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Freeport-McMoRan Copper & Gold (NYSE:FCX)

Q1 2011 Earnings Call

April 20, 2011 10:00 am ET

Executives

Conger Harry - President of Americas Division

Richard Adkerson - Chief Executive Officer, President, Director and Chairman of FM Services Company

Kathleen Quirk - Chief Financial Officer, Executive Vice President, Treasurer and Commissioner of PT Freeport Indonesia

David Thornton - President of Climax Molybdenum

Analysts

Paul Massoud - Stifel, Nicolaus & Co., Inc.

John Tumazos - Independent Research

Anthony Rizzuto - Dahlman Rose & Company, LLC

Charles Bradford - Bradford Research

John Redstone - Desjardins Securities Inc.

Paretosh Misra

Gary Lampard - Canaccord Genuity

Unknown Analyst -

Brian Yu - Citigroup Inc

Sal Tharani - Goldman Sachs Group Inc.

Michael Gambardella - JP Morgan Chase & Co

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Copper & Gold First Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Ms. Kathleen Quirk, Executive Vice President and Chief Financial Officer. Please go ahead, ma'am.

Kathleen Quirk

Thank you and good morning, everyone. Welcome to the Freeport-McMoRan Copper & Gold First Quarter 2011 Earnings Conference Call. Our results were released earlier this morning and a copy of the press release is available on our website at fcx.com. Our conference call today is being broadcast live on the Internet and anyone may listen to the call by accessing our website home page and clicking on the webcast link for the conference call. As usual, we have several slides to supplement our comments this morning. And we'll be referring to the slides during the call. They are also accessible using the webcast link on our website at fcx.com. In addition, to analysts and investors, the financial press has been invited to listen to today's call. And a replay of the webcast will be available on our website later today.

Before we begin our comments, I'd like to remind everyone that today's press release and certain of our comments on this call will include forward-looking statements. We'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 SEC filings.

On the call today are Jim Bob Moffett, our Chairman of the Board; Richard Adkerson, President and Chief Executive Officer. And we also have several of our senior operating team here today: Red Conger, who runs the Americas operations; Mark Johnson [ph], who runs Indonesia; and Dave Thornton, who runs our Molybdenum business. I'll start by briefly summarizing our financial results and then turn the call over to Richard, who'll be going through those presentation materials. As usual, after our remarks, we'll open up the call for questions.

Today, we reported first quarter 2011 net income attributable to common stock of $1.5 billion or $1.57 per share compared to net income of $897 million, $1 per share for the first quarter of 2010. The 2010 historical earnings per share amount has been adjusted to reflect the 2-for-1 stock split that took effect on February 1 of 2011.

Our sales of copper in the first quarter were 926 million pounds. Those were higher than our previous estimate in January of 840 million pounds, but slightly lower than last year's first quarter of 960 million pounds. In the first quarter, we had a favorable variance to our production performance primarily in Indonesia, where we had access to higher grade ore than we previously expected that we advanced volumes into the first quarter that we previously expected to be mined in future periods.

We also had improved production performance in North and South America. In the first quarter, our gold sales of 480,000 ounces were higher than our January estimate of 325,000 ounces, again because of mining higher grade ore in Indonesia. And those sales in the first quarter approximated the level of the prior-year period.

Our first quarter 2011 molybdenum sales of 20 million pounds were higher than our prior estimate of 17 million pounds in the year-ago period, primarily reflecting improved demand in the chemical and metallurgical sectors. First quarter results included positive pricing of all of our commodities: copper, gold and molybdenum. Our realized price for copper in the first quarter was $4.31 per pound. That was higher than last year's $3.42 per pound. Our gold realization of about $1,400 per ounce compared favorably with last year's first quarter, $1,110 per ounce. First quarter molybdenum price of $18 per pound was about 20% higher than the year-ago period.

As anticipated, our consolidated unit site production and delivery costs of $1.61 per pound in the first quarter of 2011 were higher than the year-ago period of $1.35 per pound of copper, reflecting higher input costs including energy, materials and labor. We also -- Our net unit costs, net of credit, were lower though than the first quarter of the prior year. We averaged $0.79 per pound compared with $0.82 per pound in the prior-year period. That was because of higher gold and molybdenum by-product credits in the current year period.

We had strong operating cash flows during the quarter which totaled $2.4 billion, those were significantly above our capital expenditures, which totaled $505 million during the quarter. We ended the quarter at March 31 with total debt of $4.8 billion. But after taking into account the redemption, $1.1 billion redemption of our 8.25% senior notes that we've made on April 1, our total debt approximated $3.7 billion. And our consolidated cash exceeded that amount and approximated $4.1 billion.

We also announced separately today that our board of directors declared a supplemental common stock dividend of $0.50 per share, which will be paid on June 1 to shareholders of record as of May 15, 2011. This supplemental dividend, to be paid in June, is in addition to our regularly quarterly common stock dividend of $0.25 per share. Our total shares outstanding currently approximate 947 million shares. I'd now like to turn the call over to Richard, who will be covering the slide materials on our website.

