Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Freeport-McMoRan Copper & Gold, (NYSE:FCX)

Q2 2011 Earnings Call, Jul 21, 2011

July 21, 2011 10:00 am ET

Executives

Conger Harry - President of Americas Division

James R. Moffett - Chairman of the Board

David H. Thornton - President of Climax Molybdenum

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

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

Analysts

Brian Yu - Citigroup Inc, Research Division

Aleem Ladak - Desjardins

Brian MacArthur - UBS Investment Bank, Research Division

Oscar Cabrera - BofA Merrill Lynch, Research Division

John C. Tumazos - Sanford C. Bernstein & Co., Inc., Research Division

Charles Bradford - Bradford Research

Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

Paretosh Misra - Morgan Stanley, Research Division

Isabel Darrigrandi - Celfin Capital, Research Division

Richard Garchitorena - Crédit Suisse AG, Research Division

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Sal Tharani - Goldman Sachs Group Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Freeport-McMoRan Copper & Gold Second 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 L. Quirk

Thank you, and good morning, everyone. Welcome to the Freeport-McMoRan Copper & Gold Second Quarter 2011 Earnings Conference Call. Our results were released earlier this morning, and a copy of our press release is available on our website at fcx.com. Today's conference call today is being broadcast live on the Internet, and anyone may listen to the conference call by accessing our website home page and clicking on the webcast link for the conference call.

We have several slides to supplement our comments this morning, and we'll be referring to the slides during the call. They're also available on our webcast link on fcx.com. In addition to analysts and investors, the financial press has also 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 today, we'd like to remind everyone that today's press release and certain of our comments on this call 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, our Chief Executive Officer. We also have Red Conger with us today and Dave Thornton.

I'll start by briefly summarizing our financial results and then turn the call over to Richard, who will be reviewing our recent performance and outlook using the slide materials on our website.

Today, FCX reported second quarter 2011 net income attributable to common stock of $1.4 billion or $1.43 per share. That was more than double last year's second quarter $649 million or $0.70 per share. Our second quarter 2011 results included net losses on early extinguishment of debt totaling $54 million or $0.06 per share, and we also had adjustments to environmental reserves totaling $36 million charge or $0.04 per share. For the 6 months of 2011, our net income attributable to common stock was $2.9 billion or $3 a share, compared with $1.5 billion or $1.70 per share for the first 6 months of 2010.

Our sales in the second quarter of copper totaled 1 billion pounds. That was higher than our April 2011 estimate of 965 million pounds, primarily because of the timing of shipments principally in North America. Our consolidated copper sales for the second quarter of 2011 were also higher than the second quarter of 2010 of 914 million pounds, and that reflects our increased production in North America and the timing of shipments in South America and Africa. Our consolidated gold sales during the second quarter of 2011 of 356,000 ounces were slightly lower than our previous estimate of 365,000 ounces, but higher than second quarter 2010 sales of 298,000 ounces. The variances were primarily related to the timing of mine sequencing at Grasberg.

Our molybdenum sales in the second quarter of 2011 totaled 21 million pounds. That was higher than our estimate of 17 million pounds and the second quarter 2010 sales of 16 million pounds, primarily reflecting improved demand for molybdenum. Our sales for the year 2011 for copper are expected to approximate 3.9 billion pounds, 1.6 million ounces for gold and 77 million pounds for molybdenum. Our forecast for the third quarter includes 940 million pounds of copper, 415,000 ounces of gold and 18 million pounds of molybdenum for the third quarter of 2011.

Our results in the second quarter included positive pricing of all of our key commodities: copper, gold and molybdenum. Our realized price for copper of $4.22 per pound was over $1 higher than the previous year's period. For gold, our price of $1,509 per ounce in the second quarter of 2011 was higher than last year's $1,234 per ounce realization, and our price of molybdenum of $18 per pound approximated the year-ago period.

Our consolidated average unit net cash costs, these are net of by-product credits for molybdenum and gold, averaged $0.93 per pound of copper in the second quarter of 2011. Those were lower than last year's unit net cash cost of $0.97, primarily because of higher gold and molybdenum credits in the second quarter of 2011. And those were partly offset by higher site production and delivery costs as a result of increased mining and milling activities and higher input costs, including materials, energy and currency exchange rate impacts.

With strong cash flows during the second quarter totaling $1.7 billion, those were significantly above our capital expenditures, which totaled $527 million during the second quarter. For the 6 months, our operating cash flows totaled $4 billion, and capital expenditures totaled $1 billion.

We ended the quarter with our cash balance exceeding our debt. Total debt approximates $3.5 billion, and our consolidated cash balance approximated $4.4 billion. During the second quarter, we repaid $1.2 billion in debt, including the April 2000 redemption of our 8.25% senior notes. On June 1, FCX paid a supplemental common dividend of $0.50 per share, which was in addition to FCX's current annual common stock dividend of $1 per share, which is $0.25 quarterly. We've paid common dividends year-to-date of $949 million, which includes nearly $500 million for the supplemental dividends paid on June 1. We have approximately 948 million common shares outstanding.

I'd now like to turn the call over to Richard, who'll be referring to the presentation materials on our website.

Richard C. Adkerson

Good morning, everyone. As I look at these numbers on Slide 3, just look at them and they speak for themselves. It was a very good quarter for us. The thing about it is looking under these numbers, we faced a number of the same issues that the industry is going through in terms of issues involving operations, equipment issues, weather issues in South America. We had to deal with an unfortunate industrial accident that we had in the underground at Grasberg, where we sadly lost 2 people. And we had to curtail production for a period of time.

But the fact that the numbers are so strong reflects the focus that our operating team -- and I congratulate everybody on the team, it's had on maintaining safety but working to maximize current volumes as we go through. And as you will see, we've made great progress during this period on advancing our growth projects, and that is really the strategy of our company that we push forward.

Kathleen has given you the numbers. Only a couple of things I'll point out is as projected, we had about 100,000 ounces less gold sales out of Grasberg this year than a year-ago quarter, and that has an impact on some of our unit cost numbers. And looking at the key statistics of our operating cash flows in relation to our capital expenditures, clearly demonstrates the strength of our company in terms of having these large volumes of production, attractive cost structure, very attractive commodity prices and investing in our business to grow and generating such strong cash returns.

