production because actually we sold at the right end of the second quarter. So third quarter going forward we will not have the Eagle Ford in it but we will have additional resources from the Gulf of Mexico and it continues to replace those reserves that we sold to $3.1 billon.

Talking about that transaction on page 12, we sold to Encana it here, as we fully acquired. We rotate it. It’s about $900 million of deepwater Gulf of Mexico interest. We consolidate more interest in the Lucius oil development, that’s operated by Anadarko that we have significant interest and gives us just about quarter interest in that development. And this is on schedule for the second half of this year September, October start-up as far as we always bringing that nice oil reserve on production.

Our Heidelberg oil development is a new entry for us. Anadarko also operate 12.5% interest in Heidelberg. It’s another significant Miocene play just west of our Holstein. It’s very integrated into our geologic thinking and development thinking. We think there’s lot of oil reserves there and that development is scheduled to come on second half of 2016. And we got some complementary oil and gas places to some of the resources we were capturing. So all-in-all, it was a good -- it was a very good swing.

By the end of 2017, we project these assets to be producing as much as the Eagle Ford assets were going to produce, once the client sets in there and after the drilling is finished in the Eagle Ford assets where we have engineer. So we feel like we’re replacing with a lot more growth and a lot better margin in the Gulf of Mexico.

As an important step in the debt reduction program, we want to accelerate the corporate goals of getting down to $12 billion by 2016. It’s been definitely value accretive on EBITDA basis and help refocus our portfolio, the strategic growth there is on the Gulf of Mexico. These will be our big areas of growth, higher investment returns.

Currently, we are on the eve of the beginning to start rolling with our mobile units out in the Gulf of Mexico. Next week, the Noble Sam Croft goes to work out at our Holstein facility. We’ve got a rig on our Holstein platform that’s drilling development wells and as of this morning, just drilled our second excellent-looking development well there, the first one cruising over 3,000 barrels a day.

So as we sell these onshore assets and redeploy the capital on our balance sheet and some of the capital in the Gulf of Mexico, we will not only be replacing the production but growing production much faster in the years to come, now as the rigs were replaced. We had a Noble Sam Croft starts next week. We had Noble Tom Madden started here in. And then we have a new relationship out there in deepwater but an old relationship in the drilling contracting business with Rowan Drilling Company, with the Rowan Relentless that’s going to start first half of ‘15.

What you’re going to see there is a tremendous amount of upside pressure to our production profile there in the Gulf. Our guys have done a great job at Holstein. For example, we bought the property that was producing about 11,000, 12,000 barrels a day. Today it’s over 24,000 barrels a day after just drilling one well. It’s a great production maintenance.

So with this activity, it’s been a long time coming since the acquisition of 2012. That’s what the genesis of our combination, was able to accelerate the development activity going forward on these properties. At the same point in time, further investment in Gulf of Mexico. So we project that we’ll have $4 billion to $5 billion more of onshore asset sales to further accelerate the debt paydown, debt reduction plan here at the company. At the same point in time, we will be buying additional interest in the deepwater Gulf of Mexico to complement our portfolio in the hundreds of millions of dollars.

So we’ll be selling in the $4 billion to $5 billion range and will be buying in the hundreds of millions of dollars to add to our potential launch forward. This has been a very successful program so far. We spent about $500 million on the last two oil and gas lease sales in the Gulf of Mexico and including significant onshore effort of buying leases.

And we feel like we doubled the reserve potential or the resource potential of our business from 3 billion barrels to over 6 billion barrels that we capture and at the same point in time paying down significant amount of debt here at the company. So we’re going to continue this process and going forward and the future looks like bright in all front, the assets sales as well as the Gulf of Mexico strategic position.

On Page 13 is just kind of get you the breadth of our operations. Now we are fully integrated in the deepwater Gulf of Mexico. We have operating producing assets with the great staff, great systems, topline operations and doing a great job out here with all the guys and all the partnerships with all out vendors as well that really stepped up. So we can get our jobs done on time and on budget. We’ve major development projects that we’re doing, the tiebacks to our existing facilities as well as the major development.

There are partners that doing like Anadarko that have done a great job at Lucius and also at Heidelberg and then with our exploration opportunities, here is the picture of the Sam Croft here. Now that we have top-flight equipment, we’ll have three of this drilling by the end of -- by the middle of next year and we’ll see some real action here on the development front on the wells and the production going forward.

Those three rigs will be situated between Horn Mountain, Ram Powell, Holstein, Heidelberg and Lucius areas on Page 14. Right now, at Holstein we have the rig running on the platform as I said before. We’ve got the Transocean and Deepwater Champion drilling our copper well right now, exploratory wells south of Holstein that if successful, will be tied back to Holstein and then we have the Sam Croft as I said is moving on today.

To the west side of Holstein structure, we drill some of the discoveries we made few years back. Holstein is going to look like invaded but it’s going to really see a lot of great production growth in ‘15 and ‘16 because of it.

Moving on to our development projects at Lucius and Heidelberg. As I said these are both on time and you see the net interest now about a quarter of Lucius, 12.5% of Heidelberg and then fall of this year, Lucius comes on and then the fall of 2016, the Heidelberg project comes on, both significant development assets that Anadarko’s done a great job with.

On the emerging exploration plays in the new lower Tertiary/Cretaceous activity, we continue to monitor activity out there. We moved -- we’re getting ready to move the rig in on a Farthest Gate West project to work on Lineham Creek, would be a (indiscernible) 25,000 feet that is excited about. And we’re moving forward on the completion of the Highlander that’s on schedule for either late September or early October. Well tests as well as Blackbeard East and Blackbeard West, we’re moving forward to complete those wells as well.

So there has been a lot of completion activity. We’re going to have a lot of understanding of flow reservoirs, and hopefully some fantastic production coming, especially out of Highlander going forward. 2014 outlook, Richard, you want to take off from here.

Richard Adkerson

Okay. Thanks Jim. We’re updating our outlook. It reflects the -- from our previous outlook the delay in getting restarted at Grasberg. This is based on a resumption of exports, returning to normal operations in August and shows sales outlook for our company as a whole of 4.1 billion pounds of copper, 1.3 million ounces of gold, 98 million pounds of molybdenum. By the way the price of molybdenum is up over 30% this year and oil equivalents of 58.4 million barrels equivalents.

That’s lower than previous because of the Eagle Ford sale. And as Jim said, we’ve got investment activities to look for future growth in that area. We are now projecting at -- for the year, unit cost of a $1.50 a pound, that’s $1300 of gold and $12 of molybdenum and $20 of barrel equivalent for oil. Operating cash flow is at 325 copper for the second half would be at $6.8 billion and capital expenditures now are looking to come in at $7.6 billion.