Richard Adkerson

Good morning, everyone. I would like to start with Slide 4, which has the financial results that Kathleen just reviewed for you, and add a little color to how we had better-than-anticipated performance for this year. To start with, as we look across all of our mines and processing operations, we really had strong performance in our units across the board. We benefited from the high commodity prices. And it was great to see our business operating so well at a time when we have the exposure to these -- to prices at this level.

And in particular, I want to comment on the situation that we had at Grasberg. Some of you will recall that mid-year last year, we announced that we were making some revisions to our mine plant at that time because of issues that we saw in the section of the Grasberg open pit. We deferred some planned production, changed some of our mining activities and reflected those in our plans. As we went forward, at the end of 2010 and into the first quarter, we made really good progress in dealing with those slope issues. And that allowed us, as a result of the improved situation there, to get access to higher grade material at the bottom of the Grasberg pit. It's an unusual mine, certainly different from any of our other mines and different from other mines in the industry and as the grades of copper and particularly of gold are so high at the lower elevations of the pit, that by mining a relatively small amount of material in the context of the total material that we mine out there each day, that translates into higher volumes of copper and particularly for gold. And that allowed us to mine, to produce almost 50% more physical ounces of gold this year than we had projected.

It's something that happens over time. We develop our plans then on an operational basis as we see the opportunity to access higher grades quicker. I mean, those volumes would always be mined during our life of mine plan. But when we can do that quicker than planned in a way that's safe in terms of the integrity of the pit and in a way that is consistent with our maintaining our long-term mine plans on the basis of both safety and economics, we do that. And that's what allowed us to have the kinds of volumes that we had for gold and to some extent, copper.

But looking beyond that, I want to emphasize that as you look at the particularly like the data on Page 5, you can see that our operations in North America, South America and in Africa, in our Molybdenum business all performed very well during the quarter. Kathleen mentioned the fact that like everyone in the industry, we are facing some higher input costs from energy, tires, steel. That's just the world we live in. And some of the reasons for that are correlated with the reasons we have higher copper prices.

What I was pleased about is we reviewed our individual operations that even in the face of these increased input costs, our team was able to achieve and maintain certain of the efficiencies that we built in our business following the downturn in 2008, 2009. So while some of the costs were inevitable, we have had efficiencies that we are working every day to maintain. We had success in doing that. With the higher volumes of gold at Grasberg and the higher gold price, another feature of our company is that allows us to have such an attractive consolidated unit cost of $0.79, net of credit, for this year that adds in all of those factors together.

Our view on copper markets remains very positive. We are running our business and developing our development plans with an optimistic view about long-term demand for copper globally, driven by China and the developing world as well as an improvement in the economies of the developed world, as well -- coupled with the continuing challenges the industry faces in maintaining and developing new supplies of copper to meet that demand. In the near-to-medium term, a number of issues who affect that including the unfortunate tragedy in Japan as well as buying patterns in China. But we continue to be extremely positive about the outlook for the copper industry and the Molybdenum business. And of course, we benefit from the record prices we're now achieving in the gold markets.

On Slide 7 it's just a simple illustration of what our strategy is. And I will say our strategy is simple and straightforward. We are working diligently. Our exploration team has done an outstanding job in adding to our mineral resource base, principally by drilling activity and exploration analysis associated with our existing ore bodies. That's leading to significant reserve additions. It's been 4 years since the Phelps Dodge combination with Freeport. And we've added 43 billion pounds of proved and probable copper reserves as a result of that activity. The Phelps-Dodge reserves that we acquired at that time were between 55 billion and 60 billion pounds. So that is a very significant incremental addition to our reserves as a result of our activities.

Then we're looking at our reserves and our resources and developing attractive development projects by investing internally in them. And we're aggressively pursuing those because of our positive view of the markets for our products. And we're going forward just as quickly as we can. These projects take time because of not only drilling requirements but engineering analysis, metallurgical work, permitting, securing, power and water in certain instances. But all of those are going to add into significant future growth for our company over a long period of time. And we have a long-term pipeline of projects that will be coming up over time.

In the meantime, the very positive markets we have, our existing strong production base, our attractive cost structure, is generating cash flows in excess of the requirements for current investments. And that's allowing our board to have a very attractive cash returns to our shareholders. So we're focused on growing production, focused on generating cash flows and that adds up to a very attractive situation for our company.

I want to comment on a number of our projects that we're working on and the progress that we're making. At Morenci, our flagship mine in North America, we have restarted the mill that we had shut down during 2008. It averaged 48,000 tons per day, nearing its design capacity. We've increased the mine rate, which we had cut in half there in an effort to reduce an element of high-cost production from our operations and drive our costs down. Now we're stepping mine rates back up. We have reached our original target of roughly 700,000 short tons. And we're looking to increase that rate further as we can do it economically in the present price environment.

We have begun feasibility study for our mill expansion at Morenci. Morenci, in the not-too-distant past, was viewed as a mine that didn't have expansion opportunities. And now with our exploration work and understanding the resource better, we're seeing the opportunity for significant growth in stepping our mill expansion up to 115,000 tons per day, which is more than a doubling of our current design rate. And that would provide an additional 150 million to 200 million pounds of copper within the next 2 or 3 years.