Our cost numbers by region and our production numbers by region are shown on Slide 4. Our cost did come in lower than we had projected, a bit higher than first quarter last year, and that reflects the 100,000 ounces of lower gold sales. But at less than $1 a pound with prices now in the $440 range, that's tremendous margin for us. Costs were higher this year than a year-ago period because of income -- input costs. But the good news is, we're not seeing a trend within this year that affects our overall cost structures. Before, by-product credits, our first quarter unit costs were $1.61. We averaged $1.63 for the second quarter. And later on, we'll talk about our outlook for the year where our attractive cost structure continues.

We had very strong performance in the Americas. These mines met our target production targets. They controlled our costs with Grasberg despite some of the issues that we had with the underground in terms of investing in some new wet muck equipment and taking some time to ramp back up to full production. We had good performance. Our moly business -- Dave Thornton is here, really performed well. And our African project at Tenke Fungurume continues to meet its targets despite the ongoing issues we have of managing that business and getting it set up for significant future growth.

Markets today are very interesting. After having some weakness during the second half of the quarter, which was the result of the slowing global situation in the U.S. and Europe and the problems in Japan and uncertainty in China, because of their efforts to cool their economy, by the end of the quarter, prices were ticking up, and today are very strong. There appears to be little investor funds flow that's driving this, supported by the fact that there is clearly a de-stocking of inventories in China. Even though they are taking efforts to slow their economy down, June industrial production growth was over 15%. I know there's a PMI number out this morning that's weaker than it has been, but underlying these efforts in China to slow their economy down is tremendous amounts of spending on infrastructure and housing. The country has the financial resources to continue to invest in the face of the global economy and also the commitment that's evidenced by their most recent 5-year plan to continue to invest.

Gold is highlighted in the press everyday, and it's at record prices. The molybdenum markets, we believe, look good. Seasonally, this is a slow time of the year, and the recent price movements reflect that. The prices ticked down a couple of dollars here during the quarter. But as we talk with our customers and plan for the second half of the year, we're looking for that to be a relatively strong market for molybdenum. Molybdenum hasn't recovered to the extent that copper has from its highs before the financial crisis, but we believe it's a strong market. And we'll be talking about what we're going to be doing with that business later on in the presentation.

Slide 6 just affects what we're doing. We have our exploration team working to continue to identify resources and qualify those resources as reserves. We're investing in, principally, in our existing mines and are having success and have had significant success since the Phelps Dodge merger and adding to our reserves. And then, we're taking those reserves and have our development teams look for projects to invest in because we're so optimistic about the future of the copper business. We want to grow production as quickly as we can. One of the reasons the prices are so strong throughout the industry is that takes time with getting permits and power and water and enough development analysis to get projects going. But we're progressing with that with the ultimate goal of increasing our cash flows.

The first step in that line is we started following our curtailment of activities in late 2008 and 2009, is really beginning about 2 years ago and accelerating into 2010, was to focus on some near-term projects in North America and in South America as well. That would add incremental volumes to offset some of the curtailment activities that we had taken during the slowdown. You see some pictures here of Morenci, Miami and Chino in New Mexico. And our report card on where we stand with those is reflected on Page 8. We have shut down our mill at Morenci. We have basically cut our mine rate there in half, and we're stepping that back up in stages. And the first stage is complete with 125 million pounds a year of incremental copper restored. We had deferred the Miami project in connection with our reclamation areas there. We're now ramping that up. The Chino mine in New Mexico was actually shut down. And now we're ramping it up to 200 million pounds a year. We have taken advantage of the performance of the SAG mills at Tenke to incrementally increase its production with relatively little investment in new mining equipment. We took debottlenecking steps in Cerro Verde. All of this added about 500 million pounds of copper, individually small, but 500 million pounds of copper.

We have made the decision now to restart Climax. We're going to do this in a measured way and in a way that's sensitive to market impacts. And I'll talk about that more. But that will ultimately have a capacity in this initial stage of 30 million tons a year with the ability to expand. For a year, we had deferred our El Abra Sulfolix projects to replace the depleting oxide ores there with the sulfide resources. That project is complete and operating, and we've had a multi-year investment in underground infrastructure at Grasberg to replace the pit when it's depleted, currently scheduled in 2016, and that is going on schedule.

With respect to Climax, we are now taking steps to be able to start up the operations in 2012. We expect to ramp up to 20 million pounds a year by 2013 at an annual rate. We, last year, have had hired mining -- miners. Now we're going to be hiring operators. We will monitor its production levels and also our production at our Henderson underground mine in Colorado as well and manage those operations, which we can do at reasonable cost basis to supply the market depending on the market demand. So as we stand right now, engineering is complete. Construction is 75% complete. With the summer season, we're actually mining now, and we're going to go forward, complete this construction early in 2012 and start our ramp up at that time. Great project, $700 million, about $6 a pound average cost, best moly development project in the world and will support our leading position in that industry as the world's lowest cost and largest producer.

We commenced production at the El Abra Sulfolix project in the first quarter. That project extends the life by over 10 years or 300 million pounds a year. We will complete the capital spending on that project the next few years. Most of that capital has been spent. Now beyond this project, our continued exploration drilling has identified a much larger sulfide resource than we had anticipated when we started getting involved in El Abra. And we've got a team that's working very aggressively to see how we develop that sulfide resources. And that would be a development that would be incremental to the Sulfolix project. It would involve a concentrator mill, which in northern Chile involves getting access to water resources. But we are involved in the planning for that and very optimistic that we'll have a major expansion project in our future at El Abra beyond Sulfolix.

Slide 11 summarizes where we stand with the underground development in Indonesia. Besides the open pit, today, the existing DOZ mine, which is a continuation of block cave mining that Freeport started in the early 1980s, has a capacity of 80,000 tons per day, which is 35% or so of our throughput to the mill. We've also begun mining at our high-grade Big Gossan mine, which is not a block caving mine, but had very high grades and incrementally adds to our production.

What we're focused on is the development of the Grasberg block cave, which is an extension of the ore body that we've been mining from the surface since the discovery of the Grasberg and the development in the early 1990s. As that open pit reaches its ultimate limits, which we expect in 2016, we'll then move to mine that same ore body from underground. We're extending the DOZ. We've completed a feasibility study there. That will be an important contributor with the start-up of the new mine section there in 2015. When you add up what we'll be doing in the DOZ MLZ complex and with the Grasberg block cave, we will have aggregate underground production at mill rates consistent with what we're doing now in the 240,000 tons per day. This will involve a lot of capital. We expect to spend $500 million a year over the next 5 years in pursuing this development.

The next slide gives some -- a little bit more detail about the underground block cave at Grasberg. The first point is, these reserves are in proximity to our existing mill facilities and with our infrastructure development, are now connected to the mill through a horizontal access. We're not having to hoist over here, but we actually have a new train system that will be delivering them on a horizontal basis from the side of the mountain into the mill, which gives us significant cost and efficiency benefits. It's large-scale, high-grade. As I said, production of 240,000 tons a day is consistent with what we're doing right now.