Our sales profile looking forward shows the significant growth for copper as we complete our expansion projects and see the effects of those expansions projects plus the year 2016 reflects in essence the final activities in the Grasberg open pit where we’ll have very high grades of copper and you will note the planned gold sales for that year are exceptionally high.

Note also at the bottom right, the growth in oil and gas sales as these expansion projects, Jim just talked about coming on stream. Quarterly outlook is presented on Page 19. Again based on restart at Grasberg in August and having a very strong second -- particularly the fourth quarter is for copper and for gold that’s our detail that would result on that basis of an improvement in our unit cost from the experience in the second quarter where we would look to bring in the year combined with what we had in the first half of the year at 1.50 per pound for copper and you can see how that breaks down in our different regional areas.

When we look at our models for cash flows on Page 21, you see EBITDA numbers at the top operating cash flows which take into account cash taxes and cash interests, excluding working capital changes and you can see this is an average for 2015 and 2016 and very strong cash flows between $3 and $4 ranging from over $10 billion to over $14 billion with that range.

So we’ve got a business that generates great margins from cash flows that allows us to fund our expansion projects. You can see our current outlook for capital as our mining projects wind down going into 2016 and then as our oil and gas investments reflect the opportunities that we’ve created there. So this is a really no changes in the ‘16 outlook for that. We referred a couple of times to our commitment to our balance sheet management when we announced the oil and gas deal.

We’ve talked about targeting, reducing debt to $12 billion by the end of 2016. We’ve had some challenges with copper prices have been weaker than they were prior to that announcement. We’ve had the issue with deferred revenues from Grasberg but we still are committed to having this strong balance sheet. We sold a very good asset in the Eagle Ford asset in the second quarter.

We are working now directly on additional asset sales across our business. We are prepared to respond to market conditions. We can’t predict near-term market outlooks but we will respond to those whatever they may be. And we look further opportunities to repay, reduce our debt, improve our maturity structure and so forth. We are committed to continuing to pay our current dividend of a $1.25 a share for a year until we get our balance sheet in shape and once that happens with our business, outlook for commodity prices will have a chance of paying additional dividend.

Beside asset sales, we have the opportunity of looking for participation by strategic partners in some part of our business to reduce capital expenditures. So we’re looking at this at all angles, 2016 will be a very important year in terms of achieving this because of the nature of our business plans.

So the story at Freeport stays the same. We’re working on shareholder returns, managing our base assets, investing in growth as we reduce our debt. We had a good discussion last night about the challenges of doing that and there’s not many business that can do it but we had the opportunity to do it. We are going to protect balance sheet because we and our board and we, I should, say are convinced that matching up kind of assets we have and the nature of the markets that we’re in, strong balance sheet is a key to success in our business. And we want to continue our legacy of returning cash to our shareholders and look forward to the time when we reach that dividend levels, from where we are today.

That completes our summary of our business. And now we will open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Jorge Beristain with Deutsche Bank. Please go ahead.

Jorge Beristain - Deutsche Bank

Good morning everybody. Yes, Jorge here from DB. Just wanted to follow up a little bit on the comments Richard, maybe, that were made at the start on the presentation 5 where you had mentioned that there was a possibility of selling other assets and then just picking up as well on Jim Flores’ comments about potentially even shrinking your oil and gas footprint further from potentially selling things in the $5 billion range and then rebuying stuff in hundreds of millions of dollar range.

So just kind of wanted to understand from a balance sheet perspective, how is Freeport feeling right now? Do you feel that on a go-forward basis, you’re going to have to really do some asset sales to really make those to $12 billion net debt -- sorry debt target three years out. Just trying to understand really what’s driving the divestiture landscape a little bit. There has been some rumours on Candelaria and now there is some talk of further oil and gas asset sales. So just trying to understand how you’re feeling on your balance sheet right now?

Richard Adkerson

Well, we are facing the fact that we’ve had lower copper prices than we had going into the acquisition of oil and gas deal. We had the deferrals at Grasberg. I mean that’s just part of the nature of our business. We have issues that we face and those create headwinds to reaching that. We don’t know what copper prices are going to be in 2015 and 2016, and we are not going to bet our business on predicting prices.

The way we’ve been looking at assets to sell, and I think Eagle Ford is a great example of this. This was a very good asset. There was a very strong market of bars owning to invest in that as many companies are transitioning from a natural gas orientation to all orientation. We are looking at other assets where good assets but assets that don’t have the growth profiles that our other assets have, and seeing if there is aggressive buyers who will step up and pay good prices for them, as we then focus on our assets that have good growth potential.

As a future of our oil and gas business, the strategy there is built around the deepwater Gulf of Mexico and our gas exploration play, our deep gas exploration play. So we are continuing to do that. We are assessing the market, working with interested buyers. And if we can find transactions that in effect advance our ability to repay debt or derisk the ability to repay debt, as we don’t know how things are going to unfold in 2015-2016. We will act to take place with that. These things require actions.

We look at assets and test the market at times and decide those assets even as it makes sense to sell those assets when we look at their underlying cash flows. So this is a dynamic process. We are focused on debt reduction. And if we find assets that don’t undermine our ability to grow in the future and where we have buyers that will pay reasonable prices in relation to cash flows they generate, we will execute those transactions.

Jim Flores

Jorge, this is Jim. I would just echo what Rich talked about, the all of the above balance sheet management is the mantra across all sectors of the business. And with our large CapEx budget, we could manufacture more as we’re going to do in the Gulf -- as we are doing in the Gulf of Mexico and so forth. And the fact of the matter of selling onto our oil assets, there is a premium market right now. The MLP market is very hot. Debt markets are very low. Oil prices are significantly strong. Even in the near term or long term, we can get representative value for those assets and then replicate those assets in an area in the Gulf of Mexico deepwater very quickly an area where we have higher margins the strength. It’s a bad test to arbitrage that complements or accelerates our corporate objective of reducing the leverage companywide. At the same point in time, we are still hitting the same targets of about 200,000 to 225,000 BOE a day in 2017. And that’s selling and then drilling our development wells to bring it forward.

So by meeting those objectives operationally and bringing that cash flow forward out of those assets sales to accelerate the financial standing of the company, I think what is kind of highlight is all the resources we captured joining our platforms and lease sales and so forth. And everybody is going to get used to growing production in the Gulf of Mexico and monetization of production elsewhere in the company that will go towards the balance sheet repair. And I think that’s what Richard talked about earlier. That’s a two-edge sword. That’s very difficult to do, grow business rapidly and pay down debt at the same time, but we are in a position to do it, take advantage of the price and so on. So it’s just more of a -- it’s a strategic initiative than a defensive. It’s been just to be a more aggressive and trying to get our balance sheet very, very strong and be in good shape to take advantage if any opportunity comes after 2017.

Richard Adkerson

And we have great set of assets that allow us to do that.