In the Miami Globe district, historical mining area just east of Phoenix here, we have begun mining activities that we had deferred at Miami. We are doing stripping now. And we're ramping this up to get 100 million pounds of copper a year. It's a $40 million project. And it's basically capturing copper reserves in an area where we were having to spend money to do reclamation activities. And so the economics are extraordinarily positive there.

And our mine at Safford near Morenci, we have completed the construction of a sulfur burner. The ore at Safford requires significant sulfuric acid to produce it. By having this sulfur burner there, we have a lot more flexibility with our operations. And there is attractive expansion opportunities at the Safford ore body as well as the nearby Lone Star ore body. And the sulfur burner gives us that opportunity to look for those more aggressively than we otherwise would have.

In New Mexico, Chino mine was our one mine that we had totally ceased operations on in 2008. And now, we are restarting it. Restart will require about $150 million of cost. We will build up over time to 200 million pounds a year of copper, very attractive economics. And Chino is a 100-year-plus mine. And as we keep working, we keep adding reserves. So in this environment, it's a very attractive asset for us.

I was just at our mine in Chile at El Abra, was there for CESCO week we had talked about the Sulfolix project. This is a replacement-type project, where we have sulfide ore that's available to us to replace the oxide ore base. We deferred this project for a year, and now we've completed it. We commenced production the first quarter of this year. And we're extending the leach pad now. It's a $725 million capital project, with initial phase of $565 million. And the construction project has gone extraordinarily well.

One of the things about -- a common theme you hear about our mines, at El Abra, our exploration activities have identified significantly greater resource than we thought was there. And this is a sulfide resource. We're working with our partner, CODELCO, to identify synergies for a joint development effort to give us access to this ore. We're looking at other potential sources of ore in the area. And we believe that we will find the opportunity to go forward with a major incremental mill project at El Abra.

At Cerro Verde in Chile, we have been working on and are now completing a feasibility study for a very large-scale concentrator expansion. We've had additional reserves added, resources added. Our current reserve life is 78 years, so we need to find ways to shorten that by expanding production. We had talked about a double or tripling. Now we're focused on tripling production there. The feasibility study will be completed by mid-year, and then we'll be filing our Environmental Impact Assessment. This will be 1 of the world's largest concentrator operations with this level of expansion.

In Indonesia, we are progressing, as we have been for a number of years now, the development of our underground reserves. These are probably the most attractive reserves to develop in the global mining industry, considering the grades of copper and the associated gold [indiscernible] it. We are mining underground now with our DOZ mine at 80,000 tons per day on a global stage, that is 1 of the world's very largest underground mine. We're also -- we've been block cave mining at Grasberg since the 19-- early 1980s. We have a long track record of doing that safely and in a way that would attract the economics. When the Grasberg open pit is completed, and our current plans call for that to be completed in 2016 although we're studying the possibility of extending it somewhat beyond that and we'll make a decision on that in the next year or so, we will be a total underground operation. But we're very confident about our ability to have large-scale mine volumes. Our throughput through our mill would be roughly equivalent to where it is today and with very significant copper and gold production at attractive cost level.

In Africa, a good news story there is that with our initial development, we had designed our mill to operate at 8,000 tons per day and we are achieving close to 11,000 tons per day through that mill. What this has allowed us to do is to add some mining equipment, not significant investments, but to increase the ore, so that we can take advantage of the higher design, higher capacity achieved by our mill. And we're doing that and achieving higher volumes. We are actively studying the second phase expansion, which would add 150 million pounds a year at Tenke Fungurume over the next couple of years and our exploration in metallurgical work and engineering work on further expansions is progressing. But we would have further opportunities with available oxide ore. And we are looking at alternatives for processing the very large amounts of mixed ore and what appears to be a really large sulfide resource there to provide us long-term opportunities.

Over this past week or this week, the presidential decree was signed and published, which formally completes the contract review process that we were engaged in for many months. The decree really was a step to validate the amendments to our contracts that we signed with the government in the fourth quarter of 2010. Since that date, there were no further negotiations or requests by the government, so it was a formal step to complete that process.

At Climax, our construction is now 60% complete. As we talked about in our last earnings call, we accelerated our construction activities from our original plan. We took advantage of the structures that we had built earlier to do work inside the structure on the SAG mill and the ball mill. Mine development activities have begun now, and we expect to complete construction totally by early 2012. This was a $700 million project, and we're about half way there in terms of cost. Very attractive project with 30 million pounds of initial production of molybdenum at a very attractive cost level. And we have the ability to expand that. We've begun hiring mining operators to do the stripping and preparing the mine for production. Our next step will be a decision as to when to hire operators for the processing facilities. And at that point, we will set a specific startup date for the project.

We have an analysis, a summary of these, our copper projects that I mentioned earlier, on Slide 16. The Morenci expansions, Miami, Chino, Tenke, Cerro Verde de-bottleneck project that's now in place, gives us about 500 million pounds of incremental copper. And then the El Abra Sulfolix, the Grasberg underground will be replacement type projects to replace depleting ores or the depleting pit at the Grasberg. So those are all progressing.