We're using the power-efficient block caving operations. It's a low-cost mining, and it will be among the lowest-cost producers of not just underground mines, but any mines in the world. This table shows that our 2010 mining cost per ton from our DOZ existing mine is comparable with the Grasberg open pit. There is no overburden to mine underground, and the cost per ton milled basis are lower than the DOZ than the Grasberg open pit. We're going to be evaluating the optimal time for transition from the open pit to the Grasberg underground, and we'll be looking at the economic trade-offs with the higher mining cost per ton of ore in the open pit versus the timing of the metal release underground.

These operations have common facilities, support costs, mill costs, and so it all -- when you look at the per pound numbers, we will expect our average cost per pound to be consistent in the underground area as we have in open pit area. And any year is going to be depending on the price of gold, the price of copper and the price of input costs. But it's not a radical change from what we're experiencing now and still, high-volume, low-cost asset.

Beyond this $500 million expansion in Climax, we're working very aggressively with larger-term, near-term copper projects that are currently under evaluation. In Peru at Cerro Verde, we have now completed a feasibility study to triple its mill throughput, 360,000 tons per day. That will be one of the largest milling operations in the world. It will produce 600 million pounds of copper. It will require, we think, 3.5 billion pounds -- $3.5 billion of development costs and achieve full rates in 2016.

Morenci, as we take the next step there in terms of; one, adding mill capacity; and two, increasing our mine rate, we continue to enhance that project. Previously, we had thought we'd get 150 million to 250 million pounds a year. Now we're targeting 225 million pounds a year an attractive capital of $1 billion. Expect that to come, begin producing in 2014. And our next stage at Tenke would be to increase our mill rate to 14,000 tons a day to add 150 million pounds of copper a year at roughly $800 million, and that we expect to come on in 2013. So here, we've got the next stage of projects, which would add roughly 1 billion pounds a year of incremental copper and about 5 billion pounds of -- $5 billion of capital over the coming years. And that's very exciting.

Some details on Morenci is on Page 14. Interesting, you know, you don't have to go back too many years before our acquisitions of Phelps Dodge to hear people saying nothing but negative things about Morenci. We have this little chart here that shows that since the modern era of mining in 1943, when the first modern concentrator was put in service in Morenci during World War II, our aggregate production has been 26 billion pounds of copper. Today, we have 14.5 billion pounds of reserves and 11 billion pounds of indicated recoverable material from our contained material from our resources. And we're continuing to drill there, continuing to find there. So really Morenci, which many thought was on its last leg is really -- looks to be only at best halfway through its productive life and still available to generate profits in today's world of higher prices.

But we are -- we will complete the feasibility study for this next expansion by the end of the year. Permitting is beginning -- permitting here is a step we go through. But it's not a major project like it would be for starting a new mine. We're confident we can achieve full rates in 2014. As I said, we continue to expand resources and reserves through our exploration program. And then the chart shows the incremental production that we would expect to achieve with this expansion.

At Cerro Verde, I mentioned the tripling of the size of the milling capacity, the $3.5 billion of capital. Again, the exploration continues to add to our reserves. This is proven technology. We've just completed a major expansion at Cerro Verde in 2007. We've got water resources, which has been an issue in Peru by working with the local community, where we're investing in a much-needed -- and Arequipa is the second largest city in Peru -- wastewater treatment plant, so the community is real positive about that. And we will have access to some of that water for our expansion. We have -- we are filing our environmental study the second half of this year. That would put us on schedule to start construction in 2013 and complete with it in 2016.

Tenke, we see a series of expansions over time there. And we're committed to pursuing those expansions. The first step is this 14k project that would involve increasing our mining rate to 150,000 tons today, adding some tankhouse capacity, spending about $800 million of capital and adding 150 million pounds of copper a year in an approximate 2-year time frame. And exploration, drilling and analysis continues to focus on how to maximize the oxide resource and ultimately, how to process what appears to be a very large resource of sulfide material and mixed ore material.

Now the next stage in the pipeline is near-term, immediate projects then longer-term projects. And we have a whole series of those that we're working on today. That involves a very significant milling investment at Morenci, investments at Sierrita with how to deal with this new resource we acquired at the adjacent Twin Buttes property. We're looking at a number of alternatives there. Expansions at Bagdad, which is a property where you've got copper production supported by molybdenum production with the indicated resources. We're now looking at a currently shut-in mine at Ajo, a historical mine in Arizona that Phelps Dodge operated. Safford has a sulfide resource in connection with the current oxide operations we're doing at an adjacent potential development project called Lone Star.

I mentioned the El Abra mill; the future expansion of Tenke. So we have before us a lot of our work, a lot of opportunities. We're significantly increasing our exploration spending, essentially doubling it from last year to $250 million. You can see it's distributed globally. 90% of the core holes we're drilling is on our existing projects. We have some greenfield projects. It'd be great news if those come in. But really, our confidence about our ability to identify resources, reserves and development projects with our existing ore bodies is what's driving us.

Our 2011 outlook is really consistent with what we told you in the first quarter, 3.9 billion pounds of copper, 1.6 million ounces of gold, 77 million pounds of moly. Outlook for unit cash costs, this is at $1,500 gold, $15 molybdenum for the remainder of this year would be about $1 a pound. And this is a good news story. We're not seeing -- we're seeing moving parts in our cost structure, but we're able to offset some of those. And we get benefits of higher gold prices, of course. With $1 a pound, we've got a very attractive cost structure. At $4.25 copper for the remaining 6 months, we'd have approximately $8 billion of operating cash flows, and our current estimate for capital expenditures this year is $2.6 billion. We're spending capital as aggressively as we can, and that's what we estimate we'll spend this year.

Near term, we're showing our quarterly results with really no changes that we have. This is the annual results -- annual outlook for 2012, 2013. It's really consistent with what we told you before with incremental molybdenum sales coming in with about 10 million pounds in '12 and 20 million pounds in 2013, reflecting the net of our Climax restart and other adjustments to our operations.

Our quarterly results are shown -- the outlook is shown on Page 21. There have been consistent annual results, essentially some shifting from the third quarter to the fourth quarter, principally affecting Grasberg. On July 4, our PT-FI union workers in Indonesia commenced an 8-day illegal strike, which led to a temporary suspension of all of our mining, milling and concentrating shipments. On July 11, we reached an agreement with the union to end the strike, and the operations are resumed safely, and we are ramping up production.