Jorge Beristain - Deutsche Bank

And thanks. And Jim since you brought it up, the CapEx did increase for Freeport and it was mostly on the oil side about a $400 million increase for 2014. I was wondering if you could talk about, is that sort of accelerating growth in the Gulf of Mexico? Could you flesh out what that incremental growth CapEx is, especially just after a recent assets sale there?

Jim Flores

Yes. Number one, we added some CapEx from the Heidelberg development which we acquired interest there that obviously went in our portfolio before. But the main driver that is that due to the stricter terms on some of the lease expansion and delays that the federal authorities put out here, we had to go ahead and move some rigs and try to get completions on our Blackbeard West and some of the Inboard Lower Tertiary/Cretaceous completion. So that was a more regulatory driven acceleration of that activity and we hope -- we surely hope it leads higher production rates and volumes. So it is to accelerate completion activity in ultra-deep. So in short term, either way.

Jorge Beristain - Deutsche Bank

Got it. Thank you.

Operator

Your next question will come from the line of Michael Gambardella with JPMorgan. Please go ahead.

Michael Gambardella - JPMorgan

Yes. Good morning. The question on Indonesia. In terms of the new agreement that’s a Memorandum of Understanding that you have agreement to but waiting to sign. It seems like the government is undoing a lot of the terms of the Contract of Work and replacing it with what you call this license agreements. Will they also -- will your tax rate now revert back to the statutory rate? Under the Contract of Work, you are paying a 35% tax rate, which was in place when you signed the agreement in the 90s. And now I believe that’s the rate or the rate is 25% in Indonesia. Will your corporate tax rate drop as these other royalties go up?

Jim Flores

Mike, let me -- I am going to go back over some things that I said earlier and just to make sure we got to stay set, with this MoU the basic terms of our Contract of Work are not being changed. And both our rights and obligations and the government’s rights and obligations for the basic contract are not being changed now and we’ve agreed to enter into a series of negotiations as to how to bridge this gap between our viewing the world with the eyes of our contract and the government viewing the world with the eyes of their mining law and related regulations, and that’s the work to be done.

The only three things that are currently actions that will be taken as a result of this MoU are the agreement to pay royalties, the agreement to pay these duties for a limited period of time, and the agreement to make this escrow deposit. So the tax rate will remain the same. The government’s expectation is that the tax rate would remain the same going forward. And in fact under their licensing regulations for the formal license that would apply to us if we were under licenses to situation, there is a current 35% tax rate.

So these things that we are doing now are in reality Mike concessions that we are making and our business judgment is that those concessions are warranted in terms of resolving the current impasse we have on the export bans. So it is a compromise to create a bridge for us so that we can return to normal operations, so that we maintain goodwill with the government to help us reach a resolution that it protects our shareholders interest in the long run and that’s our reasoning for doing it. But all the other terms for the contract are not being changed with this MoU.

Michael Gambardella - JPMorgan

Okay. And another question just taking a few steps forward from here, in regards to the construction of a new smelter in Indonesia. Is it your expectation that Rio Tinto would be responsible for funding 40% or some percent of the CapEx to build the smelters since they will be achieving the -- receiving the benefit of it in the future?

Jim Flores

The structure of the ownership interest and how we deal with the smelters is yet to be finalized. Rio Tinto does have an interest in the operation as you mentioned in the long run, so they will certainly be at the table on this. We will also -- we’ve had interest expressed by strategic partners about participating both in Indonesia and outside of Indonesia, and then the government we have noted in this MoU the discussion about financial incentives that the government would be able to talk about. So that is a work-in-progress like much of this MoU.

The first step is the agreement to get us to work. Then we got a lot of work to do in terms of the long-term situation, including the smelter. And the reality Mike is the Commission that managed the elections just announced the results of the vote. There is going to be a transition of a new government that will come into place at the end of October. And so as we go forward, we are going to have a period of time of dealing with the existing administration and then dealing with a new government that has a five-year term. So that’s another factor that will come into play, as we begin these negotiations on how to go forward.

Michael Gambardella - JPMorgan

Okay. The last question on this and it’s going to be a tough one to answer. But you have a contract with the government that suppose to supersede any changes in law in the country and the government comes in with the new mining law and basically changes part of the game. What’s to stop the government from doing that again in a couple of years?

Jim Flores

Well, we are going to have an arrangement. We’ve been dealing with -- you asked a tough question, we’ve been dealing with real tough questions here for 2.5 years. And so this is not an easy answer, but if you read what we’ve said in our release carefully, and in the MoU we’ve carefully crafted an acknowledgment and understanding that however we come out of this, we are going to have to have a basis for assured operations on fiscal and legal terms that protect our shareholder interest. So we will have those legal protections and then the business judgment will come out as to how do you deal with that going forward. And experience has taught us that the best way to do that if it’s achievable is to find a way to deal with it in a way that reaches common acceptability.

Indonesia needs foreign investment. Their economy has performed very well over the last 10 years. They have a very large internal economy that’s growing. They become a member of the G20. The country has changed so much over the past 25 years I have been going there. And yet, they have a very large young population. And to put people to work, they don’t have an internal saving rate as large enough to create investments, to create jobs that whoever presence is going to be have to have. So at the end of the day, they are going to need foreign investments. It’s an emerging country and emerging democracy. They don’t do everything as in the way that more developed country, more mature countries do, but there is going to be some imperatives for them to put people to work. It is a true democracy and so whoever is President, whoever is running the government is going to be responsible to these people because of the way that they can vote.

And so it’s not an easy path, and we have to make business judgments. But again we come back to the fact that those business judgments reflect our desire to have goodwill and partnership going forward and not just dig our heels in and point to out legal rights. So we’ve done this and you saw we went through in the Congo. We had a situation there where we had to make some concessions but as a result of that we kept our asset, its operating very well.

I believe, five years from now we look back and say we did the right thing and that’s how we had to look at it from the long term because this is a very long-term asset, very valuable asset for our shareholders. You just look at those numbers in 2016 and it comes real apparent to you. We want to be operating there and take benefit of all this work we’ve done.

Since -- actually, since 1988, when we discovered the Grasberg and all during the 90s to develop our mine plans. We’ve been looking forward to that year for a long time and we made a lot of money in the interim through difficult times in Indonesia, through operational issues, through political, social changes there, through tough copper markets. You and I know that all too well, Mike. So anyway that’s we’re working on this in a way that we’re long term shareholders and going to protect their interest.

Jim Bob Moffett

This is Jim Bob. There’s restructuring going on in the industry. People that have the concentrate want to have the smelters on there soil. So all this concentrate has been banned for export, mean that the smelters around the world are going to have reality. They are going to have develop smelters in the country where their concentrate is. That’s what this whole export controversy’s about. It’s going to another country and that’s why the strategic partners build this smelter, going to be coming because you can't take in and cut off as much concentrate, it has to stay on soil that is produced.