Then there are other near-term major projects that we're pursuing. The Cerro Verde project that I mentioned earlier, preliminary capital is about $3.5 billion on that project. The mill expansion at Morenci, the next expansion at Tenke, would add 900 million pounds to 950 million pounds of copper over the relatively near term. Timing will be affected by how we proceed with our engineering studies and permitting and so forth. But this gives us significant incremental copper.

Now, other projects that we're working on just as diligently are very significant projects beyond these. This includes a large-scale mill at Morenci, mill expansion opportunities at our Sierrita mine outside Tucson, which has a significant molybdenum component to it. At Bagdad, we're looking at a district that had historical mining opportunities at Ajo here in Arizona. And then Twin Buttes was a mine that had not operated in several years that's just adjacent to Sierrita where we're looking at joint operations or perhaps a separate development at Twin Buttes.

And then I mentioned Safford and Lone Star, the significant opportunity at El Abra and then at Africa, the further expansion of oxides and the ultimate development of the sulfide resource there. So this is what I was talking about earlier, our development opportunities extend from things that are starting now to things that will be starting in the near term, to others that require longer-term investments. But it's a continual flow of expansion opportunities. We're increasing our exploration budget to $225 million. It's focused on our existing ore bodies, and it's had great success in adding reserves and development opportunities for us.

For 2011, we are expecting under our current plans to have 3.9 billion pounds of copper sales and 1.6 million ounces of gold and 73 million pounds of molybdenum. As always, our objective is to advance production. And as we've seen this quarter, there are times when we have that opportunity at Grasberg. This was an unusual quarter. We can't expect that every quarter, but if you look back at our history over a long period of time, we've been successful in meeting or beating our plans. And we're committed to trying to continue to do that. There's always risk and uncertainties in this business. And we dealt with those in the past, and will in the future. But that's our goal.

Our outlook, based on these numbers and $1,400 gold and $15 molybdenum would give us a unit cost of just over $1 a pound, $8.3 billion of operating cash flows at $4.25 copper for the remainder of this year. That's after cash taxes and after the significant -- the cash interest that we have. Our interest is way down. Taxes are higher, though, obviously with what we're earning. And we have significant leveraged copper prices. We're continuing with our near-term estimate of $2.5 billion of capital. And we expect that our capital spending beyond 2011 will increase above our previous guidance, as we get board approval for the Cerro Verde expansion and other projects.

Our quarterly sales outlook -- I mean our outlook for the next 3 years of sales, are presented on Slide 21. You can see increases beginning to come in on our copper production. The gold variation is strictly a function of mine sequencing at Grasberg. Volumes are higher when we're at the lower parts of the pits and lower when we're at the upper parts. We will be beginning by the end of this period to be moving towards the final phases of that mining at Grasberg. And as we approach the end of this mine life and stripping requirements are reduced, volumes will go up higher and the economics will be very attractive during that period.

On a quarterly basis, we've made some adjustments to reflect what we've done in the first quarter here. We're ending up with similar production in the second and third quarter. We see an opportunity. And we have a lower fourth quarter estimate now, reflecting the fact that we accelerated some of the gold that we were going to produce then from Grasberg into the first quarter. And you can see the gold sales reflecting this mine sequencing issue that [indiscernible]. Our molybdenum business is performing strongly.

For the year, our cash cost is presented on Slide 23, a very attractive situation given commodity prices. Obviously to have copper prices over $4 and cash costs of $1, it shows the margins that we have available to us. And even in the face of increasing -- certain increasing input costs, our cost management programs are working. On a modeled basis at $4 copper, our operating cash flows would be approaching $8 billion, $4.50 copper is $9 billion. So you can see our leverage there. Our sensitivities to our commodity prices and certain of our input costs are shown on Page 25, so you can adjust these for the different views that you might have on these revenue and cost elements.

Capital expenditures, I mentioned we're keeping our guidance for 2011 at $2.5 billion. We are now looking at just over $2 billion for 2012. But that number and subsequent numbers are likely to be adjusted higher.

We did take a step on the, as Kathleen mentioned, April 1 of redeeming of $1.1 billion senior note as an effective use of our cash. Our current average interest cost is just over 8%. Our ability to borrow now in the market is well below that. We're investment grade rated by all the agencies. We will have an opportunity to look at a callable note that's call kicks in early next year, the first half of next year.

We don't have any particular target we're driving towards with debt. We've just been seeing these debt reductions as an opportunity, as an evaluation of how to use cash. We are committed to maintaining this strong balance sheet and our liquidity position, so that we can invest in these attractive growth projects. Current common dividend after we reinstated it in 2009 and increased it in 2010 is $1 a share. And our board has announced another supplemental dividend of $0.50 per share to be paid June 1. This is the second special supplemental dividend that our board has declared. And it will continue to review our financial policy on an ongoing basis. And with these commodity prices, the board will have the opportunity to consider further cash returns to shareholders.

So that's the summary of our story. And we were very pleased to report these results to you, very proud of all of our team around the world, about how hard they're working and how effective their work is going. And with that, we'll be happy, operator, to turn the phone over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Michael Gambardella with JPMorgan Chase.