We estimate that the aggregate impact of production lost during the strike period was 35 million pounds of copper and 60,000 ounces of gold. That is reflected in these outlook numbers on Slide 21, together with mine planned changes that we would have made in any event. The numbers would have been this much higher had not we had the strike. We have now begun the negotiations with the union. They started the second day, which completed overnight tonight. This is a contract that's scheduled to renew in October. We have not begun any negotiations with the union when the strike occurred. There was issues related to the certification of the union leadership. And so now, we're just beginning to talk with our unions about the new contract, the first stoppage we've had of this kind at Grasberg in over 40 years of operations.

The government is supportive. Of course, the government is losing taxes and benefits as this occurs. The initial discussions with the union and government officials as we begin negotiations have been positive with a lot of comments about avoiding strikes in the future. We've always been able to work cooperatively with our workers there, and we expect to be able to continue to do so. We pay at the highest levels of worker compensation in Indonesia.

I had mentioned the cost structure, and that's on Page 22. The outlook for the year continues to be attractive at site production cost of a $1.70. Before credits, we were $1.67 in the first quarter so we're seeing offsets there, but no significant jumps in unit costs. And net of credits at $1 a pound, again, this is a $15 gold, $15 moly and $14 cobalt. And you can see that goes across our boards in an attractive way. Cash flow generation will be strong at these levels with our current level of operations at $4 copper, about $8 billion of operating cash flows at $4.50 copper over $9 billion operating cash flows, and I'll just remind you, that's after cash taxes and after cash interests.

The sensitivities are shown on Page 24. And while we are subject to input cost variations, our leverage of copper is so great that the factors that might push input costs one way or the other are more than offset by copper movements. $0.10 in copper is $270 million of net operating cash flow impacts to us. That's both up and down.

Our current outlook for capital expenditures has been adjusted slightly, and by $100 million in this year to $2.6 million, $400 million next year. I want to point out, they do not include the capital spending for the project at Cerro Verde. It does include in 2012 some increase in Climax, about $64 million and then studies at Cerro Verde and other projects, which are part of the planning for future developments. We expect our capital spending to go up as these projects are advanced and improved.

Financially, we're very strong. Of course, Kathleen mentioned this. We end the quarter with $4.4 million of consolidated cash and $3.5 -- $4.4 billion of consolidated cash and $3.5 billion of debt. We're going to maintain our strong balance sheet, our liquidity. We're going to invest in attractive gold projects. We've paid debt down. We may have an opportunity to refinance or pay some debt down next year. Our board will evaluate our common dividend. We've paid supplemental dividends that the board will evaluate as it reviews our financial policy on an ongoing basis.

Strategically, we're going to continue focusing on safe production, advancing development opportunities as we continue to look for opportunities to benefit from these positive commodity markets throughout the industry.

With that, we'll open up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Brian Yu with Citi.

Brian Yu - Citigroup Inc, Research Division

On the cost side, you guys have had pretty good performance year-to-date. And I was wondering if you could -- you'll help me with the math here. I mean, if we look at your site production costs for the full year and multiply it by volumes, you're look at spending close to $6.6 billion. And year-to-date spending is about $3.1 billion. So if we look at first half versus second half, what's driving the 10% increase in total spend?

Richard C. Adkerson

It's 2 factors. One, we're increasing mining rates. As we ramp up on some of these projects that we talked about, we're increasing mining rates at Morenci and our other North American mines. We're increasing mining rates in South America. And so that's one factor. And the other factor is input cost impacts. The mining rates lead to some additional input costs. The incremental ramp-ups are at a higher -- since we scaled back mining activities with higher levels of unit costs, as we ramp up, we're incurring some higher levels. So it's those 2 factors: increased activity and mining rates and input costs. For example, when -- at the end of 2008, we idled 100 big haul trucks, Red, it was just at Morenci, right? Or was it in total North America?

Kathleen L. Quirk

Only in Morenci.

Conger Harry

Yes.

Richard C. Adkerson

It was at Morenci. All of those trucks are back at work now, and we're ordering trucks. So...

Conger Harry

Some of them had to be rebuilt.

Richard C. Adkerson

They had to be rebuilt. We cannibalized some of them, but we don't have idle trucks. I mean, we went from 100 idle trucks to all of them working and buying new trucks. So as we go through that, it's going to involve some incremental spending.

Operator

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

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Question on the Climax startup. It sounds like depending upon the market, you would reduce your moly production at Henderson if the market couldn't bear the weight of Climax. Is that correct?

Richard C. Adkerson

Ultimately, that could well happen. But what we're doing with Climax is we're going to phase in the production. We're doing it in a more measured way than we would do it if we had $30 moly. We've gone through a lot of discussions and analysis. The first step was to go ahead and spend money so that we would be in a position to make this decision. Now that we're making it, and we'll complete construction this year, we started hiring some miners last year to do stripping and get ready to get the ores to the mill. Now we're our hiring operators and -- but we're going to take this slower than we otherwise could take it. So we're going to come in with a 10 million in '12. We're currently thinking about 20 million in '13. And then from there, we'll be balancing Climax and Henderson. They're both scalable. I mean, we showed that in 2008, 2009 when we -- Dave, what do we cut Henderson down to?

David H. Thornton

From over 40 to around 20, mid-20.

Richard C. Adkerson

And we did that with a little bit impact on unit costs but not like you might expect. I mean, we still had attractive costs. So the good thing that we have, of course, we -- the byproduct moly comes, it just comes with copper production. But we now have 2 mines that can be flex producers, and we'll be operating them like that. We have enough confidence in the market that we believe that the market could absorb the amounts that we're adding. Now for example, our Cerro Verde project has 15 million pounds of copper, I mean, with moly coming with it. We expand Sierrita in Bagdad. That's more moly coming with the project. We're seeing some moly at Morenci with our future expansion. So we're going to be the leader in this industry, and we're going to the lowest cost producer. And we're going to be in a position to be responsive to market requirements.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

And Richard, you mentioned your cost estimate at Climax of about $6 a pound. What is it at Morenci? And how does that fluctuate -- how did that fluctuate with the decrease back in '08?

Richard C. Adkerson

You mean Henderson?

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

I mean, Henderson, yes.

Kathleen L. Quirk

Henderson is around $7 a pound, Mike.

Richard C. Adkerson

It's around $7 a pound, and it was lower than that back in '08 because the input costs were a lot lower. And my recollection was our costs went up about $1 a pound as we cut production in half, which is still, Mike, as you know, very attractive in terms of industry cost structure.