So if you take that into consideration and realize it as we are in these negotiations which is the government. Not only there are other changes in the social structure of Indonesia, but there is a definite change of policy around the world. So the traditional market has concentrate been smelted in other countries. It’s going to change quickly. So, we’re in the middle of that. We’re in the middle of the social development in Indonesia.

But understand that we built this bridge with this MoU. To get in and take on the step that like what the tax rates are going to be and what kind of long-term agreement we have to have with the lease reserve in front of us. And we’re converting this mine to an underground mine and the governments are well aware that we found the resource. We know where the traditional ore bodies are and so we have a long-term credibility with this government. And we will come up with something, especially with this restructuring of the whole market, when you talk about the refinery smelter requirements.

But you’re going to see that around the world. There’s going to be a lot of statements in that when they control asset, but if you look at the world and see people who have tried get too aggressive with their control of asset, look at what’s going on in Venezuela today. Headlines that you’re seeing, we’ve got headlines yesterday, chaos in Venezuela as a result of the political decisions that were made. So we have work through this.

We’ve been talking to this people a long time. And we have this partnership that was iced by our discovery of the Grasberg 88. And the government needs as to continue to have run that over. The government need us to build technical facilities. We’re going to be building the largest underground mine in the world. So we have the latest global basis, when you’re over there negotiated. So the contract is a big plus for us and that’s why we can negotiate differently and think that they don’t have it.

Michael Gambardella - JPMorgan

Thank you for those comments, Jim Bob.

Operator

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

Sal Tharani - Goldman Sachs

Good morning.

Richard Adkerson

Morning Sal.

Sal Tharani - Goldman Sachs

Can you tell us again, what's the relationship between the expansion of COW torque and the MOU? Are they dependent on each other, or are they exclusively independent of each other?

Richard Adkerson

Well, they’re not interdependent on each other that MOU is a bridge to further negotiations on the contract of work and the rights to operate beyond, including the rights to operate beyond 2021. The MoU has two components to it. One is a current agreement to take three actions that are described earlier. And then it sets up for further process for the renegotiation, extended negotiation, foreign extension and so forth. So, it does not. It’s a first step and it was first step resolve this export situation and then lead into the further negotiations.

Sal Tharani - Goldman Sachs

So would you be willing to -- so your terms would be that MOU, sorry, COW extension should stay, as is, where which is sort of post-MOU agreement, which is higher royalty and so forth, that it extends that those conditions just remain the same for the next 20 years for the extension? Is that where you would stand?

Richard Adkerson

Well, I think is a practical matter. With this agreement, we are agreeing to these new royalty rates for the life of mine. And you saw that chart that we had on page where we show the benefits to the government of Indonesia. Page 6, you can see that royalties are relatively small part of what we pay to the government. And yet it’s a lightning rod issue, meaning, publicly in Indonesia, many people think of Grasberg as a gold mine. We pay a 1% royalty on gold. It is an amount of money. But is not major in relation to our total financial situation.

So, this represents for the royalty I think, what our royalty rates going to be for the life of mine. When you get to this export duty, that’s a short-term situation leading to the smelter development and that remains to be negotiated.

So that’s the duties, the deposits, that’s all part of the smelter picture. That’s got to be a hot bucket target. The purpose of this mining law in large part had to do with the nickel industry and the bauxite industry, where Indonesia is a major global supplier.

And what Indonesia was doing, was mining raw ores, shipping them to Japan and China for further processing and for aluminum and nickel, the major part of the value is created downstream. And they have prohibited those and put a lot of small businesses and other size businesses in Indonesia, out of business.

And politically, people view copper, even though it's economically different to be in the similar situated. So that's the problem we’ve been dealing with. In a country, Indonesia is not alone like this, where you have resource nationalism to think about penalizing Indonesian companies and giving different situation for foreign investors like Freeport, is politically tough deal to swallow and that’s what we’ve been dealing with.

Sohail Tharani - Goldman Sachs

And last thing for me is, Rio Tinto obviously has -- is going to be a major part of this Indonesian mine, starting 2021. I'm just wondering, are they involved in these negotiations and will they be part of it, and would they have a say in it or is it, you are dictating the terms?

Richard Adkerson

We’re certainly not dictating the terms. We have a participation agreement with Rio Tinto. We’ve had a great partnership. It’s started in 1995. They have rights under their participation agreement. We have been negotiating with the government directly having discussions with them. There are many issues that we’re going to have to work with together as we go forward.

But we have a joint venture, it has participation agreement. They have rights under that and we will work with them consistent with their rights. But you're right, they are going to be a significant participant in the operations going forward.

Jim Bob Moffett

Hi. This is Jim Bob again. In 1988 we had the blessing find the largest ore body in the world. You look at the copper, gold, silver, paying on copper prices and gold prices. So to find the 100-year live mine in the middle of New Guinea, up at 13,000 feet, which is quite a challenge. In fact that you have evolving world and all the market forces it work from the day we found the mine, trying to get out there and get that copper down from 13,000 feet.

The remote area that has no infrastructure and no current employment base. We look at everything, aspects of this from the day we found the property. But the blessing is that it was the key measure and gave us an opportunity to build our business to what it is today. So the challenge of how you deal with the current year of mine in an ever changing world, we have to keep that in perspective.

But the good news is we have richest ore body in the world and that rich ore gives us gold and silver byproduct, especially with what happened to the price of gold and price of copper since we found the mine. Price of copper was $100 for all those years as we found the mine.

So talk about negotiations in looking forward and operations till 2041. We have to look back and say, we are blessed with the fact that we’ve got something as probably when we producing till 2061. So that’s what you have to do keep the mine on a pricing side having that kind of asset and we’ve manage through to this just like we manage through all the other challenges.

Sohail Tharani - Goldman Sachs

Thank you very much.

Operator

Your next question will come from the line of Tony Rizzuto with Cowen & Company. Please go ahead.

Tony Rizzuto - Cowen & Company

Hi. Good morning, everyone. As I was listening to your comments, Richard and Jim Bob, about the sensitivities there. It seems like there's some similarities with what you all are dealing with in Indonesia, with what Rio's dealing in Mongolia and seems like the government kind of has an edge because the projects are further along, a lot of the value is underground?

And I'm wondering, how should we -- should we be unnerved by statements coming out of the press in Indonesia that the CAL extension discussions would not begin until 2019? And is that just, that's not true? And first of all, can you make me feel more comfortable about that, as you're going through this process and clearly you're making concessions here? Is that what's the guarantee that you will be able to take that next step here, number one?

Richard Adkerson

All right. Let me, first of all, just make a comment about this two-year situation. That is the result of a regulation that was adopted by the government. It’s not a provision in the 2009 mining law. But the government considered -- the government that we have been dealing with considers that regulation to be important. And so that’s been one of the barriers that we have had to get a completion of discussion on the contract extension.