Michael Gambardella - JP Morgan Chase & Co

I have a question on the gold side. I know Richard, you talked a lot about how you've changed the mine plan a little bit in terms of where you were mining at Grasberg and achieved significantly higher gold. But for the full year, even though you're kind of maybe leveling things off, for the full year you're still now estimating 135,000 ounces higher than you had back in, I guess, January. My question is, I know you maybe moved around a little bit in the pit. But are you achieving higher grades than you thought were there in some instances in the mine?

Richard Adkerson

Mike, one of the things we've had with Grasberg, and this goes back when we started mining in the early 1990s and we've done a lot of drilling to get good models. But over time, the models have held up. So we're seeing the grades that we expected to see. The only time historically that there may be some variation is that -- is when we make a transition from the low-grade zone to a high-grade zone. The timing of that may affect expected grades. But the Grasberg has performed remarkably consistent over many years now in terms of providing us a grade that we were expecting based on our drilling results. So all of this is strictly a function of our ongoing monitoring. And we were very conservative in the way we monitored this pit situation. But as we got -- as we did some remedial work and as we got comfortable with all of our monitoring activity, it just allowed us to mine a different shape than we expected to be able to mine in the first quarter. And that means some of that material, which we would have expected to mine in the fourth quarter, some in future years, came to us in this first quarter.

Michael Gambardella - JP Morgan Chase & Co

And one other question about Grasberg, unfortunate with the accident the other day. But do you have any idea when you'll restart the underground?

Richard Adkerson

What Mike is referring to is we did have an incident in our DOZ mine of where we had wet material that flowed unexpectedly. And very sad to report, we lost 2 of our workers. We have had over the years a very strong safety record throughout the operation particularly in the underground mines. And beginning back in the mid-'90s when we were mining the OZ mine which was just directly above the current DOZ mine, we invested to deal with this wet muck situation by developing robotic-type mining activities. And when our analysis indicated exposure to wet conditions, we mined it without people. And now we are investigating and working with the government investigators now as to what happened in this situation. We are all very, very, very focused on this. We're very sad about it. We're going to get to the bottom and review our procedures and understand how this happened and do everything we can do to ensure that it doesn't ever happen again. The history that -- we'll have to work with the mine inspectors from the government. Historically that has required a short period of time, and we don't see anything that's different this time. But it will actually require us to complete that process before we start, resume underground mining at the DOZ. The DOZ provides about 20%, a little more than 20%, 80 million out of say 230 million to our mill. Again, other operations in the pit in the mill itself are not affected by this.

Operator

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

Sal Tharani - Goldman Sachs Group Inc.

Richard, you have made recently in some forms [ph], comments about the acquisition and there has been a lot of activity in the copper arena. Any new thoughts on that?

Richard Adkerson

Well Sal, I'll tell you, when I was down in Chile, as usual I did a number of interviews. And some of them I think overemphasized this question that I got about acquisitions. Our focus strategically is to invest internally on our projects. And I've always said that's set at [ph] the end, and that is our strategic focus. I did say that as we are, we are positioned that if an attractive acquisition came to us, we are financially and technically available, prepared to take advantage of it. We don't expect it. It's not part of our strategy. And if it did come to us, it would have to be an extraordinary opportunity. So there's no change. We are monitoring everything that goes on in this industry and looking, always looking for opportunities where we can apply our skills and our financial resources to create shareholder value. But we are focused on our internal projects.

Sal Tharani - Goldman Sachs Group Inc.

Okay, and one more question on Morenci, you have given some more clarification of the incremental capacity beyond what you're doing right now. Looks like you plan to put it -- do you plan to start in 2014 if everything goes right? Is this a phased expansion sort of type of project where there could be more expansion further? Or do you think this is a limit you're reaching over there in Morenci?

Richard Adkerson

I'm going to let Red Conger answer this question.

Conger Harry

Yes, Sal, the expansion immediately in front of us is something we can do right away with current permitting footprints and water resources. Then there are additional volumes that we could produce in the future, given longer permitting processes and additional water resources.

Richard Adkerson

And Red, I think it's fair to say, Sal, that when we started looking at this resource and this opportunity, our first thought was looking at this larger scale opportunity -- it's still there. But in doing that, we saw an opportunity of going in and doing a near-term, less complicated, smaller project that doesn't take away from the larger opportunity, that gives us these incremental volumes on an economic basis earlier.

Operator

Your next question comes from the line of Brian Yu with Citi

Brian Yu - Citigroup Inc

Richard, my question is more a little bit of a follow-up on what Sal just asked, of theoretical nature. On the M&A side, if you were looking at a couple projects with similar return and risk characteristics or a potential acquisition target, would you have in preference for copper or potentially diversifying to a different resource?

Richard Adkerson

We're very positive about the copper business. I mean we're in it from exploration through development through marketing. We are the world's largest public producer. In fact, our consolidated operations make us the world's largest producer of copper. So we're very positive about copper and we think the world's going to need copper. So if we saw a copper opportunity, it would be attractive. But we wouldn't limit ourselves to that. And it's not just -- we don't have a strategy of trying to diversify for the sake of diversification. I think what 2008 showed us was something that I was saying before then is that these resources are correlated in the way they're affected by global demand situations. And so what we would be looking for, if we were to invest outside copper, would be a very attractive asset. Now at the end of the day, the quality of the assets is what makes a mining company attractive. And if we could use our technical capabilities and find an attractive asset that was outside copper, we'd be prepared to move on it. But we are very positive about the copper business.