Operator

Your next question comes from the line of Oscar Cabrera with Bank of America.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Looking at your Cerro Verde, what is the burn rate you think in terms of development CapEx that you will see from 2013 and '16? And have you had any discussions with the new government regarding potential increases in taxes and royalties?

Richard C. Adkerson

Okay. I'm going to let Kathleen talk about the CapEx spending, then I'll come back and talk about the new government.

Kathleen L. Quirk

Oscar, during 2012, for most of 2012, we'll be in permitting. We don't expect to see the CapEx ramp up really coming towards 2013 and 2014. So for the next 18 months or so, we'll likely spend in the $300 million range for start engineering and permitting costs. So 2013, we're looking at ramping up. So the capital -- the rest of the capital will be split between 2013, '14 and '15.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Can we assume like normal projects about 40% -- 40%, 20% over those 3 years?

Kathleen L. Quirk

I would say that by 20% in 2013. Most of the spending will be in 2014.

Richard C. Adkerson

Okay. Now that's obviously dependent on getting our permits and our discussions on our tax situation and watching developments as they go on in Peru. Where we are with the stage of the project is we've completed a feasibility study, and we're prepared to file for the environmental permits, which would normally take about a year. And then we're looking at what our tax and royalty situation would be. Big picture, Peru has made very significant advancements as a country, principally driven by mining investments. Our company has had a really longstanding partnership with the country and with the local community. And we're really positive about the outlook for both the country and our project at Cerro Verde. When you look at the taxes and royalties in total that we currently pay, and a lot of those are in different buckets in Peru, so they don't necessarily have a complete transparency when you first look at them, they're in line with international standards. And we've been an important contributor to the region and the country. It's 18% of the GDP in Arequipa region. Arequipa's the second largest city in the country and 1% of GDP. And we're investing and have invested significantly in benefits to local communities. We did a water system earlier, this wastewater system, that we're working on. And we're targeting 1% of our revenues for community support even though that's not necessarily required. So we've worked very positively with them. Now the election was a surprise. I mean, Humala wasn't expected to win just a few months ago, and he emerged as the candidate that was elected by the people. And we always work with the elected governments. We don't get involved in internal politics. During the course of the campaign, Humala made positive comments about being supportive of mining activities. My own judgment is that anybody who's running that country is going to look to support mining because that's what they need to advance their country. And without mining, they have limited amounts of other business to fall back on. So we're going to work cooperatively with them overnight. Yesterday, the administration, the ministers were announced. The mines minister is an individual we've worked with in the past, and we can work with in the future. So we're certainly not affecting our operations, and we're going forward with our expansion plans with a positive view of working with the new government to get our plans approved and to invest. We believe the local mayor, for example, was a Humala supporter. He's very supportive of our operations and, we have a great working relationship with him. It's a question of time will tell, but we're not discouraged about where we stand right now.

Operator

[Operator Instructions] Your next question comes from the line Paretosh Misra of Morgan Stanley.

Paretosh Misra - Morgan Stanley, Research Division

A couple of questions. One, it seems like for your revised cost guidance of dollar $1, you are using slightly higher diesel and electricity costs. In fact, it seems like you're using $3.40 gallon diesel and spot. Is that pre-'10? Is that right?

Richard C. Adkerson

Well, when we're putting these numbers together, we surveyed what our people were paying. There's basis differences, so you can't just say there's a single price. But Paretosh, let's see. Kathleen will comment on...

Kathleen L. Quirk

You're about right as the base price, but $3.40 is our cost including the freight cost, is what we've got assumed. But we're using current prices for diesel in these numbers.

Paretosh Misra - Morgan Stanley, Research Division

Okay. Yes, that was my question. And then second, at Grasberg, do you buy any electricity from outside too? Or it's all internal, your own power plant?

Richard C. Adkerson

Well, we -- prior to our fourth concentrator expansion that we did in the mid-1990s with burn diesel, with that, we burn -- we developed a coal plant to generate electricity. We have 3 facilities there. We buy coal from Indonesia. And the coal provides our base load, and we supplement that with diesel. We have a project that we're working on with the province of Papua now to -- that's targeting the development of a hydro facility in Papua, which we're very encouraged about. It would be a project that would provide -- feasibility is established and we've begun work on it. We're encouraged by it. We've got work to do. But it's about 100 kilometers away from our operations, and it could potentially deliver power for us on a cost advantage basis. And the province is very interested in it because it could assist in helping to further economic development of the province of Papua. So we're working on that as a project.

Operator

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

Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

Thanks for all the color too on the Peruvian situation, I appreciate that. So I guess I'll ask about molybdenum. And in the release, you talked about improving demand. And I was wondering if you could elaborate on that a little bit. And also if you could maybe provide some color, Richard, on why you think the moly price has pulled back so much sharply here recently?

Richard C. Adkerson

Yes, I'm going to let Dave comment on that, but we believe the recent pullback principally reflects seasonal factors. It's something we've seen in the past. But of course, moly is tied into this global economic situation, and we've seen a slowdown in the growth that was occurring during 2010 in the economies in the U.S., Europe and, of course, Japan is still recovering from the earthquake, tsunami event. But Dave, why don't you make a couple of comments on the moly market?

David H. Thornton

Yes, Tony, we continue to see a strong outlook for moly overall. And in the U.S., steel capacity utilization continues to improve over last year, although modestly. We're seeing some improvements in steel demand in the EU, some weakness in China as they've trimmed back on some of their economic slowdowns. Japan, with the tsunami and everything, we've seen a slowdown in Japan, haven't yet seen the recovery there in the auto, mainly in the auto fields. So automotives continue to be strong in the U.S. and Europe. And overall, steel growth continues to be strong. We're seeing strong growth in our chemical segments as well. So overall, we continue to have a positive outlook for moly in 2011 and going forward as the world economies continue to come back and to grow, but we're taking a fairly modest approach on that, not a strong recovery. Like Richard said on the price side, I think this is more seasonal. We'd typically see a slowdown in the third quarter. As primarily in the EU, we see the steel industry take maintenance curtailments and turnarounds. So -- and we're also seeing a continued slowdown in Japan as they recover from their natural disasters. So we think last year, we had a similar outlook. We saw the prices weaken in the May, June, July timeframe last year and then recover in the fourth quarter. And we think this will be a similar situation this year in 2012.

Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

Wonder if I may ask a follow-up there, if you gentlemen have a number in mind as to what the capacity additions in addition to the Climax over the next several years, over the medium term in terms of how you're modeling out the supply growth?