We have spent a lot of time advising the government that we cannot wait until 2019 to understand our rights to operate beyond 2021. And the terms of those operations between now and 2019, our plans call for us to spend $8 billion of capital in developing the underground mine and then we have this smelter situation to deal with.

So there is important provision of this MoU is that we are going to -- we both agreed to deal with this issue over the next six months. So from the government standpoint, they have been looking at this regulation, our standpoint says our CAL makes us not applicable to that and the MoU says, okay, we are going to work this out. We didn’t reach on it now. We are going to work this out over the next six months.

Tony Rizzuto - Cowen & Company

Okay.

Jim Bob Moffett

MoU, Tony, is a bridge. What that does is, it opposed to waiting until 2019, that was the mechanism, that’s why we made the concessions so that we force both ourselves and the government to come to the table and realize.

The good news is, we’ve gotten that forward to be producing way in beyond 2040, we won’t. But having this smelter issue come up, this mining law versus the CAL and the license. That’s exactly what we try to do. To get this MoU move this negotiation period from 2019 to today. So everybody can understand the reality.

We can be spend all those money underground. Our money on the smelter without having some financial assurance, doesn’t do any good to build the smelter, if you don’t build this underground mine, it actually not available to the smelter.

So this is a very complex situation. But as I said earlier, this mine is so rich and so big, again raise this kind of problems that we have in the negotiation. That’s what the MoU does and it starts the negotiation there to solve this problem in 2021.

Tony Rizzuto - Cowen & Company

Thank you. And I guess that, I guess, my next question would be, I know you guys have been over there a lot and I just assuming a lot of your efforts these days? But have you been in direct conversation with the new President Jokowi or members of his team, the team elect there at this point and what can you tell us about his certainly understanding of the seriousness of this matters and his willingness now to meet you guys and his team at the table here as we go forward?

Richard Adkerson

Well, Tony, we stayed out of the political process leading up to the election, it was a very hotly contested election. The elections tend to be and it’s split parties, it split people and government, and we always in the position of not trying to influence election or get involve with them. We work with whatever government, people of the country elect and so we stayed out of the political process.

The Vice President under Jokowi was former Vice President under first term of SPY and we have known him for a long time. He is business man. We had past relationships with people involved on both side of the election.

Jokowi has made some positive comments recently about working to resolve the mining issue and we are going to be prepare to work with them as their transition goes from the current administration to his administration.

Our hopes are that we will be able to engage with his transition team, his leadership team and working with the current government to help us began this process before they have come into office at the end of October.

Tony Rizzuto - Cowen & Company

Okay. Thanks for that Richard and Jim Bob. And I guess the final question I have is, I haven’t heard any mention today of possibly to a sell-down provision and I -- is that, I know in the past you have talked about you would be open to possibly divesting a stake that was previously owned by some Indonesian interest, but has that come up, is that something that is likely to be part of a future contract or business license arrangement and what can you say about that?

Richard Adkerson

Yeah. It is one of the items, there were six strategic items that we have agreed to discuss in terms of the renegotiation our contract of work. This divestment issue is one of those and we have tentatively agreed on the process of divestment that would involve increasing Indonesian ownership interest overtime to 30% from the current 9.36%.

That would involve giving initially the government an opportunity to acquire interest we have talked about having a listing on the Indonesian Exchange, which we view positively and the government views positively.

Any divestment would be at fair value and but that is not something that is committed to under this or are the final agreement hasn’t been reached under this Memorandum of Understanding. But that would be part of the amended CAL and but the current contemplation is that there would be divestment of fair value overtime to raise Indonesian ownership interest to 30%.

Tony Rizzuto - Cowen & Company

Thank you, Richard. Thank you, Jim Bob. Jim Bob, I am sorry, you were going to say something too?

Jim Bob Moffett

What I am saying is in the making out here is government understands the huge expenditure, first of all, underground and it actually talking in the government about a regulation that will come out and says that people will have underground, big underground mines.

We have been shared the 30%. So there is a lot of people, thinking about lot of different things, mine open pit versus underground, major expenditures for getting underground and getting those. So again there is a bridge with this MoU. We always have this under table and try to get them understood.

Tony Rizzuto - Cowen & Company

Thank you so much gentlemen. If I may sneak in one final question, I am sorry about this, I just want to ask Jim a question, and I noticed, I didn’t hear anybody talk about this, but and I am sorry, if you -- if this is redundant? But the Davy Jones well test 2, I see that it was not a success? Can you make any further comments on that, just update us there?

Jim Flores

Well, it wasn’t the commercial success. We have work. We have perforated log section of resistant log section plus also section of the log that was suspect. We produced lot of salt water and some gas out of it.

The only comment really that makes any sense, these are wildcat completion. We are learning from each on, the equipment worked flawlessly and so forth. We are merely took all the equipment we could and especially the tubing string and all the long we got out of Davy Jones No. 2 and moved expeditiously over to Highlander. And Highlander test is really going to be one of the definitive commercial moments in this whole play.

So from the technical standpoint and engineering standpoint, we learned a lot, it was, I would say, everything was successful, safe and so forth. But from the commercial standpoint it was a failure.

We are in the process of P&A in the No. 1 well, but we are unable to get the flow, I am going to take that equipment on No. 1 well and perforate the lower to tertiary Wolfcamp zone No. 2 well before year-end.

That -- those operations plus the operations of Blackbeard West and Blackbeard East, we are -- as I said, were regulatory commitment from the standpoint and we are going to learn out of these things hope to establish the production there but all eyes on Highlander at this point, Tony.

Tony Rizzuto - Cowen & Company

And what’s the timing of that, Jim, Highlander, what should we be looking forward over there?

Jim Flores

Highlander, my engineers are saying September, so I am telling you October, how is that.

Tony Rizzuto - Cowen & Company

Okay. All right. Fair enough. Thank you, gentlemen. Thanks everybody.

Jim Flores

Thanks.

Tony Rizzuto - Cowen & Company

Kathleen too thank you.

Operator

Your next question will come from the line of Ralph Profiti with Credit Suisse. Please go ahead.

Ralph Profiti - Credit Suisse

Good morning. Thank you for taking my question. Most of them have been asked. If I can ask just one more relating to PT-FI in the state of the operation for when it’s ready to go back to 100% because for the better part of eight months, Richard, the workforce has been largely kept in place. I was wondering would it be safe to say that you have say eight months of advance stripping and equipment maintenance in place. And to what degree could we see this as a positive impact in 2015 when you think about things like production strip ratio and mining costs, if everything goes to plan?

Richard Adkerson

You made a good point Ralph. We have been -- kept our workforce productive during this time and we have been able to mine some waste and low-grade materials that we would have had to mine in the future. We’ve done a lot of maintenance work. We’ve kept the DOZ mine operating in a way so that we’ve kept the caving operation going in the effective way. And so we’ve really had a period of time despite this lower sales of having safe productive operations from our workforce and that will benefit us going forward.