Brian Yu - Citigroup Inc

Okay and my second question on the less theoretical side, with Climax, can you give us a sense of how the production outlook would unfold over the next few years if you decided to restart in early 2012?

Richard Adkerson

Dave Thornton runs our Molybdenum business, and Dave will respond.

David Thornton

Bryan, we're waiting still to decide on when we'll start up Climax. But the project will be completed by early 2012. And we have an initial ramp-up in the first year, of roughly half of our 30 million pounds of capacity. And then the second year, we would be at full capacity, 30 million pounds, and would proceed from there. And then of course we'd look at expansion opportunities after that.

Richard Adkerson

Let me also say these copper projects that I've talked about earlier bring a significant amount of molybdenum with them. And in fact, I mentioned Sierrita, that district at Cerro Verde, has an existing molybdenum line. It would be expanded. We're beginning to produce molybdenum at Morenci, and our expansions there would have it. So when we look at the total Molybdenum business, we have the by-product molybdenum. We have Henderson. And now, Climax is limning to come on stream. And we're very active downstream. Our predecessor [ph] companies and Dave's team has done a great job of developing markets for us. We sell proportion where more of our molybdenum into the chemical market than does the industry as a whole. And we have the ability by having these primary mines at Henderson to flex operations if we need to, once we get on stream to deal with changes in market conditions. So it's a great asset for our company. It's exactly what a mining company would like to have, industry-leading position and a critical metal growth opportunities and low cost structures and flexibility and good marketing impact.

Operator

Our next question comes from the line of Paretosh Misra with Morgan Stanley.

Paretosh Misra

I have two questions. Number 1 on Cerro Verde, I was wondering if you could discuss any expectations of operating cost at Cerro Verde after the expansion? Should we expect any operating cost synergies?

Richard Adkerson

Well, I would say overall, it'll be a similar cost level to what we have now. In some ways, we're replicating the expansion that was completed at the end of 2006. And it's a very efficient operation now, so we will be designing this to maximize volumes. And our analysis is based on essentially continuing our existing cost structure.

Unknown Analyst -

Okay, and then second on Morenci, what's the right way to think of the total potential there? Because you can increase the mining rate, and I believe you can take it about a million tons per day. And then you also have this mill expansion taking place. So what's -- how should I think of the total potential there at Morenci?

Richard Adkerson

Well, one thing to keep in mind is the bulk of our existing operations is an oxide ore body. I mean, a number of years ago, Morenci went to SX/EW. And that continues to be a significant part of operations and will be. The new opportunity for us is with sulfide resources that we're finding as extensions of the existing pits and at depth. And we don't know yet the extent of those resources. But in the context of a world that needs copper like it does, it's very significant. So that's allowing us to take the step now, which we are completing, we're working on feasibility for near-term mill expansion and setting us up for this longer-term mill expansion. And we're continuing to drill, to design the right mine structure, mine plans and all to take advantage of this newly known sulfide resource that our exploration drilling has revealed to us.

Operator

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

Anthony Rizzuto - Dahlman Rose & Company, LLC

I've got a couple of questions. The first question, just a follow-up on Grasberg. And, Richard, when I heard you talking about robotics, you're looking into that possibly because of this issue. And I'm wondering, how comfortable are you that this won't have an issue or an impact structurally, as you're looking to further develop the underground ore bodies? That's my first question.

Richard Adkerson

Well, Tony, let me answer that. We've been using these remote mining robotic type machines now for 10 years. And it's an active, I mean it's a fairly significant part of our total draw points that we're using them on. And they've been working very well. It's a bit slower than manned draw points. But it's not like this is new technology and so forth for us. The Grasberg block cave, and Mark, add onto this, does not have the degree of risk for wet muck that we've experienced with the DOZ mine and its predecessor mines, which is a different source of mineralization. The Grasberg block gate is a continuation of the ore body that we've been mining from the pit. It's the same ore body. And it's just at a certain point, it gets to be economic to access it underground as opposed from the pit. And just because of the nature of the geology, the location of it, the water is always an issue, I don't want to say that, it's always an issue underground. But with the heavy rainfall and conditions there at Grasberg, the risks are more pronounced and more significant with the DOZ mine.

Anthony Rizzuto - Dahlman Rose & Company, LLC

Have you factored the impact at all on your production at this point, while the suspension of the mining in that zone is in effect?

Richard Adkerson

No, and we don't expect it to be significant.

Anthony Rizzuto - Dahlman Rose & Company, LLC

Okay. And then the second question I have is related to El Abra. And I see the issues that CODELCO is dealing with, i.e., the large CapEx they have to make, just primarily to maintain their output. I'm wondering is there a possibility that you guys could potentially maybe increase your stake in El Abra as they seem to be a little bit financially strapped? Is that something that you're actively thinking about?