David H. Thornton

Tony, that's the question. I mean, we have looked at both the potential moly development projects. We also keep in touch with what is going on with copper projects. And there's a lot of expansion of copper projects that people are pursuing. All of those have uncertainties associated with them. Sometimes, it's economic uncertainties because of the higher cost structures some of these moly projects have. There are permitting issues that everyone faces. There are other issues that affect the timing of the copper projects. And all of these are what we've been analyzing and considering for the past couple of years now as to what to do with this. We've reached a conclusion that we want to, in some ways, get out ahead of some of these projects with our powers to help us maintain our market share and our market leadership position. And so I think what we're doing here is going to throw some question marks as to what happens with other's development. And so we don't really have a clear-cut view as to what's going to happen even though we follow what's going on in the industry.

Operator

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

Charles Bradford - Bradford Research

Could you talk a bit about TCRCs, which had gone up quite a bit and whether the situation in Japan is having much of an influence and how that might develop?

Richard C. Adkerson

Yes, Chuck. That's an interesting question, and we're having a lot of discussions internally about that. As you know, and I think most of you know, we're on both sides of that equation. We're a very large copper concentrate producer that we sell in the marketplace. We have an investment in a significant smelter in Spain, our Atlantic Copper Smelter in Huelva. We have a minority equity ownership interest, and we're a supplier to the Gresik smelter in Indonesia. And we have a smelter here in the southwest copper district at Miami, where we supply concentrate used asset and generate cathodes that we use in our wireline business. So we're really are on that now. Now with respect to Japan, 2 smelters were temporarily affected. Everyone needs to tip their hats to the Japanese ingenuity and work ethic for how quickly they're recovering from their situation, and they are recovering. It's had an impact short-term. Smelter business is affected by buying patterns in China and investments in smelters continue to be made there. There are other smelters being talked about around the world. There's one being talked about, about in Indonesia. So it's an evolving situation. It's not clear cut. A lot of it depends on the timing of these development projects that are coming down the pipe in the copper business. But clearly, the TCRCs have moved up, temporarily. We'll be entering into our annual negotiations later this year, and they will be reflective of what the market is at that time, but there's -- I don't think there's any clear-cut answer that we can say specifically to your question.

Operator

Your next question comes from the line of Richard Garchitorena with Credit Suisse.

Richard Garchitorena - Crédit Suisse AG, Research Division

So my first question, just quickly. So it looks like you have 300 million of restarts at Miami and Chino due by 2012. I was wondering how we should think about the ramp-up through that because it looks like if you -- like your full year guidance, it's only 100 million pounds tons versus '11. And I'm assuming that the 200 million additional in 2013 is related to that?

Richard C. Adkerson

Well, first of all, when you look at these projects and then in our aggregate guidance numbers, you also get into factors such as the timing of where we are in the pit at Grasberg and other mine plan changes. So Kathleen, do you want to comment?

Kathleen L. Quirk

Yes. No, that's really the difference. We've got the ramp-up of Miami to 100 million pounds and then the details of our respective ramp up at Chino are included in the release. But we've also got a slide that you should look at alongside of that in the reference materials on Slide 30 that shows the variations in Grasberg production as well. So it's a combination of changes at Grasberg and also this ramp up in North America.

Richard Garchitorena - Crédit Suisse AG, Research Division

And then my other follow-up, it looks that you had $60 million in environmental costs this quarter. Can you just give us a little color on where that was spent and then if that is expected going forward?

Kathleen L. Quirk

A large portion of that was an adjustment to an environmental reserve. So the largest portion of that $40 million-plus was the -- was an adjustment to an environmental reserve, which is a nonrecurring item. The balance of it relates to ongoing shutdown costs that we have. But that's a line item -- a new line item we have in the income statement, where we're separately stating what the cost of, of the historic obligations including changes in the reserves that we have on our books.

Richard C. Adkerson

And Richard, I'll just add that while Kathleen's right, this specific instance is a nonrecurring deal as we look at this, this is an important part of our business. When we acquired Phelps Dodge, we stepped into a situation where historical operations had been conducted by Phelps and by Cyprus and by Amax . And it's an ongoing management issue for us to deal with these in a responsible way, to deal with regulations. We try to get issues settled and behind us. But it is part of our business that everybody ought to understand and something we will continue to work on. And there will be issues that come up from time to time. Some of these things had to do with operations that haven't been active since the early 1900s or the mid-1900s. And anyway, we have resources and a great team that works to deal with those. And overall, since 4 years now we've been working, I've been very pleased with how we've been able to manage it. But they do involve costs.

Operator

Your next question comes from the line of Sal Tharani with Goldman Sachs & Co.

Sal Tharani - Goldman Sachs Group Inc., Research Division

Richard, on El Abra, I just wanted to understand how your talks are going with your partners CODELCO for the possible large sulfide deposit you have found because the CODELCO has been under some scrutiny because of labor union issues, lower house created a committee. And also, there's a new mining minister in Chile. Have you seen any changes in the -- in your dealing with CODELCO recently?

Richard C. Adkerson

No, we -- let me answer the general question first. We have great relationships with CODELCO, and our partnership has never been stronger in terms of the way we work. They're a minority owner, most of you know that, but they're a significant minority owner in El Abra, and we are talking with them about the possibility of doing something jointly with their adjacent operations. The new mines minister is a very well-regarded engineering expert in the country. And our people and the CODELCO people tell me they're very pleased about the prospects of working with him. We have great relationship with Martin Goldberg and so we're pleased with that. We're looking at alternatives of what to do about whether it makes sense to do something jointly with CODELCO, but there's also alternatives that we're looking at where we would do this on our own. So it's -- we're not decided yet. It's ongoing considerations but there's a couple of paths that we're currently evaluating.

Sal Tharani - Goldman Sachs Group Inc., Research Division

Great. One more thing on -- at -- in Grasberg or Indonesia, you mentioned by annual contract negotiations. So there, by -- are there -- are these negotiations -- contracts for 6 months only in Indonesia?

Richard C. Adkerson

Every other year. Every 2 years. Yes, we get a contract, and it's for 2 years.

Operator

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

John C. Tumazos - Sanford C. Bernstein & Co., Inc., Research Division

Congratulations on doing such a great job of running the operations and generating cash. My question involves when you go to spend it. I was in a mine last week where 4,500-day underground project at an existing site was quoted at $0.75 billion. And that's in Canada. Do you -- could you update on your oversight of CapEx given the forcefulness of some engineering firms and vendors to try to charge a lot of money? And if you have any maximum number of projects or CapEx dollars that you would spend where you get to the point where you maybe it's tough to spend it well? And how much is the concept for a 360,000 tons a day at Cerro Verde?