As I said we also have a substantial amount of concentrated inventory, that we don’t have to work into the market place. Concentrated market is pretty well supplied already. It will take some time to do that. But we will be able to have very positive operations beginning immediately upon our authorization to export.

Ralph Profiti - Credit Suisse

And by this renewed guidance, would it be safe to say that timing to get back to that would be a matter of weeks?

Kathleen Quirk

Yes, Ralph, this is Kathleen. We’re projecting in the guidance that you’ve seen that we will start up operations in August. There will be a period of ramp up for the mill and a period of time to get ship scheduled to come in. But as Richard said we should get up to the capacity pretty quickly.

Richard Adkerson

As an example of that Ralph, our second quarter unit operating costs for PT Freeport Indonesia was $2.66 per pound, $1.53 in the first quarter. And if we return to normal operations, for the year, it will be down to $0.96 per pound. So that just shows you how we can recover from this.

Ralph Profiti - Credit Suisse

That’s great. Thank you very much.

Richard Adkerson

Thanks.

Operator

Your next question will come from the line of Oscar Cabrera with Bank of America. Please go ahead.

Oscar Cabrera - Bank of America

Thank you. Good morning everyone. Just want to get back to, after you purchased the oil and gas assets from DXP and McMoRan. There was this notion of sales sustaining assets, meaning cash flow was from -- the oil and gas operations will be basically sustaining the development CapEx for oil and gas operations. We didn’t tend to sell assets in oil and gas. Should we think about differently about that i.e. mining operations providing the free cash flow to -- for the development of oil and gas?

Jim Flores

I’ll take this question because when you sell the Eagle Ford cash flow that was about $600 million a year of free cash flow of business declining. But it was there and you said that some additional asset size we’re talking about basically we’re going to observe the short, the CapEx, the efficiency of variance between the cash flow and the CapEx level through the asset sales. So we really -- we're going to -- the amount of asset sales that we’re going to sell or bridge negative cash flow in ‘14 and ‘15 on into a flat to positive year at ‘16 and then ‘16 oil will be self sustaining. So within the oil and gas, including the asset sales, we’ll observe any negative cash flow.

Richard Adkerson

We’re consistent with that approach Oscar. Nothing has changed, it’s just the CapEx where we’ve funded from cash flow and asset sales of oil and gas assets.

Oscar Cabrera - Bank of America

On that too -- but with the additional sales as you mentioned between $4 billion and $5 billion, I’m assuming that’s probably on the -- if its onshore California and that’s where the vast majority of the free cash flow is coming. Would that still be the case?

Richard Adkerson

Yes.

Jim Flores

That will be the case. Remember this, those type of assets have zero tax basis. So the IDCs during the spending of ‘14 and ‘15 really helps for the tax basis offset and any kind of property acquisitions, smaller property as in iconic changes. There is a tax on product there that it benefits to have the negative cash flow on that year to offset the tax burden just by selling those properties.

Oscar Cabrera - Bank of America

Okay. That’s helpful. Thank you. And then if I may on Indonesia, this statement in the press release that talks about the MoU and Freeport paying over reduced export duties, that would decline the smelter development progress. Can you give us an idea of what level of reduced export duties you are looking at because 2016 your mine plant for Grasberg, we still have significant increases in both copper production and gold production that would be impacted by an export tax.

Richard Adkerson

Yes, the process for completing the MoU will include the Ministry of Finance adopting new reduced export duties that will be declining rather than the current regulations which provides for escalating export duties. Currently, the export duty starts at 25% going to 60%. We expect and you know, it hasn’t been adopted yet but we’d expect the export duties to be initially below 10% and then they would decline based on progress with the smelter. Progress with the smelter would involve getting agreement on the long-term lives to operate. Our goal would be to work to get to zero export duty by 2016.

Oscar Cabrera - Bank of America

Okay. Great. That’s helpful. And then if I may, I’ll be quick with this one. Can you just remind me of your agreement with Rio Tinto with the divestment of 30% in Grasberg? How would that impact the 40% in case in production from the asset?

Richard Adkerson

Well we’re talking about the divestment of shares in PT-FI. And that’s what -- that's all we’re talking about here. PT-FI would continue to own 60% in the joint venture with Rio Tinto.

Oscar Cabrera - Bank of America

And in terms of production does that affect the share production, Richard?

Richard Adkerson

No, it’s PT-FIs what we’re talking about.

Oscar Cabrera - Bank of America

Thank you very much.

Richard Adkerson

Thank you.

Operator

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

Joan Lappin - Gramercy Capital

Good morning everybody. Jim, would you talk about, I assume, it’s your domain about the Gulf Coast Royalty Trust because even that was an important part of the complete transaction a year ago. And when -- what of the properties that remain viable, are going to come online and when that will influence that and also I would appreciate it, I guess, it’s a variation on the previous questioner.

On Slide 27, where you show your -- well 26 and 27 sort of fit together and you’re showing your important areas going forward. I assume the big green, the biggest green dot shows the most oil in these new -- in the new areas that you have just expanded your position in and whatever and then my last part related to that as you’ve shown us these different rigs that you will be using. Can you tell us how the cost of those relate to the drillship or whatever compared to the very expensive rigs that we were using in the shallow water ultra-deep gas project?

Jim Flores

Okay, Joan, good morning. The Gulf Coast Royalty Trust, I’m going to point you toward Kathleen Quirk and also you promised me a trip to Houston to go over all this in person and you haven’t shown us yet. So I’ll take this as our meeting there. And the aspect of the Royalty Trust is not really driving the aspects at Freeport. I mean, Freeport was being commercial.

Decisions based on good engineering data in July, that’s in the plan. The inboard lower tertiary that has grown beyond the Gulf Coast Royalty Trust footprint. But the most significant potential production asset we have today the Highlander project is in the Gulf Coast Royalty Trust.

I would focus a 100% on that and if we come up with some significant production in Blackbeard West, Blackbeard East or Davy Jones 2 in the meantime then that’s a bonus. What was depicted on Page 26 is -- and 27 is our producing assets, our major operating producing assets. And I emphasize producing because we have not produced any gas or oil out of the lower Tertiary/Cretaceous play. It’s a frontier exploration play.

On top of that, to your rig question and so forth, the different operations onshore versus deepwater, they don’t really relate as -- the jack-up market is pretty much right now but we continue to work with our partner willing to provide the premium equipment and it’s worked out -- worked out fine. These are lot of integral operations. You got to have the top wide equipments. So as far as the rig costs are about flat where they were.

Jim Bob Moffett

Jim, as far as the royalty trust, rig was discovery in the (indiscernible) area and that prospects that were reflected by (indiscernible) and because of the mainland prospect which is a parallel structures just in the East.