Richard Adkerson

Well, to say that CODELCO is financially strapped, they have tremendous resources and cash flows. Their issue is how do they tie in the running of their business with the requirements for cash from the government. And CODELCO has indicated no interest in giving up resources. And politically that would be very difficult. We are trying -- we have great relationships, a great partnership there, great relationship with the senior management of CODELCO. And we're looking for opportunities to work together on resource development. But, the likelihood of their giving up resources is very small.

Anthony Rizzuto - Dahlman Rose & Company, LLC

I phrased it the wrong way. What I meant was because that didn't seem to be a priority for them, and that they've had a lot of other capital spending to do on their other operations. And this seems to be very attractive from your standpoint. That's what I meant. I think you know what I meant.

Richard Adkerson

And you're right and the point is we're working on various joint venture structures that we might pursue with them.

Anthony Rizzuto - Dahlman Rose & Company, LLC

All right, Richard, that's great. Thank you.

Operator

Your next question comes from the line of Gary Lampard with Canaccord

Gary Lampard - Canaccord Genuity

About the cobalt at Tenke Fungurume, you're still selling the cobalt at a significant discount to cobalt prices. And I was wondering if you could let us know how you expect that to change over time, whether you'll be putting in additional capital to actually capture more of the cobalt price?

Richard Adkerson

Well, the reason the discount occurred of course is, and I know you're aware of that, Gary, but just for the rest of the people on the line, is we're producing an intermediate product right now at Tenke. It's a product that is sold to users who do further processing to use it. It is -- there's a very strong market for that product now. And so we're having great success in selling it and getting good prices of that product. But it's obviously a lower price than you would get for refined cobalt. As part of our expansions at Tenke, we are examining the potential to develop a refinery to upgrade this product that we're producing to metallic cobalt. It's a small market. And all of this comes into our view of how we get the expanding amount of cobalt that we will be producing into the market in an efficient way and possibly we might do something jointly with others to achieve that. But we've had great success, from a marketing effort with cobalt to date. And we are considering a number of options including the construction of a refinery as we go forward.

Gary Lampard - Canaccord Genuity

Just as a ballpark estimate, roughly how much would a cobalt refinery cost to build?

Richard Adkerson

Let me see. It's not a lot of money, probably in the range and boy, this is a ballpark, of $150 million, $200 million.

Gary Lampard - Canaccord Genuity

Okay, great, thanks. And finally just a simple question. It looks like your guidance for moly production for this year implies a significant decline in Henderson over the remaining part of the year. Is that correct?

Conger Harry

Yes, we're -- it's mainly based on, Gary, the market as we see it. I mean Henderson has no restrictions on its productions and it has the swing capabilities on the upside. So we're just showing what we think the market is right now. But if the market remains strong like it did in the first quarter, Henderson can increase its production to meet demand.

Operator

Our next question comes from the line of John Tumazos with John Tumazos Very Independent Research.

John Tumazos - Independent Research

After the $3.5 billion Cerro Verde CapEx project, what other projects or potential prospects, ideas et cetera do you think would be the number 2 capital consumer? What are your other plans here in [ph] Grasberg?

Richard Adkerson

Well, Grasberg has its capital program laid out for it. I mean it's a plan that we've been working on for several years, John. We've completed the access to get to the underground mines. And now we're beginning to start mine development. We can't start operating the block cave under the Grasberg until we stop mining at the pit because of subsidence that's inherent with block cave mining. So the Grasberg capital program is established and coming along on plan on schedule. After the significant capital at Cerro Verde, we have a situation in Africa with Tenke, where the resource development is going to be driven by our exploration work, our metallurgical work and logistical work. And it's the nature of that operation and where it's located, results in our ability to invest there on a quicker time schedule than we would at certain of our other mines. Then we see the North American sulfides, the more major project, I mean the near-term project at Morenci will proceed. The longer-term sulfides deposit developments require drilling. Water issues are critically important here in Arizona. And we've got a very active effort going on to develop water resources and water conservation measures and so forth to deal with that. But that would be the next focus and that's across several mines. It's Morenci, Sierrita, Twin Buttes, the following goes Bagdad and potentially Ajo. So those will be there. And then the El Abra sulfide, which I don't think is far behind those, but we'll be working on all these at the same time. But that is a project that would require access to water, is the big issue for that and how we work out synergies with CODELCO and others in the area. So that's kind of a line up.

John Tumazos - Independent Research

Thank you very much.

Richard Adkerson

Thanks, John.

Operator

Your next question comes from the line of John Redstone with Desjardins

John Redstone - Desjardins Securities Inc.

Gentlemen, most of my questions have been asked. But if I could come back to Climax for a moment, you're 60% complete. You said yourself there that it's a great asset. The current price is a good 10% above the $15 a pound that you mentioned a lot. And that's with, shall we say, a mediocre stainless steel sector for moly which will probably pick up at some point. And yet you've continued to talk about evaluating the startup for timing. And when you look at the slide on Page 21, it's still not included in your sales in '12 or even '13. So I was wondering, what are the factors that you need to see in place to give a firm green light to this project?