Richard C. Adkerson

Well, John, it's -- the question you ask is a big issue for the industry right now because it is not -- it's not just copper projects, gold projects, but across-the-board in resources. As you know, there's tremendous expansion projects going on in the iron ore business and other resources, coal projects. So this -- if you would have asked us in the spring of 2008 what was the biggest issue facing the industry, we would talk about people availability and the supplier availability and so forth. And that's going to be a huge issue as we go forward. The benefit we have now as we have a very large organization that's very experienced in managing these projects. And we have a -- we're adding to those resources. Freeport's an attractive place for people to work. We pay our people well and give them great career opportunities. And so we're planning for that. We're very comfortable with Cerro Verde because we're, in large part, replicating at a bigger scale something we've already done. And our operating team there is heavily involved with it. In terms of projects, we only do projects -- we're not about growing production just to grow production. I mean, we're looking for shareholder returns. I mean, and that's the limiting factor that we have is what are the best projects we can do to provide the greatest returns for our shareholders. Jim Bob, do you want to comment on this investment?

James R. Moffett

I think that you've covered it. And John, you sort of answered your own question. The fact is, if you're going to develop these properties, as prices go up, if you grow these ores, it becomes more important and that's why people came up with the lease process to begin with. And probably, put pressure on prices, people went to the leech pad and got very innovative. And if you're talking about cost and prices, I mean, when you lived through the era that we did of $1 copper and that's using $1.05, $1.06 copper as long-term prices, but we're in a new stratosphere with this $4.40 copper -- $4.20 copper. And then when you look at gold prices, gold prices, I can remember gold was selling at $250 an ounce. So you look at gold going over $1,600 an ounce. So then the number of people that are trying to get independence now, they're going to overspend because they tried to do things with staffs that don't have the experience that we have here at Freeport. But the answer is that's what this whole management resources business is about. It's being able to judge which ore bodies can be developed and which ones can be done without getting in and spending so much money if prices drop and you find yourselves operating at a loss.

Operator

Your next question comes from the line of Brian MacArthur with UBS Securities.

Brian MacArthur - UBS Investment Bank, Research Division

I just want to follow up on Cerro Verde. Now you have a feasibility study, and you've been good in giving us cash cost guidance for Climax and number guidance on Grasberg. Can I just confirm that the expansion, leaving out any discussion about changes to royalties and everything which you may work through that. Cash costs would be ballpark towards versus the current operations?

Kathleen L. Quirk

Brian, they will initially, as we go out, we would have had a higher cost anyway as we get to lower grades. But initially, we'll have similar cost structure than what we have in the current operations. And longer term, the cost will be in the $1, $1.50 range.

Brian MacArthur - UBS Investment Bank, Research Division

Right. So bottom line, near term, you can offset lower grade with higher volume, keep it even and eventually, just the grade falls off far enough and it runs up. That's basically how it works?

Kathleen L. Quirk

Right.

Brian MacArthur - UBS Investment Bank, Research Division

And second question, a totally different topic. There have been more rhetoric out of Indonesia again about raw material exports not being allowed out of the country. I assume under your cow you're protected. But can you just go through that? Is that a situation like what we went through years ago when we started talking about this and you got involved in Gresik, or just any color where that stands under the 2009 loss?

Richard C. Adkerson

Yes, sure, Brian. We'll come back and add some to Kathleen's. But let me talk about the Indonesian situation. It's a different situation now than with the Gresik smelter. In the Gresik smelter, when we signed our new contract of work in 1991, there was a provision in there that we committed to work to have a smelter built in Indonesia subject to its economic feasibility. And we followed through on that commitment, ultimately developed a partnership with Mitsubishi and other Japanese investors. We took an equity interest. We supported the smelter with concentrate supplies, and we fulfilled our obligation to the Indonesian government at that time. Now our contract gives us the right to market our concentrate in the world markets. And Indonesia has passed a law that they're working to see how they can implement that would restrict exports of raw materials requiring in-country processing. Our contract with the Indonesian government officials have said would be honored would exempt us from that requirement. Now having said that, we will work cooperatively with the government and with others. We're committed to encouraging economic development within the country. And developing a new smelter anywhere in the world today is economically challenging, it will be challenging in Indonesia. But we're going to work cooperatively with the government. And in the terms of our contract of work, we are confident we'll prevail in terms of the legal requirements that we're subject to.

Brian MacArthur - UBS Investment Bank, Research Division

So it may be that ultimately, you reinvest part of the smelter again if that makes sense on an economic basis, and that would also obviously give you more negotiating power as you get more accounted to Cerro Verde, all that would get factored in, or is it a standalone decision?

Richard C. Adkerson

To date, there are other investors who are talking about investing in the smelter in Indonesia. And we're talking with them about -- are prepared to talk with them about commercial-supplier relationships. We have existing contracts that we'll work with. But to date, our discussions are considerations. The discussion really is too strong a word for, have been more from a supplier standpoint, as opposed to investor standpoint.

Brian MacArthur - UBS Investment Bank, Research Division

That helps clarify that a lot.

Richard C. Adkerson

Okay, Brian. And I'll just say, as an add-on to Kathleen's comments about the situation at Cerro Verde, a comment when you look at these expansion projects that people are talking about throughout the industry, and like Cerro Verde, we talked about tripling mill throughput and so forth, underlying that is a situation that if you don't invest, you're going to see declines from grades, depleting resources, higher costs and so forth. So I've seen some analysis that picks up the production and treats it all as incremental. But underlying that is an inherent decline in the resource base because of the nature of ore resources.

James R. Moffett

This is Jim Bob. Let me comment about the smelter situation. Back when we did the smelter in Indonesia, we were able to match up with the fertilizer plant that was in -- that they had in Surabaya. If you don't have a fertilizer plant, I'll tell you that you can give me and I'll take that sulfur. It can have a huge impact on your feasibility. So -- and people are throwing away around the -- they're trying to build more smelters. It's a lot more complicated than people would realize. The smelters -- there are smelters around the world today, and they are operating at a loss. They didn't have government subsidy. So it's -- hopefully, when people get around the table and start understanding what it takes to justify economics in the smelter, it's a lot more complicated when they go into these conversation with -- they're saying it's not something these bunch of people would sit down and do overnight.

Richard C. Adkerson

That's a good point, Jim Bob. And I'll just emphasize, nobody's approached us about subsidizing smelters.