So I guess those have tremendous potential in the (indiscernible). So those various bottom shales represent several structures, 25,000 maybe and you have Highlander which was -- we are focusing on that which led to the cretaceous discovery and you have the (indiscernible) area mostly in addition to the (indiscernible).

Jim Flores

Thank you, Bob. And Chevron operates Lineham Creek, that’s why I have omitted it, because I was focused on our operations and the Lineham Creek completion is scheduled for midyear ’15. And once again Joan I issue that invitation for you to come down to Houston and get up to speed on all the specifics. Thanks.

Joan Lappin - Gramercy Capital

I accept.

Operator

Our next question will come from the line of John Tumazos with John Tumazos Very Independent Research. Please go ahead.

John Tumazos - John Tumazos Very Independent Research

Good morning and thank you for taking my question and for the presentation. I am a shareholder, and I am very happy, and I am impressed at the good moves that the company has made to pick up the Apache assets, the 20 new leases in the Gulf of Mexico, the reservoir joint venture in Europe, the (indiscernible) joint venture just announced, and other new opportunities that you may consider. I am concerned that some other people might be worried the company is obstructed by debt or distracted by Indonesia. And I'm very pleased at the progress you're making in new endeavors, in spite of all of the distractions. Please explain in a little more detail how you're slowing down the less productive activities, and reallocating -- things change dynamically, you get a good drilling result at one property, you have a roadblock at another. Tell us a little more how you are being disciplined with the weaker projects to make more room for more of the good new opportunities, please?

Jim Flores

Well, John, we have a great team. Rich here and just last week, we met with 50 or so of his managers in the Americas and reviewed every one of our projects there. Those guys are interested in what’s going on in Indonesia, but they are not involved. They are playing different positions, and everyone is focused. We had our African team there too. Everyone’s focused on their own business, and we sit down. We went through every one of our minds as to the operations they had done so far this year. What we are looking forward going forward? What were our growth opportunities? We have a separate group, that’s working on going through our mining reserves and resources in assessing how we focused on the next stage of operations. That was a same process that we went through that came up with the Tenke expansion, the Morenci expansion and the Cerro Verde expansion. Jim and his team are very interested in what’s going on in Indonesia, but they are really focused on running their assets well and looking for growth opportunities and divestiture opportunities, divestment opportunities and so forth.

Jim Bob works closely with [Rick Lodale] (ph) our exploration, both our Brownfield and Greenfield exploration. So ultimately we step back from that and say where is our business judgment for the greatest opportunity to put the development resources on? And they bring in our development team to focus on that. Dave Thornton and his team has been running our molybdenum business very well. Of course we did the expansion at Climax. We monitored that market, managed production to meet the demands of the marketplace. So while as investors of course you’re going to focus on the things that are currently most important from a corporate standpoint. Underneath that we’ve got out great team, that’s working on the rest of the business. And what I like about our company as opposed to when I look at the way larger companies they are running mining business and then the oil and gas business is, because we’ve got such a great team, it frees. When we do have a problem like we have in Indonesia or Africa, we can put senior management to work and working with our guys on that team and the rest of our business does just fine. So we’ve come a long way, you’ve been watching us for a long time and where we started to, where we have ended up now, and I couldn’t be more pleased with the people we have and where our team works together to prioritize and deal with the broad scope of our business.

Jim Bob Moffett

John, this is Jim Bob. Just a quick comparison. If we go back 10 years, this export problem related to the Grasberg mine, how would you like to have been dealing with the issues that we’ve dealt with in the last five year? The strike and the accident and the export ban, if we have been three, four like copper and gold with single is the best asset in the world. So when you look at the press release today that we’ve got all these in our Greenfield prospect for instance in the Congo. I just reviewed that recently (indiscernible) kilometers of ore at the surface that we are going to tie them together and using projections and drilling some deeper. We have a chance to have again another world class ore body. When you think about the (indiscernible) used our deeper sulfide ore exploration drilling that reserves, we found the equivalent amount of copper and gold equals another Grasberg just by drilling the Brownfield projects. So we are blessed with not only some of the biggest world class mines in the world, but we are blessed with the prospects that are becoming world class mines because of our brownfield exploration effort.

Jim Flores

Thanks, John.

John Tumazos - John Tumazos Very Independent Research

Thank you.

Operator

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

Paretosh Misra - Morgan Stanley

Thanks. Hi, everyone. So I have a follow-up question on your potential sale of stake at Grasberg. In case of a direct sale to the government, is it possible that you may have to provide financing for the sale of that stake?

Jim Flores

Not for a direct sale to the government. What I am talking there is the central government and that’s the way their regulations work. We have in the past -- we’ve actually undertaken efforts to have a stake in the shares of PTFI owned by the province of Papua. We believe that could potentially be positive and we would consider providing some financing for that piece of the transaction. We tried to accomplish this several years ago and just wasn’t able to get there. We would be really focused on making sure that any sale like that would be for the benefit of the province and the people of the province and not some third party investor, but that would be something that we would be considering as we go forward.

Paretosh Misra - Morgan Stanley

Got it. So I guess if there's financing, it would be only for that chunk, 8% or 9%. And currently you're looking at only either IPO or sale to the central government?

Jim Flores

Well, the 8% or 9%, the percentage that we would be talking about is not defined yet. 8% or 9% is a very large amount of money for an asset of this size, so that’s uncertain as to where the -- any percentage that would come about and the process would be the central government under the way Indonesia works would have the first call. They had a call -- they had an opportunity to buy this interest that we reacquired from an Indonesia organization in the 2001 timeframe, and the government opted not to do it.

Then we have the potential to do with some of the province, then beyond that, and the listing the IPO in the Jakarta exchange. And beyond that then there would be an opportunity for potentially other Indonesian nationals to invest. So it’s a process that’s yet to be worked out, it could be a combination of all of these. The important thing is that our shareholders would get fair value out of it and it would take time to execute all of these.

Paretosh Misra - Morgan Stanley

Great. Thanks, Richard.

Operator

Next question will come from the line of Brian MacArthur with UBS. Please go ahead.

Brian MacArthur - UBS

Hi. Good morning. I have two questions. Just to be clear on the MOU, the day you sign it, imminently, whatever that means, the 115 goes into effect, the higher royalties go into effect, but then do the -- whatever the reduced export taxes on the concentrates go into effect, so if they were to be 10% going down to a lower number by 2016, that you will actually have certainty the day you start exporting on what those taxes are going to be, or is that something that still has to be negotiated in that six months comment you made about the MOU?

Richard Adkerson

No, Brain, that would be defined and known and in effect upon signing of the MOU.

Brian MacArthur - UBS

Okay. So when you re-export, that will all be laid out, so you have a clear runway for what you're paying?

Richard Adkerson

As soon as we sign the MOU, we would advice the market of what its terms are and what would be effective immediately and so we will do that.