Richard Adkerson

Okay, just from a procedural matter, we put numbers in our outlook numbers when we get board approval and we're going forward with a project. And at this point, we haven't done that with Climax. We're spending all of this money, which is a change from where we are a year ago, so that we will have the option of deciding when to increase. And it's strictly going to be based, John, on a market read. We're such a large producer. We have our by-product, moly. The market is small. And so we will have the ability to make the decision, and that could occur sooner than later. But when we start hiring operators for these facilities, then we'll have a date certain for getting started. But it's strictly a market read.

Operator

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

Charles Bradford - Bradford Research

On Slide 10, you talk about the Chino restart costing $150 million or more. Is that what you spent in the first quarter or what you plan to spend for the full restart?

Kathleen Quirk

Chuck, this is Kathleen. That's the total amount that will be spent as we restart. And it's mine equipment and refurbishment of the mill there.

Charles Bradford - Bradford Research

Are there any other start-up costs that could start to come down before the end of the year?

Richard Adkerson

Well, we talked about Morenci and the possibility of increasing our mine rate there. But that's not a big capital cost to deal with.

Charles Bradford - Bradford Research

I'm looking more at the operating side, like this $150 million, which I'm assuming based on your answer, will be pretty much over by the end of the year.

Kathleen Quirk

Yes, and most of that is capital, capital cost.

Richard Adkerson

Yes, that's capital. And that's what I was looking at. The operating costs are built into our numbers. And those will be the cumulative result of input cost changes and our collective efforts to constrain them. But capital costs are what they are. And look, we're out here every day looking for ways to spend capital to produce more copper. And we'll report to you as we find them.

Operator

The next question comes from the line of Paul Massoud with Stifel, Nicolaus

Paul Massoud - Stifel, Nicolaus & Co., Inc.

Just first as a follow-up on Climax, in terms of understanding some of the thinking and what the board will probably go through as they decide whether or not to restart, are sales agreements and potential contracting for sales ahead of the restart part of that process? I mean, is there any sort of a demand from consumers for Climax and that they're coming to you to ask for the restart?

Richard Adkerson

We kind of went away from the way that business has been done prior to the merger. When Climax did do some relatively long-term -- not long-term contracts but period contracts, that actually set some price floors and ceilings as a way of capturing markets. Most of you know by following Freeport that our basic approach is to sell in the markets and realize market prices. We don't hedge or enter into long-term contracts for prices with the rest of our business. And so we've put that philosophy in place for Climax, and we basically sell at the market. We do have very close relationships with our customers. And we work together to understand their needs and we're a valued supplier because of our ability to do that. So it's more of a question of our understanding what our customers' needs are as opposed to having a contractual arrangement to assure those things. And Dave, you...

David Thornton

That's correct, Richard. Really the issue is that it's a big mine, it's a big -- a large amount of molybdenum coming into a small market. So we're just watching the markets right now and seeing what we feel the future demand growth really is for molybdenum and get comfortable with it.

Paul Massoud - Stifel, Nicolaus & Co., Inc.

And then switching gears a bit, looking at Tenke, you announced expansion at Tenke over the next couple of years. Is there any update on transport infrastructure, any progress with sort of negotiating to get a rail line to the coast?

Richard Adkerson

No, we haven't begun any negotiations on that. We're in the exploratory phase, some general discussions with the government, some discussions with other producers, continuing to monitor what's going on in Angola. We are looking at -- we have a continuing process of looking at other transportation routes. Right now, we're going through Durbin, out of Durbin, which is a long haul. I must tell you, it's working better than I had expected personally in terms of the truck movements and so forth, considering the distance and the number of vehicles that we have out there. So it's working reasonably well. Fuel costs are having an impact. And we believe that we can use this system for the expansions that we have right before us. We are looking at the possibility of developing access through Angola in Barcelona [ph]. Dealing with these things require that you have security and assurances and that sort of thing. But there's an opportunity to reduce cost by looking at alternatives, and we're continuing to do that. But the bulk of our shipping for the foreseeable future will be continuing this 1000 click trip down through southern Africa coming out of Tenke through Zambia.

Operator

Your final question comes from the line of Sal Tharani with Goldman Sachs.

Sal Tharani - Goldman Sachs Group Inc.

Richard, on Cerro Verde, initially you started talking about doubling and then you mentioned triple. And now you are not mentioning doubling the capacity, going straight for triple. I remember that water was an issue. Have you resolved this problem or you think you're very close to resolving it that you can get enough water particularly on the back of what happened at Tia Maria. Are you okay with your -- all the local communities in terms of this expansion?

Richard Adkerson

Sal, you picked up on the fact that we have gotten more confident about the water situation for Cerro Verde. And we are in a different situation than Tia Maria. We're not looking at a desalinization option for Cerro Verde. We've had alternatives that we've looked at. And we've been working on a collaborative basis with the local community and the Arequipa area. And we've developed an alternative that will be positively received by the local community. It involves a construction of a wastewater plant and using reclaimed water to provide it for us. And so while we're in the final stages of completing our studies and then starting the environmental impact studies, we have confidence that we've got this water alternative identified and one that works with the local community.

All right. We really appreciate everybody's participation on the call and look forward to continuing in 2010 on a very positive track.

Kathleen Quirk

'11.

Richard Adkerson

2011, sorry. Thanks a lot.

Operator

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

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