Operator

Your next question comes from the line of Aleem Ladak with Desjardins Securities.

Aleem Ladak - Desjardins

A question regarding the molybdenum, the Climax restart. Was there any particular -- was there anything that prompted you in particular to restart the Climax mine over the last quarter?

Richard C. Adkerson

It's the timing. I mean, this mine's located 11,000, 12,000 feet on top of the continental divide. We got a heck of a lot of snow this year. Average snowfall is 400 inches. And so you're sort of teed up to make timing decisions on things like this, driven by the seasonal situation. So the question of making this decision now or it would have to be delayed for at least 6 months. And so we have a lot of discussions. And as we talked about a year ago, we had decided to go ahead and spend capital to prepare ourselves for it. And based on our overall read of the market, we concluded now is the time to take a -- I want to use the word measured step towards start up.

Aleem Ladak - Desjardins

So it did have something to do with the present state of the molybdenum market then, right?

Richard C. Adkerson

No question. I don't think that was the driving force. If we had not had some confidence in the market, and again, molybdenum market is much smaller than copper markets, of course. This is a big project in relation to the overall market. We're a big producer of byproduct moly. We have the Henderson mine. All of this fits in together. So it was a complicated analysis, and one of those decisions that's based on pluses and minuses. And the great plus here is the resource that we have and the resources that we have in our company.

Operator

Your next question comes from the line of Isabel Darrigrandi with Celfin Capital.

Isabel Darrigrandi - Celfin Capital, Research Division

I have a follow-up question regarding Cerro Verde. You currently have a tax stability agreement in place, which exempts Cerro Verde from paying royalties. I believe this agreement expires in 2013. And in the past, you expressed the intention of negotiating a new tax stability agreement in relation with the large-scale expansion. I was wondering if you continue to -- or if you intend to negotiate a new agreement given the current political situation? And whether or not a new tax stability agreement is necessary for the project to continue to be economically viable?

Richard C. Adkerson

Well, Isabel, the tax environment will have a big impact on the viability of our project and other projects in Peru. So the tax situation is very important, taxes and royalties and however the government extracts value out of the operations. And the way we look at it is the overall sharing of benefit in the government and the project. And so that's very important. We have been engaged in discussions about a new stability agreement. Those that have not been concluded, and they've -- we expect that those will continue with the new administration. And how that proceeds is -- has some uncertainties now because we'll have to see what the new administration's view is and position is in negotiating agreements, as well as what their position is going to be in the overall tax and royalty structure for our operations that are not subject to stability agreements. There had been some very encouraging public comments that Humala has made that they're going to be supportive of development, including consideration of stability agreements. But we're in a position right now where this is unfolding, and we'll have to monitor where this goes as we have these future discussions. Humala said they will honor past stability agreements. And overall, Peru, we want to maintain its competitiveness as companies consider where to invest and it's got resources that needs mining development to continue its progress for alleviating poverty and adding to the economic well-being of the country.

Isabel Darrigrandi - Celfin Capital, Research Division

Can I have one follow-up on Cerro Verde?

Richard C. Adkerson

Sure.

Isabel Darrigrandi - Celfin Capital, Research Division

Do you expect there to be a ramp up in production before the construction is completed in 2016 if there are no expansion?

Richard C. Adkerson

Well, we're already now benefiting from this debottlenecking project that we did. And that our current level of production capacity is where we're going to be until we invest in the next expansion.

Operator

Your last question comes from the line of Oscar Cabrera with Bank of America.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Just following up on Brian's question on the smelter. When you look at your projects in North America, things like Ajo and Lone Star, the grade there is below 0.5 and Grasberg is a great asset. Just wondering, how are you thinking about in terms of extending the life of the open pit in Grasberg? Would that be economically feasible about your -- you're using, I believe, $2 a pound in copper prices. If you use $2.50, would that make sense? Or does North America have better economics?

Richard C. Adkerson

Listen, those are independent. I mean, those are totally independent, Oscar. Where I thought you were going with the North American situation is another business issue we haven't talked about on this call. But with the potential expansions that we have of sulfide projects in North America, we have an issue about smelter capacity here. Unfortunately, there were 2 great smelters in Southwest U.S. that were dismantled during the downturn of the late 90s, early 2000s. And we're going to be running up against smelter capacity as we look at all these opportunities in North America. We may have to ship concentrates internationally. But that's one set of issues, and we will deal with that in the context of our opportunities here in North America. With Grasberg, that will be looked at independently. And the issue about whether to extend the open pit or go underground is going to be an economic analysis that we'll say, is it more economic to extend the pit, which would involve having to move more waste to get down to the pit versus beginning to ramp up underground to get that ramp up started and take advantage of that over the long term. Full capacity cost underground, as I mentioned earlier, are at least consistent with open pit mining and at levels of input costs and other costs could well be lower on a unit basis in open pit mining. And so where our current indications are is that we'll complete mining in the pit in 2016. We'll have the underground infrastructure completed. We can't start caving until we're out of the pit. We're going to be prepared to start caving at that point, and we'll continue to analyze the economics of whether to extend the life of the pit for some period of time afterwards. But at the present time, our plans are to begin caving at that time period. Now I'm going to say something that you've all heard me say many times over the years, we don't focus on a single price. We'll do this on a scenario of prices, and that depends on circumstances and outlook at any point in time. So we'll evaluate what opportunities higher prices gives us, and we'll look over our shoulders and say, "How will we manage it if the world changes and we have to deal with low prices?" So it's not a -- we're not smart enough to pick a single price to drive these decisions off of.

James R. Moffett

This is Jim Bob again. When you talk about underground and open pit, you have to remember what the terrain factors are. People have missed the point that in the Grasberg, for instance, the open pit, you have all these trucks and you have fog, and you got rainfall. You don't have any fog in the underground. They don't have trucks in the underground because as Richard just said, you're not mining waste, you're just dropping the ore with this block cave down. So there's a lot of factors to be considered. But let me emphasize it again, for those of you who haven't been in the Grasberg, you're not going to see that open pit operating with the big trucks moving around that rain and fog, moving all that waste. It won't take you long to figure out that you might want to be underground.

Richard C. Adkerson

Okay, Oscar. Thank you for your questions. And we appreciate everybody's interest in questions. We're available for follow up. So if you have further needs for information after reviewing the data, David Joint is available to coordinate the calls. We look forward to talking with you as we progress through 2011. And again, thank you for participating today.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Freeport-McMoRan Copper & Gold,'s CEO Discusses Q2 2011 Results - Earnings Call, Jul 21, 2011 Transcript
This Transcript
All Transcripts