Brian MacArthur - UBS

Okay. Then my second question is, sort of putting this all together, and you've been very good over the years about giving forecasts of EBITDA and cash flow at various prices every quarter. With all the moving parts now, you give guidance for ’15, ‘16. We assume the resumption of exports in August from Grasberg, but in that, as Ralph brought up, you probably have better costs in 2015 than we used to, just because you pre-strip. You obviously have a tax now on the smelter, going forward. We've obviously sold Eagle Ford and adjusted that. Can I assume the stuff on page 21 now, given all those pluses and minuses, because it looks like it has changed a little bit, include all of those assumptions? Or is it pre- the MOU, if I want to think of that way, because there's a lot of moving parts here?

Richard Adkerson

It does not include the impact of the MOU. Yet, it does conclude the Eagle Ford and the acquisition of the Apache interest and so forth. But it does not include the MOU since that has not yet been -- it said has not been signed.

Brian MacArthur - UBS

And would it have the benefit, fair to go back to Ralph's point, because I think it's a good one that you would have some better cost structure in ‘15 and ‘16 than you did before, all else being equal, because you have done that all extra maintenance and pre-strip?

Richard Adkerson

Well, this does reflect our current mine plan. Now we review that continually. And as you know Brian, over the years we’re always looking for ways of incrementally improving it. And the guys will be looking at the ways of accessing higher grade material and with the pre-stripping the opportunities for that are much better than they have in the past. We’re talking with our guys for example about having access to some very high gold grades in the pit that we might be able to access earlier than later.

Kathleen Quirk

But Brain, the projections that are in the cash flow model are consistent with the mine plan for PTFI in the back on page 29.

Brian MacArthur - UBS

Right. And just on that, I noticed gold's up again in ’17, I assume that's just flow back from the delay and everything this year, and it looks like maybe that can come back forward, things like that is what you're talking about?

Kathleen Quirk

Right.

Richard Adkerson

That’s right.

Brian MacArthur - UBS

Okay. Great. Thank you very much.

Richard Adkerson

We’ll have the chance for optimization and we’ll keep you informed as we proceed with that. For everyone, we had a -- wait, we do have a couple of more. I’m sorry. David is pointing out. Appreciate it. So operator, do you want to -- I think, see who else is on our list.

Operator

Yes. Our next question will come from the line of Brian Yu with Citi. Please go ahead.

Brian Yu - Citi

Great. Thanks for your endurance with this long call, Rich and team. On the duties where you said it starts less than 10 and it goes down to zero, does this apply to both the copper and gold, or just copper? And is there a portion of it that gets credited towards the smelter build?

Richard Adkerson

It is own copper concentrates. So that would include the copper and gold. I mean, we don’t sell copper and gold separately. We sell copper concentrate, which has gold and silver in it and we get paid for that concentrate based on the prices of copper, gold and silver metals, but we don't actually sell those metal separately. That’s sold to the smelting company and -- but we get paid for it.

So it is going to be only own exports and on concentrates, which will include all the metals in the concentrate. No, there is no credit on the smelters, that’s a separate deal. But the way this thing works from a cost standpoint, is we only pay the export duty prior to the smelter, coming onstream. Once the smelter is build then we can reach agreement on building and so forth, the export duty goes away.

Brian Yu - Citi

Okay. And when it goes to 0%, or planned to go to 0% in 2016, that would coincide with the start up of the smelter effectively?

Richard Adkerson

No, not with the start-up of the smelter. These smelters are substantial industrial facilities and it takes time to build it. The scale down in the duty as contemplated by the MoU will be made on the basis of progress toward building this smelter. Progress is currently contemplated to be measured on the basis of cost expended and committed and the objective would be to say once you reach a point of no return, once you spin enough so that the government is satisfied that you’re going to complete it then the duties goes away.

Their view, the governments view and they’ve been vocal about this was that the duty was not designed to raise money for the government but is to provide an incentive for the companies to build the smelter.

Brian Yu - Citi

Okay. And what percentage in spend committed would 0% export duty tied to, is that like 50%, 75%?

Richard Adkerson

I think its best given the current stage of what we are. It is not that are very hot. Its not the majority of the cost is what we’re talking about. Its something less than that. But given that this thing is -- has not been singed yet. Although, we believe the terms to discuss with the government wants that are going to be adopted but it still has to be signed. I think, Brian, its best at this point, not to get that specific with what the terms are.

Brian Yu - Citi

Okay. Appreciate it. Thank you.

Operator

Your final question will come from the line of Mitesh Thakkar with FBR Capital Market. Please go ahead.

Mitesh Thakkar - FBR Capital Market

Good morning, gentlemen and thank you for squeezing me in. Just on the oil and gas side? I understand, when in May you guys announced the acquisition of additional interest in Lucius. Your working interest was supposed to go up to 35%, but it looks like now it is at 25%. Can you explain on a little bit, give us some incremental color around that?

Jim Flores

Yeah. In the oil and gas transaction, the existing holders of the Lucius interest, additional partners have a preference for right of purchase to any sale that goes on within Lucius. And so we contracted to buy the Apache 10% interest.

Two parties, the original partners exercise their pref rights, which cause us to exercise our pref right. So we got a reduced interest where Exxon and Impact, Japanese company, both liked the price we were paying for Lucius and exercise their right to get their percentage and it reduced our interest to the 5.1% versus the 10%, so that’s the reduction. And therefore instead of it being a $1.4 billion acquisition, it was $900 million.

Mitesh Thakkar - FBR Capital Market

Okay. Great. And just on Indonesia, the 2015 copper and gold guidance came down a hair and I was just wondering, if you are doing all the pre-stripping today, shouldn't it actually go up instead of going down or is the benefit just on the cost side?

Kathleen Quirk

No. There was some minor changes we made to the start-up of the Deep MLZ in 2015, which affected the volumes in a modest way. The open pit really didn't change significantly from what we had previously. But we will project in a couple of months delay from what we had before for the Deep MLZ and that’s the impact you’re seeing.

Mitesh Thakkar - FBR Capital Market

And that impact has nothing to do with the negotiations going on right now in the quarter?

Kathleen Quirk

Correct.

Richard Adkerson

No. During this whole period we’ve been proceeding with the development of our underground resources, including the Deep MLZ and the Grasberg Block Cave. And so this is just an issue related to the completion of the Deep MLZ mine and it slipped roughly a quarter.

Mitesh Thakkar - FBR Capital Market

Okay. Great. Thank you very much guys and thank you for being kind with the time.

Richard Adkerson

Okay. Well, appreciated everybody’s attention and being kind with your time. We had a lot to talk about and we will have a lot to talk about as we go forward. And we look forward to that if you have any follow-up questions, please direct them to David and we’ll get them answered. Thanks a lot.

Operator

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

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